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CFP Review > Fundamentals & Insurance > Flashcards

Fundamentals & Insurance Flashcards

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CFP® flashcards
1
Q

Standards of Conduct
E. Duties Owed to CFP Board

What are “relevant” misdemeanors?

A

Tax and financial misdemeanors are almost always relevant.

A first alcohol or drug misdemeanor is not relevant.

Driving offenses, tickets, and misdemeanors that DO NOT involve alcohol or drugs are NOT considered relevant.

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2
Q

Standards of Conduct
E. Duties owed to CFP Board

Reporting: How many days to report?

Exceptions: What are the exceptions to reporting?

A

Reporting must take place 30 days (including weekends/holidays) after a CFP professional is named, charged, convicted, settled, adversely mentioned in an action, arbitration or civil event.

EXCEPTIONS:

  • Claims of arbitration compensation for $5k or less.
  • Violations settled for $15k or less.
  • FINRA investigations and outcomes other than an uncontested minor rule violation under $2,500.
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3
Q

CFP Board Disciplinary Rules & Procedures

Timeline to respond and consequences

A
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4
Q

CFP Board Candidate Fitness Standards

ALWAYS Bar List

A

FELONY CONVICTION

  • Theft, embezzlement, financial based
  • Tax fraud or tax-related
  • Any degree murder or rape
  • Violent crime within 5 years

OR

REVOCATION OF A FINANCIAL PROFESSIONAL LICENSE
*Unless administrative in nature

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5
Q

CFP Board Candidate Fitness Standards

PRESUMED Bar List

A

FELONY CONVICTION

  • Violent crimes (*not murder/rape) OVER 5 YEARS AGO
  • *-**Non-violent crimes and perjury WITHIN 5 YEARS

OR

REVOCATION/SUSPENSION
-Non-financial professional (real-estate/attorney)
*Unless administrative in nature

OR

SUSPENSION
-Financial Professional
*Unless administrative in nature

OR

BANKTRUPTCY
-TWO or more personal and/or business

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6
Q

Registered Investment Advisor
Definition

A

TIP: “ABC”

Advice, business, compensation

Investment Advisors Act of 1940: Someone who is in the business of providing advice about securities for compensation.

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7
Q

EXCEPTIONS to Registration with the SEC

A

TIP: “TABLES” are incidental

Do not need to register and are not regulated by the Advisors Act. They are NOT bound by the anti-fraud provisions.

Teachers, Accountants, Brokers, Lawyers, Engineers - Must be solely incidental to the conduct of business (broker/dealers) or to their profession (lawyers, accountants, teachers and engineers).

AND

  • Broker/Dealers whose services are solely incidental
  • Banks/holding companies that are not investments companies
  • Advisors whose services are STRICTLY RELATED TO SECURITES OF THE US.
  • Publisher of newspaper
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8
Q

EXEMPTIONS to Registration with the SEC

A

TIP: “VIPs are SaFE and Exempt”

These advisors meet the definition of an Investment Advisor but do not need to register. They are SUBJECT TO ANTI-FRAUD PROVISIONS.

  • Venture capital (advisors who only advise venture capital funds)
  • *-I**nsurance companies (advisors who only advise insurance companies)
  • Private funds w/LESS than $150M
  • home State (advisors with clients that only reside in their state of business)
  • Foreign advisors (who do not have a place of business in the US)
  • national Exchange (advisors NOT providing advice about securities traded on a national exchange).
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9
Q

Accredited Investor Test

A

TIP: To be an accredited investor, you must meet the “1, 2, 3 test”

  1. $1M in assets (exclusive of residence)

OR

  1. Minimum of $200,000 in income (single)
  2. Minimum of $300,000 in income (joint)
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10
Q

Practice Standards for the Financial Planning Process

A

TIP: “Uber Is A Drunk Persons Immediate Motor vehicle”

  • Understanding circumstances
  • Identifying Goals
  • Analyzing information
  • Developing plan
  • Presenting plan
  • Implementing plan
  • Monitoring plan

*Analyzing can also happen in the understanding circumstances section–analyzing documents collected from the client, etc.

