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CFP Exam: March 2013 > Fundamentals > Flashcards

Fundamentals Flashcards

1
Q

Financial Planning Process is…

A 
Establish client
Gather data - Determine goals & expectations
Analyze finanical status
Developing Plan
Implement Plan
Monitor Plan
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2
Q

Life Insurance Benchmark

A

10-16 times gross income

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3
Q

Health Insurance Benchmark

A

At least $1 million lifetime cap

no caps under affordable care act

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4
Q

Disability Insurance Benchmark

A

If paying premiums with after tax dollars, then policy should pay 60-70% of gross income

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5
Q

Property Insurance Benchmark

A

Covers both home & auto for FMV

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6
Q

Long Term Care Benchmark

A

Inflation protected daily benefit

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7
Q

Personal Liability Umbrella Policy (PLUP) Benchmark

A

$1-3 million of liability protection

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8
Q

Emergency Fund Benchmark

A

3-6 months of non-discretionary expenses

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9
Q

Housing Ratio Benchmark

A

PITI = 28% of gross income

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10
Q

Total Debt Ratio Benchmark

A

PITI+All other debt expenses = 36%

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11
Q

Good Debt is…

A

When use of the asset far exceeds the term of the debt.

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12
Q

Reasonable Debt Example

A

30 year mortgage or 5 year auto loan, etc.

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13
Q

Bad Debt Example

A

Carrying credit card debt each month, etc.

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14
Q

Good Debt Example

A

15 year mortgage or 3 year auto loan

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15
Q

Educational Funding Benchmark for State College

A

$1,000/yr for 18 years

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16
Q

Educational Funding Benchmark for Semi-Private University

A

$3,000/yr for 18 years ($15k/yr tuition)

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17
Q

Educational Funding Benchmark for Competitive Private University

A

$6,000/yr for 18 years ($25k/yr tuition)

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18
Q

Retirement Amount Benchmark

A

At age 62-65, should have 16 times income needed annually saved

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19
Q

Savings Rate Benchmark

A

10-12% of income, assuming savings starts at an early age

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20
Q

Return on Investment Benchmark

A

8-10%, assuming long-term horizon

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21
Q

What are the “big three” all clients should have?

A
  1. Will
  2. Durable Power of Attorney for Healthcare
  3. Advanced Medical Directive
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22
Q

Interest Rates have an inverse relationship with…

A

Investment returns & purchasing power
Higher interest rates means lower earnings for businesses and make bonds w/ lower rates less desirable. It also makes the bond market more attractive than the stock market

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23
Q

Unemployment is inversely related to…

A

Wage rate

The lower the unemployment, the more businesses have to pay employees to compete with each other

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24
Q

The Demand Curve is affected by…

A

Incomes, Tax rates, Savings rates, & Disposable income

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25
Q

The Supply Curve is affected by…

A

Technology, Competition, & anything other than price

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26
Q

____________ is where the Supply and Demand Curves meet

A

Equilibrium

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27
Q

The Elastic Demand Curve goes…

A

horizontally sloping to the right

The quantity demanded responds greatly to changes in price

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28
Q

The Inelastic Demand Curve goes…

A

vertically sloping to the right

The quantity demanded responds little to changes in price

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29
Q

What direction does inflation move in each phase of the business cycle?

A 
Peak = Highest
Recession = Decreasing
Trough = Lowest
Expansion = Increasing
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30
Q

What direction do interest rates move in each phase of the business cycle?

A 
Peak = Highest
Recession = Decreasing
Trough = Lowest
Expansion = Increasing
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31
Q

What direction does GDP move in each phase of the business cycle?

A 
Peak = Highest
Recession = Decreasing
Trough = Lowest
Expansion = Increasing
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32
Q

What direction does Unemployment move in each phase of the business cycle?

A 
Peak = Lowest
Recession = Increasing
Trough = Highest
Expansion = Decreasing
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33
Q

Average GDP Growth?

A

3%

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34
Q

Average Business Life Cycle Duration

A

60 months

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35
Q

What is a Recession?

A

6 months, or 2 quarters, of declining GDP

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36
Q

What is a Depression?

A

18 months, or 6 quarters, of declining GDP

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37
Q

What is Disinflation?

A

A decline or slowdown in the rate of inflation

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38
Q

What is the Producer Price Index?

