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General Principles Flashcards

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CFP® flashcards
1
Q

Heuristics

A

Experiences or biases that can facilitate problem solving and probability judgements.

Effective for immediate judgement making

Can result in inaccurate or irrational conclusions

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2
Q

Behavioral Finance

A

The study of bod psychology affects finance

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3
Q

Anchoring

A

The tendency of investors to become attached to a specific price as the fair value of a holding

Ex: you bought a stock at $100/share and it drops to $50/share. You believe it’s “real” value is around $100 and you are included to hang on since it “should” come back

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4
Q

Attachment Bias

A

Holding onto an investment for emotional reasons rather than considering more practical applications.

Ex: my grandfather left me stock so I can never sell it

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5
Q

Endowment Bias

A

The feeling that because you own an asset, it is more valuable and special since it is yours. In reality, you might not even purchase the asset if you did not already own it.

Ex: you inherit a family home and would never sell it even though it has become a money pit

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6
Q

Cognitive Dissonance

A

The challenge of reconciling two opposite beliefs

Ex: remembering the positive part of an experience but forgetting the negative

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7
Q

Confirmation Bias

A

The natural human tendency to accept any information that confirms our preconceived position or opinion and to disregard any information that does not suppprt that preconceived notion

Ex: hear about hot stock from unverified source. Do research but only focus on the positive aspects and disregarding any negative aspects

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8
Q

Diversification Errors

A

Investor tend to diversify evenly across whatever options are presented to them

Ex: 401k participants spending their money across whatever options they have

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9
Q

Fear of Regret

A

The tendency to take no action rather than risk making the wrong one

Ex: an investor holds onto a stock that’s losing value, because if they sold and it rebounded, they would feel even worse

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10
Q

Financial Infidelity

A

Couples or partners with shared memory or finances being dishonest with each other

Ex: one partner hiding excessive spending, debts, etc. from the other person

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11
Q

Gambler’s Fallacy

A

An individual erroneously believe that the onset of a certain random event is likely to happen following an event or a series of events

Ex: investor holds onto a stock after it’s fallen multiple times because they think it’s improbable for it to fall even more

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12
Q

Herd Behavior

A

The tendency for individuals to minicamp the actions of a large group

FOMO

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13
Q

Hindsight Bias

A

The 20/20 vision we have when looking at a past event and thinking we understand it, when in reality we may not

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14
Q

Inappropriate Extrapolation

A

The tendency to look at recent events (or market performance) and assume that those events or conditions will continue indefinitely

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15
Q

Analysis Paralysis
(Paralysis by Analysis)

A

Individual/couple over analyzing a situation and cannot make a decision (paralyzed) meaning no solution or course of action is decided upon

Fear of making an error outweighs the potential value of success in a decision made in a timely manner. This causes a “paralysis” in the situation

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16
Q

Loss Aversion and Risk Taking

A

While investors are risk averse to gains, they see risk seekers when it comes to losses (they will take big risk to avoid realizing them)

To avoid the pain of loss, investors have a tendency to hang onto losers

Often investors will leave it up to “chance” instead of sound or rationally informed decision making

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17
Q

Prospect Theory

A

Described the difference in how people evaluate losses and gains

Researchers found that losses have a much greater negative impact than a commensurate gain will have positive

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18
Q

Mental Accounting

A

Looking at sums of money differently, depending on their source or the intended use

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19
Q

Outcome Bias

A

The tendency to make a decision based on the desired outcome rather than on the probability of the outcome

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20
Q

Overconfidence

A

The tendency to place too much emphasis on one’s own abilities. It is often hand in hand with confirmation bias

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21
Q

Overreaction

A

Investors emotionally react towards new market information

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22
Q

Over-Weighting the Recent Past

A

Investors like patterns, and recent past represents a nice easy to find pattern that can become the basis for an investment decision

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23
Q

Self- Affirmation Bias

A

The belief that when something goes right it is because you were smart and made the right decision. If it goes wrong, it is someone else’s fault or simply bad luck

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24
Q

Spotting Trends that are not there

A

Investor seek patterns that help support decisions sometimes without adequate confirming research

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25
Q

Status Quo Bias

A

The tendency of investors to do nothing when action is actually called for

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26
Q

Money Scripts

A

Subconscious beliefs people have regarding money, many developed in childhood. Personal experiences and family values can also impact

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27
Q

4 Common Types of Money Scripts

A
  1. Money avoidance
  2. Money worship
  3. Money vigilance
  4. Money status
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28
Q

Framing Effect

A

Cognitive bias, in which a person makes decisions based on whether the various options are presented in a positive or negative way, meaning individuals can tend to overlook factual data.

The person is more affected by how the information is worded rather than the actual information

This can manifest itself into investment decisions

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29
Q

Money Illusions

A

An economic theory positing that people have a tendency to view their wealth in nominal dollar terms rather than real terms which take inflation into consideration

Also called price Illusion

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30
Q

Financial Enmeshment Bias

A

When finances of parents and children are inappropriately mixed

Ex: a 4 year old should not have nightmares or worry about the parents’ finances

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31
Q

What must a planner present when discussing alternative products?

