Fundamentals - All Notes Flashcards
What is Net Present Value?
Net Present Value
Used in capital budgeting by managers and investors to evaluate investment alternatives
NPV measures the excess or shortfall of cash flows based on the discounted present value of the future cash flows, less the initial cost of the investment
NPV = present value of the future cash flows - cost of the investment
NPV is simply the sum of the present values (PVs) of all the outflows (costs) and inflows (returns) of cash
NPV used the investor’s required rate of return for similar projects as the discount rate. NPV assumes that the cash flows generated from the project are reinvested at the required rate of return or discount rate
A positive NPV would indicate an investment is providing excess cash flows and the investment should be considered
A negative NPV would indicate an investment is generating a shortfall of present value cash flows and should not be made without other completing reasons
An NPV equal to zero indicates that the investment is generating cash flow equal to the required rate of return.
Duties to the Client (15 Owed)
1) Fiduciary Duty
Based on Common Law Fiduciary Standard (Investment Advisers Act)
At All times when providing Financial Advice, a CFP professional must act in the best interest of the client. The following duties must be fulfilled:
Duty of Loyalty (interest of clients first, avoid conflicts of int. Or Obtain client consent (ex. Cant really work for divorced
clients)
Duty of Care - Act with care, skill, prudence, diligence
Duty to Follow Client Instructions - must comply with all objectives, policies, restrictions and other terms of the
Engagement and all reasonable and lawful directions of the Client.
2) Integrity - doing the right thing
3) Competence
4) Diligence
5) Disclose Conflicts of Interest - when a CFP professionals interest or the firms’ interests are adverse to the CFP professionals duties to a client or when a CFP professional has duties to one Client that are adverse to another client (common example: divorce, business partners). - can disclose oral disclosures (written consent not required)
6) Sound and Objective Professional Judgement
7) Professionalism
8) Comply with the Law - Comply with Law (FINRA, SEC, state insurance licensing)
9) Confidentiality and Privacy - can share info without consent in the below
10) Provide Information to a Client - both providing financial advice (more broad) and financial planning. Requires written information to the client prior to entering into an agreement: (description of services, how the client pays)
11) Duties When Communicating with a Client - provide info in a timely manner
12) Duties When Representing Compensation Method
13) Duties when Recommending, Engaging and Working with Additional Persons
14) Duties when Selecting, Using and Recommending Technology
15) Refrain from Borrowing or Lending Money and Comingling Financial Assets
15) Refrain from Borrowing or Lending Money and Commingling Financial Assets
-exception: Family Members, legal entity in the business of making loans
Key Points: A certificant shall not lend money to a client unless that client is a family member.
A certificant cannot commingle their property with a client’s property, even if there is no ill will.
Example - A certificant cannot pay an account maintenance fee on behalf of a client to avoid a penalty if the account maintenance fee isn’t paid by a certain date. Even though there is no ill intent, paying an account maintenance fee is a violation of the Code of Ethics.
13) Duties When Recommending, Engaging and Working with Additional Persons
- disclose any arrangements at the time of the recommendation or prior to the engagement
- have a reasonable basis for the recommendation
- communicate the scope and allocation of responsibilities
Definition of ‘Client’
Client - any person including a natural person, business organization or legal entity, to whom the CFP professional provides or agrees to provide Professional Services to an Engagement (includes prospective clients)
Duties that Apply:
- at all times
- when providing financial advice
- when providing financial planning
12) Duties When Representing Compensation Method
Specific Representations
i. Fee only (no sales commissions or trade commissions)
Ii. Fee-based
B. Sales-Related Compensation
C. Related Party
No Soft Dollars.
11) Duties When Communicating with a Client
Provide accurate information to Clients in a timely manner, and in which the client may be reasonably expected to understand
True or False: Material conflicts of interest can be delivered orally or in writing.
True
True or False: Form ADV can aide in ‘ Duty: Provide Information to a Client’
True
10) Provide Information to a Client - both providing financial advice (more broad) and financial planning.
Requires written information to the client prior to entering into an agreement:
Description of services to be provided
Compensation that any party to the agreement or any legal affiliate to a party to the agreement will or could receive under the terms of the agreement, and factors or terms that determine costs, how decisions benefits the certificant and the relative benefit to the certificant
How the client pays for products and services
Terms under which the certificant will use other entities to meet any of the agreement’s obligations
Existence of any public discipline or bankruptcy, along with relevant websites to review the info
When providing financial planning, a certificant shall also provide:
- The parties to the Agreement,
- The date of the Agreement and its duration,
- How and on what terms each party can terminate the Agreement.
