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CFP - Review Wrong answers > General Principles > Flashcards

General Principles Flashcards

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CFP® flashcards
1
Q

What do you do if your client had an unrealistic retirement income payout?

A

Run the projections using only conventionally accepted return assumptions

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2
Q

Data survey (family tree)

A

Includes information such as date of birth and health. Net worth is found in the client’s financial statement.

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3
Q

How can the material conflicts of interest be provided?

A

Either in writing or orally.

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4
Q

Privacy policy documents

A

Because FINRA and the SEC require written privacy statements, the CFP Board will also accept it.

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5
Q

What duties do you need to fulfill when presenting recommendations?

A

Explain reason behind each recommendation and present alternative products.

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6
Q

Outflow

A

Taxes create an expense, also known as outflow.

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7
Q

Advice on low marginal income tax bracket

A

Government money market account provides a better equivalent yield than a tax-free account

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8
Q

Personal balance sheet

A

Includes diversification of client’s assets, liquidity position, and debt. Does not include net cash flow.

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9
Q

PITI

A

Principal
Interest
Taxes (property only)
Insurance (homeowners only)

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10
Q

What formula do you use when a question asks for today’s dollars?

A

Real Rate of Return

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11
Q

What is another term for internal rate of return (IRR)?

A

Dollar weighted return

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12
Q

What happens if the NPV is zero?

A

The IRR matches the required rate of return.

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13
Q

In the calculator for a retirement plan example, what are the modes for the yearly contribution paid by the employer?

A

PMT and +/-

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14
Q

Time deposits

A

CDs, which are federally insured by the FDIC.

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15
Q

SIPC

A

Securities Investor Protection Corporation

Insures investors against losses arising from the failure of the brokerage firm.

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16
Q

Investment Company Act of 1940

A

Authorized the SEC to regulate mutual funds

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17
Q

Investment Advisors Act of 1940

A

Covers registration of persons or firms advising others

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18
Q

How does the SEC regulate brokerage companies?

A

Through FINRA

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19
Q

College Funding Three-Step Process

A
  1. Determine cost of the first year of college.
  2. Determine amount that must be available when child is 18
  3. Determine how much parents need to save
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20
Q

Coverdell ESA

A

Must be used before age 30. Can be used for elementary, secondary, and college. Can be held in a trust. Contributions are considered a gift of a present interest.

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21
Q

Municipal bonds in a UGMA/UTMA account

A

Advantageous because it would produce tax-free interest.

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22
Q

EE Education Bonds

A

Must be owned by an adult over 24

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23
Q

529 and Coverdell ESA withdrawal

A

Can’t be combined with a credit for the tuition paid, such as with LLC or AOC

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24
Q

QTP and UTMA similarities

A

A QTP contribution is a gift of a present interest. For gift tax purposes, it is treated the same as a gift to a UTMA

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25
Q

Credits

A

AOC ($2500k) and LLC ($2k)
Coverdell ESAs and UTMA s are not credits.

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26
Q

Earnings from UTMAs

A

Subject to kiddie tax at parent’s rate

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27
Q

Kiddie tax - order of operations

A

Income - greater of the standard deduction of $1250 or $400 + earned income - unearned income tax rate - remainder at parent’s rate

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28
Q

Best transfer arrangements for unmarried domestic partners

A

Revocable trusts and tenancy-in-common. A will can be contested by family members and trusts are private.

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29
Q

Monetary policy

A

Action taken by the Federal Reserve to influence the growth of the money supply

30
Q

Money supply tools used by the Federal Reserve

A

Open market operations, setting the discount rate, and setting the reserve requirements

31
Q

Exception to punitive damages tax inclusion rule

A

Wrongful death

32
Q

Economic indicators

A

S&P 500, supplier delivery delays, and initial unemployment claims. The yield curve is not unless it is moving

33
Q

Recession vs. Depression

A

2 quarters of negative GDP vs. 6 quarters

34
Q

What indicates tight monetary policy by the Federal reserve?

A

Fed raises the discount rate and Fed sells securities

35
Q

When does the business cycle peak?

A

When business activity ages because the public stops buying since they have everything they need.

36
Q

Setting tax rates

A

Reflects fiscal policy, not monetary policy.

37
Q

What qualifies as an alimony payment for a pre-2019 divorce?

