General Principles Flashcards
Code of Ethics
“AAAA ME”
Act with honesty, integrity, competence, and diligence
Act in client’s best interest
Act in a manner that reflects positively on the FP profession and the marks
Avoid or disclose and manage conflicts of interest
Maintain the confidentiality and protect the privacy of client info
Exercise due care
Standards of Conduct
A. Duties Owed to Clients
B. FP & application of the Practice Stds for FP process
C. Practice Stds for the FP process
D. Duties Owed to firms and subordinates
E. Duties owed to CFP Board
F. Prohibition on circumvention
Duties Owed to Client
- 15 in total | “FDIC COP” for most popular
Fiduciary Duty
Diligence
Integrity
Confidentiality & Privacy
Competence
Objectivity
Professionalism
Duties when representing compensation method (A.12)
Fee-Only - receive compensation solely from the fees clients pay from their services
Fee-Based - compensation via fees and other sources, (e.g., commissions)
Sales-related Compensation - compensation that provides incentives for the purchase or sale of financial assets, thereby presenting a conflict of interest
Fiduciary Duty (A.1)
Duty of Loyalty - place interest of client above all else; avoid conflicts of interest and or disclose; act w/o regard to the financial interests of self, firm, or others
Duty of Care - act with care, skill, prudence, and diligence that a prudent professional would exercise
Duty to Follow Client Instructions - comply with the terms of the client engagement and follow all directions of the client that are reasonable and lawful
Financial Advice
Comments that based on its content/context/press, would reasonably be viewed as rec’ that a client take or refrain from taking a particular COA
Financial Planning
Collaborative process that helps maximize a clients potential for meeting life goals through Financial Advice that integrates relevant elements of the client’s person and financial circumstances
Stds of Conduct - Integrity
Focus on “candor and honesty”
Stds of Conduct - Duties Owed to Clients - Diligence (A.4)
“…must provide professional services, including responding to reasonable client inquires, in a timely and thorough manner.”
Financial Planning Process
“Ukuleles In A Dive-bar Playing Iron Maiden”
Understand client’s personal and financial circumstances
Id and select goals
Analyze current COA and potential COAs
Develop FP rec’s
Present FP rec’s
Implement FP rec’s
Monitor progress and update
Fitness Stds - Conduct Deemed Unacceptable
(permanently barred)
Felony conviction - theft or other fin crimes
Felony conviction - tax related crimes
Felony conviction - murder or rape
Felony conviction - any other violent crime w/in last 5 yrs
Revocation of financial prof licenses for any reason other than personal decision
Fitness Stds - Conduct Deemed Presumptive Bar
(presumed unacceptable -> proceed to DEC)
Felony conviction - non-violent crimes w/in last 5 yrs
Felony conviction - violent crimes other than murder/rape 5+ yrs ago
2+ personal or biz bankruptcies
Revocation or non-financial prof licenses for any other reason beyond personal decision
Suspension of financial professional license except for something admin in nature
Fitness Stds - Other Adverse Conduct
(proceed to DEC)
Other conduct that reflects negatively on person and or marks…
-Customer complaints
-Arbitration/civil proceedings
-Misdemeanor convictions
-Employer investigations
-Felony conviction - non-violent crimes greater than 5 yrs ago
DEC Forms of Discipline
“PPSR”
Private censure: unpublished written reproach mailed by the DEC to individual
Public letter of admonition: written reproach of individual’s behavior published in a press release
Suspension: respondent is prohibited from using CFP marks; min 90 days to 5 years
Revocation: termination of individuals rights to use CFP marks; permanently barred
Business Cycle
Points: Trough & Peak
Phases: Expansion & Contraction
Business Cycle Phases
Expansion: increasing GDP and decreasing unemployment
Contraction: decreasing GDP and increasing unemployment
Business Cycle Points
Peak: very high GDP and peak unemployment (very low)
Trough: very low GDP (or negative GDP) and high unemployment
Business Cycle & Inflation
Inflation increases throughout expansion phase and remains high during contraction where credit dries up, profits decline, policy eases, and inventory/sales fall
GDP Formula
GDP = Consumer spending + Industry investment + Govt spending + (Exports - Imports)
Real GDP
Includes:
-Mkt value of all final goods and services produced w/in an economy
-Income of foreigners working in US
-Profits of foreign companies operating in US
Real GDP
Excludes:
-Imports
-Inflation
-Transactions where no new goods/services are produced
-Income of US citizens living abroad
-Profits of US companies operating abroad
Price Elasticity - Elastic
Quantity demanded responds GREATLY to price changes
-e.g. a very tight rubber band
Theory is everything become elastic over the long run
Price Elasticity - Inelastic
Quantity demanded responds LITTLE to price changes
-a very loose rubber band
-e.g. gasoline
Law of supply and demand
As the price increases, supply rises while demand declines. Conversely, as the price drops supply constricts while demand grows.
