General Principles Flashcards
The CFP Board was founded in what year?
1985
Within how many days must a CFP inform the CFP Board of an address change?
45 days
How many CE hours per reporting period are required?
30 hours
The CFP Commission can order a license suspension not to exceed ___ years.
5
Responses to complaints shall be in writing and
submitted within ___ calendar days.
30
Evidence in support of an investigation may be submitted up to ___ days prior to the scheduled hearing.
45
Use of Initials
Registered Investment Advisor and
Certified Financial Planner
NO:
- RIA
- C.F.P.
YES:
- Registered Investment Advisor
- CFP®
- CERTIFIED FINANCIAL PLANNER™
When can a CFP® licensee release client information to other persons?
- When an attorney or court subpoenas the information
- At the client’s request
- As a defense against charges of wrongdoing
Determining the Release of an Emergency Fund
(Use 3 or 6 months if…)
3 months if:
- Single with 2nd source of income
- Married, both work
- Married, only 1 spouse works, but have a second source of income
6 months if:
- Single wage earner
- Married and only 1 spouse works
How much consumer debt is considered acceptable?
≤20% of NET income
How much Total Monthly Debt is considered acceptable?
≤36% of GROSS income
How much PITI is considered acceptable?
≤28% of GROSS income
DON’T FORGET TO INCLUDE ALL INCOME!
INCLUDING DIVIDENDS AND INTEREST!
Current Ratio
Current Assets ÷ Current Liabilities
Current Assets
- Cash Equivalents
- Marketable Securities
- Accounts Receivable
- Inventory
Current Liabilities
- Accounts Payable
- Credit Card Debt
- Taxes Payable
Securities Act of 1933
The Securities Act of 1933 required that new issues purchasers be provided a detailed prospectus before the purchase was completed.
Securities Act of 1934
The Securities Act of 1934 was passed to regulate the secondary market (the trading of issued securities). The act also created the SEC to enforce securities laws.
Investment Company Act
of 1940
Investment Company Act of 1940 authorized the SEC to regulate Unit Investment Trusts (UIT) and managed investment companies (closed- and open-end funds) and variable products.
Securities Investors Protection Act of 1970
Securities Investors Protection Act of 1970 established the SIPC to supervise securities firms that get into financial difficulties. The SIPC insures investors against losses arising from the failure of a brokerage firm.
College Funding
(phase-out given)
- EE Educational Bonds - ($124,800- 154,800)
- Parents name
- Age 24+
- Lifetime - ($119k - 139K)
- Per period vs. per student max $2,000
- AOTC - ($160k - 180k)
- tax credit 100% of first $2,000 then 25% of next $2,000- max credit $2,500
- deduction not credit $4,000 for MAGI up to 65K Single or 130k MFJ
- $2,000 deduction 80k S and 160K MFJ
529 Keys
- Lump sum gift up to $75,000
- Donor can retain control
- K-12 distribution allowed up to $10,000/yr.
- Up to $10K/person distribution for student loans
Deductible Housing Interest
All mortgages cannot exceed:
- $750K combined (MFJ)
- $375K (single/MFS)
- Home equity interest is only deductible if used for home renovation/improvement.
Federal Reserve Open Market Operations
- Repos - Fed buys securities = expansionary/easy money policy
- Reverse Repos - Fed sells securities = contractionary/tight money policy
Gross Domestic Product (GDP)
Total dollar value of all goods and services produced within the US only.
- GDP counts economic activity without regard to yearly price fluctuations.
- The GDP does not include any income generated outside the US or adjustments for foreign currencies.
Business Cycle
- Expansion
- Peak
- Recession/Contraction
- Trough
- Recovery/Expansion
Recession vs. Depression
Recession - Two consecutive quarters of economic decline (negative GDP)
Depression - Six consecutive quarters economic decline (negative GDP)
Exceptions to Filing as an Investment Adviser
- Banks that are not also investment companies.
- Lawyers, accountants, teachers where advice is incidental.
- Broker/dealers or registered reps whose performance is incidental and who get no special compensation for advice.