A

Explain the advantages, disadvantages, and potential returns and risk associated with each product

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32
Q

What information must a CFP or firm provide in writing?

A
  • how it will be compensated by the client
  • terms of the engagement with the client
  • privacy statements
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33
Q

Does a financial planning agreement have to be written?

A

Yes

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34
Q

Use of Initials: Registered Investment Advisors and Certified Financial Plannee

A
  • RIA = prohibited
  • C.F.P. = prohibited
  • Registered Investment Advisor = ok
  • CFP®️= ok
  • CERTIFIED FINANCIAL PLANNER™️= ok
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35
Q

When can a CFP licensee release a client file to other persons?

A
  • when an attorney or court subpoenas the file
  • at the client’s request
  • as a defense against charges of wrongdoing
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36
Q

3 month emergency fund

A
  • single with second source of income
  • married, both work
  • married, only one spouse works, but have a second source of income
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37
Q

6 month emergency fund

A
  • single wage earner
  • married, only one spouse works
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38
Q

Housing Expense
(PITI)
Debt management

A

Principal and Interest, Taxes (home and property) and Insurance (homeowners)

< 28% of gross income

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39
Q

Total monthly debt
Debt management

A

< 36% of gross income

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40
Q

Consumer debt
Debt management

A

< 20% of net income

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41
Q

Current Ratio

A

Current Assets➗ Current Liabilities

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42
Q

Current Assets

A
  • cash equivalents
  • marketable securities
  • accounts receivable
  • inventory
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43
Q

Current Liabilities

A
  • accounts payable
  • credit card debt
  • taxes payable
44
Q

Securities Act of 1933

A

Required that new issues purchasers be provided with a detailed prospectus before a purchase was completed

45
Q

Securities Act of 1934

A

Passed to regulate the secondary market (trading of issued securities). This act also created the SEC to enforce securities law

46
Q

Investment Company Act of 1940

A

Authorized the SEC to regulate UITs and managed investment companies (closed end and open end funds) plus variable products

47
Q

Securities Investors Protection Act of 1970

A

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

48
Q

Deductible Housing Interest

A
  • all mortgages cannot exceed $750k combined (MFJ) or $375k single (MFS)
  • home equity interest is only deductible if used for a home renovation/improvement
49
Q

529 Keys

A
  • lump sum gift up to $85,000
  • donor can retain control
  • k-12 for tuition allowed up to $10,000/year
  • can be used to pay student loans ($10,000 per student over lifetime)
50
Q

Repo

A

Federal Reserve Open Market Operation

Fed buys securities- expansionary/easy money policy

51
Q

Reverse Repo

A

Federal Reserve Open Market Operation

Fed sells securities- contractionary/tight money policy

52
Q

Gross Domestic Product
(GDP)

A

Total dollar value of all goods and services produced within the US only

Counts economic activity without regard to yearly price fluctuations

Does not include any income generated outside the US or adjustments for foreign currency

53
Q

Business Cycle

A

Expansion ⬆️ Peak ↘️Recession/Contraction ⬇️Trough ↗️Recovery/Expansion

54
Q

Recession

A

Two consecutive quarters of economic decline (negative GDP)

55
Q

Depression

A

Six consecutive quarters of economic decline (negative GDP)

56
Q

Exceptions to Filing as an Investment Advisor

A
  • banks that are not also investment companies
  • lawyers, accountants, teachers- advice is incidental
  • broker/dealer 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
57
Q

Exemptions to Filing as an Investment Advisor

A
  • adviser whose only clients are insurance companies
  • family office
58
Q

How does an Investment Advisor register with the SEC?

A
  • initially, filed the ADV I and II with the SEC
  • pays a minimum filing fee of $150
  • RIA must submit Part I of ADV and Schedule I annually
59
Q

Financial Industry Regulatory Authority (FINRA) Initial Registration Process

A
  • individual associates with a broker dealer
  • registers with FINRA through broker dealer on Form U-4
  • takes and passes appropriate exam
  • issued a CRD number (central registration system)
60
Q

Series 6

A

Mutual funds, UITs, and variables (only new UITs)

61
Q

Series 7

A

General securities (UITs on the secondary market)

62
Q

Series 63

A

Uniform Securities Agent State Law Exam

63
Q

Series 65

A

Uniform Investment Advisor Law Exam

64
Q

Series 66

A

Uniform combined state law exam (combines 63 and 65 exams)

65
Q

Basic Components of a legal contract as applied to insurance

A
  1. Offer and acceptance- 2 parties: offeror and acceptor
  2. Consideration- something of value (money)
  3. Legal Object- legal in purpose
  4. Competent parties- principal must have legal capacity to execute contracts
    a. Intoxicated adults have limited to
    no capacity
    b. Minors have capacity for
    necessities (food, shelter, clothing)
  5. Legal form- contracts must meet requirements
66
Q

Express authority

A

Law of agency (insurance)

Written, explicit direction from principal to agent

67
Q

Implied Authority

A

Law of agency (insurance)

Is that which the public believes the individual holds and includes signage, rate books, etc.