Fiscal Policy
Congress controls fiscal policy
Tools:
(1) Govt Spending - promote economic growth through spending
(2) Taxation - increases in tax reduces disposable income / decreases in tax increases disposable income
Deficit spending
Govt expenditures exceed revenues generated.
Govt will sell Treasury Securities. Those securities compete with other issuers of debt securities driving values lower.
Monetary Policy
Controlled by Federal Reserve Bank (the Fed)
Tools:
(1) Discount rate - rate at which member banks borrow from govt
(2) Open marketing operations - buy and sell securities
(3) Reserve requirements - % of deposits that must be held in reserve
Contractionary or Tight Monetary Policy
Increase discount rate
Increase reserve requirements
Sell securities
These actions slow down or cools the pace of growth
Expansionary or Easy Monetary Policy
Lower discount rate
Lower reserve requirements
Buy securities
These actions increase the pace of growth and stimulates the economy
Statement of Financial Position
Aka Balance Sheet
Assets = Liabilities + Net Worth
Items always listed at fair market value
Assets listed in order of liquidity, highest to lowest
Statement of Cash Flow
Starting point: Net income
Ending point: Cash balance
Financial Ratios
“LAPD” - four categories
Liquidity - determine the ability to meet short-term obligations
Activity - determine the relative efficiency of fin mgmt
Profitability - measure relative profitability
Debt - determine ability to meet long-term obligations
Do you want your Current Ratio to be increasing or decreasing?
Current Assets / Current Liabilities = Current Ratio
Increasing.
What are the acceptable emergency fund holdings?
Cash
Checking/savings
Money market mutual funds
T-Bills
CDs
Cash value life insurance
Lines of credit
Home equity loans
FDIC
$250k per person, per ownership category, per bank.
FDIC - account ownership categories
8 total / 5 main account types
Single / Joint / Retirement (IRAs) / Revocable Trusts / Irrevocable Trusts
One single bank could hold $2M in FDIC insurance for one person
Chapter 7 - Bankruptcy
Think #7 Jalen Brown -> clear the lane -> eliminates all consumer debt
“Liquidation event”
Most debts discharged after 115 days except for: child support, alimony, income taxes less thank 3 yrs past due, student loans, and secured debt
Chapter 13 - Bankruptcy
Think #13 Delonte West -> just give him time, he’ll figure it out -> Repayment options
Allowed to keep personal assets but obligated to repay debt in full over a certain period
Must have less than $419,275 in unsecured debt, no more than $1,257,850 in secured debt
Chapter 11 - Bankruptcy
Think #11 Payton Pritchard -> all about that business -> Business reorganization
Secured and unsecured debt all reorganized and paid back over time
Consumer Credit Protect Act
Right to know costs and terms of credit
Equal Credit Oppty Act
Right to fair oppty to obtain credit
Fair Credit Reporting Act
Right to know what’s in your credit file
Fair Credit Billing Act
Right to have billing mistakes resolved
Fair Debt Collection Practices Act
Right to be protected from collection agencies
Consumer Financial Protection Bureau (CFPB)
Implements and enforces Federal consumer financial laws and ensures that markets for consumer financial products are fair, transparent, and competitive
FICO Scores
Poor. Fair. Good. Very good. Exceptional.