- Publishers of bona fide newspapers.
- Those who give advice solely relating to US government securities.
- Advisers whose only clients are insurance companies
- Family office
How does an Investment Adviser register with the SEC?
- Initially, file ADV part I and II with the SEC.
- Pay minimum filing fee of $150
- RIA must submit part I of ADV and schedule I annually.
Financial Industry Regulatory Authority (FINRA)
Initial Registration Process
- The individual associates with a broker/dealer.
- Registers with FINRA through broker/dealer on form U-4.
- Takes and passes appropriate exams.
- Is issued a CRD number (Central Registration System)
Financial Industry Regulatory Authority (FINRA)
Key Examinations/Licenses
- Series 6 - Mutual funds, UITs, and variables (only new UITs)
- Series 7 - General securities (including UITs on secondary market)
- Series 63 - Uniform Securities Agent State Law Exam
- Series 65 - Uniform Investment Adviser Law Exam
- Series 66 - Uniform Combined State Law Exam (combines 63 & 65 exams)
Basic Components of a Legal Contract as Applied to Insurance
- 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
Law of Agency (Insurance)
- Express Authority - Written, explicit direction from principal to agent
-
Implied Authority - Is that which the public believes the individual holds and includes signage, rate books, etc.
- Implied is actual authority that the agent has to carry out the principal’s business
- 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.
Which debts are not cancelable by Bankruptcy?
- Student Loans
- Government Loans
- Child Support
- Alimony
- Wage Withholding
- FICA Taxes
- Income Taxes Due
- Rollovers from qualified plans are exempt (unlimited) and non-rollover IRAs up to $1 million are exempt
Steps to financial planning process
EGADCIM
Establish
Gather
Analize
Develop
Communicate
Implement
Monitor
Quantative Data
Objective
Precise
Exact
Qualatative Data
Subjective
Opinion
Risk tolerance, goals, priorities, life expectancy, values
Exception to reporting requirement
settlement or arbitration award LESS THAN
$15,000
Net Worth =
Assets =
Liabilities =
Net Worth = Assets- Liabilities
Assets = Liabilities + Net Worth
Liablities = Net Worth - Assets
Cash Flow Statement
Inflows-Outflows= Savings
Inflows or Gross Income
Fixed Outflows (little to no flexibility)
Variable Outflows
Taxes
Pro Forma Statement
projects the expected profitability or return of the next year
or longer (the future)
Real Rate of Return
(1+after tax return / 1+ inflation rate -1) x 100
Unequal Cash Flows- 3 variations
Calculate PV
Calculate IRR/ dollar weighted return
Calculate NPV
PV- first input ALWAYS equals ZERO 0
Use CFj button - Gold NPV
IRR- first input is NEGATIVE
Use CFj botton - Gold IRR
NPV- first input ALWAYS negative
Use CFj button- Gold NPV
Serial Payments
CFj Key AND Nj Key
1st input = negative
CFj = cash flow
Nj= number of time cash flow occurs
Solve- Gold IRR/YR
Kiddie Tax
applies to investment and unearned income-
first $1,100 no tax
next $1,100 = 10% or $110 tax
amounts greater than $2,200 are taxed at parents marginal tax rate.
If child has EARNED income greater than standard deduction the amount of earned income PLUS $350 is used in step 1.
Alimony tax deductible vs. Not deductible
Deductible
cash payments from PAYOR spouse to ex per divorce agreement for
rent, mortgage, tax or tuition
Not Deductible
Life Insuracnce Premium payments made by PAYOR spouse owned by PAYEE spouse where PAYOR is the Insured.
Divorce after 12-31-18 alimony not deductible by payor or included in income of payee
COBRA
Small companies (fewer than 20 are exempt)
Voluntatry or Involuntary termination or FT to PT = 18 months
Employees Death, Divorce or seperation, Medicare= 36 months spouse and dependants
Loss of dependency - 36 Months for dependants whose status changed.