A

Contributing to payee spouse’d IRA

38
Q

When is there a step-up basis re stock purchases?

A

When someone dies. Ex. Spouse

39
Q

What is recommended during declining interest rates?

A

Buy long-term, high-grade bonds to lock in higher coupons and generate profits in the bind portfolio

40
Q

Reverse Mortgage

A

Home doesn’t need to be owned free and clear.
No monthly mortgage payments.
No income qualifications.
62 years old and older living in condos and single-family homes.

41
Q

Pro forma statement

A

It illustrates what future financial statements are expected to show. Projects the expected result of the next year or longer.

42
Q

When must you register as an investment adviser?

A

When you start giving advice

43
Q

What is needed after registering as an investment adviser with the SEC?

A

Must file an update form ADV Part 1 and Schedule 1 with the SEC each year.

44
Q

Initial registration process to sell certain equity-based products

A

First hired by FINRA firm, then files a U4, then passes exams, then receives a CRD number.

45
Q

When don’t you have to register with FINRA?

A

When you don’t receive commissions

46
Q

Difference between Series 6 and Series 7

A

6 allows a representative to sell an initial UIT offering.

7 is needed to sell closed-end funds

47
Q

ADV Part 1 vs. ADV Part 2

A

1 includes the business address and background

2 spells out the compensation arrangements

48
Q

Investors Advisers Act of 1940

A

Requires that persons or firms advising others about securities investments must register with the SEC.

49
Q

Chapter 7 Bankruptcy

A

Permits a debtor to claim either the “federal” exemptions or the exemptions available under state law. Not allowed if debtor’s monthly income for 60 months is greater than $10k

50
Q

Inflation-adjusted cap of $1million

A

Only applies to IRA contributions and earnings. Does not include 401(k) and 457 plan contributions and earnings rolled into IRA

51
Q

Why is it safer to leave funds in the 401(k) rather than roll over to an IRA account?

A

ERISA protections. IRA may only afford limited protection under bankruptcy law

52
Q

What do federal consumer protection laws provide?

A

Disclosure of APR, right to see credit reports, and right to be told why credit has been denied.

53
Q

What does entering into an agreement to provide a financial plan carry?

A

Creates a type of legal exposure contract law. It creates contract exposure.

54
Q

When does FINRA arbitration arise?

A

A broker’s dispute with a customer (before arbitration agreement is signed) and a customer’s dispute with a broker.

55
Q

What is not canceled by the declaration of bankruptcy?

A

Government loans, child support, and alimony payments

56
Q

How much is the liability of the owner for a stolen credit card?

A

$50 per card, assuming amount is over $50

57
Q

Express authority

A

Written, explicit direction from the insurance company to the agent

58
Q

Obligation of agent to principal

A

Loyalty (express)

59
Q

Fair credit reporting act

A

Provides individuals who have been denied credit the right to know the reason for denial.

60
Q

How is obtaining a mortgage reflected on the financial statement?

A

Assets and liabilities will increase while the net worth remains unchanged.

61
Q

Coverdell and elementary school

A

Tax-free withdrawals for various expenses. Permissible investments include stocks and bonds.

62
Q

Home equity interest in paid loans

A

Not deductible if it is not used to improve the home.

63
Q

What happens to the house of a reverse mortgage after client dies?

A

Heirs are responsible or else the bank will foreclose the house.

64
Q

RIA Registration

A

Not required for a private adviser who only advised insurance companies

65
Q

Are attorneys an exception to registering as investment advisers?

A

Yes if the investment advice is solely incidental to their practice.

66
Q

Adviser registration requirements

A

Broker-dealers are exempt unless they charge specific fees for investment advice/management

67
Q

When the economy passes through trough into recovery, which industry outperforms the others?

A

Auto manufacturing leads the business cycle into expansion.

68
Q

What will Congress or the Fed do if there is high unemployment, falling stock prices, and declining consumer spending?

A

Will authorize spending programs.

69
Q

What is PITI % based on?

A

PITI ÷ Gross income

70
Q

Calculation of net savings

A

Gross income - 401(k) contribution - (Fixed outflows + Variable outflows + Taxes)

71
Q

What does the emergency fund consider?

A

Fixed and variable expenses, not taxes.

CFP - Review Wrong answers (7 decks)

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