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CFP Exam > General Principals > Flashcards

General Principals Flashcards

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CFP® flashcards
1
Q

The CFP Board was founded in what year?

A

1985

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2
Q

How many days submit to CFP Board?

A

Client Complaints: 30 days

Report charges or convictions: 30 days

Days to appeal after notice of ruling: 30 days

Material changes in business disclosures: 90 days

Change of address: 45 days

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3
Q

How many Continuing Education hours are needed each reporting period?

A

30 hours every 2 years
- 2 hours required for ethics

Based on CFP designation date, not calendar year.

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4
Q

Max CFP Commission license suspension period

A

5 years

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5
Q

Client complaints need to be responded to within ____ days

A

30 days

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6
Q

CFP Commission Hearing: How many days to submit evidence before hearing?

A

45 days

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7
Q

Use of Registered Investment Advisor and CFP

A

NO
- RIA
- C.F.P. (no periods)

YES
- Registered Investment Advisor (spelled out)
- CFP®
- CERTIFIED FINANCIAL PLANNER™

Always use with one of CFP Board’s approved nouns (“certificant,” “professional,” “practitioner,” “certification,” “mark” or “exam”) unless on the same line directly following the name of the individual certified by CFP Board.

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8
Q

When can you share information about a client?

A
  • At client’s request
  • Attorney or court subpoena
  • Part of defense against charges of wrongdoing
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9
Q

Emergency Fund Needs

A

3 Months
- 2 sources of income (married, single with 2 jobs)

6 Months
- 1 source of income (single, married with one earner)

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10
Q

Emergency Fund Sources

A
  • Checking Account: cash flow needs to cover monthly expenses, if not, can’t use it.
  • Liquid (sell it with no price movement)
  • Marketable assets (has a buyer)
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11
Q

Acceptable Personal Debt Levels

A

Total Monthly Debt: ≤36% of GROSS income

Housing: Principal, Interest, Taxes Insurance (PITI) OR Rent: ≤28% of GROSS income

Total Consumer Debt: ≤20% of NET income

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12
Q

Current Assets and Liabilities

A

Current Ratio = Current Assets / Current Liabilities

Current Assets
- Cash Equivalents
- Marketable Securities
- Accounts Receivable
- Inventory

Current Liabilities
- Accounts Payable
- Credit Card Debt
- Taxes Payable

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13
Q

Securities Act of 1933

A

Focused on new issues, IPOs

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14
Q

Securities Act of 1934

A

Focused on the secondary market. Created SEC to enforce security laws.

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15
Q

Investment Company Act of 1940

A

Focused on packaged products (UITs, mutual funds, closed end funds). SEC regulates.

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16
Q

Securities Investors Protection Act of 1970

A

SIPC insures investors from losses from failures at broker dealers.

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17
Q

College Planning: Strategies

A

FUNDING YEARS

UGMA/UTMA
- kiddie tax under 24

Educational Bonds
- parents own bonds
- tuition and fees only
- won’t work in UGMA/UTMA
- MAGI phase out

Coverdell ESA
- max $2,000/yr contribution
- covers a lot of different expenses (tutoring, equipment, uniforms, internet access, etc)
- can’t use for student loans
- can invest in any investment type
- MAGI phaseout

529 (QTP)
- account or tuition
- $17,000 yr or $85,000 5 years total gift free
- can use to pay student loans
- No MAGI

COLLEGE YEARS

American Opportunity Credit
- $2,000 + 25% of next $2,000 in expenses (max $2,500 credit)
- no felony
- first 4 years of college only

Lifetime Credit
- 20% of first $10,000 in expenses each year ($2,000 max)
- it’s a per period (year) total credit across all eligible students, not $2,000 max per student of the tax payer. It’s based on total costs across all students
- any higher education

Wealthy
- PLUS loans

Poor
- Pell Grants
- Supplemental Education Opportunity
- Subsidized Stafford Student Loans

GRADUATE YEARS
- 529s
- Coverdell ESA (distribute by 30)
- Fulbright Scholarship

*All have MAGI phaseouts

**Can’t use either AOC or Lifetime Credit but not for the same distribution amount on a Coverdells or 529 on the same expense

