General Principles Flashcards
Practice Standard 100
Defining the Scope of the Engagement
. Services provided . Conflicts of interest . Compensation . Responsibilities . Duration of agreement . Limit the scope
Practice Standard 200
Determine 200-1 . Financial goals . Needs . Priorities . Responsibilities Obtain 200-2 . Quantitative Information . Quantitative Documents
Practice Standard 300
Analyzing and Evaluating
Use assumptions
• client specified
• mutually agreed upon
• other reasonable assumptions
Practice Standard 400
Developing and Presenting
Recommendations
400- 1— Identifying alternatives
. consider multiple assumptions
. conduct research
. consult with other individuals
400-2 - Developing
. Arialysis/Eval. incorporated into plan
. Personal assumptions added if necessary
400-3 - Presenting advantages/disadvantages
. Risk
. Time sensitivity
Practice Standard 500
Implementing the Recommendations
500-1 — agreeing on responsibilities . Referring to other professionals . Coordinating with other professionals . Sharing information as authorized . Selecting and securing products 500-2 - selecting products and services . SuitabilityClient's best interest . Disclosures required by applicable regulators
Practice Standard 600
Defining Monitoring Responsibilities
- What is to be monitored
* Frequency of monitoring
Domain 1 (8% of Exam) Establishing and Defining the Client- Planner Relationship Mutually defining and understanding engagement Key — realistic expectations
Related Principles and Rules . Principle 4, 7 . Rule 1.1 Mutual Agreement . Rule 1.2 Material Element . Rule 1.3 Written Agreement . Rule 2.2 Compensation
Domain 2 (9% of Exam)
Gathering Information Necessary to Fulfill the
Engagement
Measurable objectives/client interest first
Key — Unable to obtain data — restrict the scope or
terminate the engagement
Related Principles and Rules • Principle 7 • Rule 3.3 Obtain information • Rule 4.4 reasonable judgment • Rule 4.5 suitable recommendations
Domain 3 (25% of Exam)
Analyzing and Evaluating the Client’s Current Financial
Status
Heightened awareness of specific values
Key - analysis may identify other issues-if so, it is appropriate
to amend the scope of the engagement
Related Principles and Rules • Principle 2, 3, 7 • Rule 1.4 Fiduciary • Rule 4.1 Treat fairly • Rule 4.4 Reasonable judgment • Rule 4.5 Suitable recommendations
Domain 4 (25% of Exam)
Developing the Recommendation(s)
What is possible?
Domain 5 (9% of Exam)
Communicating the Recommendation(s)
Key — strategies and objectives, recommendations meet
client’s planning goals, needs and priorities
Related Principles and Rules . Principles 1, 2, 3, 6, 7 . Rule 2.1 misleading . Rule 4.1 treat fairly . Rule 4.4 reasonable judgment . Rule 4.5 suitable
Domain 6 (9% of Exam)
Implementing the Recommendation(s)
Client is responsible at this point except by mutual agreement
If there are conflicts of interest, sources of comp or material relationship with
other professional or advisers that have not been previously disclosed, such
conflicts, sources on relationships shall be disclosed at this time.
Use appropriate products
Related Principles and Rules . Principles 2, 3, 4, 6, 7 . Rule 1.2 material element . Rule 2.2 compensation . Rule 4.1 treat fairly • Rule 4.4 reasonable judgment • Rule 4.5 suitable
Domain 7 (5% of Exam)
Monitoring the Recommendation(s)
Mutual understanding for monitoring
Key — clients are more likely to be satisfied
goals/recommendations are both realistic and clear
Related Principles and Rules . Principle 7 . Rule 1.2 material element . Rule 3.3 material deficiencies . Rule 3.4 supervision • Rule 4.1 treat fairly
Domain 8 (10% of Exam)
Practicing within Professional and
Regulatory Standards
Know the Principles and the Rules of Conduct
and
Do The Right Thing!
Principles of the
CFP Board Code of Ethics
Integrity (#1) International Objectivity (#2) Olympic Competence (#3) Committee (IOC is competent) Fairness (#4) Fire Confidentiality (#5) Company Professionalism (#6) Police Diligence (#7) Department (Fire and Police require confidentiality)
Use of Initials
Registered Investment Advisor
and
Certified Financial Planner
. R1A (prohibited) . C.F.P. (prohibited) . Registered Investment Advisor (ok) . CFP® (ok) . CERTIFIED FINANCIAL PLANNERTM (ok)
When can a CFP® licensee release
a client file to other persons?
