Fundementals Flashcards
What are the standards of professional conduct?
Code of Ethics and Practice Standards
Candidate Fitness Standards
Disciplinary Rules
What is financial advice?
Communication
Recommendation of action (or refrain from action)
Examples:
- how to manage portfolio
- how to manage assets
- selection and retention of other experts
- having discretionary authority
If they call you up and ask you to buy something, not advise
What is financial planning?
Collaborative
maximize the clients potential for meeting life goals through financial advice
Relevant elements
More extensive than advice
Review this chart.
What is required when you are providing financial advice? Financial planning?
Financial Advice
- Fiduciary duty
- Disclose and manage conflicts
- Provide info to clients
- Duties when recommending, engaging, and working with additional person
Financial Planning?
- Practice standards for FP
- Info to clients in Writing
What’s included on the Code of Ethics?
- Act with honesty, integrity, competence, and diligence
- act in the clients best interest
- exercise due care
- avoid or disclose and manage conflicts of interest
- maintain the confidentiality and protect the privacy of client info
- act in a manner that reflects positively on FP and CFP cert
What is the CE requirement for CFP?
30 hours every 2 years. 2 of these hours must be ethics
How do you use the CFP marks approprately?
Erin Little, CFP(R)
CERTIFIED FINANCIAL PLANNER (tm) (All Caps)
Don’t use in parenthesis
If written, it’s followed by a noun:
- professional
- certificant
- practitioner
- certification
- mark
- exam
DO NOT use CFP in your email or url
What are the Standards of Conduct?
- duties owed to the client
- financial planning and application of the practice standards for financial planning process
- practice standards
What’s included with duties owed to the client?
Read A.1 - A.15!!!!
What are the components of fiduciary duty?
Duty of loyalty: clients interests before CFP, avoid conflicts of interest,
Duty of Care
Duty to follow client instructions
What are important things about avoiding conflicts of interest?
This is part of the duty of loyalty
Must fully disclose material conflicts
Must get the clients informed consent
What is the duty of care?
Care, skill, prudence, diligence
understanding their full situation, not just finances. Understand their personal circumstances
What are examples of conflicts of interest?
compensation
limited product set
proprietary funds
paid referrals
How do you inform the client about confidentiality and privacy?
Written
What are exceptions to the confidentiality and privacy rules?
for ordinary business purposes (client oks)
for legal and enforcement purposes
- defend against wrondoing
- audits
- subpoena (court approved)
Memorize this chart
When financial planning, what is the document that you need to provide that isn’t required with financial advice?
Terms of engagement - implementing, monitoring, updating, what’s excluded.
What are requirements around client payment?
If you, firm, or related party receive pay:
- Make sure to cover this before payment:
– product management fees
– surrender charges
Where do you typically put information about client payment?
ADV part 2
engagement letter
brokerage agreement
offering docs
prospectus
Can be in multiple places.. important thing is that it is very clear
What do you need to do if you file bankruptcy or had public discipline?
Disclose it to the client and disclose it on all relevant web-sites
- broker check (FINRA)
- IAPD (SEC)
- CFP.net (if board related issue)
What must you update annually with the SEC?
ADV
Privacy policy
What do you need to do if you have a material change in your business?
Material change: compensation policy, etc
Notify board within 30 days
Notify clients within 90 days
What does a FP terms of engagement need to include?
Scope
limitations (stuff you won’t do)
period of engagement
the clients responsibility
A CFP is responsible for implementing, monitoring, and updating the FP unless specifically excluded
How is sales related compensation defined?
12b-1 fees
transaction fees
revenue sharing
referral fees
What is the definition of Financial Planning?
A collaborative process that helps maximize a clients potential for meeting life goals through financial advice that integrates relevant elements of the clients personal and financial circumstances
What are relevant elements?
- manage cashflow
- identify and manage risk
- educational needs
- financial security
- tax consideration
- retirement
- philanthropic
What are integration factors and why are they important?
