General Principles Flashcards
What do you do if your client had an unrealistic retirement income payout?
Run the projections using only conventionally accepted return assumptions
Data survey (family tree)
Includes information such as date of birth and health. Net worth is found in the client’s financial statement.
How can the material conflicts of interest be provided?
Either in writing or orally.
Privacy policy documents
Because FINRA and the SEC require written privacy statements, the CFP Board will also accept it.
What duties do you need to fulfill when presenting recommendations?
Explain reason behind each recommendation and present alternative products.
Outflow
Taxes create an expense, also known as outflow.
Advice on low marginal income tax bracket
Government money market account provides a better equivalent yield than a tax-free account
Personal balance sheet
Includes diversification of client’s assets, liquidity position, and debt. Does not include net cash flow.
PITI
Principal
Interest
Taxes (property only)
Insurance (homeowners only)
What formula do you use when a question asks for today’s dollars?
Real Rate of Return
What is another term for internal rate of return (IRR)?
Dollar weighted return
What happens if the NPV is zero?
The IRR matches the required rate of return.
In the calculator for a retirement plan example, what are the modes for the yearly contribution paid by the employer?
PMT and +/-
Time deposits
CDs, which are federally insured by the FDIC.
SIPC
Securities Investor Protection Corporation
Insures investors against losses arising from the failure of the brokerage firm.
Investment Company Act of 1940
Authorized the SEC to regulate mutual funds
Investment Advisors Act of 1940
Covers registration of persons or firms advising others
How does the SEC regulate brokerage companies?
Through FINRA
College Funding Three-Step Process
- Determine cost of the first year of college.
- Determine amount that must be available when child is 18
- Determine how much parents need to save
Coverdell ESA
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.
Municipal bonds in a UGMA/UTMA account
Advantageous because it would produce tax-free interest.
EE Education Bonds
Must be owned by an adult over 24
529 and Coverdell ESA withdrawal
Can’t be combined with a credit for the tuition paid, such as with LLC or AOC
QTP and UTMA similarities
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
Credits
AOC ($2500k) and LLC ($2k)
Coverdell ESAs and UTMA s are not credits.
Earnings from UTMAs
Subject to kiddie tax at parent’s rate
Kiddie tax - order of operations
Income - greater of the standard deduction of $1250 or $400 + earned income - unearned income tax rate - remainder at parent’s rate
Best transfer arrangements for unmarried domestic partners
Revocable trusts and tenancy-in-common. A will can be contested by family members and trusts are private.
Monetary policy
Action taken by the Federal Reserve to influence the growth of the money supply
Money supply tools used by the Federal Reserve
Open market operations, setting the discount rate, and setting the reserve requirements
Exception to punitive damages tax inclusion rule
Wrongful death
Economic indicators
S&P 500, supplier delivery delays, and initial unemployment claims. The yield curve is not unless it is moving
Recession vs. Depression
2 quarters of negative GDP vs. 6 quarters
What indicates tight monetary policy by the Federal reserve?
Fed raises the discount rate and Fed sells securities
When does the business cycle peak?
When business activity ages because the public stops buying since they have everything they need.
Setting tax rates
Reflects fiscal policy, not monetary policy.
What qualifies as an alimony payment for a pre-2019 divorce?
Contributing to payee spouse’d IRA
When is there a step-up basis re stock purchases?
When someone dies. Ex. Spouse
What is recommended during declining interest rates?
Buy long-term, high-grade bonds to lock in higher coupons and generate profits in the bind portfolio
Reverse Mortgage
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.
Pro forma statement
It illustrates what future financial statements are expected to show. Projects the expected result of the next year or longer.
When must you register as an investment adviser?
When you start giving advice
What is needed after registering as an investment adviser with the SEC?
Must file an update form ADV Part 1 and Schedule 1 with the SEC each year.
Initial registration process to sell certain equity-based products
First hired by FINRA firm, then files a U4, then passes exams, then receives a CRD number.
When don’t you have to register with FINRA?
When you don’t receive commissions
Difference between Series 6 and Series 7
6 allows a representative to sell an initial UIT offering.
7 is needed to sell closed-end funds
ADV Part 1 vs. ADV Part 2
1 includes the business address and background
2 spells out the compensation arrangements
Investors Advisers Act of 1940
Requires that persons or firms advising others about securities investments must register with the SEC.
Chapter 7 Bankruptcy
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
Inflation-adjusted cap of $1million
Only applies to IRA contributions and earnings. Does not include 401(k) and 457 plan contributions and earnings rolled into IRA
Why is it safer to leave funds in the 401(k) rather than roll over to an IRA account?
ERISA protections. IRA may only afford limited protection under bankruptcy law
What do federal consumer protection laws provide?
Disclosure of APR, right to see credit reports, and right to be told why credit has been denied.
What does entering into an agreement to provide a financial plan carry?
Creates a type of legal exposure contract law. It creates contract exposure.
When does FINRA arbitration arise?
A broker’s dispute with a customer (before arbitration agreement is signed) and a customer’s dispute with a broker.
What is not canceled by the declaration of bankruptcy?
Government loans, child support, and alimony payments
How much is the liability of the owner for a stolen credit card?
$50 per card, assuming amount is over $50
Express authority
Written, explicit direction from the insurance company to the agent
Obligation of agent to principal
Loyalty (express)
Fair credit reporting act
Provides individuals who have been denied credit the right to know the reason for denial.
How is obtaining a mortgage reflected on the financial statement?
Assets and liabilities will increase while the net worth remains unchanged.
Coverdell and elementary school
Tax-free withdrawals for various expenses. Permissible investments include stocks and bonds.
Home equity interest in paid loans
Not deductible if it is not used to improve the home.
What happens to the house of a reverse mortgage after client dies?
Heirs are responsible or else the bank will foreclose the house.
RIA Registration
Not required for a private adviser who only advised insurance companies
Are attorneys an exception to registering as investment advisers?
Yes if the investment advice is solely incidental to their practice.
Adviser registration requirements
Broker-dealers are exempt unless they charge specific fees for investment advice/management
When the economy passes through trough into recovery, which industry outperforms the others?
Auto manufacturing leads the business cycle into expansion.
What will Congress or the Fed do if there is high unemployment, falling stock prices, and declining consumer spending?
Will authorize spending programs.
What is PITI % based on?
PITI ÷ Gross income
Calculation of net savings
Gross income - 401(k) contribution - (Fixed outflows + Variable outflows + Taxes)
What does the emergency fund consider?
Fixed and variable expenses, not taxes.
