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 Advisor
No:
- RIA
- C.F.P.
Yes:
- Registered Investment Advisor
- CFP®
- CERTIFIED FINANCIAL PLANNER™
When can a CFP® licensee release client information to other persons?
- Subpoena: When an attorney or court subpoenas the information
- At the client’s request
- As a defense against charges of wrongdoing
Determining Emergency Fund (3 or 6 months)
Fixed and Variable expenses and real estate taxes.
3 months if:
- Single with 2nd source of income.
- Married, both work.
- Married, only 1 spouse works, but has a second source of income.
6 months if:
- Single with one source of income (single wage earner).
- Married, and only one spouse works.
EFs can be invested in the following vehicles:
- Checking accounts (excluding funds to be used for expenses)
- Government money market accounts
- CDs close to maturity (<90 days)
- Savings vehicles
- Laddered CDs < 6 months
How much consumer debt is considered acceptable?
≤20% of NET INCOME
Net is even less than gross. Should be spending the least on Consumer goods.
How much Total Monthly Debt is considered acceptable?
Housing expense, auto loans, credit card debt.
≤36% of GROSS INCOME
How much PITI is considered acceptable?
Principal, Interest, Taxes (property), Insurance (homeowners).
≤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
Requires that purchasers of new issues be provided with a detailed prospectus before the purchase is complete.
Securities Act of 1934
Passed to regulate the Secondary Market (trading of issued securities).
Also created the SEC to ENFORCE securities laws.
Investment Company Act of 1940
Authorized the SEC to regulate UITs and managed investment companies (closed/open), and variable products.
UITs
Managed Investment Companies
Variable Products
Securities Investors Protection Act of 1970
Established the SIPC to SUPERVISE securities firms that get into financial difficulties.
SIPC insures investors against losses arising from the failure of a brokerage firm.
529 Key
- Lump sum gift up to $85,000.
- Donor can retain control.
- K-12 distribution allowed up to $10,000/yr.
- Up to $10,000 PER PERSON distribution for student loans.
Deductible Housing Interest
ALL MORTGAGES cannot exceed:
- $750,000 combined (MFJ)
- $375,000 (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.
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
Recovery/Expansion
Peak
Recession/Contraction
Trough
Recession vs. Depression
Recession- TWO consecutive QUARTERS of economic decline (negative GDP).
Depression- SIX consecutive QUARTERS of economic decline (negative GDP).
Exceptions to filing as an Investment Adviser
- Banks that are not also investment companies.
- Lawyers, Accountants, Teachers, Engineers where advice is incidental.
- B/Ds or RRs 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.
- An intrastate advisor in unlisted securities.
Exemptions to Filing as an Investment Adviser
- Advisers who only clients are insurance companies.
- Family office.
How does an Investment Adviser register with the SEC?
- 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.
FINRA Initial Registration Process
- Associate with a B/D.
- Register with FINRA through BD on form U-4.
- Take and pass appropriate exams.
- Get CRD number
FINRA Key Examinations/Licenses
- Series 6: Mutual funds, New UITs, and variables.
- Series 7: General Securities (UITs on Secondary market).
- Series 63: Uniform Securities Agent State Law Exam. Meets requirements to be licensed in states other than state of residence.
- Series 65: Uniform Investment Advisor Law Exam. RIA state requirement.
- Series 66- Uniform Combined State Law Exam.
Basic Components of a Legal Contract as Applied to Insurance
- Offer and Acceptance: Two parties. Offeror and acceptor.
- Consideration: Something of value
- Legal Object: Legal in purpose
- Competent Parties: Must have legal capacity to execute contract. Minors only have capacity to contract for necessities.
- Legal Form: Contract musts meet requirements.
Law of Agency (Insurance)
- Express Authority: Written, EXPLICIT direction.
- Implied Authority: What the public believes the individual holds. Includes signage, rate books, etc. This is actual authority 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.
Which debts are NOT cancelable by Bankruptcy? 6
- Student loans
- Government loans
- Child support
- Alimony
- Taxes and Wage withholding
- Rollovers from qualified plans are exempt (unlimited), and non-rollover IRAs (traditional or Roth) up to $1 million are exempt.
SEPs, SIMPLEs, ERISA plans, and deferred comp plans are generally exempt assets.
Business Capitalized Value:
Capitalized Value = Annual income / Cap Rate
Liquidity Ratio
Assets / Liabilities
Only include taxes when the material indicates taxes are due or taxes are payable. Only use mortgage information when the data tells you the CURRENT AMOUNT of mortgage due.
Savings Strategies
Ideally, a family should save at least 5-8% of gross income.
“Pay yourself first” is generally the best advice to succeed at saving.
