General Principles Flashcards
Scope of Engagement Between Planner and Client
Amongst other things, there must be a written agreement and the scope can include segmented planning (not a full/comprehensive plan) services.
Textbook 1-11
Is the Financial Planning Process limited to the 7 steps?
No, the 7 steps should be followed but there are exceptions.
Textbook 1-12
Quantitative vs. Qualitative client data
Quantitative info is objecitive/factual (names, ages, investments) while qualitative info is subjective (attitudes, emotions, desires).
Textbook 1-14
Evaluating Current Financial Situation Strengths/Weaknesses
Evaluations are based on current quantitative info such as cash flow, expenses, and debt. Future scenarios should not be taken into account.
Textbook 1-16
Financial Planning Subject Areas vs. Financial Planning Process
Subject areas are specific topics such as education planning that can be revealed/discussed through the financial planning process (7 steps).
Textbook 1-18
Client Info Needed Regarding Their Life Insurance Contracts
Includes insurance premium, dividend options, policy loans, and policy ownership
Workbook 1-6
What if a client’s expectations require unrealistic return assumptions?
A competent financial planner does not need to make return assumptions based on unrealistic expectations and can just use conventional return assumptions.
Workbook 1-6
Family Member / Family Tree Data Survey
Includes info about the family as well as the client’s potential life expectancy since it will have DOB and health details.
Workbook 1-7
Prospect Theory
Losses have a much greater negative impact than a commensurate gain will have positive.
Workbook 1-3
Financial Enmeshment
Parents inappropriately commingling finances (accounts, transactions, discussions) with their children. It is generational and doesn’t apply between spouses.
Workbook 1-3
Disclosing Conflicts of Interests
Conflicts of interest should be disclosed in full BEFORE or AT the time related financial advice is provided.
Textbook 2-3
Sales-Related Compensation
Any compensation the CFP OR the firm might receive when I client purchases or sells an asset. Registered reps at a broker-dealer receive sales-related compensation.
Textbook 2-9
CFP Duties Relative to Presenting Client Recommendations
Explain the reason behind each recommendation and present alternative products including insurance policy coverage comparisons.
Workbook 2-2
Current Assets
Current assets are short-term/liquid assets such as cash equivalents, marketable securities (including municipal bonds), accounts receivable, and inventory.
Textbook 3-9
Calculating Emergency Fund from Cash Flow Statement
Add the total annual fixed and variable outflows, divide by 12, and then multiply by number of 3 or 6 months. Do not include taxes in sum of outflows.
Textbook 3-13
Calculating Housing Expense Ratio for Home Owners
Add principal, interest, property taxes, and homeowners insurance (PITI) and divide that sum by gross income. Confirm whether monthly payments are PITI or just principal and interest.
Textbook 3-13
Calculating Current Amount in Emergency Fund.
If checking account balance exceeds monthly expenses, subtract one month of expenses and add to other funds that could be used as emergency funds (e.g. MMA, savings account, short-term CDs)
Textbook 3-13
Emergency Fund Suggestions for Aggressive Investors
Aggressive investors are unlikely to keep a 6-month emergency fund in cash. A better first suggestion would be to tell them to create a budget and save more.
Textbook 3-19
Emergency Fund Suggestions for Families with Excessive Debt
A better first suggestion would be for the family to reduce total debt to less than 36% of gross income before building emergency fund.
Textbook 3-19
Stages of Client Financial Behavior
1st Denial - client is unaware of spending problems or unwilling to change spending habits.
2nd Ambivalence - client is considering possibility of changing spending habits but not ready to make the commitment.
3rd Preparation - client has made decision to improve spending habits and is eager to learn about actionable steps.
4th Action - client has taken action and is exhibiting new spending habits.
5th Maintenance - client is working on efforts to sustain the change and cement new behaviors.
Textbook 3-20
What questions should a CFP ask prospective client?
There are many questions that can be asked that could be important including about client’s age (as client may be a minor and have a parental custodian) and investment experience.
Workbook 3-1
Taxes on the Cash Flow Statement
Income taxes are considered an outflow. However, only fixed and variable outflows should be used to calculate emergency fund.
Workbook 3-2
Government Money Market Fund vs. Tax-Free Money Market Fund Relative to Emergency Fund
Both can be used for emergency fund but the government money market fund provides a better equivalent yield for families in lower tax brackets.
Workbook 3-2
Investment Company Act of 1940 vs. Investment Advisors Act of 1940
The former regulates mutual funds and investment companies. The latter defines and covers registration of persons or firms advising others (fiduciary duty).
Workbook 5-1
FINRA vs. SEC Regarding Brokerage Companies
FINRA regulates brokers and borkerage companies/firms directly. The SEC oversees securities markets and enforces laws. FINRA operates under the SEC’s supervision.
Workbook 5-1
FDIC Insurance Limits Per Account Type Per Institution
$250K total across individual deposit accounts
$250K total across trust accounts (must be a beneficiary)
$250K total across retirement accounts
$250K total across joint accounts.
i.e. one person can have up to $1M at one bank that is FDIC insured
Textbook 5-2 and 5-3
Insurance Regulation by Branch
Legislative passes insurance laws.
Judicial (state courts) interprets laws.
Executive enforces laws through the state’s insurance commissioner.
Textbook 5-6
Securities “Sales” Under the Securities Acts of 1933 and 1934
Sale is an agreement between a buyer and a seller on the price of a security which results in a trade.
Textbook 5-8
Coverdell ESA Qualified Expenses
Include K-12 public, private, or religious school tuition, fees, tutoring, supplies, uniforms, room and board, and after school day care programs.