A

A measure of price changes in the wholesale and manufacturing sectors

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39
Q

Leading, Lagging, or Coincident Indicator: Stock Prices

A

Leading

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40
Q

Leading, Lagging, or Coincident Indicator: Initial Unemployment Claims

A

Leading

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41
Q

Leading, Lagging, or Coincident Indicator: Money Supply (M2)

A

Leading

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42
Q

Leading, Lagging, or Coincident Indicator: New Manufacturing

A

Leading

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43
Q

Leading, Lagging, or Coincident Indicator: New Private Housing Units

A

Leading

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44
Q

Leading, Lagging, or Coincident Indicator: Consumer Sentiment

A

Leading

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45
Q

Leading, Lagging, or Coincident Indicator: Employees on Payroll

A

Coincident

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46
Q

Leading, Lagging, or Coincident Indicator: Personal Income

A

Coincident

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47
Q

Leading, Lagging, or Coincident Indicator: Industrial Production

A

Coincident

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48
Q

Leading, Lagging, or Coincident Indicator: Manufacturing Sales

A

Coincident

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49
Q

Leading, Lagging, or Coincident Indicator: Average Duration of Employment

A

Lagging

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50
Q

Leading, Lagging, or Coincident Indicator: Change in the CPI

A

Lagging

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51
Q

Leading, Lagging, or Coincident Indicator: Change in Labor Cost per Unit

A

Lagging

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52
Q

Leading, Lagging, or Coincident Indicator: Consumer Credit to Income

A

Lagging

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53
Q

Leading, Lagging, or Coincident Indicator: Value of Outstanding Loans

A

Lagging

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54
Q

Leading, Lagging, or Coincident Indicator: Average Prime Rate Charged by Banks

A

Lagging

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55
Q

What are the Four Tools Used by the Fed?

A
  1. Reserve Requirement
  2. Discount Rate
  3. Open Market Operations
  4. Excess Reserves
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56
Q

What is the Reserve Requirement?

A

The required percentage of deposits a bank must maintain in cash
(The higher the reserve requirement, the less money supply, and higher the interest rates)

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57
Q

What is the Discount Rate?

A

The overnight interest rate member banks can borrow from the Fed to meet the reserve requirement
(This is the only interest rate the Fed sets)

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58
Q

What are Open Market Operations?

A

When the Fed buys or sells gov’t securities, the money supply is influenced and pressure is placed on interest rates
(If the Fed buys Treasuries, money supply increases, causing interest rates to fall and vice versa)

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59
Q

What are Excess Reserves?

A

The amount of money in excess the reserve requirement a member bank holds at the Fed

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60
Q

Effects on Money Supply & Interest Rates: The Fed Increases the Reserve Requirement

A

Money supply decreases

Interest rates increase

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61
Q

Effects on Money Supply & Interest Rates: The Fed Increases the Discount Rate

A

Money supply stays the same

Interest rates increase

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62
Q

Effects on Money Supply & Interest Rates: The Fed Sells Treasuries in the Open Market

A

Money supply decreases

Interest rates increase

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63
Q

Effects on Money Supply & Interest Rates: When Excess Reserves Increase

A

Money Supply decreases

Interest rates increase

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64
Q

What are the Three Fiscal Tools used by Congress?

A
  1. Taxation
  2. Spending
  3. Debt Management
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65
Q

How is Taxation a Fiscal Tool?

A

Increases in taxes reduces the money supply, thus raising interest rates

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66
Q

How is Spending a Fiscal Tool?

A

Increased spending results in more money supply, thus lower interest rates

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67
Q

How is Debt Management a Fiscal Tool?

A

If there is a deficit, then congress must borrow more money, decreasing the amount of money available to lend, thus decreasing the money supply and increasing interest rates

68
Q

If a lost or stolen credit card is reported, but used, what is the liability according to the Fair Credit Billing Act?

A

$50 per card, or the amount charged, whichever is less

69
Q

The credit CARD act limits late fees generally to…

A

$25

70
Q

The Credit CARD Act requires companies give _____ days notice of a rate increase.

A

45

71
Q

The Credit CARD act doesn’t allow companies to issue cards to anyone under age ____, unless there is a co-signer over age ____.

A

21, 21

72
Q

New Health Insurance Policies cannot have Lifetime Caps if issued after…

A

September 2010

73
Q

How has the Affordable Care Act impacted tanning salons?

