General Principals Flashcards
Qualitative data
Financial goals
Priorities
Risk tolerance
Health presumptions
Life expectancy presumptions
Family circumstances
Ethical and religious values
Expectations
Current financial planning actions.
Emotional data
Quantitative data
Age
Dependents
Other professional financial, tax and legal advisors
Income and expenses
Assets and liabilities
Savings
Available resources
Investment accounts amounts and allocations
Risk capacity
Government benefits
Employee benefits
Amount and allocation of retirement accounts
Tax exposures
Insurance and coverages and ownership
Estate plans
Factual data
Mutual agreed assumptions examples
Practice standards for the financial planning process. CFP should consider:
Reporting requirements for CFP professionals
Charge or convictions of above examples of misconduct must be reported to CFP board within
30 days
Of the charge or conviction. The report must be in writing and include a narrative statement that describes all material cactus as well as the outcome of the charge, conviction, arbitration or lawsuit
Appeals
Individual May appeal any tilling from DEC by filling, within 30 days of the notice of the adverse ruling BY MAIL. This is accomplished by submitting a petition for appeal generally by certified mail. In the absence of financial hardship, the deemed violator must absorb the costs related to the appeal.
Life insurance cash values are technically not cash equivalents
Because life insurance companies may delay distributing such funds for up to 6 months (delay clause)
Use assets
Home
Personal property
Collectibles for personal enjoyment
Vacation home
Automobiles or recreational vehicles
(Assets are generally shown at FMV- buyers are willing to accept presuming neither is forced into transaction )
Note: rental properties is investment.
Fixed outflows
Little to no flexibility.
Note payments/car payments
Insurance premiums
Alimony paid
Mortgage payments, rent
Property tax
Variable outflows
Some flexibility
Food
Clothes
Entertainment
Gifts
Home maintenance
Car maintenance
Utilities
Vacation
Charity
Miscellaneous
Capitalized value
Savings and loans
Squire funds through deposits.
Made to make mortgage loans minsudance: savings association insurance fund (SAIF) and bank insurance fund (BIF).
Coverage depends on the titling of the account. Coverage is accumulative per titling.
Credit unions
National credit union share insurance fund, insures up to $250k
Offer loans, but NOT commercial loans
Insurance regulation
Mostly at state level
Legislative branch: passes insurance laws and provide funding for regulation
Court: interpret insurance laws and resolve disputes
Executive branch: through insurance commissioner, enforces insurance regulatory laws
————————————
Federal regulation of insurance:
COBVRA and HIPAA( health insurance coverage continuation)
Standardized of Medicare supplement policies
Taxation of various insurance politics, including life insurance, annuities, long-term care, viatical settlements, Disability and so on
Security act of 1933
New issues
Securities act of 1934
Secondary market
SEC
Investment company act of 1940
Authorize SEC to regulate UITs, managed investment companies( close and open-ended), and the separate accounts that operate in variable life insurance and annuities
Investment advisors act of 1940
IA- have to be fiduciary
What qualifies as investment advice and stipulates who must register with state and federal regulations in order to dispense it
Securities investor protection act of 1970
Supervise securities firms that get into financial difficulties
SIPC: failure of brokerage firm, not bad investing
Three-steps to determine college funding
Step1: determine the cost of the first year of college.
We use inflation rate to calculate future cost of college per year(end mode)
Step2: determine amount that must be available when child is age 18
We use real rate of return to calculate the total cost for 4 years of college at the beginning of the 1st year. (Use begin mode)
Step3: determine how much parents need to save.
We use the investment return rate to decide save+invest each year (usually end mode)
College funding options
UGMA/UTMA: subject to kiddie tax for children under age 24
EE education bonds: parents own bond, so will not work in a UGMA/UTMA
Coverdell education savings plan(ESA)3 limited to $2000/year contributions on total
Section 529 plan (QTP):
Available in college savings, or prepaid
$16000 contribution per year per child times 5 years=80,0000
College years funding
Graduate years college funding
Fulbright scholarship
Stafford loan
529 distribution or coverdell withdraal
EE bond tax exemption
Interest will be fully exempt from federal income tax only.
For parents to receive the full benefit of the tax-free status, the parents modified adjusted gross income in the resumption year must be below certain thresholds. :
$128,650-158,650 MFJ
85,800-$100,800 single
Questions on the test often involve suitability, related to clients timebhorizon, risk tolerance, tax advantages.
