Fundamentals Flashcards
Whether to Rifi or not
Mortgage like annuity, so use END Mode
Solve for payment, then plug in months already paid, AMort = total payments. X>
Savings Ratio
Annual Savings (Employee + Employer / annual gross income
10-12% benchmark
Liquidity Ratio (emergency fund)
Current assets / monthly discretionary expenses
3-6 months
Debt, rent, car, food, utilities
Debt Ratio
Front End Ratio, Housing Ratio #1 (less than or + 28%)
Principal + Interest + Taxes + Insurance / Monthly GROSS Income
Back End Ratio, Housing Ratio #2 (less than or + 36%)
P + Int + Taxes + Ins + Reoccurring Debt/ Monthly GROSS Income
Buy of Rent
Short Period 1-3 years Rent
Over 3 years Buy
Current Ratio
Current Assets / Current Liability
Cash, Cash Equivalent, Marketable Securities
Credit Cards included in Liability
Taxation of Workers Comp and Unemployment
WC not included in income, UE included in income
Shift on Demand Curve
Income
Taxes
Savings Rate
Disposable Income
Quantity Demanded - Price change is not a shift, moves along demand curve.
Monetary & Fiscal Policy
Federal Reserve controls Monetary & Congress controls Fiscal
Monetary Policy
Feds want to maintain
Long Term economic growth
Price Levels
Full Employment
Fiscal Policy
Congress (same as Feds) wants to maintain
Long Term economic growth
Price Levels
Full Employment
Discount vs. Federal Fund Rate
Feds control Discount Rate
Supply and Demand controls FFR (rate banks charge other banks)
4 Tools Feds Influence Money Supply
$ Supply up - Interest Rates go Down
- Reserve Requirement
- Discount Rate - Rate banks can barrow from Feds,
don’t confuse with Federal Funds Rate) - Open Market Operations - Buy/Sell Treasury Securities
- Excess Reserve Rate - $ Banks hold in Central Bank above Reserve Requirement
3 Tools Congress Influences Money Supply
- Taxation (Increase Taxes / Less $ Supply)
- Spending (Gov’t Spend More / More $ Supply / Lower Interest Rates)
- Debt Management (Congress barrow $ / Lower $ Supply / Higher Interest Rates)
Bankruptcy Laws
Ch 7 - Debts Not Discharged
- 3 yrs. of back taxes
- Alimony & Child Support
- Student Loans
What is Protected Rollover IRAs - Not inherited Alimony & Child Support Pensions, Life Ins & Annuities - IRAs up to $1.3M
Ch 13 - Relief thru Adj. to Debts
Ch. 11 - Business or Self-employment
Fiduciary Duty
Loyalty
Duty of Care
Follow Instructions
15 Duties owed to Clients
A1 Fiduciary Duty A2 Integrity A3 Competence A4 Diligence A5 Disclosure of COI A6 Sound & Objective Professional Judgement A7 Professionalism A8 Comply with Law A9 Confidentiality & Privacy A10 Provide Client Info A11 Communicating A12 Compensation A13 Recommending A14 Selecting Technology A15 Refrain from landing and commingling
Use Marks Appropriately
Your Name, CFP (r)
CERTIFIED FNANCIAL PLANNER TM
Followed by Professional, certificant, practitioner
Do NOT use as part of email or website
Practice Standards for Financial Planning Process
UIADPIM
Understand Clients Personal & Financial Circumstances
Identify & Select Goals
Analyze current course of action & Potential Alternatives
Develop FP Recommendations
Present FP Recommendations
Implement
Monitor
Define Financial Planning
A collaborative Process that helps maximize the clients potential for meeting life goals through financial advice
Fee Only
Hourly, flat rate, subscription fees, AUM fees, custodial platform fee
Salary or bonus not attached to sales or production goals
Travel to Custodial or research
Compensation Method
Fee Only - CFP/Firm NO sales Commissions
Fee Based - “fee and Commission”
Sales Related Compensation - Commissions, trailing, 12b-1 fees, revenue sharing, referral fees
Code of Ethics (6 Codes)
- Act with honesty, integrity, competence & Diligence
- Act in Client’s best interests
- Exercise due care
- Avoid or Disclose COI
- Maintain confidentiality, and Protect client’s privacy &
information - Act in a manner that reflects positively on CFP
profession
Always bar
- felony for theft, embezzlement or other financials crimes
- felony for tax fraud or other tax related crimes
- revocation of financial professional license
- violent crime with in 5 years
- rape and murder
Diligence
Timely (not instant)
Thorough
Integrity
Honesty
Understanding
Candor
Fiduciary Duty
Duty of loyalty
CFP professional must:
Place interests of clients above interests of CFP and firm
Avoid COI or fully disclose material COI to client & manage COI
Act with out regard to the CFP financial or other interests of CFP
Fiduciary Duty - Duty of Care
A CFP® professional must act with the care, skill, prudence, and diligence that a prudent professional would exercise in light of the client’s goals, risk tolerance, objectives, and financial and personal circumstances.