- When an attorney or court subpoenas the file
- At the client’s request
- As a defense against charges of wrongdoing
Determining an Emergency Fund
Use 3 or 6 months if …
3 months. • Single with 2nd source of income • Married, both work • Married, only 1 spouse works, but have a 2nd source of income 6 months: • Single wage earner • Married, only 1 spouse works
Debt Management
Housing Expenses (PITI)
Total Monthly Debt
Consumer Debt
< 28% of gross income (PITI)
< 36% of gross income (total monthly debt)
< 20% of net income (consumer debt)
Current Ratio
Current Assets
Current Liabilities
Current Ratio: Current assets ± Current liabilities
Current Assets: Cash equivalents, marketable securites, accounts
receivable, inventory
Current Liabilities: Accounts payable, credit card debt, taxes payable
Federal Securities Acts
Securites Act of 1933 - Required that new issues purchasers be provided
with a detailed prospectus before a purchase was completed.
Securites Act of 1934 - Passed to regulate the secondary market (trading
of issued securities). This act also created the SEC to enforce securities
laws.
Investment Company Act of 1940 - Authorized the SEC to regulate unit
investment trusts (UITs) and managed investment companies (closed-end
and open-end funds) plus variable products.
Securities Investors Protection Act of 1970 - Established the SIPC to
supervise securities firms that get into financial difficulties. The SIPC insures
investors against losses arising from the failure of a brokerage firm.
College Funding
Phase outs (married filing jointly):
• Educational Bonds ($113,950- 143,950)
• Lifetime($108K- 128K)
• American Opportunity ($160K- 180K)
Federal Reserve
Open Market Operations
Repo - Fed buys securities - expansionary/easy money policy
Reverse Repo - Fed sells securities - contractionaty/tight money policy
Gross Domestic Product
GDP
• Total dollar value of all goods and services produced within the US
ONLY
• GDP counts economic activity without regard to yearly price
fluctuations.
• Does NOT include any income generated outside the U.S. or
adjustments for foreign currencies
Business Cycle
National
Output
Expansion
Peak (business activity ages)
Recession (Contraction)
Trough
Time
Recession vs. Depression
Recession - Two consecutive quarters of economic decline (negative
GDP)
Depression - Six consecutive quarters of economic decline (negative
GDP)
Exceptions to Filing as an
Investment Adviser
• Banks that are not also investment companies
• Lawyers, accountants, teachers - advice is incidential
• Broker/dealers or registered reps whose performance is incidential
and who get no special compensation for advice
• Publishers of bona fide newspapers
• Those who give advice solely relating to U.S. government securities
Exemptions to Filing as an
Investment Adviser
• Adviser whose only clients are insurance companies
• Private adviser who during the previous 12 months had fewer than
15 clients
How does an Investment Adviser register with
the SEC?
- Initially, files the ADV Part I and II with the SEC
- Pays a minimum filing fee of $150
- RIA must submit Part I of ADV and Schedule I annually
National Association of Security Dealers (NASD)
Initial Registration Process
- The individual associates with a broker dealer
- Registers w/ NASD through broker/dealer on Form U-4
- Takes and passes appropriate exam
- Is issued a CRD Number (Central Registration System)
National Association of Security Dealers (NASD)
Key Examinations/Licenses
Series 6: mutual funds, UITs and variables (only new UITs)
Series 7: general securities (UITs on the secondary market)
Series 63: Uniform Securities Agent State Law Exam
Series 65: Uniform Investment Advisor Law Exam
Series 66: Uniform Combined State Law Exam (combines 63 and 65
exams)
Basic Components of a Legal
Contract as Applied to Insurance
- Offer and acceptance - Two parties: offerer and acceptor
- Consideration - Something of value (money)
- Legal object - legal in purpose
- Competent parties - principal must have legal capacity to execute
contracts
a. intoxicated adults have limited or no capacity to execute
contracts
b. minors have capacity to contract for necessities (food, clothing,
shelter) only - Legal form - contract must met requirements
Law of Agency
Insurance
Express authority: written, explicit direction from principal to agent
Implied authority: is that which the public believes the individual holds
and includes signage, rate books, etc. Implied authority is actual authority
that the agent has to carry out the principal’s business.
Apparent authority: arises out of negligence of the principal in allowing
the agent to appear to have the authority because of certain actions of the
agent in the past. This typically affects terminated agents.
Bankruptcy
Debts not cancelable by bankruptcy:
• Student loans, government loans, child support or alimony.
• Wage withholding,FICAtaxes, income tax is due
Rollovers from qualified plans are exempt (unlimited), and non-rollover
IRAs up to $1 million are exempt.
