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
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)
- 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)
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.
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:
- 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
Financial Planning Process 7 Steps
- Understand personal and financial circumstances
- Identify and Select Goals
- Analyze current cours of action AND potential alternatives
- Develop Plan Recommendations and alternatives
- Present the plan
- Implement the Plan
- Monitor progress and update
EIGHT Principal Knoweledge Categories
- Professional Conduct and Registration
- General Fiancial Planning Principals
- Psychology of Financial Planning
- Risk Management and Insurance Planning
- Investment Planning
- Tax Planning
- Retirement Savings and Income Planning
- Estate Planning
Fee BASED
Sales Related Comp
- Commissions
- 12b-1 fees
- Trailing commissions
- Bid/Ask spreads (markup/downs to market makers)
- Transaction fees
- Revenue Sharing
- Solicitor fees
Fee ONLY
NOT sales related comp
- Soft dollars (research) , safe harbor section 28-e of SEC Act 1934
- Custodial fees and admin fees (not based on size of client account or trade)
- Non-monetary benefits related to client service
- Professional Services fees (not referral or solicitor)
- Turnkey asset management platform fees
- Fees related to a related solicitor for CFP or Firm
Net Worth = Assets - Liabilities
Liabilities = Networth - Assets
Assets = Liabilties + Net Worth
Cash and Cash Equivalents
Cash/Checking/Savings
MMKT Dep (bank)
MMKT MF (Security)
Laddered CDs
CDs Close to Maturity
Investment Assets
- Annuities (Var and Fix)
- Business Interests
- Real Estate as an investment
- Collectibles as an investment
- MFs/Stocks/Bonds
- Pensions/IRA/Roth
Life Isurance “technically” Cash but ……
Life Insurance Co. Can delay distribution for up to 6 mos.
Use ASsets
Home
Personal Property
Collectibles for ENJOYMENT
Vacation Home
Vehicles
Relationship Between B/S and Cash Flow
CF can increase or decrease Net Worth on the B/S
Capitalization of Income
Projected flow of Income = PV
Cap Value = Annual Income ÷ Cap Rate
Emergency Fund
High Accessm minimal risk and volatility
Checking (after expenses)
Govt MMKT
Savings
Laddered CDs ≤ 6 mos
CDs close to Maturity ≤ 90 Days
IF Checking Balance > monthly expenses
THEN subract 1 month expenses
IF Checking Balance < monthly expenses
THEN IGNORE the negative #
DEBT Management RATIOs
PITI ≤ 28% of Gross Income
Monthly Debt ≤ 36% of Gross Income
Consumer Debt ≤ 20% NET income
Liquidty Current Ratio
Current Ratio = Current Assets ÷ Current Liabilities
Federal Sec Acts
- 1933 New Issues/Primary Offerings
- 1934 Secondary Trading
- 1940 Investment Company Act
- UITs, Open and Closed End Funds
- Life Insurance (Variable and Annuities)
- 1940 Investment Advisor Act – Roles and responsiblities of an Advisor
- 1970 SIPC (Brokerage firm failur protection)
- 1988 Insider Trading Act
What is a Trust Company
Organization usually commercial bank
Engaged in trustee and finduciary services, investment management and estate planning
Trustee Administration
College Funding map
Who sets Rates?
Prime Rate set by Banks
Discount Rate set by Fed
Reserve Requirements Set by Fed
FAFSA and EFC
Fafs determines EFC (Education Family Contribution) based on prior 2 yrs tax returns.
Protected assets: Small Businesses < 100 Employees
IRAs
Life Insurance
Best Options for Transfer of Assets for Unmarried Couples
- Revocable Trust
- TIC
WRONG ANSWER: Will, intestacy (NO WILL), JTWROS
COBRA Qualifying Events and Coverage`for ≥ 20 Employees
- 18 months: Terminated employees and dependents
- Voluntary or Involuntary
- Full Time to Part time
- 36 Months: Spouses and other dependents
- Employee death, Divorce, Legal Separation or Eligibility for Medicare
- 36 Months: Dependents whose status has changed
- Loss of Dependent Status (marriage, reaching dependentcy age limit)
Structured Settlements and Windfalls
- Compensatory Damanges: Tax Free
- Injury or physcal sickness
- Punitive: TAXABLE
- Punishment for wrongdoing (discrimnation, harassment)
- NOT taxable related to emotional distress from WRONGFUL DEATH
Leading Economic Indicators
- Initial claims for unemployment insurance
- New private houseing units
- Stock prices, 500 common stocks
- index of consumer expectations
- Avg wkly hrs for prod. workers in manufacturing
- New manufacturing orders
- Vendor performance % of slower deliveries
- Contracts/orders for plans and equipment
- Interest rate spread
- Money supply
Coincidental Indicators
- Industrial Production (Index)
- # of employees on non-agricultural payrolls
- Personal income less transfer payments (soc sec, welfare)
Lagging (Confirming Indicators)
- Avg duration of unemployment
- Avg Prime Rate charged by banks
- Commercial and industrial loans outstanding
- Ratio of consumer installment credit outstanding to personal income
- Change in the consumer price index for services.
GDP
Measure of total production for goods and services in the U.S.
