General Principles Flashcards
Code of Ethics
- Act with honesty, integrity, competence, and diligence
- Act in the clients best interest
- Exercise due care
- Avoid or disclose and manage conflicts of interest
- Main confidentiality and privacy
- Act in a manner that reflects positively on the profession
Fiduciary Duty
- Duty of loyalty (place clients interests above your own)
- Duty of care (act with skill and prudence)
- Follow client instructions
Always applies when providing financial advice
CFP professional must comply with the practice standards when:
- CFP professional agrees to provide financial planning services
- Financial advice that requires integration of relevant elements
- The client has a reasonable basis to believe the CFP will provide financial planning
Practice Standards (7 Steps)
- Understand the clients situation
- Identify and select goals
- Analyze current and alternative courses of action
- Develop financial planning recommendations
- Present recommendations
- Implement recommendations
- Monitor and repeat
When must a CFP inform clients about a disciplinary action or bankruptcy against them?
Within 90 Days
Integration Factors
Number and scope of relevant elements
Amount of assets impacted
Length of time the advice could change
Potential risk that would be assumed
Barriers to implementing
Refrain from Adverse Conduct
- Felony or Relevant Misdemeanor conviction (felony is a felony offense with a year in prison or $1k fine and relevant misdemeanor is criminal offense that is not a felony involving fraud, theft, misrepresentation, dishonesty, moral turpitude, violence, or second or more drug or alcohol related offense).
- Finding in a regulatory action or civil action that CFP engaged in fraud, theft, misrepresentation, or dishonest conduct.
- Personal bankruptcy (2 or more) or business bankruptcy if a control person unless can prove you were not in it. Federal or non-Federal tax lien on property owned by CFP unless you can prove why it doesn’t matter.
Behavior Requiring Reporting to CFP
- Charged with, convicted or felony or relevant misdemeanor
- Named a subject in a regulatory investigation for failure to comply with rules or governing services
- Conduct mentioned adversely in a finding in a regulatory action with failure to comply with laws or rules of a professional service (unless it is less than a $2,500 minor rule violation)
- Conduct mentioned in a civil action failing to comply with laws of professional service
- Adverse arbitration of more than $15k with failure to comply with laws, rules, or regulations governing professional services
- Mentioned or finding in civil action with fraud, theft, misrepresentation or dishonesty.
- Aware of adverse arbitration award or civil judgement or settlement alleging fraud, misrepresentation, or dishonesty with you as CFP or if you were a control person.
- Professional license revoked
- Terminated for cause
- Named in customer complaint for: forgery, theft, sales practice violation for $5k fee, or more than $15k settlement for sales practices.
- Bankruptcy for yourself or if you are control person. (Second or more bankruptcy can cause you to lose your CFP marks but every bankruptcy you have to report).
- Notice of tax lien on your property or failed to satisfy a non-federal tax lien within one year.
Public Discipline (in order) by the DEC
Letter of admonition, suspension up to 5 years, and revocation
CFP board cannot take any legal action against you, just stuff with the CFP marks
These are PUBLIC so they will be published.
Ownership categories protected under FDIC
$250,000 for each person in each ownership category for each bank
- individual accounts
- joint accounts
- IRAs and Keoghs
- Revocable Trust beneficiaries
Insurance Deposit Products (FDIC Insured)
Savings and checking
Money market deposit accounts
CDs
Broker/Dealer and Mutual fund regulation
Broker/Dealer through SEC through FINRA
Mutual Fund through SEC
Trust company
Acts as a fiduciary as the trustee and can be named executor
529 Transferring
Has to be a family member of the original beneficiary, up to first cousin.
Rollovers for the same beneficiary can only happen once every 12 months
EFC for Financial aid
Parents assets - 5.64%
Students assets - 20%
529, Savings bonds, CESA count as parents assets
UTMA count as students asset
Small businesses controlled by parents are not included in parent assets, neither are retirement accounts, life insurance cash value
CESA Highlights
Custodian can’t stop beneficiary from using funds for something other than school.
$190k-220k MFJ limitation to contribute
Earnings not used for school are taxed and 10% penalty
Can’t contribute after 18 (kid has to be under 18 to contribute)
Funds Need to be out by 30
$2k per year per student
More K-12 expenses allowed than 529
Assets considered owned by parent
Student loan payments not allowed
Assets not used for education cannot be reclaimed.
529 Highlights
Owner retains control of account (advantage)
Anyone can be owner
Rollover for same beneficiary can only happen within a 12 month period
Treated as parental asset
Trust is best successor owner for original owner
Family member goes out to first cousin
Cannot directly do 5 year gift through trust (do 5 year then change ownership or trust establishes 529 and person contributes 5 year)
Prepaid tuition:
Risk averse investor, undergrad, no room and board, refunds are investment plus low returns.