***Student loans interest is tax deductible above the line but subject to MAGI, max $2500 deduction

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18
Q

College Funding: 529s

A
  • Gift up to 5 years lump sum: $85,000
  • Donor retains control
  • K-12 tuition up to $10,000/yr
  • Student loans up to $10,000 lifetime
  • can be owned by a trust, company, partnership, estate
  • owners can change beneficiary any time, needs to be in same family
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19
Q

Housing: Deducting Interest

A
  • Deduct interest if itemize on Schedule A
  • Mortgage Interest: $375k/$750k maximum
  • Home Equity Loan Interest: only if used for improvements
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20
Q

Federal Reserve: Open Market Operations

A

Repos: Fed buys securities
- buy securities, pay cash to banks, banks lend
- easy money, expansionary

Reverse Repos: Fed sells securities
- sell securities, take money from banks, less bank lending
- contractionary, tight monetary policy

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21
Q

Gross Domestic Product (GDP)

A
  • economic activity within the country (not outside the country)
  • Ignores inflation (Real GDP takes inflation into account)

Consumption + Investment + Government Spending + Net Exports

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22
Q

Business Cycle

A
  • Expansion
  • Peak
  • Recession/Contraction
  • Trough
  • Recovery/Expansion
23
Q

Recession / Depression

A

Recession: 2 quarters of negative GDP

Depression: 6 quarters of negative GDP

24
Q

Investment Advice But Don’t Have to Register as an Investment Advisor

A
  • Banks
  • Lawyers, accountants, teachers
  • Broker Dealers and their reps that aren’t paid for advice (only commissions)
  • Publishers
  • People advising only on U.S. government securities
  • Advisors whose clients are insurance companies
  • Family Office
25
Q

How to Register as an RIA with the SEC

A
  • File ADV I and II
  • Pay $150 filing fee
  • RIA submits ADV I and Schedule I annually
26
Q

How to Register with FINRA

A
  • Join a broker dealer
  • Register with FINRA through B/D on form U-4
  • Pass FINRA exams
  • Get a CRD number
27
Q

FINRA Exams/Licenses

A
  • Series 6: packaged products, variable products
  • Series 7: individual securities trading on secondary market
  • Series 63: allows work across states
  • Series 65: allows to be a registered investment advisor
  • Series 66: combines Series 63 and 65
28
Q

Legal Contract Components

A
  • Offer and Acceptance - Two parties, offerer and acceptor
  • Consideration - Something of value (money)
  • Legal Object - Legal in purpose
  • Competent Parties - Principle must have legal capacity to execute contract:
    Intoxicated adults have limited or no capacity
  • Minors only have capacity to contract for necessities (food, clothing, shelter)
  • Legal Form - Contract must meet requirements
29
Q

Insurance: Law of Agency

A
  • Principal: insurance Company
  • Agent: insurance agent
  • Broker: independent, can sell insurance but not working as an agent for the insurance company
  • Express Authority: written direction between insurance company and agent
  • Implied Authority: public believes the agent has authority to work on behalf of the insurance company (principal)
  • Apparent Authority: Arises out of negligence of the principal in allowing the agent to appear to have authority because of certain actions of the agent in the past. This typically affects terminated agents.
30
Q

Bankruptcy: Debts That Can’t Be Cancellable (still have to pay back)

A
  • Student and government loans
  • Child support and alimony
  • Wage withholding (FICA, FUTA), Income taxes
31
Q

Bankruptcy: Assets Protected

A
  • Home
  • Retirement Accounts (ERISA), Rollovers
  • IRAs up to $1 million
32
Q

Education: Coverdell ESA (educational savings account)

A
  • K-12 (education tax free)
  • Phaseouts
  • Max 18 yrs to contribute
  • $2,000/yr max contribution
  • Distributed by age 30
  • Gift is the asset of the parent (regardless who donates)
  • A gift of present interest ($17,000 annual exclusion)
  • Can’t pay student loans
  • Can invest in anything
33
Q

Reverse Mortgage

A
  • 62 yrs and older only
  • ends at death, term, no longer in house in a year
  • tax free cash flow
  • lump sum, payments or line of credit
34
Q

SEC Regisration vs. State

A

Advisors with $100 million (float to $110 million) need to register with SEC

35
Q

CFP Annual Renewal

A

Need to pay a fee every year and sign terms and conditions of certification, with disclosures.