A

10% service tax

74
Q

What does the Affordable Care Act done about Medicare Part D’s “Donut Hole”?

A

Individuals will receive $250

75
Q

Until What age can a child stay on their parent’s health care policy?

A

26th birthday, regardless of if parents claim them as a depend, a student, or married.

76
Q

The Affordable Care Act requires employers who provide health insurance to report what on the employees W-2?

A

Disclose the value of the benefit for that employee

77
Q

Debts that are not discharged in Ch 7 Bankruptcy

A

Student Loans, 3 years of back taxes, Alimony, Child Support

78
Q

Bankruptcy exempt assets are…

A

Contributory IRAs up to $1 million, Qualified Plans and converted IRAs are unlimited

79
Q

Ch 11 Bankruptcy is…

A

relief through reorganization for business or self-employed

80
Q

Ch 13 Bankruptcy is…

A

Relief through adjusting debts

81
Q

Workers Compensation will pay regardless of who is at fault. True or False?

A

True. Workers Compensation is an absolute form of liability

82
Q

What is the maximum number of weeks one can receive unemployment payments?

A

26, and 39 in times of high unemployment

83
Q

What is a Balance Sheet?

A

A snapshot at “a moment in time” of one’s net worth

84
Q

What is the Balance Sheet Formula?

A

Assets - Liabilities = Net Worth

85
Q

What are the Three Categories Under Assets in a Balance Sheet?

A
  1. Cash & Cash Equivalents (Current Assets)
  2. Invested Assets
  3. Personal Use Assets
86
Q

What are the Two Categories Under Liabilities in a Balance Sheet?

A
  1. Current Liabilities (Due in < 12 months)

2. Long-Term Liabilities

87
Q

Liquidity Ratios Measure…

A

The ability to meet short-term liabilities

88
Q

Debt Ratios Measure…

A

How well a person manages their overall debt

89
Q

Performance Ratios Measure…

A

Financial flexibility & progress toward goals

90
Q

Current Ratio Formula

A

Current Assets / Current Liabilities = Current Ratio

91
Q

Emergency Fund Ratio Formula

A

Current Assets / Non-discretionary expenses = Emergency Fund Ratio

92
Q

Name Three reasons to Buy a Home vs Renting?

A

When you will be there > 3 yrs
When your goal is to build equity
When you have a high marginal tax rate and can benefit from the mortgage interest deduction

93
Q

What does the “2/6” in a 2/6 ARM Mortgage mean?

A

Interest rate can’t increase more than 2% per year, or more than 6% for the entire term

94
Q

What is the Minimum Age to Enter a Reverse Mortgage?

A

62

95
Q

What is the Maximum Amount that can be deducted from Mortgage Interest?

A

$1,000,000 for the home

$100,000 for a home equity loan

96
Q

ROI Formula

A

(Ending Investments - Beginning Investments - Savings - Gifts Received) / ((Beginning Investments + Ending Investments) /2)

97
Q

What is the Expected Family Contribution?

A

The amount congress determines a family should pay toward secondary education formulated in the FAFSA form that considers income, family size, assets, etc

98
Q

When are Students Considered Independent?

A

If any of these:
Over 23
Married
Working on Masters or Doctorate
If they have legal dependents other than spouse
Currently serving or veteran of US armed forces

99
Q

Name the Four Most Important Financial Aid Programs for Education

A
  1. Federal Pell Grant
  2. Stafford Loan
  3. Parent Loans for Undergraduate Students (PLUS)
  4. Federal Perkins Loan
100
Q

Who Qualifies for a Pell Grant?

A

Students who have not already earned a Bachelors or professional degree and who qualifies for a needs based loan

101
Q

How is the amount of a Pell Grant determined?

A

The EFC formula

102
Q

What is the Primary Type of Aid Provided by the Dept. of Education?

A

Stafford Loans

103
Q

When must Stafford Loans Recipients Begin to Pay Back Their Loans?

A

6 months after either leaving school or falling below part-time status (6 semester hours)

104
Q

What are the Two Types of Stafford Loans?

A

Subsidized and Unsubsidized

105
Q

Which Type of Stafford Loan is Needs Based?

A

Subsidized

106
Q

When are Stafford Loans Inappropriate?

A

When the parents intend to pay the loans

107
Q

What is a PLUS loan?