Conflicts of interest can be orial or in writ5ing
privacy document must be in writing (Privacy Policy)
9) Confidentiality and Privacy - can share info without consent in the below
Key Points: Know when it is OK to disclose confidential client information, such as
In response to proper legal process.
As necessitated by obligations to a certificant’s employer or partners.
To defend against charges of wrongdoing.
In connection with a civil dispute.
As needed to perform the services.
As required by CFP Board in conjunction with an investigation or adjudication.
8) Comply with the Law -
Comply with Law (FINRA, SEC, state insurance licensing)
7) Professionalism
6) Sound and Objective Professional Judgement
5) Disclose Conflicts of Interest -
when a CFP professionals interest or the firms’ interests are adverse to the CFP professionals duties to a client or when a CFP professional has duties to one Client that are adverse to another client (common example: divorce, business partners). -
conflicts can be oral or in writing
4) Diligence
3) Competence
Know areas of core expertise
2) Integrity -
doing the right thing
1) Fiduciary Duty
Based on Common Law Fiduciary Standard (Investment Advisers Act)
***only for when providing Financial Advice or Financial Planning explicityly.
At All times when providing Financial Advice, a CFP professional must act in the best interest of the client. The following duties must be fulfilled:
Duty of Loyalty (interest of clients first, avoid conflicts of int. Or Obtain client consent (ex. Cant really work for divorced
clients)
Duty of Care - Act with care, skill, prudence, diligence
Duty to Follow Client Instructions - must comply with all objectifves, policies, restrictions and other terms of the
Engagement and all reasonable and lawful directions of the Client.
CFP Code of Ethics
What constitutes FInancial Advice?
Financial Advice - a communication that based on its content, context and presentation would reasonably be viewed as a ****recommendation*** the the Client take or refrain from taking a particular course of action with respect to:
The development or implementation of a financial plan
THe value of the advisability of investing in, purchasing, holding, gifting, or selling Financial Assets
Investment policies or strategies, portfolio composition the management of Financial Assets or other financial matters
The selection and retention of other person to provide financial of Professional Services to the Client (CPAs/ attorneys)
The exercise of discretionary authority over the FInancial Assets of a Client
Examples of activity that are not financial advice: - unsolicited transactions, general financial education, marketing materials
Review Thoroughly Duties Owed to Clients https://www.cfp.net/ethics/compliance-resources/2020/09/duties-owed-to-clients
COE and SOC
Code of Ethics - Honesty/Integrity/Best interest of of Client
SOC - 15 Duties to Client, Financial Planning Process, 7 Practice Standards (“uber is a drunk persons…’, duties to firm and subordinatine
Memorize this chart
FA vs , FP
a COLLABORATIVE process that helps maximize a client’s potential for meeting life goals through Financian Advice that intergrates relevant elements of the Client’s personal and financial circumstances
When us a client first engaged with a CFP professional??
A. WHen a written contract is signed
B. When the client pays that practitioner
C. When the client first relies on the practitioner’s advice
D. When the client transfers their assets to the practitioner for management?
Answer: C. When the client first relies on the practitioner’s advice
Code of Ethics
Fiduciary Duty =
Fiduciary Duty = Duty of Loyalty + Duty of Care + Duty to Follow Client Instructions
Written or Orally? Memorize
Any material changes? When do you disclose?
Notify CFP Board within 30 days, notify clients within 90 days
Financial Planning: Terms of the Engagement
Provided prior to or at the time of the engagement.
Include:
- the Scope of Engagement and any limitations
- the period(s) during which the services will be provided
- The Client’s responsibilities
A CFP professional is responsible for implementing, monitoring, and updating the Financial Planning recommendations unless specifically excluded form the Scope of Engagement
Under what circumstances may Alan, a CFP professional, commingle assets with his clients?
A. It is never allowed.
B. Only if assets are properly tracked and available to the clients on demand
C. Only if given explicit written authorization, properly tracked and permitted by law.
D. Only if given explicit written authorization and available to the clients on demand
A. It is never allowed
When does the CFP Board allow you to use “fee only” to describe a CFP professional’s compensation?