Duty to Follow Client Instructions
A CFP® professional must comply with the terms of the client engagement and follow all directions of the client that are reasonable and lawful.
FP Process Step 1
Understanding client’s personal & financial circumstances
Obtain qualitative and quantitative info
Analyze info to assess clients personal and financial circumstances
Address incomplete information
Step 2
FP process
Identify & select goals
Discuss assessment of client’s financial and personal circumstances
Develope Reasonable assumptions
Discuss any realistic goals
Note impact that particular goals have on other goals
Step 3
FP process
Analyze the client’s current course of action and alternatives
Material advantages and disadvantages of current course
Analyze potential alternatives
Note does NOT become a recommendation until Alternative is selected in step 4
Step 4
Develop & Present Financial plan Recommendations
From current and alternative courses of action, select one or more recommendation designed to maximize the potential for meeting client’s goals.
Timing and priority of recommendations
Whether recommendation is independent or dependent on other goals
Step 5 of Financial planning process
Presenting the FP recommendations
Provide advantages and disadvantages of continuing current plan and any alternative plans
Recommendations can be orally, in person or in writing.
Five elements that should be included in FP presentation
Client goal review Assumptions made Observations and findings Recommendations Alternatives
Effective communicating
Pacing - match speed of client’s talking
Rephrasing
Reflecting
Step 6
Financial plan process
Implementing financial plan
Must be complete unless excluded
Establish responsibilities
Set timeframe
Select implementation actions, product and services
Step 7
Financial planning process
Monitoring
Must complete unless excluded
Establish monitoring & updating responsibility
Monitor the client’s process
Update goals, recommendations, implementation
Financial aid independent
Over age 23
Married
Working on masters or PhD
Have legal defendants other than spouse
Orphan or ward of state
Veteran
Duties to clients
When providing Financial
Planning
Duties that apply when providing financial advice
The practice standards for the FP process
Information to a client in writing
Candidate fitness standards
Presumed unacceptable - can petition for consideration
- Two or more personal or business bankruptcies
- Felony of violent crime more than 5 yrs ago
- Non-violent crime within the last 5 yrs.
- Revocation or suspension of non-financial license
Note: all bankruptcies will be posted on CFP boards website for 10 years and included in press release issued periodically.
Reporting to CFP Board
Within 30 calendar days after CFP is named, charged, convicted, settled, adversely mentioned in an action, arbitration or civil event. Report both initial and outcome.
Felony offense - one year in jail or more than $1000 fine.
Exceptions - claims for arbitrary compensation of $5000 or less and settlement of $15,000 or less.
Registered Investment Advisors
< $100M AUM Register with the State
> $110M AUM Register with SED
if $100 - $110M Either State or SEC
Definition of Investment Advisor
Defined Investment Advisors Act of 1940 as a person who is:
- In the Business
- of Providing Advice about securities
- for compensation
CANNOT use RIA after name, only “Registered Investment Advisor”
ADV - Part 1
Contains investment business, ownership, clients, employees, business practices, affiliations and disciplinary events of advisor or employees.
Registered Investment Advisors must electronically file ADV Part 1 annually, within 90 days of their Fiscal year end
ADV - Part 2
Form Contains advisor’s compensation, fees, education, investment objectives, COI, and the background of advisory personnel.
- must be written in English
- promptly update if any information becomes materially inaccurate. Otherwise changes can be done annually.
Exceptions to registration with SEC
Does not meet the definition of Financial Advisor
Any broker/dealer whos services are solely incidental to the conduct of their business..
Lawyers, accountants, teachers and engineers whose advice is solely incidental to their professions.
Bank and Bank holding companies are not investment companies.
TABLE - Teachers, Accountants, Brokers, Lawyers and Engineers.