The more you are involved in them the more impact the advice has on the portfolio, the more likely that it’s financial advice
Factors include:
- Portion and amount of assets
- length of time the client might be affected
- effect on client’s overall exposure to risk
- barriers to modify
What is the financial planning process?
Uber is a drunk persons immediate motor vehicle
Understand
Identify
Analyze
Develop recommendations
Present
Implement
Monitor
What is prohibition on circumvention?
you’re prohibited to get someone else to do something that you’re not allowed to do.
What is motivational interviewing?
Conveys empathy and acceptance
focus on partnerships, evocation, acceptance, compassion
Basically help them to come to the right conclusion
What are the fitness standards?
How the CFP board judges if you are fit to be a CFP. They look at:
Conduct that is unacceptable
Conduct that is presumed to be unacceptable
Other conduct that might reflect adversely
What is conduct that is deemed unacceptable?
Can’t be a cfp!
Certain Felony CONVICTIONS
- theft, embezzlement, tax fraud, financial crimes
- murder/rap
- violent crime in the past 5 years
Revocation of financial professional license
(unless you forgot to renew your license
What conduct would be deemed a presumptive bar?
You have an option to petition
Presumptive bar if:
- two or more personal or business bankruptcy*
- felony conviction of violent crimes more than 5 years ago
- nonviolent crimes
– perjury, within 5 years
- REVOCATION or suspension of a non-financial professional license (real estate)
- SUSPENSION of a financial professional license
*bankruptcies are still disclosed on the CFP board website
What’s the process if the CFP is reviewing a presumptive bar
They review evidence
hearing panel recommends to DEC (Disciplinary Ethics Commission)
DEC reviews and accepts, rejects or modifies
DEC issues final order to grant or deny or impose temporary bar or permanent bar
CFP Board publishes
If you’re suspended for more than one year, when can you file a written petition for reinstatment?
after 6 month or before 5 years
Hearing panel and DEC review
What are the reporting requirements for bankruptcy?
Report it to CFP Board in 30 days
to clients in 90 days and on all relevant public websites
Alternatively, you can report it to the board then pay the hearing fee and try to convince them it’s not a problem
If 2 bankruptcies, must report and you follow the normal disciplinary procedure
According to the Investment Advisor act of 1940, when are you giving investment advice?
ABC
When giving Advice
As part of your Business
and you receive Compensation
At what AUM level do you register with the state versus the SEC?
> $100m - State
$100m-$110m - choose
<$110m - SEC
This is from the 2010 Dodd Frank act
Midsize advisors are between $25m and $100m
What are the registrations processes for RIAs?
File form ADV with SEC
Withdraw with form ADV-W
What is form ADV part 1A and B?
Filed annually with SEC (doesn’t need to go to client)
Firm name
background (executives)
Facts about FINRA?
Not actually a gov organization
What is part 2 of the ADV?
Client brochure
Includes:
-firm and advisor info
-compensation and fees
-education
-investment objectives and strategies
-conflicts of interest
What is ADV part 3?
client relationship summary
conflicts of interest
written in plain English
Who has an exception and does not need to register?
Make an exception for your TABLE
Don’t have to register, not subject to fraud statutes
banks, bank holding companies that aren’t investment companies
any broker dealer whose advisory services are solely incidental
lawyers, accountants, teachers, engineers that provide incidental advice
Teachers
Accountants
Bankers/brokers
Lawyers
Engineers
Publishers of bona fide
What are exemptions for investment advisor registrations?
Don’t have to register, are subject to fraud statutes
Advisors whose clients reside in their state and they do not provide advice
Advisors providing advice to securities not on the national exchange
Only clients are insurance companies
only clients are venture capital funds
only clients are private funds less than $150m
foreign advisors without a place of business
VIPS are SaFE from exemptions
Venture capitalists
Insurance companies
Private funds
S
Foreign
Exchanges
What is the brochure rule?
What form do you use to register with FINRA?
U-4
What exam do you need to pass to sell mutual funds, UITs and variables (life insurance and annuities)
Series 6
The more vertical the demand curve, the more…
Inelastic. Peopler are indifferent to the price.