Savings bond can be held in an UGMA/UTMA account but then they cannot qualify for educational expense exclusion. If redeemed for college, interest is taxable.
AOC and lifetime learning
Eligibility expenses include tuition fees, supplies and books and equipment, but not room and board.
The same taxpayer May elect both credits in the same year provided credits are not used for the SAME student expenses.
Coordination with coverdell ESA: possible if there are sufficient qualified education expenses to cover both
Coordination with 529:
Possible only if distribution is not used for the same expenses for which credit was claimed
In the test, do not select any combination of the APC, lifetime, coverdell， or QTP in any one year due to the coordination rules.
Student loan forgiveness
Income-driven repayment plans. When enrolled in one of the plans, the borrowers’ remaining loan balance will be eligible for forgiveness after 20-25 years. A special pay as you earn program May cap loan payments at 10% of income.
Public service loan forgiveness
Available to government and qualifying nonprofit employees with federal student loan. Eligible borrowers can have their remaining loan balance forgiven tax-free after making 120 qualifying payments. Such as firefight, teaching, millibars , government and nursing.
Teacher loan forgiveness program
Borrow who teaches full time at a qualifying school for five full and consecutive years is generally eligible to have from 5000 to up to 17,500 in loans forgiven.
Plus loan does not apply
Pell grant
Only available for families under $60000 MAGI
Economic indicators: leading economic indicators
1 average weekly hours for production workers in manufacturing
2 initial claims for unemployment insurance
3 new manufacturing orders
4 vendor performance measured as a percentage of companies reporting slower deliveries
5 contracts and orders for plants and equipment
6 new private housing units
7 interest rate spread
8 stock prices, 500 common stocks
9 money supply
10 index of consumer expectations
Economic indicator: coincident indicators
1 number of employee on non-agricultural payroll
2 personal income less transfer payments
3* industrial production
Economic indicator: lagging indicators
- Average situation of unemployment
2 average prime rate changed by the banks
3 commercial and industrial loans outstanding
4 ratio of consumer installment credit outstanding to personal income
5 change in the consumer price index for services.
Gross domestic product (GDP)
Us economy’s total production of goods and services. Meandered the dollar value of all final goods and services NEWLY produced within the country’s boundaries.
CDP counts economic activity WITHoUT regard to yearly price fluctuations (inflation)
Producer price inde
Index of the price of various items such as farm products and industrial commodities.
**This index does not include the value of services as does the CPI.
The leading indicator of inflation trends is the PPI**
Business cycles
Financial reform bill
The state will regulate equity indexes annuities.
The SEC is barred from oversight of these products. Investment managers who are not currently subject to oversight by SEC may be required to register with SEC
Investment advisor registration with the SEC
- Files an ADV form with SEC
-pays filing fee of 150(minimum)
-submits ADV part1 and schedule I updated annually
ADV part II material change
Deliver to each of its clients a material change summary within 120 days after the end of fiscal year.
Delivery of ADV part 2
Client are no longer permitted to receive a 5-day termination right without penalty if the brochure is not delivered at least 48 hours in advance of entering into the advisory agreement.
The final rule obligation : RIA to deliver current brochure to any client before or at time the RIA enters into the advisory agreement with the client.
Reporting: FINRA must be notified promptly when:
Has violated any provision of securities law
Is subject to a written customer complaint alleging theft, misappropriation of funds, or forgery
Is named as defendant or respondent in any legal proceeding alleging violations of the securities act brought by a regulatory authority
Is indicated, convicted, or pleads guilty any criminal offense
Express authority
Written, explicit direction from principal to agent.
Implied authority
Public believes the individual has and is based on such indicators as signate, rate books.
Actual authority that the agent has to carry out the principal’s business in accordance with general business practices.
Apparent authority
Aries’s out of the negligence of the principal in allowing the agent to appear to have the authority because of certain past actions of the agent.
Chapter 7: state law exemptions
Homestead
Limited amount of personal property
Wages due to the head of a family including anyone providing more than one-half of support for a child or other dependent
Limited amount of equity in a motor vehicle
Pension and retirement plan rights
Cash value of life insurance:proceeds of annuity contracts
Disability benefits/unemployment workers comp
Property held in tenancy by entirety
Miscellaneous federal exemptions;
Vivian service retirement benefits/railroad pension/veteran’s benefit
Debts not generally canceled by bankruptcy
Student and government loans
Wage withholding and FICA obligation:recent income tax due
Child support and alimony
Chapter 7 “means test”
Fair credit reporting act
- free report once a year
- denoted credit, right to receive a free copy of their file
-information may be retained up to 7 years
-only interested parties can access the file
Consumer credit protection act( truth in lending)
-Mimi’s t be reported as annual percentage rate
-credit terms must be disclosed, including fees, points, prepayment penalties
-lost or stolen credit cards have limited liability of $50 per card
Pro forms statement
Projects the expected profitability or return of next year or longer. It estimates the excess of income over expenses.
