General Principles Flashcards
Steps in the Financial Planning Process
1) Understanding client’s personal and financial circumstances
2) Identifying and Selecting Goals
3) Analyzing client’s current course of action and potential alternative courses of action
4) Developing financial planning recommendations
5) Presenting the financial planning recommendations
6) Implementing the financial planning recommendations
7) Monitoring progress and updating
Uber Is A Drunk Person’s Immediate Motor-vehicle
Code of Ethics
1) Act with honesty, integrity, competence, and diligence
2) Act in client’s best interests
3) Exercise due care
4) Avoid or disclose and manage conflicts of interest
5) Maintain the confidentiality and protect the privacy of client information
6) Act in a manner that reflects positively on the financial planning profession and CFP certification (macro, umbrella)
Fiduciary Standard
1) Duty of Loyalty
2) Duty of Care
3) Duty to follow client instructions
Nouns that can be used with CFP
Certificant
Practitioner
Professional
Certification
Mark (not letters!)
Exam (not test!)
Buying vs renting a home
The higher the marginal tax bracket, the greater the advantage of home ownership. Also consider the time frame. Short-time periods favor renting; long time periods favor owning
Federal Housing Administration (FHA)
government guarantees mortgages through FHA insurance for low and middle income individuals
max mortgages range from $472,030 - $1,089,300
Qualified residence interest rules
If proceeds of a mortgage loan or HELOC are used to buy, build, or improve a taxpayer’s home and if these mortgages combined with any others taken out total more than $750k ($375 MFS), only the interest paid on the first $750k is deductible.
None is deductible if not being used for the home
College funding years options
UGMA/UTMA: Subject to kiddie tax for children under age 24
EE Education Bonds: Parents own the bonds, so will not work in UGMA/UTMA
Coverdell ESA: Limited to $2k/year contribution total
529: two types - college savings or prepaid tuition
$17k contribution per year per child x 5 years = $85k
College grants and loans for Wealthy parents
Parent Loan Undergraduate students (PLUS)
Wealthy Parents are a PLUS
College grants and loans for Poor parents
Pell Grants
Supplemental Education Opportunity Grant
Subsidized Stafford Loans
PooriSh (<= $60k income cap)
American Opportunity Credit (AOC)
$2000 + 25% of the next $2000 of expenses (max $2500 credit)
MAGI phaseouts on tax sheet
first four years of college only
Lifetime Learning Credit
$2000 max
Any higher learning institution (undergrad, grad, continuing ed)
MAGI phaseouts on tax sheet
Coverdell withdrawal
Must be used before student is 30
MAGI phaseouts on tax sheet
529 distributions
No MAGI phaseouts
College funding options for graduate school
Fulbright scholarship
Stafford loan
529 distribution OR Coverdell withdrawal (coordination rules)
Tools of the Federal Reserve (Monetary Policy)
Reserve requirements that member banks must maintain
Discount rate is the rate the Fed charges its member banks to borrow to satisfy reserve requirements
To tighten credit, Fed increases reserve requirement or discount rate
To loosen credit, Fed decreases reserve requirement or discount rate
Open market operations (Fed)
BEST
Buy, Expansion; Sell, Tighten
Fed buys securities, expansionary/easy money policy
Fed sells securities, contractionary/tight money policy
Recession
two consecutive quarters of decline in real GDP
Depression
six consecutive quarters of decline in real GDP (18 months, not 12 months!!)
RIAs with under $100MM must register with _____
Their state of domicile
RIAs with over $100MM must register with _____
the SEC
Exemptions and exemptions to filing as an RIA
Banks that are not also investment companies
Lawyers, accountants, teachers – advice is incidental
Broker/dealers or registered reps whose performance is incidental and who get no special comp for advice (eg. wrap fees)
Advisor whose only clients are insurance companies
A family office (advisory services provided exclusively for family members)
Federal exemptions for Chapter 7 bankruptcy
Homestead
Some limited amount of personal property and equity in a vehicle
Wages due to head of family
Pension and retirement plan rights (ERISA plans)
Cash value of life insurance/proceeds of annuity contracts/disability benefits
Endowment Bias
Individuals value an owned object higher, often irrationally, than its real-world market value
Reporting requirements for charges and convictions (misconduct) to CFP board
30 days
In writing, with a narrative statement that describes all material facts as well as the outcome of the charge, conviction, arbitration, or lawsuit
What is considered a “minor rule violation” and does not require reporting to CFP board?
Minor rule violation of an SEC rule or a rule of a self-regulator (FINRA), where the fine is $2500 or under, and the alleged rule violator does not contest the charge of the rule violation
What complaints do not have to be submitted to CFP board?
Relative to one or more sales practice violations where customer sought an adjustment of under $5k
How long does a CFP practitioner have to appeal any ruling?
