General Principles Flashcards
How many days from notice do you have to appeal a CFP DEC ruling?
30 DAYS
- Must send appeal via certified mail -
CFP Reporting Exceptions
- SEC/FINRA fine <$2.5k (provided no contest)
- Settlement/arbitration <$15k
- Customer complaint arbitration <$5k
- Sales practice settlement <$15k
CFP Felony Definition
≥ $1k Fine
≥ 1yr Prison
Securities Act 1933
- IPO
- Prospectus
- Prevention of fraud
Securities Act 1934
Regulates SEC-ondary market (trading SEC-urities)
Created the SEC
When can you share client info under the Confidentiality Standard?
- At client’s instruction
- In compliance with the law
- Within your firm through course of business
- In defense of accusation of wrongdoing
- By request of CFP board
Competence Standard
Know your stuff.
If you don’t know something, don’t do it. Communicate that you don’t know it. Find the person who knows it.
What are the financial planning steps?
- Understand client personal/financial circumstances
- Identify/Select goals
- Analyze current course of action
- Develop recommendations
- Present recommendations
- Implement recommendations
- Monitor recommendations
Money Status
Money = Self-worth
Money Worship
Money = Happiness
Money Avoidance
Money = Evil
Wealth = Greed
Loss Aversion
(Prospect Theory is similar)
Gain = x1 happy
Loss = x2.5 sad
We avoid loss more than we pursue gain!
Herd Behavior
FOMO
Example: Crypto bandwagon
Financial Enmeshment
Unhealthy parent/child $ relationship
- Engaging with kids about $ before they’re ready (too young)
- Involvement with kids about $ when they should be on their own (too old)
Ideal Total Monthly Debt Ratio
≤ 36% Gross income
Ideal PITI Monthly Debt Ratio
≤ 28% Gross income
*Look for footnotes in case studies defining HO Insurance amt!
Emergency Cash Minimums
3mo. = Two Income Sources
6mo. = One Income Source*
*Includes two income sources with large disparity
Emergency Fund Assets
- Checking acct. (- 1mo. necessary spending)
- Savings acct.
- Gov’t. money market
- CD ≤ 90 day maturity
- CD Ladder ≤ 6 months
College Funding Step 1 Calc
“Inflate” FV
PV = Current cost of college
N = Years until college start
I = Education cost inflation rate
Solve for = FV
College Funding Step 2 Calc
“I Need” PV
PMT = Step 1 answer
N = Years of college
I = Real ROR
Solve for = PV
Real ROR: [(1+ rp)/(1+ri)-1] x 100
College Funding Step 3 Calc
“Invest” PMT or PV
FV = Step 2 answer
N = Year until college start
I = Investment return*
Lump sum → PV
Series → PMT
*Inflation adjustment accounted for in FV
Coverdell Withdrawals
- Must distribute before 30yo
- Tax-free distribution if below MAGI phaseout
- Qualified Expense:
Tuition, Room & Board, Supplies
(+ Tutoring for K-12)
Coverdell Contributions
- Maximum $2,000 per student/yr
- Non-deductible
- Contribution subject to MAGI phaseout
UTMA Keys
- Cash, Investments, Real Estate, LPs
- Transfer rights up to 25yo
- Gift of present interest
- Kiddie Tax
- Asset owned/counted by child
UGMA Keys
- Cash, Investments
- Transfer age of majority (18 - 21yo)
- Gift of present interest
- Kiddie Tax
- Asset owned/counted by child
EE Bond
- Owned by parent; NOT issued to child
- Interest fed tax-free
- Subject to phaseout
- Qualified expense: Tuition/Fees
- NO ROOM/BOARD
College Funding Years Options
- EE Bonds
- UGMA
- UTMA
- Coverdell
- 529
College Years Grants/Loans
(Poor-ish)
- Pell grant
- Supplemental Education Opportunity
- Subsidized Stafford Loan
College Years Grants/Loans
(Wealthy)
PLUS Loan
College Tax Credits/Distribution/Withdrawal Options
CAN ONLY USE ONE
- American Opportunity Credit
- Lifetime Limited Learning Credit
- Coverdell distribution
- 529 distribution
American Opportunity Credit Keys
First four years of school ONLY
- $2,500 Max. credit PER STUDENT
- 1st $2,000 of expense, dollar for dollar credit
- Next $2,000 of expense, 25%
- No felony drug conviction
- NO ROOM/BOARD
Lifetime Learning Credit
- $2,000 Max. credit PER RETURN
- 20% of 1st $10,000 of expense
- ANY higher learning (undergrad, grad, continuing ed)
- NO ROOM/BOARD
Qualified Expenses for American Opportunity Credit and Lifetime Learning Credit
- Tuition
- Fees
- Books
- Supplies
- Equipment
Expected Family Contribution (FEC) %
Assets + Income
- Parental assets x 5.64%
- Child assets x 20%
Excluded: IRAs, Life Insurance cash value
Fiscal Policy v Monetary Policy
Fiscal Policy = Set by Congress
- Tax & Spending
Monetary Policy = FED
- Supply of $ in the system
Fed Open Market Ops. Impact
“BEST”
Buying = Expand
Selling = Tighten
Fed Action Steps
Discount RateL: ↑ Expand ↓ Tighten
Open Mkt. Ops: Buy = Expand Sell = Tighten
Reserve Req: ↑ Expand ↓ Tighten
Margin Rates: ↑ Expand ↓ Tighten
Coincident Indicators
- # Employees on Non-farm payroll
- Personal Income
- Industrial Production
Leading Economic Indicators
- Unemployment Claims
- New Manufacturing Orders
- New homes built
- SP 500
- Consumer expectations
CPI v PPI
CPI - Lagging indicator
PPI - Leading indicator
- Does not include services
Durable v Non-durable goods
Durable = Cyclical
- Underperform in down cycle
Non-durable = Stable
- People always need them
Series 7
- All Investments
EXCEPT:
- Commodities
- Some options
Series 65
RIA State Requirement
Series 66
Combined 63 & 65
- 63 = Lic. in state other than residence
- 65 = RIA state req.
