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General Principles- CFP > General Principles > Flashcards

General Principles 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

Within how many days must a CFP inform the CFP Board of an address change?

A

45 days

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3
Q

How many CE hours per reporting period are required?

A

30 hours

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4
Q

The CFP Commission can order a license suspension not to exceed ___ years.

A

5

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5
Q

Responses to complaints shall be in writing and

submitted within ___ calendar days.

A

30

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6
Q

Evidence in support of an investigation may be submitted up to ___ days prior to the scheduled hearing.

A

45

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7
Q

Use of Initials

Registered Investment Advisor and

Certified Financial Planner

A

NO:

  • RIA
  • C.F.P.

YES:

  • Registered Investment Advisor
  • CFP®
  • CERTIFIED FINANCIAL PLANNER™
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8
Q

When can a CFP® licensee release client information to other persons?

A
  • When an attorney or court subpoenas the information
  • At the client’s request
  • As a defense against charges of wrongdoing
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9
Q

Determining the Release of an Emergency Fund

(Use 3 or 6 months if…)

A

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
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10
Q

How much consumer debt is considered acceptable?

A

≤20% of NET income

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11
Q

How much Total Monthly Debt is considered acceptable?

A

≤36% of GROSS income

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12
Q

How much PITI is considered acceptable?

A

≤28% of GROSS income

DON’T FORGET TO INCLUDE ALL INCOME!

INCLUDING DIVIDENDS AND INTEREST!

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13
Q

Current Ratio

A

Current Assets ÷ Current Liabilities

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14
Q

Current Assets

A
  • Cash Equivalents
  • Marketable Securities
  • Accounts Receivable
  • Inventory
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15
Q

Current Liabilities

A
  • Accounts Payable
  • Credit Card Debt
  • Taxes Payable
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16
Q

Securities Act of 1933

A

The Securities Act of 1933 required that new issues purchasers be provided a detailed prospectus before the purchase was completed.

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17
Q

Securities Act of 1934

A

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.

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18
Q

Investment Company Act

of 1940

A

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.

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19
Q

Securities Investors Protection Act of 1970

A

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.

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20
Q

College Funding

(phase-out given)

A
  • 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
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21
Q

529 Keys

A
  • 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
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22
Q

Deductible Housing Interest

A

All mortgages cannot exceed:

  • $750K combined (MFJ)
  • $375K (single/MFS)
  • Home equity interest is only deductible if used for home renovation/improvement.
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23
Q

Federal Reserve Open Market Operations

A
  • Repos - Fed buys securities = expansionary/easy money policy
  • Reverse Repos - Fed sells securities = contractionary/tight money policy
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24
Q

Gross Domestic Product (GDP)

A

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.
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25
Q

Business Cycle

A
  • Expansion
  • Peak
  • Recession/Contraction
  • Trough
  • Recovery/Expansion
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26
Q

Recession vs. Depression

A

Recession - Two consecutive quarters of economic decline (negative GDP)

Depression - Six consecutive quarters economic decline (negative GDP)

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27
Q

Exceptions to Filing as an Investment Adviser

A
  • 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
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28
Q

How does an Investment Adviser register with the SEC?

A
  • 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.
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29
Q

Financial Industry Regulatory Authority (FINRA)

Initial Registration Process

A
  • 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)
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30
Q

Financial Industry Regulatory Authority (FINRA)

Key Examinations/Licenses

A
  • 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)
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31
Q

Basic Components of a Legal Contract as Applied to Insurance

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
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32
Q

Law of Agency (Insurance)

A
  • 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.
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33
Q

Which debts are not cancelable by Bankruptcy?

A
  • 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
34
Q

Steps to financial planning process

A

EGADCIM

Establish

Gather

Analize

Develop

Communicate

Implement

Monitor

35
Q

Quantative Data

A

Objective

Precise

Exact

36
Q

Qualatative Data

A

Subjective

Opinion

Risk tolerance, goals, priorities, life expectancy, values

37
Q

Exception to reporting requirement

A

settlement or arbitration award LESS THAN

$15,000

38
Q

Net Worth =

Assets =

Liabilities =

A

Net Worth = Assets- Liabilities

Assets = Liabilities + Net Worth

Liablities = Net Worth - Assets

39
Q

Cash Flow Statement

A

Inflows-Outflows= Savings

Inflows or Gross Income

Fixed Outflows (little to no flexibility)