Exemptions from Registration with SEC
Meets the definition of Financial Advisor, but does not need to register
Advisors solely for Venture Capital
Advisors whos clients are only Insurance Companies
Advisors solely for Private Funds less that $150M
Home State
Foreign Advisors
Advisors of Securities not on a national exchange
FINRA - Series 6 & 7
Person Registers with FINRA using form U-4
Series 6: Mutual Funds, UITs, variable Life Insurance and Annuities. Must also have state license of LI and Annuities
Series 7 - can sell everything except commodities and futures
Brochure Rule
Written disclosures for every client
- Advisory Services provided and fees
- Type of securities that are part of investments
- Education background
- Participation/Interest in securities transactions
- Must be given to a client before or at the time of entering into a contract
- and must be provided annually, either deliver or offer to deliver
Benchmarks - Risks
- Life insurance (10 - 16 x gross pay)
- Health Insurance
- Property: Home and Auto Greater than or = FMV
- Long-Term Care (Inflation Protection) 36-60 months
- Personal Liability Umbrella Policy ($1-3M)
Benchmarks - Short-term Savings and Investment
- Emergency Fund 3-6 months Current Assets / Monthly Non-Discretionary Cash Flows
- Housing Ratios (28/36)
PITI/Monthly GROSS Income
PITI+Recurring Debt Payments/Monthly GROSS Income
Debt Analysis
Good - Bad - Reasonable
Benchmarks - Long-term Savings and Investments
Education Funding ($3000/$6000/$9000 per child per year for 18 years)
- Retirement (16 x Pre-Retirement Income
Savings Rate (10-12%)
Return (8-10%) expected
Risk/Standard Deviation (8-14%) - Legacy (Will, Durable Power of Attorney, and Advanced Medical Directive)
Demand
How much consumers will demand at certain price levels.
As prices increase, demand decreases. As prices decrease, demand increases
Price along Side, Quantity along bottom.
Shift in Demand Curve
Discretionary income increase - shift up and to the right
Discretionary income decrease - Down and to the left
Supply
Reflects quantity of a good or service that businesses are willing to supply at a given price
The bigger the price the more willing to supply
Price along Side, Quantity along bottom.
Change in price, movement along supply curve.
Shift in supply curve
Shift Down and to the Right
- More firms enter market place
- technology improves efficiency
- Goods used in manufacturing decreases in price
Shift Up and to the Left
- Less firms enter market place
- Goods used in manufacturing increases in price
Equilibrium
Where quantity demand = quantity supplied
Substitutions vs Complements
Products that serve similar purpose.
Price goes up in one, demand increase in other.
Consumed jointly.
Price goes up in one, demand decrease in other.
Elastic vs Inelastic Demand
Responds significantly to price change - examples airline tickets, movie tickets, alcohol, luxury items. Demand Curve almost horizonal, sloping down and to the right.
Very little change in demand with change in price. Almost Vertical curve, clopping down and to the right.
Remember “I” for inelastic. Shape of Curve
Business Cycle
Peak - Highest IIP/Lowest UE
Recession Decreasing IIP/ Increasing UE
Trough Lowest IIP/Highest UE
Expansion Increasing IIP/ Decreasing UE
These 3 move together:
Inflation
Interest Rates
GDP
Unemployment
Investment During Business Cycles
Expansion - Short-duration bonds and equities
Because interest rates are increasing
Peak - Sell Bonds, Preferred stock and other high duration or fixed income assets. Buy Equities and hard assets (gold/real estate)
Recession - Equities and hard assets sold. Reinvest in short-term cash or bonds.
Trough - buy high duration bonds and consider equities
Gross Domestic Product vs Gross National Product
GDP - Amount of goods/services produced in US , regardless of ownership. Mexican Beer produced in Texas is included, but a BigMac made in France is not.
GNP - Amount of goods/services produced by a county’s citizen, regardless of where the goods/services are produced. A ford car made in Mexico is included.
Recession
6 months or 2 consecutive quarters of declining GDP
Inflation
Increase in prices, creates a Loss of purchasing power
Depression
Recession becomes a depression after
18 months or six consecutive quarters of declining GDP.
Moderate inflation
When prices are slowly increasing. Historic inflation is 3%, so moderate would be 1-2%.
Galloping Inflation
when money loses value very quickly
Deflation
Opposite of inflation, when prices are falling. Hold on the cash, because it is becoming more valuable. Can buy more goods and services as prices decrease.