Gas, milk, etc
What will shift the demand curve?
increase or decrease in
-income
-taxes
-savings rate
-disposable income
What will shift the supply curve?
change in :
- technology
- competition
- anything other than price
What is the business lifecycle?
Expansion
- GDP, inflation, and interest rates are increasing
- Unemployment is decreasing
Peak
- GDP is at its highest
- inflation and interest rates are peaking
- unemployment is at a low
Contraction
- GDP begins to slow
- inflation and interest rates begin to decline
- unemployment begins to increase
Trough
- GDP, inflation and interest rates are at their lowest levels
- unemployment is at its highest
What are the 4 parts of GDP?
Consumer spending
net trade
gove spending
business investment
What are leading indicators?
initial unemployment claims
stock prices
money supply
new manufacturing orders
new private housing starts
consumer sentiment
Yield curve
market volatility
consumer confidence index
jobless claims
Coincidental indicators
employees on payroll
personal income
industrial production
manufacturing sales
employment
real earnings
GDP
What are lagging indicators
Average duration of unemplyment
change in CPI
change in labor cost per unit
consumer credit to income
corporate profits
unemployment rate
interest rates
What is a recession vs depression?
Recession - 2 consecutive quarters of declining GDP
Depression - 6 consecutive quarters of declining GDP
What is monetary policy?
Federal reserve control the money supply and influencing interest rates
Three goals:
1. maintain long term economic growth
2. maintain price levels supported by the economy
3. maintain full employment
What is Fiscal policy?
Congress controlling spending and taxation
What tools does the fed have to influence monetary policy?
- Can adjust the reserve requirement
- Discount rate (rate between fed and banks)*
- Open market operations - Buying and selling gov securities. Buying securities increases money supply
- Excess reserve rate -
- more money in circulation drives interest rates down
*Fed funds rate is the rate between banks
What tools does congress have?
Fiscal policy
- Taxation
- Spending
- Debt management
What are consumer protection laws?
Fair Credit reporting act
Fair deb
Fair credit billing act - 30 days to dispute, consumer liability for lost or stolen card is limited to the lesser of $50 or charges incurred if notice is given to the credit card company
Truth in lending act - what are you actually paying in interest rate/APR
CARD
What is FDIC insurance?
US deposits are covered, outside of the US not covered.
Stocks, bonds, mutual funds are not covered. Money market mutual fund is not covered.
Each deposited has a total of $250k of insurance per type of account
- including IRAs, SEP, Simple IRAs
For joint accounts, each is deemed to own 50% of the joint account for FDIC purposes
What is Chapter 7 bankruptcy?
Relief through liquidation - typically for individuals
Protected assets:
- Rollover IRAs have unlimited protection
- IRAs and Roth are exempt up to $1.3 million
- inherited IRAs don’t have protection
- Alimony and child support
- Pensions, life insurance, and annuities
Debts that are not discharged (forgiven):
- 3 years of back taxes
- Alimony and child support
- student loans (unless undue hardship)
What is chapter 11 bankruptcy?
Relief through reorganization - typically for businesses
Is workers Comp taxable?
No!
Is unemployment comp taxable?
Yes!
How much is social security?
15.3% up to the wage base - $147k
12.4 to wage base
2.9 Medicare over wage base
What are federal programs versus state programs?
Federal:
special education
social security
veterans
state:
residential services
transportation services
respite care services
family support services
day program services
What is a balance sheet?
Snapshot at moment of time
Assets and liabilities
Assets-liabilities=net worth
What is the current ratio?
Current ratio = current assets/current liabilities
measures the clients ability to meet short term obligations
Current assets include cash and cash equivalents
- CDs less than 12 months in maturity
- money market
- savings
- cash
- accounts receivable
Current liabilities include credit cards, short term debts less than 12 months
The bigger the better! should be at least 1 which would indicate you have enough liquid assets to cover your short term debt
What’s a good emergency fund?
