General Principles Flashcards
What are the practice standards for the financial planning process? (7)
UIADPIM = ukuleles in a dive bar playing Iron Maiden
- Understanding the clients personal and financial circumstances
- Identifying and selecting goals
- Analyzing the client’s current course of action and potential alternative courses of action
- Developing the financial planning recommendations
- Presenting the financial planning recommendations
- Implementing the financial planning recommendations
- Monitoring progress and updating
What is the code of ethics that a CFP professional must abide by? (6)
It is the Best Interest Standard. INTEGRITY
AAEAMA =
- Act with honesty, integrity, competence, and diligence
- Act in the clients best interests
- Exercise due care
- Avoid or disclose and manage conflicts of interest
- Maintain confidentiality and protect the privacy of client information
- Act in a manner that reflects positively on the financial planning profession and CFP certification
What is the fiduciary standard? (11)
When providing advice to a client, a CFP is always a fiduciary. There are duties, THE DUTY TO:
- Loyalty
- Care
- Follow client instructions
- Diligence
- Disclose and manage conflicts of interest
- Sound objective professional judgment
- Professionalism
- Comply with law
- Confidentiality
- Provide information to the client
- Fairly represent the method of compensation
Under which circumstances may a CFP share otherwise confidential client information with others?
Subpoena, by request, in the CFP’s own defense
What is the correct usage of the CFP marks?
CFP must be in all caps
CFP must have the registered mark
CERTIFIED FINANCIAL PLANNER must be in all caps
CERTIFIED FINANCIAL PLANNER must have trademark marks
Registered Investment Advisor must be written out
No CFP in email addresses
When CFP or certified financial planner marks are used in a sentence, what nouns must follow? (7)
- Certificant
- Practitioner
- Professional
- Registrant (individuals who are not currently certified but have been in the past and are generally entitled to use the marks)
- Certification
- Mark (not letter, as in CFP letters on biz card)
- Exam (not test, as in I just passed the CFP test)
What is an FHA loan?
It is the best mortgage loan for low and middle income individuals. Mortgage maximum ranges between $270,000 and $730,000
What is the qualified residence interest rule?
If improving a qualified home qualified home with a mortgage loan or home equity loan, the interest paid on the 1st $750,000 (MFJ) is deductible.
The qualified home is the first or second home. if If you have more than two homes they may qualify, but if any of them are rented out it gets messy.
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
Current Ratio
Current Assets ÷ Current Liabilities
Measures liquidity since we are using current numbers
(over time, ratio increases if numbers look better and it decreases if numbers look worse)
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)
- Lifetime - ($119k - 139K)
- AOTC - ($160k - 180k)
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)
GDP = C + I + G + E
- c: personal consumption
- i: investment (gross private domestic investment)
- g: government spending
- e: exports (net exports)
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.
- includes the value of final goods only
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.
Exemptions to Filing as an Investment Adviser
- 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:
- Of sound mind
- Minors only have capacity to contract for necessities (food, clothing, shelter)
- Legal Form - Contract must meet requirements, meeting of the mind
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
When do you use the CFj and Nj keys?
When you are doing a TVM calculation and have uneven cash flows.
CF = cash flow, starting at 0
N = repeat value
Duties of Agent and Principal
- An agent owes the following duties to a principal:
- Loyalty: can’t compete, etc
- Obedience: follow reasonable instruction
- A principal owes the following duties to an agent:
- Compensation
- Indemnity: if company does something wrong, you won’t be in trouble
- Protection: safe working environment
Individual’s financial statement
- balance sheet:
- snapshot in time
- assets on left and liabilities on right
- statement of cash flows:
- overtime, usually calendar year or quarterly
- statement of changes in net worth
- transactions that impact net worth
Always reported at FMV
Business financial statement
- balance sheet:
- snapshot in time
- assets on left and liabilities on right
-
income statement:
- measures a company’s financial performance, such as revenues, expenses, profits, or losses
- over a specific period of time
- statement of cash flows:
- measures the sources of a company’s cash and its uses of cash
- over a specific period of time
- statement of changes in Stockholder’s Equity
- transactions that impact net worth
Always reported at at cost or lower of cost or FMV
Balance Sheet
- also called statement of financial position
- prepared at a point in time
- Assets - Liabilities = Net Worth
- Assets = Liabilities + Equity (Because both liability and equity are something that the company owes in order to own the assets)
- layout:
- left side assets based on liquidity (liquid to illiquid)
- right side: ST liabilities, LT liabilities, total liabilities, net worth/stockholders equity
Statement of Cash Flow
- a period of time
- cash inflows and outflows during that period
- breaks cash into sources and uses
Discretionary
Disposable, to be used by owners discretion.
