Fundamentals Flashcards
Invesetment Advisor but exempt (“investment advisor” but don’t have to register) from registration…
Advisors to…
Venture capital
Insurance
Private funds <$150M
s
(are)
home State
Foreign advisors
securities NOT on national Exchange
(from exemptions)
governed by Section 206 - anti fraud
Statement of Financial Position or Statement of Net Worth =
= Balance Sheet
Statement of Cash Flows
Income & Expense Statement
4 Tools Used by Fed to regulate interest rates and m oney supply
- Reserve Req
- Excess Reserve
- Discount Rate
- Open Market Operations
Capital Goods & Consumer Durables
Fluctuate directly with economy and GDP
- capital goods - goods used to make other things
- consumer durable goods - longer lasting goods
Taxation of US Treasury Securities
Taxable at federal level
Nontaxable at state & local level
- EE Bonds tax exempt at all levels if used for qual education exp
Interest Rate Fluctuation
- Lower money supply = higher rates
- Decreasing US deficit = higher supply = lower rates
- Lower inflation = lower rates = higher money supply
- Weaker credit demand = lower rates
- Dollar-denominated assets sold overseas = decreasing money supply = higher rates
Investor Advisers Act of 1940: Disclosure Brochure
- submitted w/in 48hrs before entering into contract OR
- at time of contract with 5-day “look-see”
Client first/highest priority after losing job
file for UE
Emergency Fund Asset Types
Current Assets only
- CD, money market mutual fund, cash
- NOT balanced mutual fund, line of credit
Exceptions (not recognized as “investment advisors” and not regulated by SEC) under definition of “investment advisor”
- TABLE plus
- banks that are NOT investment companies
- publisher of bonafide newspaper, magazaine, periodical of regular circulation
- advisor who advise strictly securities guaranteed by US
Absolute Liability
situation where someone has undertaken activities or actions that bring about extraordinarily hazardous circumstances
comparative negligence
- defense to negligence
- adjust damage amount by allocating negligence and loss proportionately
Rescission
- parties in a legal contract have a error/misunderstanding and no agreement can be reached
- carried out by court of law
Reformation
parties in a legal contract have a error/misunderstanding but willing to work out together
contributory negligence
- defense to alleged negligence
- evidence that injured party didn’t look out for own safety
assumption of risk
parole evidence rule
Once the contract is placed in written form, all previous and prior understandings of a verbal contract (or any other nature) will not be allowed to contradict the written contract
estoppel
if right has been waived, company will be stopped from denying a claim
waiver provisions
company reps cannot change contract
Open Market Operations
- buy/sell TREASURY securities
- NOT corporate securities
Treasury Dept NOT Federal Reserve
- prints money
- issues treasury bills
Agreements & Full Disclousure
without full disclousure of assets, info, etc. it is not possible to arrive at a fair arrangement
i.e., pre-nup, FP (limit/terminate)
FP Process Questions
- Where in Process?
- full disclosure?
- What has client already decided?
Quantitative Data
Names & Numbers
i.e. copies of trust docs and wills
Type of Data…Risk tolerance levels
PASS Score?
Qualitative data
CFPs perception of entering financial planning
irrelavent as to whether CFP must following the planning process
CFP bankruptcy
- must be disclosed to client regardless of when
Update Scope of Engagemen?
- Change in Risk aversion
- New Husband
- NO
- Yes
Provide information to a client outlined in Duties to a Client including but not limited to How the client pays for products, services and additional incurred costs including surrender charges and sales loads iii. How the CFP® professional and their firm are compensated for providing products and services.
Needed before Engagement?
NO
Client’s perception of CFP providing FP services…
CFP must follow Board practice standards
Requisite of fund prospectus and investment policy statements…
Not required when providing prof advice or making financial recs
brochure rule
- ADD info
- requires that a planner or advisor provide the client with all of the information as required at the meeting, or before the meeting, you enter into contract with them.