UGMA/UTMA Highlights
UTMA holds more stuff including real estate and LPs
Transfer to child at age of majority
Normal exclusion for gifts
Kiddie tax
Counts as students asset
Transferring an UTMA to a 529 makes the student the owner
Parent is custodian so can only use funds for benefit of the kid
Can only contribute before age of majority
Series EE or I savings bonds for education
Need to be bought by parent and they need to be at least 24
Can’t buy in a custodial account or in the name of the child (if held in UTMA then interest is taxable)
Redeemed in year of education expenses
Qualified expenses are tuition and fees, room and board not included
AOTC Highlights
100% of first $2,000 and 25% of next $2,000
Room and board NOT included
First 4 years only
Full time or half time student
MAGI phaseout
No felony drug conviction
$4,000 deduction is available also
LLC Credit Highlights
20% of $10,000
Per taxpayer for all students
No particular credit load
Can cover anyone for either grad or undergraduate
MAGI phaseout
Room and board not included
Coordination with credits and education savings
Cannot exclude CESA or 529 from income when using either LLC or AOTC
Can only use one of these at a time.
If UTMA is for room and board then you can use one of the credits for the rest.
Grants and Loans
Pell: Max of $7k, only for undergraduate and full-time or more than 6 hours.
Under $70k income for Pell, supplemental, and subsidized loans
EFC (expected family contribution) from FAFSA (2 year prior tax return)
Financial need = cost - EFC
PLUS Loan: parent loan for entire college cost, not need based
Perkins loans (not available)
Subsidized Stafford loans: need based, loan is limited, undergraduate
Supplemental grants: available for Pell grant recipients up to $4k
Unsubsidized Stafford loans: available for both undergraduate and graduate students, not need based
Fulbright: graduate student and teachers, scholars, in from other countries and the US
Student Loan Forgiveness
Income Contingent Repayment: 20% income, 25 years
Income Based Repayment: 15% income, 25 years
Pay As Your Earn:
- Normal: 10% income, 20 years
- Revised: 10% income, 20 year for undergrad and 25 years for grad
Public student loan forgiveness: teachers and government workers after 10 years
Teacher loan forgiveness: in low-income areas if taught for 5 consecutive years can have from $5k to $17.5k forgiven of subsidized and unsubsidized loans
Disability discharge: if completely disabled the loan may be cancelled, may be monitored to see if actually disabled
PLUS loan forgiveness: if you or the parent die or become disabled
Alimony Payments After a Divorce
After 2019: not deductible or taxable income
Before 2019: taxable and deductible if 4 conditions are met:
- must be in cash
- must be for the benefit of the payee
- can’t file a joint return or live together
- payment can’t extend beyond life of payee
Qualifies as alimony:
- cash (cannot be non-cash) directly paid for obligations of payee spouse (not owned by payor)
- life insurance premiums on life of Payor paid by payor with payee as beneficiary and owner
Child support never deductible
Can change to post 2019 rules if both spouses agree
COBRA
18 months - quit or get fired, move to part time
36 months - death, divorce, eligibility for Medicare and loss of dependency status
Settlement Taxation
Structured settlements: paid out in stream of regular payments, not taxable
Compensatory damages: Not taxable unless discrimination unless emotional hardship
Punitive damages: taxable unless for wrongful death
Annuitizing the award: if no access to pv of the award and paid out in annuity stream, entire payment not taxable, including earnings
If award is invested, earnings are taxable
Prizes won (lottery) are taxable in full right away unless at least paid out in at least 10 years with no access to principal, then each payment is taxable when received (60-day window to choose)
Fiscal Policy and Monetary Policy
Fiscal Policy - federal government can raise or lower tax and raise or lower spending
Monetary policy- Federal Reserve can do open market operations, set discount rate, and increase or decrease both margin requirements and reserve requirements
Economic Indicators
Leading: claims for unemployment, new orders, new homes, stock prices, consumer expectations, delivery speed
Coincident: production, jobs, salaries
Lagging: duration of unemployment, prime rate, loans outstanding, change in CPI
Bankruptcy
Chapter 11: for those that don’t qualify for 13
Chapter 13: (reorganization): manage debt payments down but keep all stuff
Chapter 7 (debt forgiven)(best): debtor claims exemptions
Income cutoff:
> $10,000/month for the last 60 months: can’t apply
>$6,000/month but <$10,000/month: only if net monthly income < 25% of debt
<$6,000/month: qualify
Chapter 7 Exemptions
Homestead
Personal property
Wages
Equity in a car
Pension and retirement plans
(Contributory IRAs up to $1M, rollover unlimited but Needs test comes into play here)
Cash value life insurance and proceeds of annuity contracts
Disability/unemployment/workers comp
Tenancy by Entirety property
Civil service retirements benefits/veterans benefits
Investment Advisor and Registered Representative of a securities firm tests