36
Q

CFP Duties: Fiduciary Duty

A

At all times when providing Financial Advice to a Client, a CFP® professional must act as a fiduciary, and therefore, act in the best interests of the Client. The following duties must be fulfilled:

a. Duty of Loyalty. A CFP® professional must:
i. Place the interests of the Client above the interests of the CFP® professional and the CFP® Professional’s Firm;
ii. Avoid Conflicts of Interest, or fully disclose Material Conflicts of Interest to the Client, obtain the Client’s informed consent, and properly manage the conflict; and
iii. Act without regard to the financial or other interests of the CFP® professional, the CFP® Professional’s Firm, or any individual or entity other than the Client, which means that a CFP® professional acting under a Conflict of Interest continues to have a duty to act in the best interests of the Client and place the Client’s interests above the CFP® professional’s.

b. Duty of Care. A CFP® professional must act with the care, skill, prudence, and diligence that a prudent professional would exercise in light of the Client’s goals, risk tolerance, objectives, and financial and personal circumstances.

c. Duty to Follow Client Instructions. A CFP® professional must comply with all objectives, policies, restrictions, and other terms of the Engagement and all reasonable and lawful directions of the Client.

37
Q

CFP Duties: Integrity

A

A CFP® professional must perform Professional Services with integrity. Integrity demands honesty and candor, which may not be subordinated to personal gain or advantage. Allowance may be made
for innocent error and legitimate differences of opinion, but integrity cannot co-exist with deceit or subordination of principle.
b. A CFP® professional may not, directly or indirectly, in the conduct of Professional Services:
i. Employ any device, scheme, or artifice to defraud;
ii. Make any untrue statement of a material fact or omit to state a material fact necessary in order to make the statements made, in the light of the circumstances under which they were made, not misleading; or
iii. Engage in any act, practice, or course of business which operates or would operate as a fraud or deceit upon any person.

38
Q

CFP Duties: Competence

A

A CFP® professional must provide Professional Services with competence, which means with relevant knowledge and skill to apply that knowledge. When the CFP® professional is not sufficiently competent in a particular area to provide the professional Services required under the Engagement, the CFP® professional must gain competence, obtain the assistance of a competent professional, limit or terminate the Engagement, and/or refer the Client to a competent professional. The CFP® professional shall describe to the Client any requested Professional Services that the CFP® professional will not be
providing.

39
Q

CFP Duties: Diligence

A

A CFP® professional must provide Professional Services, including responding to reasonable Client inquiries, in a timely and thorough manner.

40
Q

CFP Duties: Disclose and Manage Conflicts of Interest

A

. Disclose Conflicts. When providing Financial Advice, a CFP® professional must make full disclosure of all Material Conflicts of Interest with the CFP® professional’s Client that could affect the professional relationship. This obligation requires the CFP® professional to provide the Client
with sufficiently specific facts so that a reasonable Client would be able to understand the CFP® professional’s Material Conflicts of Interest and the business practices that give rise to the conflicts,
and give informed consent to such conflicts or reject them. A sincere belief by a CFP® professional with a Material Conflict of Interest that he or she is acting in the best interests of the Client is insufficient to excuse failure to make full disclosure.
i. A CFP® professional must make full disclosure and obtain the consent of the Client before providing any Financial Advice regarding which the CFP® professional has a Material Conflict of Interest.
ii. In determining whether the disclosure about a Material Conflict of Interest provided to the Client was sufficient to infer that a Client has consented to a Material Conflict of Interest, CFP Board will evaluate whether a reasonable Client receiving the disclosure would have understood the conflict and how it could affect the advice the Client will receive from the CFP® professional. The greater the potential harm the conflict presents to the Client, and the more significantly a business practice that gives rise to the conflict departs from commonly accepted practices among CFP® professionals, the less likely it is that CFP Board will infer informed consent absent clear evidence of informed consent. Ambiguity in the disclosure provided to the Client will be interpreted in favorof the Client.
iii. Evidence of oral disclosure of a conflict will be given such weight as CFP Board in its judgment deems appropriate. Written consent to a conflict is not required.
b. Manage Conflicts. A CFP® professional must adopt and follow business practices reasonably designed to prevent Material Conflicts of Interest from compromising the CFP® professional’s ability
to act in the Client’s best interests.