Investment Advisors Act of 1940: Section 202
- Anti-fraud & deceit
- regulates those exempted from registration
regulation of banks
federal reserve system & Federal Deposit Insurance Corporation
regulation of pension plans
subject to federal regulation by PBGC & ERISA
regulation of organized stock exchanges (NYSE)
federal gov’t through SEC
Federal authorities govern the insurance industry in the following instances and manner…
through the…
- IRC
- SEC
- ERISA
consumer confidence index
used to forecast consumer behavior/feeling
consumer price index
forecast future inflation
index of leading economic indicators
used to forecast economic expansions and contractions
Regulates Form ADV
SEC
Integration Factors for Engaging in FP
- relavent elements affected
- portions and amounts affected
- length of time affected
- exposure to risk affected
- barriers to modifying actions
Sales Based Compensation
- more than any de minimis benefit tied to the sale of a financial asset
- bonuses, front end or trailing commissions, ongoing 12b-1 fees, transaction fees, revenue sharing or solicitor fees.
Code of Ethics and Standards of Conduct
Only Applicable when Financial Planning
- All other duties
- Practice Standards
- All info in writing, except material conflicts of interest
Education Funding: Paying School Directly
- qualified transfer
- doesn’t use annual exclusion
- minimizes taxable gift…NOT taxable gift
“reasonable and customary fees” paid for custodial services
- NOT sales-based comp
- Do NOT have to specifically disclose
Must always be disclosed in writing (FA or FP)
Privacy Policy
Never has to be disclosed in writing
material conflicts of interest
CFP Timeframe for providing services and informations
Duty of Diligence - timely and thorough
FDIC Protection
- $250K per depositor, per bank, per account type
- Joint with wife & joint with son = 2 types
-
NOT covered
- money market mutual funds
- IRAs unless cash invested
- deposits payable outside US
- stocks, bonds, mf
Regulation Z of Consumer Protection Act issued by Fed
dollar amount of finance charges and annual percentage rate (APR) must be disclosed
After providing worker’s comp to EE, ER protected from…
- suit by EE
NOT protected from…
- suit from EE family
- suit from third party
- suit from EE’s spouse
Max client liability for fraudulent credit card charges
$50 per card
- Look for charges under $25
Fair Credit Reporting Act (FCRA)
- credit reports are required to contain accurate, relevant, and current information
- allows individuals to challenge information deemed to be incorrect on their credit report and provides for changing that information if the creditor does not respond with a specific time period.
Loans NOT available to grad students
- Perkins (ended)
- Subsidized Stafford Loans (Unsubsidized okay)
- Pell Grants
- SEOG
- Parent PLUS Loans (parents of undergrad only, Graduate PLUS okay)
Coverdell ESA
no limit to the number of accounts that can be established for a particular beneficiary; however, the total contribution to all accounts on behalf of a beneficiary in any year can’t exceed $2,000
like an IRA
Prepaid Tuition
asset of parents AND included in EFC
CFP Board Bankruptcy Considerations
CFP Board disciplinary actions will consider if the bankruptcy was a result of Roland’s inability to manage his personal finances or the business’ financial affairs
fee-based
- CFP or firm can receive fees and commissions
- CFP charges only fees but affiliated third party receives commissions
maximum loan to value ratio
down payment amount excluding (plus) closing cost
lottery winnings and inflation
lotto winning streams = fixed annuity
do not adjust return for inflation in TVM
TVM - car payment vs saving for car
don’t confuse mixture of lingo
i.e. wants to purchase in 3 years - put 12000 down
or
i.e. wants to pay off in 3 years - has 12,000 saved
duties owed to client: fiduciary duty
- duty of loyalty
- duty of care
- duty to follow client instructions
suitability vs fiduciary
read carefully
CFP board requires fiduciary
CFP employed by RIA under ownership of broker-dealer
broker-dealer is related party to CFP
inelastic demand
price increases, revenue increases
price goes up, people will buy same amount, revenue increases
demand change minimal with price change
milk and gasoline
elastic demand
price increases, revenue decreases
price goes up, people will buy less, revenue decreases
demand change significant with price change
airlines and luxury items
material conflicts
could impact advice or cause harm
integrity
CFP Professional may not professionally engage in conduct to defraud, make any untrue statement, omission, mislead or engage in fraud or deceit.