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11
Q

Life Insurance Typical Benchmark

A

10 to 16x gross income (if the client has a life insurance need)

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12
Q

Health Insurance Benchmark

A

$1M lifetime cap (pre ACA). The ACA eliminated per illness and lifetime caps.

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13
Q

Disability Insurance Benchmark

A

60-70% of gross income (if a client is paying premiums w/after-tax dollars)

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14
Q

Property (Home & Auto) Benchmark

A

Fair-market value of home/auto

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15
Q

Long Term Care Benchmark

A

Inflation protection should be 36-60 months
A policy should provide a daily benefit for nursing home, home health care or help with ADL’s.

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16
Q

PLUP Benchmark

A

$1-3M in protection

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17
Q

Consumer Debt Benchmark

A

Should NOT exceed 20% of NET income

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18
Q

Emergency Fund Benchmark

A

3-6 Months of non-discretionary expenses

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19
Q

Housing Ratio Benchmark

A

28% or less of gross income

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20
Q

Housing Ratio Plus All Other Debt Benchmark

A

Should NOT exceed 36% of gross income

(primary mortgage plus all other recurring debt payments)

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21
Q

Education Funding Benchmark

A

$3k/yr or $6k/yr or $9k/yr for 18 years.

($3k for public state, $6k for semi-private, $9k for competitive private).

22
Q

Retirement AMOUNT Benchmark

A

By age 62-65: client should have roughly 16x the annual amount of retirement income needed saved.

Ex: If a client needs $100k/year in retirement, that individual should have saved $100k x 16 = $1.6M saved by age 62-65.

23
Q

Savings Rate for Retirement Benchmark

A

10-12% should be saved towards a retirement goal

24
Q

Return on Investments Benchmark

A

Return of 8-10% assuming a long-term horizon.

This is what an investor should expect as a return of investment.

25
Q

Risk / Standard Deviation Benchmark

A

The benchmark / standard deviation for a diversified portfolio is 8-14%

Risk is measured using standard deviation (which is a measure of volatility and variability).

26
Q

Describe the shape of an elastic demand curve and an inelastic demand curve

A

Elastic:

  • An elastic demand curve is almost horizontal, sloping down and to the right.
  • When there’s a small change in price there’s a large change in quantity demanded.

Inelastic:

  • An inelastic demand curve is almost vertical, sloping down and to the right.
  • When there’s a small change in price there’s very little change in quantity demanded.

*Remember the “I” in Inelastic and that should help remember the shape of the inelastic demand curve.

27
Q

Business Life Cycle Components

  • Expansion
  • Peak
  • Contraction/Recession
  • Trough
A

Expansion

  • The expansion phase is characterized by increasing GDP, inflation and interest rates. However, the unemployment rate is decreasing.

Peak

  • The peak phase is characterized by GDP being at its highest.
  • Inflation and interest rates are peaking and the unemployment rate is at its lowest levels.

Contraction/Recession

  • The contraction phase is characterized by GDP slowing.
  • Inflation and interest rates are also beginning to decline.
  • The unemployment rate begins to increase during the contraction phase.

Trough

  • A trough is characterized by GDP, inflation, and interest rates being at their lowest levels.
  • Unemployment is at its highest during a trough.
28
Q

What direction are the following variables headed in at each phase in the business life cycle:

  • Inflation
  • Interest Rates
  • Unemployment
  • GDP
A
29
Q

What are cyclical in nature and fluctuate directly with the business cycle?

A

Consumer durables and capital goods.

30
Q

Definition of a Recession

Definition of a Depression

A

A recession consists of six consecutive months (or two quarters) of declining GDP.

A recession becomes a depression if the recession lasts for 18 months or six consecutive quarters.

31
Q

Definition of Deflation

A
  • Deflation is the opposite of inflation, where prices are falling.
  • During periods of deflation, individuals prefer to hold cash because cash becomes more valuable as it can buy more goods and services and prices decrease.
32
Q

Definition of Disinflation

A
  • Disinflation is a decline or slowdown in the rate of inflation.
  • For example: If annual inflation has been running at 4% each year for the past three years, then slows to 3.0 – 3.5% that would be a slowdown in the rate of inflation.
33
Q

What are the three main goals of the Federal Reserve?