Disinflation
Decline or slow down of the rate of inflation
Feds Buying or selling government securities
Buy - Increase $ supply / decrease interest rate
Sell - Decrease $ supply/ increase Interest rates
Fair Credit Reporting Act
- if refused credit card or employment, the consumer must be provided with the information in the report
- Right to a free credit report once a year
Fair Debt Collection Act
- Creditors cannot harass
- Cannot threaten a lawsuit if not intended
- Cannot contact you at work
- Telephone call limited to 8am - 9pm
Fair Credit Billing Act
- Gives creditors 30 days to acknowledge receipt of billing dispute
- explain or correct error within 90 days
- Consumer responsible to lost or stolen credit card is limited to lesser of $50 or charges incurred if notice is given to credit card company
Truth in lending
Must disclose total cost of financing
CARD Act 2009
- Must be 21 to open credit card in your own name
- limit certain fees and practices
FDIC Insurnace
- Each depositor has a total of $250,000 per type of account ownership.
Three types of ownership
- Individual
- Joint (each person deemed to own 50%)
- Trust Accounts
FDIC - Not covered
- Any deposit only payable outside the US NOT cover
- Money held in a money market mutual fund NOT covered
- Stocks, bonds and mutual funds NOT covered
- Any deposit payable in the US IS covered
Students are considered independent if:
Over the age of 23 Married Grad or PhD student Have Legal dependents, other than spouse Orphan or ward of the state Veteran
Expected family contribution
Tuition/Cost of Attendance
- Expected Family Contribution
= Financial Needs
Types of Financial Aid
Need Based
- Federal Pell Grant - 1st time students
- Subsidized Stafford Loan - No interest until graduation or less then part time
NOT Need Based
- Unsubsidized Stafford Loan - interest charged upon distribution
- PLUS Loan (Parent loan for Undergrad Students) - it’s unsubsidized and must be repaid in 10 years
- Graduate PLUS Loans - grad or professional students enrolled at least 1/2 time, interest accrues, payment begin 6 months after leaving school.
Campus Based Financial Aid
Federal Supplement Education Opportunity Grant - only paid if funds available
Federal Work Study - on or off campus employment
Programs to Reduce student loan payments
- Pay as you earn - 10% of discretionary income, forgiveness after 20 years. Only Direct Federal and Grad PLUS.
- Income based repayment - 15% discretionary, forgiveness after 25 years. Most Fed loans except Parent Loans
- Income contingent Repayment - 20% discretionary, forgiveness after 25 years. Only Direct Federal and Grad PLUS
Tax Advantage Plans for Education
Qualified State Tuition Plans - Prepaid Tuition or 529 Plans Coverdell Education Savings Roth IRA Series EE Savings Bonds Uniform Gift to Minor's Act
Assets of the Parents or child
Assets of Parent
Pre-paid college plan
529 Savings, except when student withdraws
Coverdell Education Savings
UGMA/UTMA - Assets of child
529 Savings
- Appreciation tax free, if used for qualified education expenses
- Can contribute 5 years at a time tax free - $75,000
- Can use gift splitting - $150,000 max tax free
Coverdell Education
- Only $2000 per year per beneficiary
- grow tax-differed, tax free if used for qualified education
- Must use funds by age 30
- cannot contribute beyond 18th birthday
529 vs Coverdell
Contribution Deductible NO
Re-invested Earnings Taxable NO
Qualified Withdraws Taxable NO
Nonqualified Taxable 10%
Included in Account owners Estate NO
Dollar Limit on Contribution Very High $2000
Age limit No < 18
Age limit on Beneficiary No < 30
Qualified Education + Apprentice K-12, Post 2nd
AGI Phase out No Yes
Series EE Bonds
- May convert in 529 plan
- No FEDERAL tax if used for education expenses
- Bond must be redeemed same year as education exp
- Bonds must NOT be purchased in Child’s name
- Buyer must be 24 or older
UGMA / UTMA
- Assets of child
- irrevocably gifts asset to custodial account
Taxation of unearned income
- Child less than 18 - at parents rate
- Child 19 or older - taxed at child’s rate
- Exception: full time student up to age 23 subject to
kiddie tax
- funds not transferable
Lifetime Learning Credit vs American Opportunity Tax Credit
Lifetime
Tuition and fees to undergrad, grad or PhD
20% first $10,000
Max Per Family credit of $2000
AOTC 1st 4 years of college 100% first $2000 25% percent second $2000 Max total of $2500 per student