A

Parent Loans for Undergraduate Students

108
Q

What is the Basis for a PLUS loan?

A

The parent’s credit score, not needs based

109
Q

Are PLUS Loans Subsidized?

A

No

110
Q

Who are Perkins Loans for?

A

Students with exceptionally low EFC amounts, it is needs based

111
Q

Name the Needs Based Financial Aid for Education

A

Pell Grants
Subsidized Stafford Loans
Federal Perkins Loans
FSEOG

112
Q

What is an FSEOG

A

Federal Supplemental Education Opportunity Grant, awarded to students with very low EFC

113
Q

What is Federal Work Study?

A

On or Off campus employment to help pay for educational expenses

114
Q

Income Based Repayment reduces loan payments to what?

A

15% of discretionary income, also there is 25 year debt forgiveness

115
Q

What Type of Loan is Eligible for IBR?

A

Stafford Loans, not PLUS loans

116
Q

Name the 5 Tax-Advantaged Plans for Education

A
  1. Qualified state tuition plans (prepaid and 529 plans)
  2. Coverdell Educational Savings Accounts
  3. Roth IRA
  4. Series EE Savings Bonds
  5. Uniform Gift to Minor’s Act
117
Q

What is Prepaid Tuition?

A

An asset owned by the parents where they buy college credits today for use in the future at an in-state college

118
Q

What are the Advantages to Prepaid Tuition?

A

Lock in tuition cost in today’s dollars

119
Q

What are the Disadvantages to Prepaid Tuition?

A
  1. The return is equal only to tuition inflation
  2. The child may receive a scholarship and not need the credits
  3. If parents return the credits, they only get the principle back with no interest
  4. State schools may not have the desirable curriculum in the students area of interest
  5. Only design to pay tuition, not room and board and other expenses
120
Q

What is the 529 Prorated Contribution?

A

You can spread out a single contribution to a 529 plan over 5 years. The maximum would be $65k.

121
Q

What are Qualified Educational Expenses for a 529 Distributions?

A

Earnings are tax free for tuition and fees, books, supplies, equipment, and room and board if enrolled at least half time

122
Q

What is the Penalty for Using 529 Distributions on Non-Educational Expenses?

A

Earnings must be included in gross income plus a 10% penalty

123
Q

What are the Exceptions to the 529 10% penalty?

A

Distributions on account of death, disability, and scholarship

124
Q

Who May Contribute to a Coverdell ESA and How Much?

A

Parents and Grandparents, totaling to $2,000 per year

125
Q

What are the Tax Advantages to a Coverdell ESA?

A

Distributions are tax free if used for qualified educational expenses

126
Q

What Types of Schools Can You Use an ESA for, but not a 529?

A

Private elementary or secondary education

127
Q

What Age Must an ESA be Used By?

A

By the time the beneficiary turns 30, contributions can’t exceed 18th birthday

128
Q

How Can You Use a Roth IRA for Education?

A

There is an exemption to the early withdrawal penalty for qualified educational expenses

129
Q

What Can an UGMA Invest in?

A

Stocks, mutual funds, and bonds

130
Q

What Can an UTMA Invest in?

A

Real estate, stocks, mutual funds, and bonds

131
Q

What is the Primary Risk of an UTMA/UGMA?

A

The child may use the funds for whatever they like

132
Q

What Type of Deduction is the Student Loan Interest Deduction? What is the Limit?

A

Above the line, $2,500

133
Q

What Programs do the Lifetime Learning Credit Apply?

A

Undergraduate, graduate, and professional programs

134
Q

What are the Limits to the Lifetime Learning Credit?

A

20% of up to $10,000 in expenses per family, but can be claimed for an unlimited number of years

135
Q

What Programs do the American Opportunity Tax Credit Apply?

A

Tuition & fees for four years of post-secondary education for each dependent

136
Q

What are the Limits to the American Opportunity Tax Credit?

A

100% for the first $2,000 & 25% for the second $2,000 ($2,500 max)

137
Q

To Use the Lifetime Learning Credit, Which Expenses Must Payments Be Made Directly to the School?

A

tuition & fees, student activity fees, books, supplies, and equipment

138
Q

To Use the American Opportunity Credit, Which Expenses Must Payments Be Made Directly to the School?

A

tuition & fees, & student activity fees.