Consumer Price Index CPI
- Food and beverage
- apparel
- education and communication
- housing
- transportation
- other goods and services
- recreation
- medical care
Producer Price Index (Leading Indicator)
Farm and industrial commodities
Durable vs Durable
- Durable: Hard Items that don’t wear out quickly
- NonDurable: Soft/Consumables
- Not effected by recession because they are always needed and wear out
Inflation, Deflation, Stagflation
- Inflation: Rise in prices in goods and services (too much money, too few goods)
- Indicators: CPI and PPI
- Deflation: Decline in price of goods and services (too little money, too many goods)
- Stagflation: Slow economic growth, high unemployment with rising prices
FINRA Licenses – U-4
SEC regulations: Form ADV
- Series 6:
- Mutual funds, UITs, and variables (only new UITs)
- Series 7:
- General securities (UITs on the secondary market)
- Series 63:
- Uniform Securities Agent State Law Exam (Blue Sky)
- Series 65:
- Uniform Investment Advisor Law Exam
- Series 66:
- Uniform Combined State Law Exam (combines 63 and 65)
Buy vs Lease consideration
Normally the higher the marginal tax bracket the greater the advantage of owing a home.
Also consider time frame: short for rent, longer for buyers.
Qualified Residence Interest Deduction Limitation
for Home Equity and Mortgage
≤ 750,000 MFJ
≥ 375,000 Single
Existing primary prior to TCJA ≤ $1mm grandfathered
Who is an Advisor?
BLAT
- Banker, Lawyer, Accountant, Teacher when advice is incidental
- Publisher of BONA FIDE financial magazine
- Seller of US Govt issues/guaranteeds only
- One State only (intra state) UNLISTED securites seller
- Advisor with ONLY INSURANCE COMPANIES as clients
- Family Office
Register with SEC with Form ADV and $150 filing fee.
What are the parts
- Part 1: Applicant Brochure
- Part 2: Business Brochure, Wrap Brochure (conflicts)
- Final Rule: 120 Days to present “Material Change Summary”
- 48 Hours to Deliver RIA Advisory Agreement
- Form CRS: SEC Disclosure
- ADV-W used when you leave advisory services (5 years of records keep)
FINRA REgistration Process
- Join a B/D firm
- Register with FINRA U4
- Pass exams
- Registrations goes in to the CRD (Central Registration Depository)
Law of Agency
What Isurance Companies grant agents
-
Express Authority
- Direct from Principal to Agent (Actual authority is to carry out principal interests)
- Written
- Explicit Direction
- Direct from Principal to Agent (Actual authority is to carry out principal interests)
-
Implied Authority
- What the public believes is the agent’s authority based on agent action
-
Apparent Authority
- Related to NEGLIGENCE of PRINCIPAL by allowing an agent to “appear” to have authrity due to actions of an agent
Contracts are an agreement between ≥ 2 parties require which elements for enforceability?
- Agreement preceded by an offer an acceptance
- consideration (usually money)
- Principal must have LEGAL CAPACITY
- Competent and Sober
- Minors can contract for necessities
- Must be LAWFUL
- If an agent illicitly writes a cotract w/o full disclosure, Principal will refund premium and null contract (RECISSION) OR reunderwriting will occure (REFORMATION)
What is Conditional Receipt?
- Evidence of a temporary contract obliging life insurance
- Allows time for processing
- IF applicant DIES before issue is complete
- THEN Death Benefit of the policy will be issued.
Bankruptcy
Ch. 11: individual (not qualified under Ch 13)
Ch 13: Reorg (payment to creditors reduced, no harassment by creditors, no full surrendore of assets)
Ch 7: debtor can claim “Federal” exeptions or state exemptions
Chapter 7 Federal Expemtions availably under state law
- Homestead
- Limited personal property
- Limited equity in motor vehicle
- Pension and retirement plans (ERISA and IRA)
- Cash Value of Life Ins and Annuity
- Disability/unemployement workers comp benefit
- TBE property
Bankruptcy debts NOT CANCELLABLE
STU-GO-T-CH-A
Student Loans
Government Loans
Taxes
Child Support
Alimony
Chapter 7 means test
- Avg Mthly NET Income for 60 mths > $10,000 THEN Ch 7 is NOT and option
- Avg Mthly Net Income for 60 mths < $6,000 THEN Ch 7 IS ALLOWED
- Avg Mthly Net Income btwen $6,000 and $10,000 THEN the debtor can file IF
- IF net monthly income <25% of all non-priority unsecured debts.
- MUST:
- Provide tax returns
- go to credit counseling
- provide Roth and IRA > $1mm
- provide ESAs, 529s opened within 2 years
Fair Credit Reporting Act
- One free credit report / year
- If denied credit, entitled to free copy of file
- Information may be retained <= 7 years
- Only “interested parties” can access file
- Creditors, Mortgage companies, insurance companies
Consumer Credit Protection Act
(aka Truth in Lending)
- Interest must be reported as APR
- Credit Terms must be disclosed
- fees
- points
- prepayment penalties
- Lost or stolen credit cards have limited liability ($50)
Credit Scores
- Entitled to see credit score IF:
- turned down for a loan
- offered a high rate relative to others