300 - 580 - 670 - 740 - 800 - 850
90 70 60 50
FICO Score Calculation
“PAL in NC”
Payment history 35%
Amounts owed 30%
Length of credit history 15%
New credit 10%
Credit mix 10%
Educational Funding Calc Steps
Step 1 = FV: i = education %; inflate annual cost of college from today to future dollars
Step 2 = PV: (BEGIN mode); i = inflation-adjusted: solve for total cost of attendance on Day 1
Step 3 = PV or PMT: i = investment %; solve for amount to cover costs in today’s dollars
529s
Non-deductible contributions
Contrib’s are completed gifts up to $16 annual exclusion
One person can super fund 5 yrs = $80k or $160 for MFJ
Up to $10k can be used for K - 12
Up to $10k can be used for loan repayment
No time or age restrictions
EFC - counted as a parent’s asset (5.64%)
Nonqualed expenses = 10% penalty & federal tax
Coverdell Education Savings Accounts
Contrib’s completed gifts up to $16k annually
$2k annual contrib amount per beneficiary
No limit on K - 12 usage
Contribution phase out
EFC - counter as parent’s asset (5.64%)
Nonqualed expenses subject to 10% penalty and federal tax
Educational Funding Options
In order…
529s
Coverdell Education Savings Account
Series EE Bonds
UTMG/UGMA
Roth IRA
Trad IRA
Mutual Funds
529 ABLE accounts below what amount are excluded from EFC calculation?
$100,000
EFC Formula
Cost of Attendance - (Income + Assets) = Financial Need
EFC Contribution Amounts
Income
Parent: 22% to 47%
Student: 50%
Assets
Parent: 5.64%
Student: 20%
What assets are included in EFC formula?
Cash, savings, checking, money market funds, CDs
Investments
Rental real estate equity, business, investment farms, trust funds
College savings plans, CESAs, 529s
EFC - Student Income Protected Amount
First $7,040 protected from student income inclusion in formula
American Oppty Tax Credit
AOTC -> “All Of The Kids”
No limit to usage on tax return
Up to $2,500 credit per eligible student
40% of credit refundable up to $1000
Does not apply towards room and board
Lifetime Learning Credit
LLC
Up to $2k per return
Not refundable
Student does not need to be pursuing a degree
AOTC & LLC MAGI Limits
MFJ = $180,000
Single = $90,000
AOTC Formula
100% of first $2,000
25% for next $2,000
For a total of $2500
CFP continuing education req’s
30 hours every two years
Code of Ethics - 15 principles
Fiduciary Duty
Integrity
Competence
Diligence
Disclose and Manage Conflicts of Interests
Sounds & Objective Prof Judgment
Professionalism
Comply with the Law
Confidentiality and Privacy
Provide Information to Client
Duties When Comms with a Client
Duties When Representing Compensation Method
Duties When Rec’d, Engaging, and Working with Addtl Persons
Duties When Selecting, Using, and Rec’d Tech
Refrain From Borrowing or Lending Money & Commingling Financial Assets
529 taxation for unqualified withdrawals
If money was not used to pay education expenses, gains from a 529 plan are taxed as ordinary income and a 10% penalty is applied.
Stafford Loans are administered by who?
Federal Family Education Loan Program
To be eligible for Perkins Loans, what must your student status be?
Full-time or part-time
FINRA was created via the merger between what two organizations?
Enforcement divisions of the NYSE and National Association of Securities Dealers
Which principle?
“CFP professional must act with the care, skill, prudence, and diligence that a prudent professional would exercise in light of the Client’s goals, risk tolerance, objectives, and financial and personal circumstances.”
Fiduciary Duty -> Duty of Care
What is an unconditional promise to pay a sum of money to a payee under specific terms?
Promissory note
Glass-Steagall Act of 1932 was ultimately overturned by what legislation?
Gramm-Leach-Bliley Act
Ensured the separation of banking, insurance, and securities sales in the US
For an IRA, max amount of AUM before having to register with the SEC
$100M
US Treasury guarantees that an EE bond will double within _____ years.
20
Essential trait of any professional and involves a subordination of one’s own feelings, prejudices, and desires to achieve a proper balance of conflicting interests
Fairness
Fee-only
Only in:
-The CFP receive no sales-related comp, and
-Related parties receive no sales-related comp in connection with any professional services the CFP or firm provides to clients
Violation of fee-only comp
Paid for a,
-referral fee
-commissions
-per trade basis