30 days
Must submit a Petition for Appeal, usually by certified mail
Housing expense ratio
PITI or rent should reflect <= 28% of gross income
Total monthly debt ratio
<= 36% of gross income
Consumer debt ratio
<=20% of NET income
Current Assets
Cash equivalents
Marketable securities
Accounts receivable
Inventory
Current Liabilities
Cash Owed
Accounts payable
Credit card debt
Taxes payable
Leading economic indicators
Most important:
- Initial claims for unemployment insurance
- New manufacturing orders
- New private housing units
- Stock prices, 500 common stocks
- Index of consumer expectations
Less important:
- Avg weekly hours for production workers in manufacturing
- Vendor performance measured as % of companies reporting slower deliveries
- Contracts and orders for plants and equipment
- Interest rate spread
- Money supply
Coincident indicators
Industrial production
Number of employees on non-agricultural payrolls
Personal income less transfer payments (SS, welfare)
Lagging indicators
Avg duration of unemployment
Avg prime rate charged by banks
Commercial and industrial loans outstanding
Ratio of consumer installment credit outstanding to personal income
Change in consumer price index for services
What entity controls monetary policy?
Federal Open Market Committee (FOMC)
Industrial production is what type of economic indicator?
Coincident indicator
Number of employees on non-agricultural payrolls is what type of economic indicator?
Coincident indicator
Personal income less transfer payments (SS, welfare) is what type of economic indicator?
Coincident indicator
Avg duration of unemployment is what type of economic indicator?
Lagging indicator
Avg prime rate charged by banks is what type of economic indicator?
Lagging indicator
Commercial and industrial loans outstanding is what type of economic indicator?
Lagging indicator
Ratio of consumer installment credit outstanding to personal income is what type of economic indicator?
Lagging indicator
Change in consumer price index for services is what type of economic indicator?
Lagging indicator
Initial claims for unemployment insurance is what type of economic indicator?
Leading indicator
New manufacturing orders is what type of economic indicator?
Leading indicator
New private housing units is what type of economic indicator?
Leading indicator
SP500 stock prices are what type of economic indicator?
Leading indicator
Index of consumer expectations is what type of economic indicator?
Leading indicator
Chapter 11 Bankruptcy
Generally, for individuals who do not qualify under Chapter 13 because they exceed the debt limitations or do not have a regular source of income.
Chapter 13 Bankruptcy
Reorganization: Payments to creditors are typically reduced to be more manageable.
Creditors cannot harass the debtor. The advantage is that the debtor generally is not required to
relinquish assets.
Chapter 7 Bankruptcy
The Bankruptcy Code (Chapter 7) permits a debtor to claim either the “federal” exemptions or the exemptions available under state law. There are 33 states which have opted out of Federal
exemptions.
Debts not cancelable by bankruptcy
- Student and government loans
- Wage withholding & FICA obligations/recent income taxes due
- Child support and alimony
Consumer Credit Protection Act—also known as Truth in Lending
- Interest must be reported as annual percentage rate (APR).
- Credit terms must be disclosed, including fees, points, prepayment penalties, etc.
- Lost or stolen credit cards have limited liability of $50 per card.
Fair Credit Reporting Act
- Consumers may review their files at any time for a nominal fee but are entitled to one free report per year.
- If consumers are denied credit, they have a right to receive a free copy of their file. Information may be retained up to 7 years.
- Only interested parties can access the file (creditors, mortgage companies, insurance companies,
etc.)
Duty of Loyalty
Under the Duty of Loyalty, the CFP® professional is required to:
- Hold the interests of the client above those of the planner and the firm
- Balance conflicts of interest so as to maintain the client’s best interest above all
Duty of Care
Under the Duty of Care the CFP® professional is required to act with the skill, prudence and diligence of
a prudent professional in consideration of the client’s goals, risk tolerance, and personal circumstances.
Duty to Follow Client Instructions
Under the Duty to Follow Client Instructions the CFP® professional is required to comply with the
client’s instructions, objectives, policies, and restrictions presuming they are reasonable and lawful.
The Integrity Standard
CFP® professional may not:
- Deceive or defraud clients and the public in general
- Make untrue statements of material facts
- Omit a material fact in order to mislead a client or the public in general
- Encourage any business act that would operate as a fraud or deceit upon anyone
The Competence Standard
- Provide professional services with competence encompassing relevant knowledge and skill
- Recognize that professional’s lack of competence in a particular area and, in that light must do one of the following:
o Obtain the assistance of a competent professional
o Refer the client to one or more competent professionals
o Limit or terminate the engagement
The Diligence Standard
- Provide services in a professional manner
- Respond to reasonable client inquiries and requests in a timely fashion
What is a pro forma statement?
Projects the expected profitability or return of the next year or long (future)
Who regulates Savings and Loan (S&L)/Thrifts?
A branch of the FDIC, and Federal Home Bank Board
Ownership categories for FDIC insurance
- Individual accounts
- Joint accounts
- Revocable trust (in tryst for or payable on death to)
- IRAs and Keoghs
$250k each
Who regulates Trust Companies?
State law
Can you use AOC and LLC for the same student?
No! But they can be used in the same year for different students/different expenses
Are 529s considered assets of owner or child?
Assets of owner, unless the owner is not the parent, then it can be considered asset of child