A
  1. Maintain long-term economic growth.
  2. Maintain price levels supported by the economy.
  3. Maintain full employment.
34
Q

Describe the four tools used by the Federal Reserve to influence the money supply and interest rates:

  1. Reserve Requirement
A

1. Reserve Requirement (First Tool).

  • The reserve requirement is a percentage of deposits a bank must maintain in cash.
  • As the reserve requirement increases, there’s less cash available to lend, therefore the money supply decreases and interest rates increase.
  • As the reserve requirement decreases, there’s more cash available to lend, therefore the money supply increases and interest rates decrease.
35
Q

1. Reserve Requirement (First Tool).

  • The reserve requirement is a percentage of deposits a bank must maintain in cash.
  • As the reserve requirement increases, there’s less cash available to lend, therefore the money supply decreases and interest rates increase.
  • As the reserve requirement decreases, there’s more cash available to lend, therefore the money supply increases and interest rates decrease.
A

2. Discount Rate (Second Tool).

  • The discount rate is the overnight interest rate at which member banks can borrow from the Federal Reserve to meet their reserve requirements.
  • As the discount rate increases, short-term interest rates increase as well.
  • As the discount rate decreases, short-term interest rates decrease as well.
36
Q

Describe the four tools used by the Federal Reserve to influence the money supply and interest rates (continued):

  1. Open Market Operations
A

3. Open Market Operations (Third Tool).

  • As the Federal Reserve buys or sells government securities, the money supply is influenced and places pressure on interest rates.
    • To increase interest rates the fed will sell government securities, effectively reducing the money supply.
    • To decrease interest rates the fed will buy government securities, effectively increasing the money supply.
37
Q

Describe the four tools used by the Federal Reserve to influence the money supply and interest rates (continued):

  1. Excess Reserves
A

4. Excess Reserves (Fourth Tool).

  • Excess reserves are monies that a bank holds at the Federal Reserve (or central bank) in excess of the required reserve amount.
  • An increase in the excess reserves rate will cause more banks to hold excess reserves, which takes money out of the economy - this is contractionary.
  • A decrease in the excess reserves rate will cause fewer banks to hold excess reserves, which means they will have more money to lend into the economy - this is expansionary.
38
Q

FDIC Insurance

A
  • Each depositor has a total of $250,000 of insurance per type of account ownership.
  • Four types of ownership:
    • Individual accounts.
    • Joint accounts.
    • Trust accounts.
    • Self-directed retirement accounts.
  • Accounts at separate banks each receive $250,000 of insurance.
    • Each person is deemed to own 50% of joint accounts.
39
Q

List some examples of debts that are not discharged in bankruptcy and the assets that are exempt from creditors.

A
  • Below are examples of debts that are not discharged through Chapter 7:
    • Student loans
    • 3 years of back taxes
    • Alimony
    • Child support
  • Traditional and Roth IRA’s are assets that are exempt, up to $1 million (as indexed), from creditors.
  • Clearly identified rollover IRA’s have an unlimited exemption if not combined with other IRA money or contributions.
40
Q

Definition of Workers Compensation

A
41
Q

Life Insurance Nonforfeiture Options

A

TIP: Is there “RECourse?” Yes, Reduced paid-up, Extended term, Cash value.

  • Cash Surrender Value
    • Insured receives the accumulated cash value when terminating the life insurance policy. The cash surrender value is the cash value less surrender charges.
  • Reduced Paid-up Insurance
    • Insured receives the cash value in the form of a paid-up policy with a smaller face amount.
  • Extended Term Insurance
    • The insured receives the cash value in the form of a paid-up term policy for a specified duration, with the same face amount as the original policy.
42
Q

What are the five dividend options?

A

TIP: “CRAP-O” Cash, Reduce premiums, Accumulate at interest, Paid-up additions, One-year term.