A. Insurances sales and commission.
B. Hourly rate only
C. Salary and bonus from employer.
D. 12b-1 Fees
B. Hourly rate only
A CFP professional is responsible for all steps of the financial planning (UIADPIM) process unless specifically excluded from the scope of the engagement
CFP professional must prudently document information as facts and circumstances require (when in doubt, document)
- CRM software
- hadnwritten notes
- emails
Ex: a client says they don’t want your recommended Long term care insurance
CFP Board Candidate Fitness Standards
Specific character and fitness standards for candidates for CFP certificatyion and former CFP professionals seeking reinstatement.
Three categories of adverse conduct (possibly barring you from CFP designation)
- conduct that is unacceptable (always bar you)_
- conduct that is presumed to be unacceptable (may bar you unless you have a good explanation/.story)
- conduct that may reflect adversely upon the individual’s integrity or fitness, the profession, or the CFP certification marks
*
If your marks are removed by the DEC can you ever get them reinstated/
No
A CFP professional is responsible for:
- making sure RMDS occur
- making sure a client deposits a 401k rollover check in time
- just about everything else, except
Not responsible for:
- selling real estate
- writing a will/trust docs
- completing a tax return
A- L= NW
Asset - liabilities = Net Worth
Exceptions to Register with SEC
BD’s whose advisory services are solely incidental to the conduct of business, lawyers, accountants, teacher and engineers whose advice is solely incidental to their profession, banks and bank holding companies that are not investment companies,newspaper publisher,
Remember “TABLEs” are incidental
Section 202(a)(11)(E). The scope of the exception includes persons whose advice is limited to: (i) direct obligations of the Federal government (e.g., U.S. Treasury obligations); (ii) securities subject to guarantees from the Federal government; and (iii) securities issued by or guaranteed by corporations whose securities are designated by the Secretary of the Treasury as exempt from the Exchange Act. The SEC staff has stated that advice about repurchase agreements collateralized by U.S. government securities does not fall within the exception. J.Y. Barry Arbitrage Management, Inc., SEC Staff NoAction Letter (Oct. 18, 1989). See also In the Matter of Rauscher Pierce Refsnes, Inc., et al., Investment Advisers Act Release No. 1863 (Apr. 6, 2000) (“Because Rauscher’s advice was not limited to Treasury securities or other government securities as described in section 202(a)(11)(E), that provision did not operate to exclude Rauscher from the definition of investment adviser.”).
Demand and Demand Cruve
- demand reflects the quantity of a good or service that consumers are willing to purchase.
- As price increases, consumers demand less. As prices decrease, consumers demand more.
- Anytime there is a change in price, there’s a movement along the demand curve, or a change in quantity demanded,
- Shift in the Demand Curve - will shift (and create a change in demand due to an increase/decrease in):
- income
- taxes
- savings rate
- disposable income
- *anything that cause discretionary income to increase will shift the demand curve up and to the right (ex: decrease in tax rates)
- anything that cause discretionary income to decrease will shift th4e demand curve down and to the left (Ex: increase in tax rates)
Supply
supply reflects the quantity of a good or service that businesses are wiling to supply at a given price
The higher the price, the more suppliers are willing to supply. The lower the price the less suppliers are willing to supply
Anytime there is a change in price, there is amovement along the supply curve due to a price change, which is called a ‘change in quantity supplied’
Shifts in the supply curve: The supply curve will shift to the left of right because of a change in :
technology
competiton
anything other than price
Equilibrium
price at which the quantity demanded equals the quantity supplied.
Yield Curve - Normal vs. Inverted
Normal - concave. Sloping upward and to thr right
Inverted - convex, sloping downward and to the right.
FDIC Insurance
each depositor has a total of $250K of insurance per type of account ownership. Four types of ownership:
individual accounts
joint accounts
trust accounts (per owner, per beneficiary)
self-directed retirement accounts
- Accounts at different banks are insured separately.. (Ex: $250K at two different banks = $500K in total FDIC coverage)
- FDIC only covers cash, bank deposits, or CDS (not stocks, mutual funds, etc).
- Each person is deemed to own 50% of a joint account for FDIC insurance purpose.
- Any deposit only payable outside the U.S. is not covered
- Money held in a money market fund is NOT covered