Use of payment begin mode
College tuition paid
Retirement benefits received
Family needs
Use of payment end mode
401(k) deferrals
Profit-sharing contribution
Bond interest paid
Mortgage payment s
Unequal cash flow
ALWAYs enter ZERO as first input and the required rate of return as stated in the problem
Calculate IRR
Always enter the initial investment as a negative input
Calculate the NPV
Always enter the initial investment as a negative input and the required rate of return
NPV: IRR and required rate of return
NPV positive, IRR > Required rate of return
NPV negative, IRR < Required rate of return
NPV=0, IRR=required rate of return
Monetary windfalls
1) structured settlement: the injured receives a stream of tax-free payments.
2) compensatory damages: generally tax-free on physical and psychiatric. Taxable on discrimination
3) punitive damage: taxable regardless of nature of the claims. Punish wrongdoing by the defendant.
4) Annuitizing the award:
Compensatory damage: tax excludable
Income from investment: not tax excludable
If annuity, all tax excludable
4) prizes and awards: annuity over 10 yes, payout taxable “qualified prize option”
The mortgage amortization calculation example (very important)
Butchy, age 15, signs a contract to purchase a used car for $5,000, which of the following is true?
A. Butchy can force the used car dealer to honor the agreement
B. The used car dealer can force Butchy to pay $5,000
C. This is a legally enforceable agreement
A.
When one of the parties to a contract is legally imcompetent because of aged illness, or inebriation, the contract is valid but may be voided by the incompetent party. In this case, only minor but not the dealer can void the contract
When consulting with married couple, if one come and confess he/she has concealed information from one of the spouse -
As CFP, you consider terminating the relationship. This is because this behavior puts you in a position that could compromise your adherence to code of principles such as fairness and objectivity
A certificant shall notify CFP board in writing of any conviction of a crime, except misdemeanor traffic offenses or traffic ordinance violations unless such offense involves the use of Al hole or drugs, or any professional suspension or bar within 30 calendar days after the date on which certificant is notified of the conviction, suspension, or Bar
Time deposit= CD
The investment company act of 1940 authorize the SEC to regulate mutual fund
Pro from a statement is what future financial statement are expected to show
If found someone violating regulation, you should notify the board, SEC, FINRA, state securities department
ADVpart 1: business address and background
ADVpart2: spell out the compensation
Bankrupt: only traditional and Roth IRA are protected up to $1,000,000.
SEPs, SIMPLEs, ERISAs and deferred compensation are generally protected assets under 2005 bankruptcy law
gifts to UGMA, UTMA, and 529 are gift of present inyeeest.
EE bond are not complete gifts if the parent will own the bond.
Prepaid tuition plans are generally counted as parents assets to qualify for financial aid
Series EE saving bond
Cannot be issued in child’s name or in a custodian account
Bond must be redeemed in a year in which the owner pays qualified higher education expenses, defined as tuition and fees only for education saving bond purpose. Room and board are not a qualified education expense
Structured settlement
Tax free payment
Can be agreed privately or by court
Compensatory damages
Physical injuries or sickness—-tax free
Non-physical (discrimination, mental)—taxable, psychiatric is taxable
Interest paid on tax-free damage is taxable
Punitive damages
Usually taxable except for wrongfully death which is tax -free
Compensatory award (annuitizing)
— lump sum payment , present value of the future damages , invest for the benefit of claimant who has actual or constructive receipt or the economic benefit of the lump sum .
ONLY lump sum amount is excludable, none of the earnings are.
- damages to be paid periodically and the injured person retains no right to the discounted present value of the payment or any control over investment of the present value.
Entire amount of each periodic payment is excludable , including earning of the fund.
Qualified prize option
If have option of lump sum or annuity—has to include it in gross income even chose annuity
Either cash or annuity (60 day window) and annuity payout over at least 10 years, then payouts are taxable as received. (Qualified prize option)