Actual authority that the agent must carry out the principal’s business

68
Q

Apparent authority

A

Law of agency (insurance)

Arises out of negligence of the principal in allowing the agent to appear to have the authority because of certain actions of the agent in the past

This typically affects terminated agents

69
Q

Debts not cancelable by bankruptcy

A
  • student loans, government loans, child support alimony
  • wage withholding, FICA taxes, income tax is due

-rollover from qualified plans are exempt (unlimited)
- nonrollover IRAs up to $1 million are exempt

70
Q

SIPC insures

A

Investor against losses arising from failure of the brokerage firm

71
Q

Which agency regulates brokerage companies?

A

FINRA

72
Q

Consumer confidence is part of what stage of the business cycle?

A

Expansion

73
Q

How is a single premium immediate annuity awarded for compensatory damages tax?

A

100% excludable

74
Q

Auto industry is a

A

Cyclical industry

75
Q

When becoming an RIA, which agency must the CFP notify first?

A

SEC

76
Q

Registration process to sell certain equity based products

A
  1. Associate with B/D
  2. Register with FINRA through B/D on Form U-4
  3. Pass appropriate exams
  4. CRD system makes registration with FINRA uniform among all states
77
Q

If you do not receive commission then you do you not need to register with

A

FINRA

you just register as an investment advisor

78
Q

Mortgage Payments impact on net worth

A

Both assets and liabilities will increase while net worth remains unchanged

Cash outflow will probably increase due to mortgage payments

79
Q

PITI

A

Principal, Interest, Taxes, Insurance for home

Mortgage is the principal and interest

Use gross income not net income for calculating (ex: 401k deferral)

80
Q

Real Rate of Return

A

(1+nominal rate➗1+inflation) - 1 x 100

Ex: nominally is 7.2% inflation is 3.1%
(1.072➗1.0311) - 1 x 100 = 3.9867

81
Q

Coverdell ESA

A
  • beneficiary must be under 18 years old when contributing to the account
  • contributions are treated as gifts of present interest from contributor to beneficiary
  • qualified expenses include religious elementary school costs
  • permissible investments include stocks and bonds
82
Q

Home Equity Interest

A

Home equity interest paid on loans that are not used to improve the home are no longer deductible

83
Q

Do B/Ds and their representatives have to register as investment advisors?

A

They are exempt unless they charge a specific fee for investment advice/management

84
Q

Can B/Ds accept client funds?

A

Yes they just can’t be commingled with the planning firm’s general accounts

85
Q

Advisors with $110 million or more of AUM must

A

Register with the SEC under the Investment Advisors Act of 1940

86
Q

Commingling of client money or property

A

Cannot be commingled with funds of the financial planning firm

Can be commingled in a common client investment account

87
Q

What part of the business cycle do auto sales tend to outperform others?

A

In the expansion part of the cycle. When the economy passes through the trough into recovery

88
Q

Unintentional Tort

A

Negligence

89
Q

What investment is recommended when a negatively sloped yield curve is declining to a normal/positively sloped yield curve?

A

Treasury bonds

90
Q

Emergency Fund

A

Only fixed and variable expenses not taxes

Be prudent on the exam, life changes like wanting or planning for a second child and maternity leave can be a 6 month situation

91
Q

Can an UTMA have kiddie tax?

A

Yes

92
Q

Mortgage points and refinancing

A

Mortgage points are paid. They are not refinanced

Do not favor points into PV for TVM questions

93
Q

Changes to net worth

A
  • points for new mortgage- negative impact
  • contributions to UTMA- negative impact- assets leave parents and now becomes child’s
  • mortgage payment is principal reduction- positive impact- the negatives cancel out making it a positive: assets - (- liability)
94
Q

Prioritizing financial needs

A

If there is no mention of life insurance, make that a top priority then list emergency fund if they need it

95
Q

Regulates banks

A
  • the comptroller of currency
  • federal deposit insurance corporation
  • fed reserve
96
Q

During prolong periods of economic expansion, interest rates generally

A

Increase

Demand for loans rises as business activity increases and the Fed Reserve will tighten credit

97
Q

Damages for age discrimination

A

Are taxable

98
Q

FHA mortgages are guaranteed by

A

Federal budget office (federal government)

99
Q

Industrial production

A

Coincidental economic indicator

100
Q

Qualified home equity

A
  • for interest to be deductible, the loan proceeds must be used for the home
  • cannot exceed the difference between the current FMV and current indebtness
101
Q

When NPV is 0

A

Interest rate is the same as required rate of return

NPV can be a negative

102
Q

7 Step financial planning process

A
  1. Understand the client’s personal and financial circumstances
  2. Identify and select goals
  3. Analyze the client’s course of action and potential alternative courses of actions
  4. Develop the financial planning recommendations
  5. Presenting the recommendations
  6. Implement the recommendations
  7. Monitor the recommendations
103
Q

Affected by Recession

A

Capital goods and consumer non-durable goods

104
Q

Fiscal Policy

A

Government/Congress

Taxes and spending

105
Q

Monetary Policy

A

The Fed

  • money supply
  • reserve requirements
  • discount rate
  • open market operations
  • Fed funds rate is controlled by member banks

CFP (6 decks)

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