Variable Outflows

Taxes

40
Q

Pro Forma Statement

A

projects the expected profitability or return of the next year

or longer (the future)

41
Q

Real Rate of Return

A

(1+after tax return / 1+ inflation rate -1) x 100

42
Q

Unequal Cash Flows- 3 variations

Calculate PV

Calculate IRR/ dollar weighted return

Calculate NPV

A

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

43
Q

Serial Payments

A

CFj Key AND Nj Key

1st input = negative

CFj = cash flow

Nj= number of time cash flow occurs

Solve- Gold IRR/YR

44
Q

Kiddie Tax

A

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.

45
Q

Alimony tax deductible vs. Not deductible

A

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

46
Q

COBRA

A

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.

47
Q

Prizes and Awards

A

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

48
Q

How does Fed reserve control money supply

A

Open market operations

setting discount rate

setting reserve requirements

PRIME is always a wrong answer RE: Monetary policy

49
Q

Leading Economic Indicators

A

Initial Claims for unemployment

New manufacturing orders

New private housing

Stock prices

Index of consumer expectations

50
Q

Lagging Economic Indicators

A

avg duration of unemployment

average prime rate

outstanding loans

change in teh CPI for services

51
Q

Coincident Indicators

A

move in tandem with broad economy

Industrial production

of employees on non - AG payrolls

Personal income less transfer payments

52
Q

Yield Curve

A

Normal- as maturities lengthen - yield increases

Inverted - short term rates above long term rates - happens when economy is overheating- inflation fears increase

53
Q
A
54
Q

AGENT vs. BROKER

A

Agent is loyal to company

Broker is loyal to client

55
Q

Bankruptcy

A

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.

56
Q

Consumer Credit Protection Act/ Truth in Lending

A

Lost or stolen Credit Cards have limited liability of $50 per card!

57
Q

Coverdell ESA’s

A

$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.

58
Q

Reverse Mortgages

A
59
Q

ANCHORING

A

tendency to become attached to specfic price as the FAIR price

60
Q

ATTACHMENT BIAS

A

Holding onto an investment for emotional reasons

“grandfather left it to me”

61
Q

ENDOWMENT BIAS

A

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”

62
Q

COGNITIVE DISSONANCE

A

challenge of two opposing beliefs

63
Q

CONFIRMATION BIAS

A

natural human tendency to accept any information that confirms our preconceived position or opinion and disregarding anything that does not support that.

64
Q

DIVERSIFICATION ERRORS

A

investors tendency to diversify evenly across whatever options are available

65
Q

FEAR OF REGRET

A

tendency to take no action rather than making a wrong choice.

66
Q

GAMBLER’S FALLACY

A

false belief that the onset of a certain random event is likely to happen following an event or a series of events.

67
Q

HERD BEHAVIOR

A

the tendency of an individual to mimic the actions of a larger group

68
Q

HINDSIGHT BIAS

A

the 20/20 vision we have when looking at a past event and thinking we understand it

69
Q

INAPPROPRIATE EXTRAPOLATION

A

tendency to look at recent events (or market performance) and assume that those events will contine indefintely.

70
Q

ANALYSIS PARALYSIS

A

overanalyzing a situation can cause decision making to become paralyzed

71
Q

LOSS AVERSION AND RISK TAKING

A

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)

72
Q

PROSPECT THEORY

A

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.

73
Q

MENTAL ACCOUNTING

A

looking at different sums of money differntly depending on source or intended use.

“how I manage seperate bank accounts”

74
Q

OUTCOME BIAS

A

tendency to make a decision based on desired outcome rather than probability of that outcome

75
Q

OVERCONFIDENCE

A

placing too much emphasis on one’s own abilities.

76
Q

OVERREACTION

A

investors emotionally react towards new market information.

77
Q

OVERWEIGHTING RECENT PAST

A

giving too much emphasis to what’s happened in the past.

78
Q

SELF- AFFIRMATION BIAS

A

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.

79
Q

SPOTTING TRENDS THAT ARE NOT THERE

A

investors seek patterns that help support decisions sometimes without adequate confirming research

80
Q

STATUS QUO BIAS

A

tendency of investors to do nothing when action is called for.

General Principles- CFP (1 decks)

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