3-6 months non discretionary expenses
- 3 for dual wage earners
- 6 for a single wage earner family
- could be wage, alimony, trust income, etc
Looks at current assets
Emergency fund= current assets/monthly non-discretionary expenses
What is the housing ratio?
housing ratio should be less than or equal to 28% of gross income
Mortgage, property tax, insurance, interest
P = principal
I = interest
T = taxses
I = insurance
What is the housing + recurring debt ratio?
housing + recurring debt less than or equal to 36%
Mortgage, property tax, insurance, interest, car debts, credit card, etc
When is it appropriate to lease or rent?
if time in property is going to be short - 1-3 years
Buy when it’s long term, you want to build equity, and there is a high marginal tax bracket
What part of a mortgage is deductible?
interest up to $750k loan
not on a heloc unless used to improve home
What is a 2/6 loan?
Can’t increase more than 2% per year or 6% over entire term of the loan
What is a reverse mortgage?
available for 62 or older
Take out a line of credit on your house
Repayment can be while living or at death
When is a student considered independent?
Over age 23
have legal dependents other than spouse
married
working on masters or doctorate
What is a federal pell grant?
“need” based - dependent on expected family contribution
What is a Stafford loan?
two types
need based - subsidized (pay back after college)
- not available to grad students
not needs based - unsubsidized (start paying during college)
- available for grad students
What is a PLUS loan?
Not need based
repaid within 10 years
for the parent
can request deferment if child is enrolled half time
What is Graduate PLUS loans?
student loans for graduate students
Payments begin 6 months after graduateion
can pay interest while in school
What are tax advantaged plans for education savings?
Qualified tuition plans
- prepaid tuition
- savings plans (529)
- ABLE accounts - disabilities
Coverdell education accounts - $2k maxx
Roth IRA
Series EE savings
UGMAs/UTMAs (kiddie taxed)
Features of a 529A
Features of Coverdell
$2k per year per bene. Phase out
owner may change bene
funds must be used by 30
no contributions after bene turns 18
considered a parent asset for FAFSA
Features of a 529 versus a cover dell plan?
When is a 529 plan included in the gross estate?
If they did the 5 year rollup and then died before the 5 years - if that happens, there is a clawback
When is a 529 plan included in the gross estate?
If they did the 5 year rollup and then died before the 5 years - if that happens, there is a clawback
How is prepaid tuition treated when calculated EFC?
It is an asset to the parents and included in the calculation for EFC.
What are pell grants?
Undergatuate only
must have a high unmet need
What is a Federal Supplemental Educational Opportunity Grant?
Undergraduate only
must have a high financial need
What happens when you use Roth money for edu expenses?
No 10% penalty
Contributions and conversions are tax free
earnings is taxable
What is a series EE bond?
Can be used for tuition and fees in addition to the AOTC, as long as not on the same expenses
No federal income tax on interest if you are paying for qualified expenese
Bonds are not purchases in the childs name
buyer must be over 24 when purchased
can be converted into 529 plans or coverdell esa
must be used in the same year the bond is redeemed
How is an UGMA treated for financial aid purposes?
Treated as an asset of the child
Biggest difference between UGMA and UTMA?
UTMA is more flexible, can include real estate
When is student loan interest deductible?
Above the line
Limited to $2500
Phase out starting at $75k
What is the lifetime learning credit?
Tax dollar for dollar credit
20% of up to $10k in qualified expenses
max $2k per family
Can be claimed for an unlimited number of years of college
Tuition and fees related to undergrad, graduate, or professional programs
Phased out starting at $80k
What is the American opportunity tax credit?
100% of first $2000
25% of next $2k
So $2500 if you spend over $4k
Per student
Only for first 4 years of undergrad
Phased out
Always go for AOTC first!
Can you use the AOTC and LLC together?
Yes! But they must be used on different expenses
If you use your 529, you can’t use this credit
When qualifying for financial aid, which assets are considered?
529 - parent
coverdell - parent
UTMA - kid
What are the rules for emplpyer education assistance?