Investment Advisor: ABC
Advice is given
Business operated
Compensated for the advice
(If these elements are found then they need to register even if they are one of the exempt people)
Securities rep: Earn commissions
Need to file for RIA if ABCs are met (advice) and need to file as securities rep if earning commissions, these are separate
If you do not meet the ABC test then you do not file as RIA
Net Worth Formula
Net worth = assets - liabilities
Reverse Mortgage Highlights
Original homeowner still owns home
Must be 62 or older
Equity is used as a lump sum payment, annuities payment, or credit to draw on
Whoever inherits can take a mortgage to pay off reverse mortgage balance or sell home and use that to pay reverse mortgage balance, essentially a loan
Investment Advisors Act (IAA) of 1940
Authorized SEC to monitor those who advise pension funds, people, or institutions. More than $110 Million AUM needs to register with SEC
Under $110M is states
What counts as emergency reserve for funds?
Checking account (if total is less than 1 month then don’t count. if total is more then count excess)
Savings account
MM funds or accounts
CDs (less than 90 days maturity)
CD ladder (6 months to maturity)
In a panic mode what do investors do or in market downturns
Most investors will not make changes and will not sell in downturns
Need to follow the seven steps and practice within these standards
Adhere to CFP’s Code of Ethics and Professional Responsibility
Understand disciplinary procedures
Work within CFP’s practice standards
Manage practice risk
Maintain awareness of legal
Responsibilities of a financial planner
Take his job seriously and place client interest over his
Use their skill careful
Demonstrate good knowledge
Treat client in good way
Keep information in confidence
Avoid providing advice unless qualified
Discuss goals and objectives
Client’s responsiblities
Take active role
Agree to realistic goals
Treat the planner well
Share relevant information
Provide names of other advisors
Regulation S-P
SEC regulation that satisfies confidentiality policy
Definition of Financial Planning
Collaborative process intended to maximize a client’s potential for meeting life goals considering relevant aspects of their financial life
DEC disciplinary actions
Can be private or public
Statement of cash flow tips
Any funds not allocated to expenses will be savings
pro forma statement goes into the future
Emergency Fund Calc
Take variable and fixed expenses, divide by 12 and multiple by how many months you need
Gross income for PITI Calc
All of the income generated
Don’t forget to look at salaries because sometimes they are “net” of 401k deferrals that need to be added for gross income
Banks vs Credit Unions
Banks hold you money and invest it and are insured by FDIC
Credit unions are insured by National Credit Union Share Insurance Fund up to same amounts and let their members borrow at reasonable rates
FINRA needs to be notified when
Anyone has violated a securities law, subject to customer complain about theft, named defendant, guilty to a criminal act.
Protect yourself from dealing business with family members
Safe Harbor provisions where your firm never does that you do not need to do anything
Related parties is anyone who would receive sales-related pay that could benefit the CFP directly or indirectly.
What is a heuristic - real world example
Heuristic is a irrational judgement about a situation that is a snap judgement to decrease brain load. If you think through a situation it is not a heuristic.
What is overconfidence?
Overconfidence is believing that profits are attributable to your skill.
Financial Enmeshment
This is when the parents financial woes are translated to their kid unnecessarily. Either the kid overhears, or something else but it ends up hurting the child.
Herd Mentality
FOMO
Qualitative Items
Health status, risk tolerance, goals and desires, anything emotional and not a number.
Client wants you to use very high return numbers for retirement projection, what should you do?
You should run the analysis with normal, conventionally accepted return assumptions to show them what they are likely to actually achieve and how realistic their goals are in comparison to that.
Letting clients know your marks were suspended
Needs to be within 90 days and needs to be with current and prospective clients.
That is the duty of loyalty.
Disclosing compensation to a client
Specific amount does not need to be shared (because it may not be completely known) but you do have to disclose methods of compensation that you might receive through the relationship with the client.
Under CFP Boards Practice Standards what is the most important thing to consider
Putting the client’s best interest above everything else
Always put you and your firms goals second to the client
If client goals are unrealistic
Nicely ask them to reconsider and reassess their goals by explaining that their current goals seem unrealistic
If client wants to sell out of everything, take their money, and start a new business venture
Respect their decision, but document that they acted against your financial planning recommendations
When must a CFP report a disciplinary action against them to their employer?
