General Principles Flashcards
Securities Act 1934
- Regulates Secondary Market
- SEC created to enforce laws
Securities Act 1933
- New issue - need a detailed prospectus
- Full/Fair disclosure of risks
Express Authority
Authority granted by insurance company
CFP Code of Ethics
“The Practice Standards” is designed to dove tail with financial planning process
Proper CFP marks are
CFP®
CERTIFIED FINANCIAL PLANNER®
CFP® & CFP® in the US
Cases of conduct under “Presumptive Bar” or that may reflect adversely on CFP profession are reviewed by DEC (Disciplinary & Ethics Commission
They can revoke/deny marks
1. 2 personal bankruptcies are presumptive triggers
2. Convicted of financial crime - unfit to hold marks
3. To recertify after petition - must fulfill education, examination and experience again
Investment Comp Act of 1940
Investment Advisors Act of 1940
Company Act: SEC regulates mutual funds
Advisors Act: registration of persons/firms advising others
QTP (Qualified Tuition Plan)
1 gift of present interest
2. ower retains control
3. grows tax-deferred, distributions are tax-free if qual. education expenses.
UTMA
- gift of present interest
- owner loses control when student is age of majority
- growth/distributions can be subject to both regular tax & kiddie tax
AOC American Opportunity Credit
100% of first $2000
25% of next $2000
Total $2500
*claim first 4 years of secondary education
Lifetime Learning Credit
20% of first $10,000 qual tuition/related
Max of $2000
Injury:
Single premium annuity taxation
100% excludable by taxpayer receiving pymts
Leading Economic Indicators
-avg wk hours prod/mfg
-initial unemployment claims
-new mfg orders
-vendor performance (contract orders for equip/plants
-new private housing units
-interest rate spread
-stock prices/500 common - money supply
-index consumer expectations
Coincident Indicators
- # employees or non-agric payrolls-Industrial productions
Lagging Indicators
-avg duration unemployment
-avg prime rate charged by banks
-commercial/industrial loans outstanding
-ratio of consumer installment credit outstanding to personal income
-change in cons price index for services
Recession vs Depression
2 qtrs of neg GDP (recession)
6 qtrs of neg GDP (depression)
When is business cycle peak?
When business activity ages / public stps buying b/c they have enough
Who sets prime rate?
Commercial banks
Who sets Fed Fund rate?
Auction by member banks
What must advisor file with SEC each year?
Form ADV Part 1 and Schedule 1
How to find Real Rate of Return
[(1+ after-tax return/1 + inflation rate ) -1 ] x 100
Are home equity loans NOT used for home improvement deductible?
No
RIA & Reg Rep can accept funds to purchase stock when it hits certain price But…
Funds cannot be comingled with planner of firm funds
RE: Financial Aid
What is considered owned by the child?
UTMA
*Not EE bonds, can only be owned by adults
*Not Coverdell ESAs
*Not 529s
Negative slope yield curve, should we invest in short or long term bonds
Short
If negative slope is returning to normal/positive, then look to Treasury Bonds
What do you need to sell Variable Insurance?
State variable license + Series 6 or 7
BEST
Buy = expansion
Sell = tighten
Which are taxable?
-Compensatory damages
-Punative damages
Lottery Annuity (10 yrs w/i 60 days)
Compensatory damages (injury) - no
Punative -yes unless wrongful death
Lottery - yes - div by 10 years
Is Coverdell future or present interest?
Present Interest
When economy is recovering what purchasing increase?
Automobiles
Appliance
Suspensions by CFP Board
Automatically published
If it wasn’t appealed within 30 days of notice, it is permanent
Home Equity Loans are deductible when
They are used for the home. Amount you can borrow is the difference in FMV and amount owed.
Client wants to buy an investment that will produce positive ash flows of $6000, $7000, and $8000 over a three year period. At ene of 3 years, he will sell it for $115,000. He needs to make return of 12%. What amount should he pay for the investment?
$98,486.47
gold, clear all
0, CFj
6000, CFj
7000, CFj
123,000 CFj
12, I/yr
gold, NPV
Who controls monetary policy?
Federal Open Market Committee (FOMC) is the Federal Reserve’s primary body for setting U.S. monetary policy
Portfolio XYZ has folowing hcaracteriscc:
Mart value: beg of year 1. $100,000
Capital w/d: end of year 1. $4000
end of year 2 $5000
end of year 3 $6000
Market value: $120,000
$10.92%
gold, clear all
$100,000 -$, CFj
4000, CFj
5000, CFj
126000, CFj
gold, IRR/YR
What is NPV?
Net Present Value
When the NPV is zero, the interest rate is the same as the required rate of return.
So if the NPV of an investment is ZERO using a 12% interest rate, the IRR (required rate of return) is 12%
What is HRA?
Health Reimbursement Acct
-solely ER funded
-reimburses EE for substantiated medical expenses up to maximum dollar amount per coverage period
Whole Life policy on key employees
-company can borrow but they must pay the interest
-limited to $50k on each policy
FSA
-have until 2 1/2 mos past yearend to spend
-limited to $3200 (2024)
Money Scripts:
Avoidance
Worship
Vigilance
Status
Avoidance-$ is negative, “root of all evil”
Worship- “money = happiness”
Vigilance- concerned about spending, limiting vacations, hard to enjoy
Status-self worth tied to money/embarrassed by not having
Uber Is A Drunk Person Immediate Mode
Understand client’s circumstances
Identify/select goals
Analyze course of action
Develop financial plan
Present financial plan
Implement
Monitor
Fee Based vs Fee Only
Fee based - commission and/or fee
Fee only - no commission, only fee
Prospect Theory
feeling losses more significantly than gains even though equal (loss aversion)
The 4 F’s of Behavioral Finance
Fear -
Faith -
Framing -
FOMO (Fear of Missing Out) -
Endowment Bias
Prefer investments they already have been endowed with. Value an owned object (such as a stock or piece of real estate) at a higher value than its market value.
mental accounting in behavioral finance
An investor groups their investments into “safe” and “risky” categories and treats each category separately, even though all investments are part of the same portfolio.
Loss Aversion
Sell profitable positions and hold onto losing security positions
confirmation bias
confirmation bias, preferring to focus on information that confirms rather than contradicts his market opinion.
Comingling funds are allowed when
Funds of clients can comingle with those of other clients. Mutual funds, investment pools etc are examples.
Money scripts are:
avoidance
worship
vigilance
status