They can reimburse an employee for education expenses up to $5250 without the employee having to include that in income
Know this chart
Know this chart
What is an accredited investor?
123 test
$1million net worth not including residence
$200k income if single
$300k income if married or in a relationship like a spouse
What is a good life insurance benchmark?
10-16x gross pay
What’s a good benchmark for retirement savings?
Save 10-12% per year
Save 16x your the amount of income needed every year in retirement
What rate does the fed reserve control?
discount rate
NOT prime lending rate or fed funds rate
fed funds rate is the overnight borrowing rate between member banks
Summary chart of monetary policy
Education funding summary chart
What are capital goods? Consumer durable goods?
Durable goods: goods not for immediate consumption and able to be kept for a period of time. cars. washing machines
Non-durable goods: food. paper products. consumed immediately
Capital goods: used for producing profit or other goods
How do you calculate inflation adjusted return?
[(1+rate of return)/(1+inflation rate)] - 1) x100
Which industries are typically more affected by recession with regard to production and employment?
Capital goods
Consumer durable gooods
For purposes of the Free Application for Federal Student Aid (FAFSA), what is considered includible assets?
Money in cash, savings, and checking accounts
Businesses
Investment farms
Real estate (other than a personal residence)
Other investments
Assets do not include:
A personal residence
Life insurance
Retirement plans (401(k) plans, pension funds, annuities, IRAs, Keogh plans, etc.)
What should a CFP do if they think illegal activity is happening in their org?
Contact their supervisor
They should only contact regulatory authorities in the event that no correct action is taken after they discuss the situation with their supervisor.
How are 529 assets treated for FAFSA?
A 529 savings plan purchased by the student’s UGMA is treated as assets of the parent on the FAFSA.
What is reflection-of-feelings response?
Reflection-of-feelings response is a technique a counselor uses during active listening to encourage additional discussion. The counselor responds to the client by attempting to reflect back to the client in words the underlying feelings presented by the client’s statements of concern. The counselor communicates understanding and empathy for the client’s distress. The other responses presented in this question are responses a counselor uses to signal that she is moving away from active listening and in a new direction beyond the client’s statements.
What is the phase out for usnig the AOTC? LLC?
The AOTC is subject to a phase-out for taxpayers with adjusted gross income in excess of $80,000 ($160,000 for married couples filing jointly).
For TY2022, the amount of your LLC is gradually reduced (phased out) if your MAGI is between $80,000 and $90,000 ($160,000 and $180,000 if you file a joint return). You can’t claim the credit if your MAGI is $90,000 or more ($108,000 or more if you file a joint return).
What is Money Status in terms of a money script identified by Klontz, Britt and Klontz.
Recent research (Klontz et al. 2011) has identified four categories of money scripts, three of which are associated with poor financial health: (1) money avoidance, (2) money worship, (3) money status, and (4) money vigilance.
Are long term disability plans subject to nondiscrimination?
NOOOO!!! Long-term disability income plans are not subject to nondiscrimination rules, so such plans may be provided for only a select group of executives.
How are disability benefits taxed?
If the employer pays half, they will be one-half taxable income because the employer pays half of the premium. Steven’s plan will only pay him 50% of his monthly salary if he should become disabled for any reason.
Are CDs insured by FDIC?
Yes
Who issues treasury bills?
The treasury departembt - not the fed
The provision that all credit reports are required to contain accurate, relevant, and current information is a part of:
The Fair Credit Reporting Act.
For FAFSA, which assets are included or not included?
Assets include:
Money in cash, savings, and checking accounts
Businesses
Investment farms
Real estate (other than a personal residence)
Other investments
Assets do not include:
A personal residence
Life insurance
Retirement plans (401(k) plans, pension funds, annuities, IRAs, Keogh plans, etc.)
What is a client’s liability for the fraudulent transactions on their cards?
$50 max for each card
When can you breach confidentiality?
As necessary to provide information between attorneys, accountants and auditors”.