When it is a public discipline
When could a CFP have to report to the CFP board about bankruptcy stuff?
When a federal tax was levied on their property because that shows that the professional’s conduct contributed to the failure of the firm.
Can you appeal a revocation?
Yes, needs to be in writing and submitted within 30 days of written notice.
Privacy Policies
Satisfied if they meet the regulation S-P
Can you use CFP in a website domain?
NO
Presumptive Bar list for CFP DEC
Reviewed by the DEC
Two or more personal bankruptcies are deemed to be a presumptive bar triggers.
Conviction of financial crime makes you unfit for CFP.
Steps in being a CFP
Pass the exam, get the experience, pass background check, complete the application for certification, agree to abide by terms and conditions, sign ethics declaration.
Best Savings Method
Pay yourself first
Advice to an aggressive investor who needs to save more
They will probably not pay off debt first, so get them to budget and save more
Order of priority
First - debt (if excessive)
Second - emergency fund
Third - Immediate insurance
But… it seems the CFP actually likes establishing a 6-month emergency reserve before reducing debt, so if not specified that there is a lot of debt, probably better to have an emergency reserve first
Denial and Ambivalent Phase
Denial is when they have a problem but just do not see it
Ambivalent is when there is increased receptivity to learning about their situation to start change
Which agencies oversee commercial banks?
FDIC
Federal Reserve
Comptroller of Currency
What does sales mean under the 1934 act?
Entering into a contract to sell a security, NOT loaning or giving the stock away.
Investment Adviser Act of 1940
Covers registration of persons or firms advising others. SEC monitors them.
Can CESA funds be held in a trust?
Yes
Would someone in a 37% tax bracket be allowed to exclude the interest from a US savings bond for education expenses?
No, phaseout is between $145k-175k and 37% tax bracket would be higher than that
What AGI qualifies for Pell grants?
If MAGI is under $60,000
Do PLUS or CESA generate income tax credits?
No
Is debt management a part of fiscal policy?
Yes
Components of the Yield Curve
YTM
Same tax status
Term to maturity
Same bond quality
What should a couple do first when they are newly together
They both should have new wills and trusts drawn up
What qualifies for compensatory damages?
Sicknesses or general pain does not, neither does an auto accident. Has to be an injury because of an auto accident.
Age discrimination does however qualify.
When does the business cycle peak?
when business activity ages
Who charges the prime rate?
Commercial banks
12 months of negative GDP
that is 4 quarters, so recession
Which home mortgage type has the lowest payments?
Balloon, then ARM
Brochures from a CFP
ADV Part 2 must include:
- Nature of RIAs business
- Fees
- Services
- Conflicts of interest
- Methods of Analysis and investment strategies
- Risk of loss
- Brokerage Practices
- Education of advisors
Need to deliver at or before the RIA enters into the advisory agreement with the client.
Need to deliver a need Brochure if it materially changed within 120 days after fiscal year end.
Specifics do not need to be named.
Integrity Standard
CFP must perform professional services with integrity which means honesty and candor.
Interest of the client must not be subordinated to the firm or planner. An error is not an integrity breach. Intentional deceit is.
Competence
CFP has to provide professional services with skill and recognize when they do not have the skill and get help, refer clients to others, or limit or terminate the engagement.
CFP with services that they will not provide
Needs to be clearly stated to the client
Diligence
Professional Manner and in a timely fashion
Disclose Conflicts of Interest
Fully disclose to client
Need to obtain consent from client at or BEFORE providing advice to which conflicts of interest could apply, consent does not have to be written
Sound Judgement
Refuse any gifts that could compromise the CFPs objectivity
Professionalism
Treat others with respect
Comply with the Law
Comply with laws and rules and not intentionally assist in another person’s violation of rules
Standard to provide information to a client
Needs to be disclosed PRIOR TO OR AT THE TIME OF ENGAGEMENT both parts, advice part if giving that and planning part if giving that.
Need to provide a description of services and products that will be provided AND a clear explanation of how they will pay when giving financial advice or planning. The exact amount is not important but the form is. (FINANCIAL ADVICE OR PLANNING)
In addition to: how CFP is paid, any discipline, conflicts of interest, economic benefit for referrals, and any other material info for a client to engage with you.