41
Q

CFP Duties: Sound and Objective Professional Judgment

A

A CFP® professional must exercise professional judgment on behalf of the Client that is not subordinated to the interest of the CFP® professional or others. A CFP® professional may not solicit or accept any gift, gratuity, entertainment, non-cash compensation, or other consideration that reasonably could be expected to compromise the CFP® professional’s objectivity.

42
Q

CFP Duties: Professionalism

A

A CFP® professional must treat Clients, prospective Clients, fellow professionals, and others with dignity, courtesy, and respect.

43
Q

CFP Duties: Comply With the Law

A

a. A CFP® professional must comply with the laws, rules, and regulations governing Professional Services.
b. A CFP® professional may not intentionally or recklessly participate or assist in another person’s violation of these Standards or the laws, rules, or regulations governing Professional Services

44
Q

CFP Duties: Confidentiality and Privacy

A

a. A CFP® professional must keep confidential and may not disclose any non-public personal information about any prospective, current, or former Client (“client”), except that the CFP® professional may disclose information:
i. For ordinary business purposes:
a) With the client’s consent, so long as the client has not withdrawn the consent;
b) To a CFP® Professional’s Firm or other persons with whom the CFP® professional is providing services to or for the client, when necessary to perform those services;
c) As necessary to provide information to the CFP® professional’s attorneys, accountants, and auditors; and
d) To a person acting in a representative capacity on behalf of the client;
ii. For legal and enforcement purposes:
a) To law enforcement authorities concerning suspected unlawful activities, to the extent permitted by the law;
b) As required to comply with federal, state, or local law;
c) As required to comply with a properly authorized civil, criminal, or regulatory investigation or examination, or subpoena or summons, by a governmental authority;
d) As necessary to defend against allegations of wrongdoing made by a governmental authority;
e) As necessary to present a civil claim against, or defend against a civil claim raised by, a client;
f) As required to comply with a request from CFP Board concerning an investigation or adjudication; and g) As necessary to provide information to professional organizations that are assessing the CFP® professional’s compliance with professional standards.
b. A CFP® professional may not use any non-public personal information about a client for his or her direct or indirect personal benefit, whether or not it causes detriment to the client, unless the client consents.
c. A CFP® professional, either directly or through the CFP® Professional’s Firm, must take reasonable steps to protect the security of non-public personal information about any client, including the security of information stored physically or electronically, from unauthorized access that could result in harm or inconvenience to the client.
d. A CFP® professional, either directly or through the CFP® Professional’s Firm, must adopt and implement policies regarding the protection, handling, and sharing of a client’s non-public personal information and must provide a client with written notice of those policies at the time of the Engagement and thereafter not less than annually (at least once in any 12-month period) unless (i)
the CFP® professional’s policies have not changed since the last notice sent to a client; and (ii) the CFP® professional does not disclose non-public personal information other than as permitted without a client’s consent.
e. A CFP® professional shall be deemed to comply with this Section if the CFP® Professional’s Firm is subject to, and the CFP® professional complies with, Regulation S-P under the federal securities laws or substantially equivalent federal or state laws or rules.

45
Q

CFP Duties: Provide Information to a Client

A

a. When Providing Financial Advice.

When providing or agreeing to provide Financial Advice that does not require Financial Planning in accordance with the Practice Standards, a CFP® professional must provide the following information to the Client, prior to or at the time of the Engagement, and document that the information has been provided to the Client:
i. A description of the services and products to be provided;
ii. How the Client pays for the products and services, and a description of the additional types of costs that the Client may incur, including product management fees, surrender charges, and sales loads;
iii. How the CFP® professional, the CFP® Professional’s Firm, and any Related Party are compensated for providing the products and services;
iv. The existence of any public discipline or bankruptcy, and the location(s), if any, of the webpages of all relevant public websites of any governmental authority, self-regulatory organization, or professional organization that sets forth the CFP® professional’s public disciplinary history or any personal bankruptcy or business bankruptcy where the CFP® professional was a Control Person;
v. The information required under Section A.5.a. (Conflict of Interest Disclosure);
vi. The information required under Section A.9.d. (Written Notice Regarding Non-Public Personal Information);
vii. The information required under Section A.13.a.ii. (Disclosure of Economic Benefit for Referral or Engagement of Additional Persons); and
viii. Any other information about the CFP® professional or the CFP® Professional’s Firm that is Material to a Client’s decision to engage or continue to engage the CFP® professional or the CFP® Professional’s Firm.