Prizes and Awards
lump sum or annuity = full value included in gross income no matter what they choose
cash or annuity (60 day window) and chooses annuity over at least 10 years then payouts are taxable as received = qualified prize option
How does Fed reserve control money supply
Open market operations
setting discount rate
setting reserve requirements
PRIME is always a wrong answer RE: Monetary policy
Leading Economic Indicators
Initial Claims for unemployment
New manufacturing orders
New private housing
Stock prices
Index of consumer expectations
Lagging Economic Indicators
avg duration of unemployment
average prime rate
outstanding loans
change in teh CPI for services
Coincident Indicators
move in tandem with broad economy
Industrial production
of employees on non - AG payrolls
Personal income less transfer payments
Yield Curve
Normal- as maturities lengthen - yield increases
Inverted - short term rates above long term rates - happens when economy is overheating- inflation fears increase
AGENT vs. BROKER
Agent is loyal to company
Broker is loyal to client
Bankruptcy
Ch. 7
average mothly income for 60 months > $10,000 CH. 7 is NOT an option
Less than $6,000 Yes to Ch. 7
between $6,000 and $10,000 Yes IF net monthly income is < 25% of all non - priority unsecured debts
proof of consumer credit counseling within 6 months
tax returns and retirement accounts over 1 million and 529’s opened within 2 years.
Consumer Credit Protection Act/ Truth in Lending
Lost or stolen Credit Cards have limited liability of $50 per card!
Coverdell ESA’s
$2,000 per year per child under age 18
subject to phase out
gift of present interest.
qualified elementary and secondary expenses
including room and board, uniforms, transportation, etc.
funds must be used before age 30
can be rolled to another family member.
Reverse Mortgages
ANCHORING
tendency to become attached to specfic price as the FAIR price
ATTACHMENT BIAS
Holding onto an investment for emotional reasons
“grandfather left it to me”
ENDOWMENT BIAS
the feeling that because I own it, it is more valuable and special. In reality you may not purchase it now if you didn’t already own it.
“money pit cabin”
COGNITIVE DISSONANCE
challenge of two opposing beliefs
CONFIRMATION BIAS
natural human tendency to accept any information that confirms our preconceived position or opinion and disregarding anything that does not support that.
DIVERSIFICATION ERRORS
investors tendency to diversify evenly across whatever options are available
FEAR OF REGRET
tendency to take no action rather than making a wrong choice.
GAMBLER’S FALLACY
false belief that the onset of a certain random event is likely to happen following an event or a series of events.
HERD BEHAVIOR
the tendency of an individual to mimic the actions of a larger group
HINDSIGHT BIAS
the 20/20 vision we have when looking at a past event and thinking we understand it
INAPPROPRIATE EXTRAPOLATION
tendency to look at recent events (or market performance) and assume that those events will contine indefintely.
ANALYSIS PARALYSIS
overanalyzing a situation can cause decision making to become paralyzed
LOSS AVERSION AND RISK TAKING
investors are risk adverse when it comes to gains (don’t want to give them up)
but also risk seekers when it comes to losses (taking big risks to avoid realizing them)
PROSPECT THEORY
different ways people evaluate losses and gains.
Kahnerman and Tversky found losses have a greater negative impact than an gain will have positive impact.
in other words
losses impact us more than gains.
MENTAL ACCOUNTING
looking at different sums of money differntly depending on source or intended use.
“how I manage seperate bank accounts”
OUTCOME BIAS
tendency to make a decision based on desired outcome rather than probability of that outcome
OVERCONFIDENCE
placing too much emphasis on one’s own abilities.
OVERREACTION
investors emotionally react towards new market information.
OVERWEIGHTING RECENT PAST
giving too much emphasis to what’s happened in the past.
SELF- AFFIRMATION BIAS
the belief that when something goes right it is because you were smart and made the right
decision. If it goes wrong it was someone else’s fault.
SPOTTING TRENDS THAT ARE NOT THERE
investors seek patterns that help support decisions sometimes without adequate confirming research
STATUS QUO BIAS
tendency of investors to do nothing when action is called for.