How any third party is paid
Need to disclose any bankruptcy’s, disciplinary actions, and any info that would be relevant to a client (FINANCIAL ADVICE OR PLANNING)
Need to disclose as everything as above AND:
Need to disclose not later than at the time of engagement:
- terms of engagement
- scope of engagement
- limits on the above
- CFPs role in implementation
- Any material change to this info or new discipline within 90 days
(FINANCIAL PLANNING ONLY)
Communicating
Provide accurate info
Respond quickly
Compensation Method
Fee only: no sales related income
Fee based: fee and sales related
Sales related: commissions, 12 b-1 fees, trailing commissions, bid/ask spreads, transaction fees, revenue sharing, solicitor fees.
Non-sales related: soft dollars, reasonable fees for custodial stuff, non-monetary benefits, fees for professional services, fees for turnkey, unrelated solicitor fee.
Lending Money
NEVER commingle
Can only borrow if its family or they are in the business of lending
Durable vs Non-Durable Goods
Durable Goods last and are only purchased when the economy is good.
Nondurable is needed more often like food and is purchased in good and bad.
CPI and PPI
PPI leads CPI and is a good leading indicator of inflation.
GDP
It is not price adjusted
Refinancing a mortgage key issues
Need to think about:
1. length of time there
2. cash flow capacity
Reasons to refinance:
- lower interest rate
- consolidate debt
- change term of loan
- raise extra cash
SEC / State Regulation
RIAs with less than $100M (or $110M) need to register with their state and if over then with the SEC
ADV Part 1
Applicant
Background
Form of business
Location
Investment Philosophy
Disciplinary Action
CRS
Uniform disclosure prescribed by SEC, intended to enhance investor protection.
Closing Advisory
ADV W
IAA Restriction
Can only reassign clients with their consent.
Proper RIA and CFP use
Registered Investment Advisor
CFP (r)
CERTIFIED FINANCIAL PLANNER (TM)
Cannot use RIA
ADV Part 1 and 2
Part 1 handles business address and background
Part 2 handles compensation
Agent vs Broker
Agent is a legal rep
Broker is an intermediary
Law of Agency
Compliance with the rules of the insurance company (the principal) falls under this law.
Conditional Receipt for Life Insurance
Evidence of a temporary contract obliging a life insurance company to provide coverage as long as a premium accompanies an acceptable application.
If applicant dies before policy was issued, company would have to pay out if they would have issued the policy.
Chapter 7 needs to meet the means test and…
Consumer credit counseling.
Fair Credit Reporting vs Consumer Credit Protection
Fair Credit:
- consumers can review their files any time and have 1 free report
- if denied credit, you can receive a free report
- information retained for 7 years
- only interested parties can access the file
Consumer Credit:
- interest is reported
- credit terms disclosed
- lost credit cards have a limited liability of $50 per card
When does fiduciary standard apply?
When providing financial advice to a client.
Disclosing privacy policy
Policies need to be disclosed in writing no later than at the time of engagement with annual updates if necessary.
Financial Planning vs Advice
Planning everything is written except conflicts of interest
Advice everything is oral except privacy policy
Duties when recommending other professionals
Have a basis
Exercise reasonable care
Disclose to client in how it helps
Need to communicate with these professionals and inform the client if the professional is slacking
Using technology
Exercise judgement
Understand assumptions of the tech
Believe that it will help
Financial Planning Definition
Collaborative process meant to maximize the client’s opportunity to meet life goals by applying financial advice that considers aspects of their financial and personal life
Disciplinary action with practice standard
If not followed, CFP can penalize you
What needs to be written
Act in clients best interest
Policies
Firm procedures
Significance
Incomplete Info vs No agreement for financial planning
Incomplete: Limit or terminate
No agreement: Limit, decline, terminate, or provide and explain why planning would help
When does your firm need to be notified
Right away
CFP Board DEC
Responsible for investigating and taking action against violation of the code of ethics and practice standards. Hearing panels come together several times a year and panel volunteers assist the DEC to review specific disciplinary situations. DEC members must have prior service as a hearing panel member.
CFP Board vs SEC Rules for Disclosures
CFP Board has their own rules on:
Advice: description of services and products and how client will pay along with disciplinary actions
Planning: above and terms, scope, limit, implementation, and changes or disciplinary action
ALONG WITH: compensation, conflicts of interest, privacy policy
SEC has the form ADV
When should FINRA be reported
Violated any provision of securities law
Subject to written customer complaint alleging theft or misappropriation
Named as a defendant in violations of securities act
Indicted or criminal offense
Best Bankruptcy to file for
Best would be chapter 7 because they wipe out most of your debt
Questions on fiduciary duty
Focus on giving a better experience to clients.