Proforma Statement
- hypothetical figures for the period in question
- Forecasts expected sales, expenses, profits, and other financial data for a future accounting period
- optimistic to a fault
Debt Ratio
Total Debt / Total Assets
Long-Term Debt Ratio
Total income available for living expenses / total LT debt payments
Living Expense Ratio
Monetary assets / [annual living expenditures debt ratio / 12]
Monthly Housing Cost Ratio
PITI / Gross Monthly Income
Should be less than or equal to 28% of gross monthly income
Monthly Housing Cost and Other Debt Repayments Ratio
[PITI + monthly debt payments]/ Gross Monthly Income
Should be less than or equal to 36% of gross monthly income
Expected Family Contribution
Determines financial aid eligibility on FAFSA
Tuition cost - EFC = Financial Need
Excluded assets
- Home equity in primary residence
- retirement plans
- cash value life insurance
- annuities
- value of small biz owned/controlled by the family
(Child’s assets are INCLUDED)
What helps a student with college costs? (6)
(best to worst)
- Pell Grant
- Supplemental Educational Opportunity Grants
- Perkins Loans
- Federal Direct/Stafford Loans
- PLUS Direct/PLUS Loans
- Work-Study Programs
What rate can Stafford Loans not exceed?
8.25%
What rate is a Federal Perkins loan?
5%
What conditions will cancel a Federal Perkins Loan?
- death
- total and permanent disability
- becoming a full-time special ed teacher, nurse, or medical technician
- serving in the armed forces
How is alminoy taxed?
Tax free to payee, non-deductible to payor.
Elastic vs inelastic
- elastic: when quantity demanded responds greatly to price changes
- luxury items
- inelastic: quantity demanded responds little to price changes.
- gas, beer, necessities
Substitutes vs Complements
- substitutes: increase in the price of one will cause an increase in demand for another
- increase in gas costs will increase demand for firewood
- complements: usually consumed jointly, a decrease in one price will cause an increase in the demand for another
- jelly goes on sale, demand for peanut butter will increase
Diminishing Marginal Utility
the law of diminishing marginal utility states that the marginal utility of a good or service declines as more of it is consumed by an individual. Economic actors receive less and less satisfaction from consuming incremental amounts of a good.
What happens when the Treasury sells debt?
Value of debt goes down due ot the increased supply of debt, causing yields on debt instruments to rise to meet competition.
Monetary Policy
The Fed:
- Reserve Requirement
- an increase causes less money available to loan, restricting money supply
- Fed Funds Rate: overnight lending rate between member banks
- Open market operations: Fed purchases/sells government securities in the open market
- they buy to inject money into the market, increasing lending and decreasing interest rates
- Discount rate: rate at which member banks can borrow from the Fed to meet reserve requirements
- when they raise the discount rate, it increases short term borrowing costs and discourages banks from borrowing. Money supply contracts
Retained Earnings
a firm’s cumulative net earnings or profit after accounting for dividends. They are a type of equity, and though they are not an asset, they can be used to purchase assets in order to help a company grow its business.
“Beginning retained earnings” refers to the previous year’s retained earnings and is used to calculate the current year’s retained earnings.
Debt to Capital Ratio
Total Debt/(Total debt + shareholder’s equity)
What is included in Shareholder’s Equity?
- outstanding shares
- additional paid-in capital
- retained earnings
- treasury stock.
Book Value
- NAV of a company
- the net difference between that company’s total assets and total liabilities, where book value reflects the total value of a company’s assets that shareholders of that company would receive if the company were to be liquidated.
- An asset’s book value is equivalent to its carrying value on the balance sheet.
- Book value is often lower than a company’s or asset’s market value.
What is one basis point equal to?
0.01% (1/100th of a percent) or 0.0001 in decimal form.
Ex: 1.5 points = 0.015%