  1. Cash – clients receive the money and can use it or invest it as they wish.
  2. Accumulate at Interest – the company invests the dividends and they are tax-free up to the client’s basis in the policy. Interest paid on the dividends is taxable.
  3. Reduce Premiums – decreases the out of pocket expense for premiums.
  4. Paid-up Additions – purchases additional insurance each year for insured regardless of health or occupation.
  5. One-year Term – adds term insurance each year to the policy face amount equal to cash value of the policy. Also known as the 5th dividend option on the CFP® Exam!
43
Q

Is a testamentary trust revocable or irrevocable?

A

It is irrevocable.

A testamentary trust (or will trust) is created when an individual dies and the trust is detailed in their last will and testament. Because the establishment of a testamentary trust does not happen until death, it is by nature irrevocable once death occurs.

44
Q

When Pete Morin purchased his $100,000 home, he insured it at the required coinsurance amount of 80% of the value. Over the last five years, the value of his home has increased and is now $160,000, but he has not increased his coverage. Pete has a $500 deductible. He has a kitchen fire causing $10,000 in damage. What amount will his insurer pay for repairs?

  1. $4,250
  2. $5,750
  3. $6,250
  4. $9,500
A

Solution: The correct answer is B.

The amount carried divided by the amount required (80% of current value) times the loss, minus the deductible equals the payment. One of the tricks on this one is that he purchased $80,000 of coverage initially (80% of the purchase price). So, the covered loss equals [$80,000 / (.80 × $160,000)] × $10,000 = $6,250. The insurer will pay $6,250 - $500 = $5,750.

45
Q

Six years ago, Sonny Gates purchased a building for $400,000. Its current replacement cost is $800,000. The building is covered for fire-related perils by Commercial Carriers Insurance Company to $400,000, with an 80% coinsurance provision and a $2,000 straight deductible. Last week, a fire broke out in the building, causing $600,000 of covered damage. What amount will Commercial Carriers Insurance Company pay for this loss?

  1. $298,000
  2. $373,000
  3. $598,000
  4. $600,000
A

Solution: The correct answer is B.

(Face value ÷ coinsurance) × Loss - Deductible

(insurance I have ÷ insurance I should have) x Loss - Deductible

He has $400,000 of insurance. He should have 80% of 800,000 or 640,000.

[400,000 ÷ (.80 × 800,000)] × 600,000 - 2,000

[(400,000 ÷ 640,000) × 600,000] - 2,000

(.6250 × 600,000) - 2,000

375,000 - 2,000

373,000 is what the insurance company will pay towards this loss.

46
Q

HO Coverages

A

Coverage A: Attached Structures
Coverage B: the space Between (covers detached garages)
Coverage C: covers my Crap
Coverage D: Damage so bad I cannot live here (pays for housing elsewhere during repairs)
Coverage E: EEEkkk I am in trouble (liability) Liabiliteeeeeeee
Coverage F: someone Fell and I owe them medical payments. OR “Feel better” coverage

47
Q
A
48
Q

What are the four categories of information gathered by a planner during the data gathering phase?

A
  • list of assets and liabilities
  • dollar values
  • ownership information
  • contractual agreements
49
Q

Form ADV (used to register with the SEC)

Form ADV-W (used for withdrawal)

Part 1A + B (for RIA)

Part 2A + B (client brochure)

Part 3 (relationship summary / CRS)

A

Form ADV - Must be filed annually
Form ADV W - Used for withdrawal

Part 1A + B (for RIA)

**Part 2A + B (client brochure)

  • firm and advisor information
  • compensation and fees
  • education
  • investment objectives & strategies
  • conflicts of interest (proprietary funds)**

Part 3 (relationship summary / CRS)

50
Q

What does the Brochure Rule require?

A

Written disclosure to every client including:

  • Advisory services/fees
  • Types of securities
  • Educaiton and business standards
  • Participation/interest in securities transactions
  • Conditions for managing accounts

This information must be given to the client at or before the time of entering into the contract

COMPLIANCE WITH THE BROCHURE RULE IS ACCOMPLISHED BY PROVIDING THE CLIENT WITH ADV 2 (outlines fees)
AN RIA MIGHT REQUIRE CRS/ADV 3 (CRS - Client Relationship Summary)

CFP Review (7 decks)

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