If cash is given to you to buy a mutual fund and you are a registered rep
Have your broker/dealer accept the funds and buy the security so they are not commingled with the firms general account.
Can client funds be commingled in a general client investment account
YES
Giving a client a gut recommendation on an investment
Guilty of negligence which is a tort and of breaching your fiduciary duty.
Not a breach of contract and might not require arbitration
For the cash flow questions, if gifting to an UTMA
That would decrease their net worth because contributing to an UTMA would leave their estate and decrease their net worth.
What to prioritize if there is no life insurance
Prioritize life insurance over emergency fund because they have some safety cushion in savings and really need insurance
Education accounts opened and funded within 2 years of chapter 7
Not protected
Which phase of the business cycle would you expect the leading indicator to go up but not coincident or lagging?
Trough to recovery
Which phase of the business cycle would you expect the leading and coincident indicators to go up but not lagging?
Recovery to expansion
Which phase of the business cycle would you expect all the indicators to be going up?
Expansion to peak
Business cycle
Peak to recession to contraction to trough to recovery to expansion to peak
What does inverted yield curve show?
Short term rates are high
Balance Sheet vs Cash Flow
Balance sheet is a snapshot of your financial position
Cash flow is a future look at what will happen
Emergency Reserve
If 2 income sources than 3 months, if 1 then 6 months.
If both spouses work for the same company then 6 months because if the company goes under they both lose their job.
If woman is pregnant then 6 months because you do not know if she is going to want to go back to work
Large trust fund counts as stable income for the 6 months.
Ideal amount to save
5%-8%
FDIC insurance
Per person
Per bank
Per account type
Are stocks in an IRA at a FDIC insured bank protected?
NO only one of the eligible categories
Are credit unions federally insured?
YES
When was the SEC established
With the act of 1934
Securities Act of 1933 and 1934
1933: New issues
1934: Secondary market and SEC
If an EE bonds are in an UTMA is the interest deductible?
NO
Using credits and plans for education
YOU CAN ONLY USE 1 ON THE EXAM. If they are giving general expenses then make sure you do not choose an option that uses both. ONLY USE AN ANSWER WITH ONE
If they give you actual expenses then you can categorize based on expenses
When to use fulbright
Only for graduate
529 plan changing beneficiary
1st cousin and closer
UTMA
Can hold real estate and can be testamentary
LTCG or qualified dividends for kiddie tax
$2,700 of LTCG
$1,300 standard deduction
$1,300 at kids rate (0% since they are in the 10%-12% income tax bracket)
$100 in the parents LTCG rate (0%, 15%, or 20%)
If you are 22 and done with college and working do you have kiddie tax?
No
When is compensatory and punitive not taxable/taxable
Compensatory is not taxable if for physical injury
Punitive is not taxable if for wrongful death
Regulation T
50% initial margin
Multiplier effect
People spending money that creates ripples
Biggest thing with GDP
It is not price weighted, NO inflation adjustment
CPI vs PPI
CPI is for consumer
PPI is a leading indicator and does not include services
Does a CFP need the 65?
No but they do need the other ones if they earn commissions.
Who are agents loyal to?
Principal or insurance company brokers are loyal to client.
Which bankruptcy is the best?
Chapter 7 because it gets rid of everything
Biggest exemption from Chapter 7
Cash value life insurance and annuity payouts
Big thing from consumer protection or truth in lending
You are liable up to $50 PER CARD
What to prioritize first in a case study for the client
Look for what they are emphasizing in the case study and go with that
guardianship is usually a good bet
Delay clause
Life insurance cash values can be delayed from distributing the cash by the insurance company for up to 6 months.
Cap value
Annual Income / Cap rate
Net worth of a business = book value of assets - book value of liabilities
Wealthy for education planning
Parent loan
Poor for education
Pell
Supplemental
Stafford subsidized
Graduate years
Fulbright
Stafford unsubsidized
529 or CESA
College Savings vs Prepaid Tuition 529 plans
College savings
- invested in market
- risk tolerant
- parent’s asset
- open enrollment
- graduate school
- room and board included
- out of state
- not guaranteed
- refunds subject to 10% penalty and tax on earnings
Prepaid:
- tracks inflation
- risk averse
- parents assets
- specified enrollment
- undergrad
- tuition only
- restricts out of state
- maybe state guaranteed
- refunds are investments plus low returns
Beneficiary changes
up to first cousin
Gifting 529 through trust
Not smart to fund the trust and then fund the 529 through that. No 5 year election for that.
Better to fund the 529 then change ownership to trust or change ownership to trust then fund 529 directly.