code of ethics vs standard of conduct vs fitness standards
see notes
most proactive way for CFP to minimize personal liability
follow CFP Board guidelines on acting as a fiduciary with a duty of care, loyalty and following client instructions
when is implementation carried out
always after client agrees to course of action presented
Code of Ethics and Standards of Conduct
general statements expressing the ethical and professional ideals certificants and registrants are expected to display in their professional activities. As such, they are aspirational in character and provide a source of guidance for certificants and registrants.
Always Bar List…petition/reviewed
NO, unless license vacated or conviction overturned
Code of ethics DONT
enforce uniform method for business practices
approximately, what change has most significant impact on financial plan
getting married
inputs for determining client goals
- attitudes
- values
- expectations
- time horizon
NOT current income level, beleifs could vary
Disciplinary and Ethics Commission’s (DEC) decision regarding petition
final or not final
not final, may be appealed
fee only
Hourly fees, flat fees, subscription fees, asset under management fees, custodial platform fees, salary or bonus not related to sales or production goals, travel to custodian or research conference.
Invesetigation Reporting
within 30 days after named, charged, convicted, settled, or adversly mentioned in action, arbitration, or civil suit…must also report outcome
Form ADV
- ADV Part II meets CFP Board disclosure requirements
- ADV Part II may be provided before contract
- may be used to disclose compensation
- not approved by SEC, only approves right to be “investment advisor”
construction loan
difficult to obtain
short-term (less than 1 yr)
Duty of Diligence and Sickness
sickness not an issue
if price has significantly changed, CFP should contact client to see if still interested in transaction
Impact on dutues due to significant changes
if already in ongoing FP process, don’t have to revisit duties to be preformed. May only need to revisit needs and course of action
FAFSA Includible assets
Assets include:
- Money in cash, savings, and checking accounts
- Businesses
- Investment farms
- Real estate (other than a personal residence)
- Other investments
DO NOT include:
- personal residence
- Life insurance
- Retirement plans (401(k) plans, pension funds, annuities, IRAs, Keogh plans, etc.)
decrease in federal deficit
gov’t spending down, taxes up
interest rates down
reduces money supply
increase in inventories
consumer spending down
low money supply
decline in interest rates
decrease in demand for credit
lowers interest rates
Discliplinary actions by CFP
- Does NOT enforce rules/regs through employers
- Does NOT impose fines for misconduct
- Does NOT issue public censure, only private censure
DOES issues public letter of admonition
CFP goes on vacation and gives all client responsibility to non-CFP intern
broke Duties Owed to Firm and Subordinates
broke “supervision duty”
Priority of Client’s Needs
Biggest financial risk
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V
Least financial risk
What is CFP professional responsible for?
Everything related to client’s personal finances except what requires a special license…
selling real estate, writing a will or trust, completing tax return (unless CPA or EA)
Use of RIA, Registered Investment Advisor
Daniel Whitt RIA - NO
may use “Registered Investment Advisor”
Series 6
FINRA adminstered
mutual funds, UITs, and variable life insurance and annuities (must also have state insurance license)
Series 7
FINRA adminstered
everything except commodities and futures
FED funds rate
rate at which member banks borrow from one another
controlled by supply and demand
NOT a tool of the FED to regulate money supply
Not discharged through bankruptcy
3 years of back taxes
alimony and child support
student loans (unless undue hardship)
debts through fraud
debts through negligence…discharged
rent or buy
rent - 1-3yrs
buy - >3yrs, high marginal tax bracket, wants to build equity
Expected Family Contribution (EFC) factors
easier to qualify if:
- >23
- married
- working on Masters/Doctorate
EE bonds & AOTC
may be used for tuition and fees in addition to AOTC but NOT for same expenses