However, books, supplies, and equipment don’t have to be paid directly to the school to qualify

139
Q

Can an Individual Claim both the Lifetime Learning & American Opportunity Credits for a Dependent in the Same Year?

A

No

140
Q

If an Employer Reimburses Your Education Expenses, How much is Not Included in Income?

A

Up to $5,250

141
Q

Qualified Expenses for ESAs are…

A

Tuition & Fees, Books & Supplies, Equipment, Room & Board

142
Q

Qualified Expenses for RIRAs are…

A

Tuition & Fees, Books & Supplies, Equipment, Room & Board if half time or more

143
Q

Qualified Expense for Lifetime Learning Credit are…

A

Tuition & Fees paid direct, Books & Supplies paid direct, Equipment paid direct, no room and board

144
Q

Qualified Expenses for American Opportunity Credit are…

A

Tuition & Fees paid direct, Books & Supplies, Equipment, no room & board

145
Q

Can an RIA Use those letters after his name?

A

No, must spell out Registered Investment Advisor

146
Q

What Defines an Investment Advisor

A

ABC:
Advice
Business
Compensation

147
Q

An Advisor Must File Form _____ with the SEC to register

A

ADV

148
Q

An Advisor Must File Form _____ with the SEC to withdraw register

A

ADV-W

149
Q

What is on an ADV Part I?

A

Advisor’s name, education, business, and disciplinary history of the last 10 years

150
Q

How Often Does an Advisor Have to Update ADV Part I and Schedule I?

A

Annually, within 90 days of the fiscal year end

151
Q

What Is on an ADV Part II?

A

Advisor’s compensation, fees, education, investment objectives, conflicts of interest, & background of advisory personnel

152
Q

How Often Does an Advisor Have to Update ADV Part II and Company Brochure?

A

Annually, or promptly when when any information becomes materially inaccurate

153
Q

How Often Does an Advisor Have to Provide an ADV Part II and Company Brochure to Clients?

A

Annually

154
Q

RIA Registration Exceptions are…

A 
TABLE:
Teachers
Accountants
Brokers
Lawyers
Engineers

Advice must be solely incidental to their profession

155
Q

RIA Registration Exemptions are…

A

VIPs are SaFE
Advisor to Venture capital firms
Advisor to Insurance companies
Advisor to Private funds less than $150 million
home State (and doesn’t provide advice for national securities)
Foreign advisors (without a place of business in US)
securities not a national Exchange

156
Q

Who are the Five Gatekeepers that Perform Critical Roles for Advisers?

A
  1. Auditors
  2. Prime Brokers
  3. Custodians
  4. Administrators
  5. Marketers
157
Q

What is a Mid-Sized Advisor

A

AUM between $25 and $100 million

158
Q

The Brochure Rule Requires what Four Disclosures?

A
  1. Explanation of advisory services and fees
  2. Types of securities
  3. Educational background of advisor
  4. Participation/Interest in securities transactions
159
Q

When Must a Brochure Be Presented to a Client?

A

Within 48 hours prior to entering into a contract, or, at time of entering contract with 5 day grace period

160
Q

Series 6 Securities

A

Mutual Funds, UITs, variable insurance and annuities

161
Q

Series 7 Securities

A

Anything but commodities and futures

162
Q

Define an Accredited Investor

A 
1,2,3,4 test:
$1 million net worth review every
4 years
$200k of income if single or
$300k of income if married
163
Q

Name the Seven CFP Principles

A
  1. Integrity
  2. Competence
  3. Objectivity
  4. Confidentiality
  5. Fairness
  6. Professionalism
  7. Diligence
    (I Can Obtain CFP Designation)
164
Q

What Four Elements Determine if a Certificant is Engaged in Financial Planning

A
  1. The client’s understanding & intent
  2. Multiple FP areas are involved
  3. Comprehensive data gathering
  4. Breadth & depth of recommendations
165
Q

The “Always Bar” List

A

Felony conviction for financial crimes
Revocation of a financial professional license
Felony conviction for rape or murder
Felony conviction for violent crimes in past 5 yrs

166
Q

The “Presumed Bar” List

A

Two or more personal bankruptcies
Revocation or suspension of non-financial license
Suspension of financial professional license
Felony conviction for non-violent crime within 5 yrs
Felony conviction for violent crimes more than 5 yrs

CFP Exam: March 2013 (7 decks)

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