Transfers for the same beneficiary
Once every 12 months
Can transfer between prepaid tuition and savings program by same state. Also can transfer state plan and a prepaid plan.
Inflation, Disinflation, Deflation, and Stagflation
Inflation: Increase
Deflation: Decrease
Disinflation: Slow down in inflation
Stagflation: Increase in inflation and increase in job losses (slow or negative economic growth)
Cyclical vs Defensive industries
Cyclical move with the business cycle like cars (outperform in growth)
Defensive do not like food (outperform in recession)
VA and FHA loans
Federally guaranteed which reduces risk to lender
Low and middle class can put less down to get a mortgage
Veterans too if they are
Requirement to sell variable annuities and/or life insurance
Series 6 or 7 and state variable license
Coordination rules for education
CANNOT have AOTC or LLC or CESA or 529 together.
If they are poor probably can’t door Parent loan and if rich can’t do PELL.
Kate and Ashley are 19, Kate loves school and Ashley hates it. Ashley will start working next year and Kate will stay in school, who is subject to kiddie tax?
Both are since it is implied that both are currently in school.
Kiddie Tax
Under 18
18 but less than half your support
19-23 full time student and less than half your support
If you are not in school 19-23 then no kiddie tax
If economy is going down what should the federal reserve do?
Lower discount rate, reserve requirements, and margin requirements or buy securities using repos to loosen
If economy is too hot do the opposite to tighten
What does GDP include and not include?
GDP includes goods and services MADE in the USA.
It does not include goods and services produced elsewhere and sold in the USA
What is included in GDP?
Toyotas made in Tennessee
Chevys made in Canada but sold in New York
Toyotas made in Tennessee are included because they are made in US
Chevys made outside US are not included
Joe is an aggressive investor who wants to start a college savings program for his kid, control the investments and deposit the most possible without gift tax.
- UTMA
- 529
- CESA
- 2503(c)
Best answer would be UTMA.
529 he would not be able to control the investments.
CESA is low amount
2503(c) the trust income would be taxable to him and included in his estate (beneficial enjoyment)
What was the SEC established by?
Securities act of 1934
Which assets can always be used as emergency fund?
Cash/cash equivalents
Checking
Savings
Laddered CDs with less than 6 months of maturity
Savings and Laddered CDs with less than 6 months of maturity.
Checking may not always be used, sometimes if the monthly expenses are more than the amount in the checking account it cannot be used and cash/ cash equivalents may sometimes not work. Checking is included in that category and that is one that may not always work.
If Mary takes out a home equity loan to help pay for college what is the max she can interest she can deduct?
$0 because it is not secured by the house or going to improve the house.
What goods are most impacted by a recessions?
Capital and durable goods.
Mary wants to do this:
Fund for $40,000 in 6 years
Deposit $3k at year end increasing it by $1k every year for 6 years
What return does she need to make that happen?
IRR = 9.63%
Mary:
Refinances her home spending $3k
Buys a new car using cash flow of $15k and trading in her old car of $5k
Takes out a home equity loan of $25k to make improvements
Saves $5k
What is her change in net worth?
$17k increase
Priya, a CFP, meets Steve at a retirement convention and hears that Steve will be retiring soon. She asks if she can send him a document that her firm sends out called “what will my savings cover in retirement”. Steve agrees to get the document. Does Priya have a fiduciary duty to Steve?
No because Steve is not a client and she has not provided any financial advice. She only provides general financial advice. It is reasonably viewed as general advice.
Meghan is a CFP who works with a broker dealer. Her client asks for info regarding a certain stock and Meghan gets her firm to create a research report that says the stock is undervalued. Meghan tells him that she has not had a chance to look at the stock and whether it is a good idea for him. He asks her to go ahead and buy it. What is Meghan’s duty?
She does not have a fiduciary duty because she did not give financial advice. The research report was not individually tailored and she did not recommend it. (Maybe she would’ve she just didn’t get around to it)
Cindy, a CFP, manages a client who has only a few accounts with her that does not make up most of their wealth. In addition to that they want some cash flow planning from each portfolio. Is this financial advice that requires financial planning?
No because the advice is limited to managing the three portfolios and providing cash flow planning.
Financial planning is not required when:
- it is investment advice and short-term portfolio and cash flow illustration
- not providing financial advice on a majority of assets
- provide short term cash flow
- no cash flow planning on income, retirement, expenses
Peter, a CFP, is providing financial advice to a client on all their investment accounts and their retirement plan. In addition, they discuss their goals and a cash flow report is developed looking at retirement dates, income and expenses, RMDs, and projections. Is this financial advice that requires financial planning?
