Fundamentals of Financial Planning Flashcards
Hannah currently has $915,000 saved. She will retire in 10 years and wants to take $80,000 income for 25 years at the beginning of each year. She also wishes to have $1,000,000 35 years from now to leave to her heirs. What is the internal rate of return needed to accomplish this?
A) 5.99%
B) 4.96%
C) 3.13%
D) 4.75%
The correct answer is B. Income needs to begin at the beginning of year 10, make end of year 9 the last year of inactivity. The 1,000,000 is entered separately as it is not part of the retirement income stream.
10BII and 10BII+ (zeros were truncated to speed up calculation)
915 +/-CF
0 CF
9 [OS] Nj [OS] means Orange Shift
80 Cf
25 [OS] Nj
1000 CF
[OS] IRR/YRl
Individuals have different preferences and place different values on comparable amounts in difference situations. This is referred to as the concept of
Mental accounts
Historical information will not help investors achieve above average market returns. Essentially rejects technical analysis
Weak
fundamental works only in weak
Regardless of form charting, i.e. technical analysis does not work
Historical and public information will not help investors achieve above average market returns. Rejects technical and fundamental analysis
Semi-Strong
Regardless of form charting, i.e. technical analysis does not work
Historical, public and private information will not help investors achieve above average market returns. Rejects technical & fundamental analysis, and also inside information. So, diversify stocks randomly or merely go with an Index
Strong
Regardless of form charting, i.e. technical analysis does not work
The investor relies on index funds
Understanding the Client’s Personal and Financial Circumstances
Step One
1) Obtain qualitative and quantitative information
2) Analyze information: Assess the Client’s personal and financial circumstances
3) Address incomplete information
A CFP® professional’s staff creates a statement of financial condition from data provided by the client.
Identifying and Selecting Goals
Step two
1) Identify potential goals
Discuss your assessment of client’s financial and personal circumstances
Develop reasonable assumptions and estimates
2) Select and prioritize goals
Note impact that particular goals have on other goals
Discuss any goals that may be unrealistic
Analyze the client’s current course of action and potential alternative courses of action
Step Three
1) Analyze the current course of action
Analyze material advantages and disadvantages of the current course of action
2) Analyze potential alternative courses of action
Note: potential alternative course of action does not become a recommendation until the CFP® professional selects it as a recommendation in Step 4 of the process
trend analysis and information evaluation.
Undertake teambuilding and networking with other professionals who are already working with the client.
Modify goals if need be during this step.
Developing and Presenting Financial Plan Recommendations
Step Four
From the current and potential alternative courses of action, select one or more recommendations designed to maximize the potential for meeting the Client’s goals
Presenting the Financial Planning Recommendations
Step Five
Present to the Client the selected recommendation(s) and the information that was required to be considered in developing the recommendation(s).
Provide advantages and disadvantages of continuing the current plan and of any alternative plans.
Recommendations may be presented orally, in writing, in person, over the phone, or in another format that fits the client’s needs.
Consider the complexity of your recommendations when determining the presentation.
Keep in mind client’s that have visual or hearing impairments
Implementing Financial Plan Recommendations
Step Six
1) Must be completed unless specifically excluded
2) Establish responsibilities of the client, CFP® professional and any third parties.
CPA, Attorney, Insurance Agent, etc.
3) Set timeline and priority
4) Select implementation actions product and services
Monitoring the Plan
Step Seven
1) Must be completed unless specifically excluded
2) Establish monitoring and updating responsibility
How and when
Be realistic and clear in setting expectations
Client’s responsibilities to update
Ensure you have proper access or authority to communicate with third-parties
3) Monitor the client’s progress
Analyze at appropriate intervals
4) Obtain current qualitative and quantitative information
5) Update goals, recommendations, or implementation decisions
Determine if the terms of engagement are up to date
For which purposes should a CFP® professional use a prospectus?
To disclose expenses the client will incur.
A prospectus will disclose expenses such as administrative or management fees associated with a variable annuity or mutual fund.
All answer choices are false statements below
- To disclose conflicts of interest that may be immaterial.
- A prospectus is not an approved form of disclosure according to the CFP Board’s Code of Ethics.
- A prospectus may be used to disclose the costs associated with a term life insurance policy.
CFP Board’s Code of Ethics
The compensation of a CFP® Professional must be based upon the fair market value of the services agreed to in the engagement letter. A CFP® Professional may not disclose confidential client information without their explicit consent.
Compensation is addressed in section A of the Code and Standards and not in Ethics. Compensation must be fair and reasonable, but no market value requirement exists.
There are several exceptions to the non-disclosure rules. For example, a CFP® professional may disclose confidential information if compelled to do so by a legal court document such as a subpoena.
CFP Board’s Practice Standards, which of the following is/are correct?
If the scope of the engagement is limited to financial advice not requiring financial planning, no written agreement is required. The Practice Standards for Financial Planning do not apply when the practitioner is engaged in financial planning.
When financial advice that does not require financial planning is given, the agreement can be made orally and is not required to be in writing. The Privacy policy must be given in writing. If a financial Planner is engaged in Financial advice that does not require financial planning, the client is owed a fiduciary duty, but the Practice Standards for Financial Planning would not need to be followed. The Practice Standards must be followed when providing Financial Planning.