When Providing Financial Planning.

When providing or required to provide Financial Planning in accordance with the Practice Standards, a CFP® professional must provide the following information to the Client, prior to or at the time of the Engagement, in one or more written documents:
i. The information required to be provided in Sections A.10.a.i.-iv. and vi.-viii.; and
ii. The terms of the Engagement between the Client and the CFP® professional or the CFP® Professional’s Firm, including the Scope of Engagement and any limitations, the period(s) during which the services will be provided, and the Client’s responsibilities. A CFP® professional is responsible for implementing, monitoring, and updating the Financial Planning recommendation(s) unless specifically excluded from the Scope of Engagement.
c. Updating Information. A CFP® professional has an ongoing obligation to provide to the Client any information that is a Material change or update to the information required to be provided to the Client. Material changes and updates to public disciplinary history or bankruptcy information must
be disclosed to the Client within ninety (90) days, together with the location(s) of the relevant webpages.

46
Q

CFP Duties: When Communicating with a Client

A

A CFP® professional must provide a Client with accurate information, in accordance with the Engagement, and in response to reasonable Client requests, in a manner and format that a Client reasonably may be expected to understand.

47
Q

CFP Duties: When Representing Compensation Method

A

A CFP® professional may not make false or misleading representations regarding the CFP® professional’s or the CFP® Professional’s Firm’s method(s) of compensation.
a. Specific Representations
i. Fee-Only. A CFP® professional may represent his or her or the CFP® Professional’s Firm’s compensation method as “fee-only” only if:
a) The CFP® professional and the CFP® Professional’s Firm receive no Sales-Related Compensation; and
b) Related Parties receive no Sales-Related Compensation in connection with any Professional Services the CFP® professional or the CFP® Professional’s Firm provides to Clients.
ii. Fee-Based. CFP Board uses the term “fee and commission” to describe the compensation method of those who receive both fees and Sales-Related Compensation. A CFP® professional who represents that his or her or the CFP® Professional’s Firm’s compensation method is “fee-based” or any other similar term that is not fee-only:
a) May not use the term in a manner that suggests the CFP® professional or the CFP® Professional’s Firm is fee-only; and
b) Must clearly state that either the CFP® professional or the CFP® Professional’s Firm earns fees and commissions, or that the CFP® professional or the CFP® Professional’s Firm are not fee-only.
b. Sales-Related Compensation. Sales-Related Compensation is more than a de minimis economic benefit, including any bonus or portion of compensation, resulting from a Client purchasing or selling Financial Assets, from a Client holding Financial Assets for purposes other than receiving Financial Advice, or from the referral of a Client to any person or entity other than the CFP® Professional’s Firm. Sales-Related Compensation includes, for example, commissions, trailing commissions, 12b-1 fees, spreads, transaction fees, revenue sharing, referral or solicitor fees, or similar consideration.
Sales-Related Compensation does not include:
i. Soft dollars (any research or other benefits received in connection with Client brokerage that qualifies for the “safe harbor” of Section 28(e) of the Securities Exchange Act of 1934);
ii. Reasonable and customary fees for custodial or similar administrative services if the fee or amount of the fee is not determined based on the amount or value of Client transactions;
iii. Non-monetary benefits provided by another service provider, including a custodian, that benefit the CFP® professional’s Clients by improving the CFP® professional’s delivery of Professional Services, and that are not determined based on the amount or value of Client transactions;
iv. Reasonable and customary fees for Professional Services, other than for solicitations and referrals, the CFP® professional or CFP® Professional’s Firm provides to a Client that are collected and distributed by another service provider, including under a Turnkey Asset Management Platform; or
v. A fee the Related Party solicitor receives for soliciting clients for the CFP® professional or the CFP® Professional’s Firm.
c. Related Party. A person or business entity (including a trust) whose receipt of Sales-Related Compensation a reasonable CFP® professional would view as directly or indirectly benefiting the CFP® professional or the CFP® Professional’s Firm, including, for example, as a result of the CFP® professional’s ownership stake in the business entity. There is a rebuttable presumption that a Related Party includes:
i. Family Members. A member of the CFP® professional’s Family and any business entity that the Family or members of the Family Control; and
ii. Business Entities. A business entity that the CFP® professional or the CFP® Professional’s Firm Controls, or that is Controlled by or is under common Control with, the CFP® Professional’s Firm.
d. In Connection with any Professional Services. Sales-Related Compensation received by a Related Party is “in connection with any Professional Services” if it results, directly or indirectly, from Client transactions referred or facilitated by the CFP® professional or the CFP® Professional’s Firm.
e. Safe Harbor for Related Parties. Sales-Related Compensation received by a Related Party is not “in connection with any Professional Services” if the CFP® professional or the CFP® Professional’s Firm adopts and implements policies and procedures reasonably designed to prevent the CFP® professional or the CFP® Professional’s Firm from recommending that any Client purchase Financial Assets from or through, or refer any Clients to, the Related Party.
f. Misrepresentations by a CFP® Professional’s Firm. A CFP® professional who Controls the CFP® Professional’s Firm may not allow the CFP® Professional’s Firm to make a representation of compensation method that would be false or misleading if made by the CFP® professional. A CFP®
professional who does not Control the CFP® Professional’s Firm must correct a CFP® Professional’s Firm’s misrepresentations of compensation method by accurately representing the CFP® professional’s compensation method to the CFP® professional’s Clients.