Yes because there are many relevant elements and goals are being addressed along with more of their assets.
Financial planning is required when:
- there is investment advice, comprehensive cash flow, retirement planning
- financial advice on all investments accounts including retirement
- providing long term cash flow planning and retirement
- managing all aspects of cash flow
Susan does not like her investment guy so goes to Blaine, a CFP. Blaine determines that she needs investment management and retirement planning. It would affect almost all of her assets and a lot of her financial life. She does not want to engage in financial planning. What should he do?
Limit the scope of engagement to investment management and inform Susan that he will not be performing retirement planning.
Gross income for case studies
Make sure you are looking at income and whether it is net of 401k deferrals.
For gross income you want the gross amount so add back the deferrals.
When are mortgage payments made?
END MODE
When are retirement payments and school payments made?
BEGIN MODE
Nouns you can use
Practitioner
Professional
Certificant
Certification
Mark
Exam
Which of these convictions or investigations requires notification to the CFP Board?
- Theft of money
- Embezzlement of money
- Tax Fraud
- Traffic felony with alcohol
ALL of these would require notifying the CFP board within 30 days.
Although the alcohol will not mean anything since it is (2 or more) but it still must be reported to the CFP board within 30 days in writing.
In the data gathering step a client appears to get emotionally upset and started moving in his chair uncomfortably. What should you do?
- Recommend he get help
- Talk to his family
- Talk to his referral
- Decline them
Best to decline them. You cannot recommend they get help or talk to others about him so best to just decline them.
Talking to others is the duty of privacy and recommending help is the duty to refer another professional.
Paula spent a year and a half getting her CFP marks and finally when she got them the CFP board found cause to suspend issuance of the CFP certification for 2 years. Will the board publish such a suspension?
YES because it is a public suspension along with:
letter of admonition
suspension
revocation
These are public ruling so they would be published.
After one year, can Sid appeal his suspenion?
NO, after 30 days it becomes permanent.
Todd works for ABC brokerage and they only sell proprietary products and he earns commissions. He really needs the commissions and things are starting to get tight at his work. A new investment product comes out for them that locks up a client’s investment account by giving them airline miles, low interest credit cards, and below market loans. What should Todd do?
- Explain the program to all his current and potential clients.
- Quit and find a new job.
- Continue to treat clients fairly and provide professional services with integrity and objectivity.
- Enter into agreements with all his clients disclosing compensation arrangements for the company’s proprietary products.
Todd should enter into agreements with all his clients disclosing compensation arrangements for the company’s proprietary products.
The main point of thought in this question is around the products that he is selling. You want to make sure that you are disclosing your compensation. That is what is highlighted by the question and what you should focus on.
Dr. Adams wants to pay a flat fee and you already performed all the steps with him and completed the plan. You get through estate and he says he does not want to pay for a lawyer, what should you do?
- Go online and download documents
- Disclose that you are not an attorney and volunteer to help find the documents.
- Pay an attorney out of your fee.
- Refer your friend attorney and two other attorneys.
The best answer is to refer your friend and other attorneys.
The other answers do not work, you cannot help gather the documents and should not pay the fee. Referring attorneys will help.
What is FOMC
Federal Open Market Committee and that controls the monetary policy of the US.
Tommy, a CFP, is meeting with a new client. What should be his first step?
- Give them the firms brochure
- Provide the client with written disclosure of all material info
- Ask them for a written agreement as to his understanding of the process
- Review their goals and objectives
You should provide them with written disclosure of all material info.
We know that this is a CFP but we do not know if they are an RIA. In that case, they would not need to give a brochure but you would have to disclose of material info.
If taking out a home equity loan to improve the home and it is backed by the home, how much can you take?
You can take up to the FMV of the home. So if your current debt on the home is $260k and the FMV is $340k then you can take out $80k for improvements.
Ed and Martha approach you for investment planning. They are waiting on the assets of their mom, Hazel, who is 85. They have all their plans but what should you do next?
- Obtain a POA before developing an investment plan
- Develop an investment plan for Ed and Martha
- Meet with Hazel to develop her goals and invest for her needs
- Recommend that Ed and Martha purchase LTC insurance for Hazel.
Best answer would be to meet with Hazel first.
Being a fiduciary to Hazel in this situation would be to treat the assets in the way that she wants them to be treated first before doing anything else.
Professional Standard
Treat people with respect
Spouses as clients
If one person approaches you then they are your client, not the other spouse so need to keep that in mind.
If you have a JT account under your management then they are both your clients.
Does the CFP like you educating clients?
YES definitely should be a go to