FINRA Registration Steps
- Connect with BD
- File form U-4 with FINRA
- Pass exams
- Obtain CRD#
Series 63
License in state other than residence
Investment Advisor Definiton
“ABC”
- Give Advice
-and- - In the Business of giving advice
-and- - Compensated for giving advice
MUST BE ALL THREE
Investment Advisor Filing Exemptions
Teacher
Accountants
Banks
Lawyers
Engineers
Non-cancelable Bankruptcy Debt
- Student loans
- Gov’t loans
- Child support
- Alimony
- Wage withholdings
- FICA
- Income tax
What acts require FINRA notification?
MUST BE WRITTEN NOTICE
- Violate securities law
- Written customer complaint regarding: theft, misappropriation, forgery
- Named as a defendant
- Indictment, Conviction, Guilty plea for criminal offense
Series 6
- Mutual Funds
- Primary UITs
- Variable Life Insurance
- Variable Annuities
RIA Registration Exemption
- Advisor working with Insurance Co. only
- Family Office
- B/D with no comp. for advice
CFP Code of Ethics
- Act with integrity, honesty, competence, diligence
- Client’s best interest
- Due Care
- Avoid/Disclose conflict of interest
- Client confidentiality
- Don’t tarnish the CFP board
CFP Nouns
Certificant
Practitioner
Professional
Certification
Mark
Exam
SEC AUM Registration Requirements for RIAs
<$100mil. AUM = Reg. with state of domicile
$110mil. AUM = MUST register with SEC
Rule of thumb CFP Planning Priorities
- Guardianship
- 911 Cash
- Pay down debt
Property exempt from bankruptcy creditor claims
- Homestead
- Limited personal property/motor vehicle equity
- Head of family wages
- ERISA plans
- Cash value in LI/Annuity proceeds
SEC Reg. S-P
Disclosure to clients regarding privacy policies and procedures.
Protection of client information.
Loss Aversion/Risk Taking
Gains = Risk Averse (Don’t want to lose a gain)
Loss = Risk On (Don’t want to realize a loss)
Inappropriate Extrapolation
Assuming recent events will continue indefinitely
Related Party Definition
Person, Business, Trust who’s sales-related compensation may directly/indirectly benefit the CFP
Current Ratio Formula
Current Assets / Current Liabilities
Current Assets:
Cash/Cash Equivalent
Marketable securities
Accounts Receivable
Inventory
Current Liabilities:
Accounts Payable
CC Debt
Taxes Payable
Unequal Cash Flow PV Calc
0, CFj
Periodic Cash Flow (±) CFj
Req. ROR, I/YR
Gold, NPV
First entry is always 0 if no investment amount is given
PV v. NPV
PV = Present value of future money
NPV = Total present value of future cash flow (-) Initial investment
NPV Keys
Positive NPV = Earn above req. ROR
Negative NPV = Earn below req. ROR
NPV of 0 = Earn at req. ROR
Internal Rate of Return Calc
“Dollar-weighted return/IRR”
Initial investment (-) CFj
Period cash flows (±) CFj
Req. ROR, I/YR
Gold, IRR/YR
Unequal Cash Flow NPV Calc
Initial Investment (-) CFj
Periodic Cash Flow (±) CFj
Req. ROR, I/YR
Gold, NPV
Amortization Calc
(END)(12P/YR)
N = Term years
I = Interest rate
PV = (+) Mortgage
FV = 0
Solve, PMT
1, Input, number of pay periods
Gold, AMORT
