General Principles 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
Business Cycle
* Expansion * Peak * Recession/Contraction * Trough * Recovery/Expansion
26
Recession vs. Depression
**Recession** - Two consecutive quarters of economic decline (negative GDP) **Depression** - Six consecutive quarters economic decline (negative GDP)
27
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
28
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.
29
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)
30
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)
31
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
32
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.
33
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
34
Steps to financial planning process
EGADCIM Establish Gather Analize Develop Communicate Implement Monitor
35
Quantative Data
Objective Precise Exact
36
Qualatative Data
Subjective Opinion Risk tolerance, goals, priorities, life expectancy, values
37
Exception to reporting requirement
settlement or arbitration award LESS THAN $15,000
38
Net Worth = Assets = Liabilities =
Net Worth = Assets- Liabilities Assets = Liabilities + Net Worth Liablities = Net Worth - Assets
39
Cash Flow Statement
Inflows-Outflows= Savings Inflows or Gross Income Fixed Outflows (little to no flexibility) Variable Outflows Taxes
40
Pro Forma Statement
projects the expected profitability or return of the next year or longer (the future)
41
Real Rate of Return
**(1+after tax return / 1+ inflation rate -1) x 100**
42
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
43
Serial Payments
CFj Key AND Nj Key 1st input = negative CFj = cash flow Nj= number of time cash flow occurs Solve- Gold IRR/YR
44
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.
45
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
46
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.
47
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
48
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
49
Leading Economic Indicators
Initial Claims for unemployment New manufacturing orders New private housing Stock prices Index of consumer expectations
50
Lagging Economic Indicators
avg duration of unemployment average prime rate outstanding loans change in teh CPI for services
51
Coincident Indicators
**move in tandem with broad economy** Industrial production of employees on non - AG payrolls Personal income less transfer payments
52
Yield Curve
Normal- as maturities lengthen - yield increases Inverted - short term rates above long term rates - happens when economy is overheating- inflation fears increase
53
54
AGENT vs. BROKER
Agent is loyal to company Broker is loyal to client
55
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.
56
Consumer Credit Protection Act/ Truth in Lending
Lost or stolen Credit Cards have limited liability of $50 per card!
57
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.
58
Reverse Mortgages
59
ANCHORING
tendency to become attached to specfic price as the FAIR price
60
ATTACHMENT BIAS
Holding onto an investment for emotional reasons "grandfather left it to me"
61
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"
62
COGNITIVE DISSONANCE
challenge of two opposing beliefs
63
CONFIRMATION BIAS
natural human tendency to accept any information that confirms our preconceived position or opinion and disregarding anything that does not support that.
64
DIVERSIFICATION ERRORS
investors tendency to diversify evenly across whatever options are available
65
FEAR OF REGRET
tendency to take no action rather than making a wrong choice.
66
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.
67
HERD BEHAVIOR
the tendency of an individual to mimic the actions of a larger group
68
HINDSIGHT BIAS
the 20/20 vision we have when looking at a past event and thinking we understand it
69
INAPPROPRIATE EXTRAPOLATION
tendency to look at recent events (or market performance) and assume that those events will contine indefintely.
70
ANALYSIS PARALYSIS
overanalyzing a situation can cause decision making to become paralyzed
71
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)
72
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.
73
MENTAL ACCOUNTING
looking at different sums of money differntly depending on source or intended use. "how I manage seperate bank accounts"
74
OUTCOME BIAS
tendency to make a decision based on desired outcome rather than probability of that outcome
75
OVERCONFIDENCE
placing too much emphasis on one's own abilities.
76
OVERREACTION
investors emotionally react towards new market information.
77
OVERWEIGHTING RECENT PAST
giving too much emphasis to what's happened in the past.
78
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.
79
SPOTTING TRENDS THAT ARE NOT THERE
investors seek patterns that help support decisions sometimes without adequate confirming research
80
STATUS QUO BIAS
tendency of investors to do nothing when action is called for.