48
Q

CFP Duties: When Recommending, Engaging and Working with Additional Persons

A

a. When engaging or recommending the selection or retention of additional persons to provide financial or Professional Services for a Client, a CFP® professional must:
i. Have a reasonable basis for the recommendation or Engagement based on the person’s reputation, experience, and qualifications;
ii. Disclose to the Client, at the time of the recommendation or prior to the Engagement, any arrangement by which someone who is not the Client will compensate or provide some other
material economic benefit to the CFP® professional, the CFP® Professional’s Firm, or a Related Party for the recommendation or Engagement; and iii. When engaging a person to provide services for a Client, exercise reasonable care to protect the
Client’s interests.
b. When working with another financial or Professional Services provider on behalf of a Client, a CFP® professional must:
i. Communicate with the other provider about the scope of their respective services and the allocation of responsibility between them; and
ii. Inform the Client in a timely manner if the CFP® professional has a reasonable belief that the other provider’s services were not performed in accordance with the scope of services to be provided and the allocation of responsibilities.

49
Q

CFP Duties: When Selecting, Using and Recommending Technology

A

A CFP® professional must exercise reasonable care and judgment when selecting, using, or recommending any software, digital advice tool, or other technology while providing Professional Services to a Client.
b. A CFP® professional must have a reasonable level of understanding of the assumptions and outcomes of the technology employed.
c. A CFP® professional must have a reasonable basis for believing that the technology produces reliable, objective, and appropriate outcomes.

50
Q

CFP Duties: Refrain From Borrowing or Lending Money and Commingling Financial Assets

A

a. A CFP® professional may not, directly or indirectly, borrow money from or lend money to a Client unless:
i. The Client is a member of the CFP® professional’s Family; or
ii. The lender is a business organization or legal entity in the business of lending money.
b. A CFP® professional may not commingle a Client’s Financial Assets with the Financial Assets of the CFP® professional or the CFP® Professional’s Firm.

51
Q

FDIC $250k Insurance Coverage by Account

A

Individual

Joint

Allows revocable trust full covers at $250k per beneficiary

IRA

Keogh

52
Q

529/Coverdells
UGMA/UTMA
EE Bonds
For Financial Aid

A

529/Coverdells
Parents Own: considered parents’ assets for financial aid
Non-Parent (grandparent, etc) Own: considered the child’s asset for financial aid

UGMA/UTMA: considered child’s asset for financial aid

EE Savings Bonds: considered parents’ assets for financial aid, can’t be used in UGMA/UTMA

53
Q

Student Loan Forgiveness

A

Public Service: after 10 years (firefighter, teacher, military, government, nursing)

Total Permanent Disability: may be forgiven

Teacher Loan Forgiveness: teachers teaching low income families

54
Q

Compensatory vs. Punative Awards: Taxes

A

Compensatory: injury - tax free income

Punative: punishment for negligence - taxable income

CFP Exam (9 decks)

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