Deposit a specific amount from each paycheck into a savings account.
Use of PMT Begin or End mode
Begin: College education paid, Retirement benefits received, Family needs.
End: 401(k) deferrals, Profit-sharing contributions, Bond interest paid, Mortgage payments.
Real rate of return
also referred to as the inflation adjusted interest rate.
WHENEVER A QUESTION ASKS FOR “TODAYS DOLLARS”, USE THE INFLATION ADJUSTED RATE (REAL RATE).
Unequal cash flows/IRR/NPV:
1st Variation- Calculate PV
- Use the CFj function
- 0 as first input (usually first output will state “End of year 1” so this is why 0 is the first input)
- Make sure to input the Required Rate of Return as I/YR.
Unequal cash flows/IRR/NPV:
2nd Variation- Calculate IRR/DWR
- Use the CFj function
- Initial Investment is entered as a negative
- Solve for IRR
Unequal cash flows/IRR/NPV:
3rd Variation- Calculate NPV
- Use CFj function
- Always enter initial investment as a negative
- Make sure to input the Required Rate of Return as I/YR
Only difference between this variation (NPV) and the 1st variation (PV), is that when solving for NPV, there is an initial investment that is taken into consideration in CF0.
Mary and Paul Gardner plan to retire in 10 full years. They currently have $1 million in investments earmarked for retirement. During their retirement years they want to draw out $150,000 at the end of each year. They feel their joint life expectancy will be 25 years after retirement. When the second person dies, they want to leave $1 million to family members. What return do they need to achieve if no additional money is added to their investment account?
6.88%
-1,000,000, CFj
0, CFj
10, golf, Nj
150,000, CFj
25, gold, Nj
1,000,000 CFj
Gold, IRR/YR
If a bank is federally or nationally chartered, it is regulated by: (3)
The Comptroller of the Currency
The Federal Reserve
The FDIC
FDIC insured amount and types of ownership categories:
(Each ownership category gets separate coverage)
$250,000/person/bank/ownership category
- Individual
- Joint. Each individual has their own $250,000. This means JT accounts are covered up to $500k. $250k for one ind, and $250k for the other.
- Revocable Trust (in trust for, or payable on death to). Additional $250,000/beneficiary.
- IRAs and Keoghs. Insured separately, additional $250,000/account.
- Insurable: Checking, Savings, MMDAs, CDs
- Not Insurable: Stocks, Bonds, Mutual funds (including money market mutual funds), US treasury bills/notes/bonds. These are covered by SIPC
ALWAYS NET CDs AND MMDAs
State Insurance regulators
Three branches of the state government:
- Legislative branch passes insurance laws and provides funding for regulation.
- Courts interpret insurance laws and resolve disputes
- Executive branch, through the insurance commissioner, enforces insurance regulatory laws.
Federal Insurance Regulators
Three major areas:
- cobra and Hipaa, as they relate to health coverage continuation.
- Standardization of Medicare supplement policies
- Taxation of various insurance policies, including life insurance, annuities, long-term care, viatical settlements, disability, etc.
Trust Companies
Typically engage in fiduciary investment management and estate planning.
Assets are typically in trust, a legal document that spells out the beneficiaries and how the assets may be distributed.
Needs a trustee
Trust companies can be named as an executor or personal rep.
College Funding Needs Analysis:
Step 1: INFLATE. Determine the cost of the first year of college
- This is a straight forward FV calculation using the college cost inflation rate. SOLVE FOR FV.
Step 2: ADJUST. Determine the amount that must be available when the child is age 18 to fund the required years of college (typically 4 years)
- Invested college funds will continue to grow, but so will the cost of college. THIS MEANS THE INFLATION ADJUSTED RETURN (REAL RATE) MUST BE USED.
- Put calculator in BEG mode
- FV from step 1 becomes PMT. This is because that is the amount that is being paid each year.
- Solve for PV. This is the amount needed to cover college costs.
Step 3: INVEST. Determine how much parents need to invest
- Lump sum needed will be solved using PV.
- Annual saving amount will be solved using PMT.
- This step can be in BEG or END mode depending on client preference.
- PV in Step 2 becomes FV
- I/YR is the after-tax return that the parents can earn.
Funding Strategies: Funding Years
- UGMA/UTMA: Subject to Kiddie tax for children under 24.
- EE Education Bonds: Parents own bonds. Will not work in an UGMA/UTMA.
- CESA: Limited to $2,000/year contribution.
- 529 (QTP): College Saving or Prepaid Tuition. $17,000/year contribution per child, or $85,000 5 year frontload.
Funding Strategies: College Years- Wealthy
Wealthy parents are a PLUS.
Parent Loans for Undergraduate Students