Textbook 6-8
ESA Contributions: Gifts of Present vs. Future Interest
All ESA contributions are considered to be a gifts of present interest (i.e. the recipient is potentially eligible to receive the benefit immediately)
Textbook 6-9
Combination of Techniques to Pay Education Costs
Any combination of the American Opportunity Credit, Lifetime, Coverdell, ESA withdrawal, or qualified tuition distribution in any one is typically not recommended due to coordination rules.
Textbook 6-17
Coverdell and PLUS vs. Federal Income Tax Credits
Coverdell and Plus do not generate federal income tax credits
Textbook 6-18
529 savings plan vs. 529 prepaid tuition plan
Prepaid tuition plan is more limited and for a risk averse investor. Limitations include restrictions on out-of state costs and may not cover room and board. Also, plan may be limited to undergrad costs. Savings plans do not have these limitations.
Textbook 6-19
Education plan distributions vs. education tax credits
Client is not eligible for education tax credits the same year education distributions are made.
Workbook 6-1
QTPs vs. UTMAs
QTPs and UTMAs are both gifts of present interests. Owner of QTP retains right to determine how and when to use money in account while custodian of UTMA loses control to minor once they reach majority age (18 in most states). Owner of QTP can change beneficiary while custodian of UTMA can not. QTP can grow tax-deferred if funds are used for qualified education expenses, UTMA growth and distributions can be subject to both regular and kiddie tax.
Workbook 6-2
Kiddie Tax Calculation
Kiddie tax rules applies to child with unearned income greater than $2600. Child can take $1300 standard deduction and remaining $1300 will be taxed at at 10%. Anything above the $2600 will be taxed at the custodian’s tax rate.
Workbook 6-3
College Funding Calculation
- Determine cost of first year of college (future value calculation).
- Determine total amount that must be available for all four years (present value calculation using real rate of return since invested cost of college will still be increasing each year. Begin mode, PMT=cost of first year from step 1.)
- Calculate how much parents need to start saving now to have total amount for all four years when child starts college (PMT calculation, use nominal rate of return instead of real rate of return).
Workbook 6-1
Federal Funds Rate vs. Discount Rate vs. Margin Rates
Fed does not set the Federal Funds rate (charge for overnight loans from one bank to another bank).
Fed sets the Discount Rate (rate charged for member banks to borrow from the Fed to meet reserve requirements, it is typically higher than the Fed Funds rate)
Fed sets initial margin rates for securities under Reg. T.
Textbook 7-9
Punitive Damages Taxability Exception
Punitive damages in conjunction with wrongful death aren’t taxable. Otherwise, punitive damages are generally taxable.
Workbook 7-1
Compensatory Damages Taxability Exception
Compensatory damages are generally not taxable. Damages received for non-physical injury cases (e.g. discrimination) are taxable less the medical care expenses for emotional distress.
Workbook 7-1
Annuitized Damage Award Taxability
Damage awards paid periodically, and where the injured person has no right to a lump sum payment option, are not taxable.
Workbook 7-1
Prizes and Awards Taxability Exception
The full amount of the prizes and awards (e.g. lottery winnings) are generally recognized and taxed the same year won despite the winnings being paid as a lump sum or annuity. However, if annuity option is selected within 60 days of winning, the payments are taxable as received.
Workbook 7-1
Recession vs. Depression (Technical Definitions Relative to GDP)
Two quarters of negative GDP is a recession and six quarters of negative GDP is a depression.
Workbook 7-2
Gross Domestic Product (GDP)
GDP measures the value of new goods and services produced within a country’s borders. U.S. company production in another country does not count towards the U.S.’s GDP but foreign company production within the U.S. does count towards the U.S.’s GDP.
Workbook 7-3
Business Cycle Peak
When business activity ages i.e. the public stops buying because they have enough of everything they need.
Workbook 7-3
Alimony Payments Pre-2019 Divorce Include
Cash payments from payor to third parties for an obligation of the ex-spouse such as rent, mortgage, tax, tuition liabilities, and retirement account contributions.
Workbook 7-3
After-Tax Mortgage Payment Calculation
Since mortgage interest is deductible up to a certain amount, you can can calculate the after-tax mortgage payment by calculating the annual interest, multiplying it by the marginal tax rate, and then subtracting it from the total annual mortgage payments.
Textbook 8-6
Registered Reps Supervision Requirement
Registered reps must be supervised by a FINRA-registered principal of a broker-dealer. Advisors at RIA firms are supervised by a Chief Compliance Officer of the firm subject to SEC/state regulations.
Textbook 9-5
First Entity Notified When Starting an RIA
In order to start an RIA, the advisor first needs to register with the SEC which is the firm’s main regulator.
Workbook 9-1
ADV Filing Regulators
ADVs must be filed with the SEC or state securities regulators for review, not FINRA. However, forms are submitted through FINRA’s system.
Workbook 9-1
FINRA Registration Process
- advisor associates with (hired by) broker-dealer firm
- advisor registers with FINRA through firm on Form U-4
- advisor passes appropriate exams
- Central Registration Depositary System makes registration with FINRA uniform among states
Workbook 9-1
Registering with SEC vs. Registering with FINRA
All advisors (offering financial advice, at a business, and for a fee) must register with the SEC or state regulator. Only advisors working as reps/brokers and selling securities (typically receiving a commission) need to register with FINRA.
Workbook 9-2
Series 6 vs. Series 7 FINRA Qualifications
Series 6 only allows reps to sell mutual funds, initial offerings for unit investment trusts (UITs), variable life insurance, and variable annuities. They can’t sell securities that are traded on exchanges or other secondary markets.
Series 7 allows reps to sell all securities except commodities and certain options.
Workbook 9-2
