General Principles Flashcards
Quantitative vs Qualitative
Quantitative - Assets, Liab., Cash flows, copies of trust, gifting, financial advisors
Qualitative - attitude, opinion, desire, goal and objectives, health, interest and hobbies, risk tolerance
What are the domains?
EGADCIMP
Establish,Gather, Analyzing, Develop, Communicate, implement, monitor, Practice
Principles of Fin. Planner Responsibilities
IOCFCPD = Integrity, Objectivity, Competence, Fairness, Confidentiality, Professionalism, Diligence
Client’s Responsibiltiy
Active Role in their financial future, Realistic goals, Treat Planner professinally, Share relevant fin information, Provide contact info of other advisers to create overview.
Candidates
Certificants
Registrants
Candidate: registered to take the exam
Certificant: have been certified in the past and retian the right to reinstate their cert
Registrant: no current certified by the board in the past and have entitlement, to potentially use the cfp marks
Use of Initials
OK
John Smith, CFP(r)
CERTIFIED FINANCIAL PLANNER (tm)
Conflict of interest
Disclosure, at a min of the relationship of the broker dealer to the client. Also, if insurance license shoudl disclose that relationship to client.
Commingle Client Funds Permitted/not permitted
Permitted- subject to compliance, accurate records are maintained for each client. ok in a common client investment account
Not Permitted - commingled client funds with funds of the financial planning firm.
Loan b/t board designee client rules and recognized exceptions
ok if client is a family member, in the normal business activity, terms and conditions are fair and reasonable,
fee vs. fee only
fee: hourly, fixed, or flat fees, % fee, performance base fee
fee only: compensation from all clients derived solely from fees
cash/cash equivalents
cash, checking, money market mutual funds, savings accts, cds close to maturity, laddered cd
Investment Assets
LI cash value pension, IRA Roth IRA Real estate collectibles VA, Fixed annuity Business interest, Mutual funds, stocks, bonds
Use Assets
Home, personal property, collectibles for personal enjoyment, vacation home or condo, automobiles, or recreational vehicles
Liabilities
credit cards
Personal Loans
auto loans
mortgage loans
components of cash flow
inflow - outflow = savings
Outflow - fixed outflows, variable outflows, taxes
business financial statements
measured value of a business
balance sheet, income statement, statement of cash flow
book value = assets-liabl= net worth
pro forma statement
expectations of future result
est of income over expenses
projected excesss
Emergency Fun Invested
checking account = exclude monthly necessary expenses)
money market acct
CD if close to maturity, less than 90 days
saving accts
laddered CDs less than 6 month
establishing an emergency fund
3 mo vs 6 mo
3 mo = single with second source of income, married and both work, married only 1 work and spouse has send source of income
6 mo = single wage earner, married only 1 spouse works
debt mgmt ratios:
housing PITI
Total Moly 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 = CA-CL
Current Assets = cash equivalents, marketable securities, account receivable, inventory
Current Liab = Acct Payable, credit card debt, taxes payable
Begin Mode vs End mode
Begin Mode: College Education, Retirement BENEFITS, Family needs
End Mode: 401K deferrals, Profit sharing contributions, Bond interest, Mortgage Payments
How Funds are insured
Single accounts - 250,000
Jt accts - 250,000 per person
Revocable Trust - 250,00
IRA and Keoghs - 250,000
Federal Securities Act
Securities Act 1933 - new issues purchasers, prospectus before purchase
Securities Act 1934 - secondary market, creates the SEC to enforce securities laws
Inv Co act f 1940 - Authorizes the SEC to reg UIT and inv companies close and open end funds + variable products
Securities Investors Act 1970 - SIPC
Education needs analysis
determine. ..
1) how much the 1st year of college will cost
2) amount tat must be available when child is 18
3) how muhc the parent needs to save either lump sum pv or yearly pmt
529 ownership
parent, grandparent, single with no dependents, trust
successor owner 529 plans
if successor owner is a trust, the original owner can control disposition of the trust through the terms of the trust.
Change of the 529 bene
owner can change bene to almost anyone… a long list. spouse, 1st cousin, uncle, sibling.
529 rollover
if rolled to a beneficiary in a generation below that of the current beneficiary, rollover will be treated as a taxable gift.
if rollover stays in the same generation there is no taxable gift.
Coverdell ESA
2k per year to benefit each child under age 18
not deductible
earning accumulate tax def
income limitations - single (100,000) Joint (200,000)
UTMA vs. UGMA accounts
UGMA - cash type investment, transfer to child at 18/21, gift tax excllustion (13,000), subject to kiddie tax over 24 years, assets count against Fin aid
UTMA - cash +real estate+LP, controlled by custodian until age 25 , same as above
Kiddie Tax
applies to kids who have not attained age 24 by year end
over 1900
-950 standard ded
additional 950 taxes at children’s rate of10%
Education Savings Bonds - EE bonds
purchased in parent’s name
can be put in UTMA, but won’t qualify for the education expense deduction. If redeemed for college, int is taxable
interest fully exempt from fed income tax only
AGI limitation to get full tax free status.
Financial Aid Options
Pell grant- Full time student, max 5,500
PLUS - non need based as anyone can apply
Perkins Loans - college decides on student need, borrow 4000/yr total 20,000
Stafford loan- loan limited needs based
Deductible alimony test
1) transfers of non cash items like property or loans = not alimony
2) pmts to 3rd party can if made by divorce agreement
3) pmts to maint property owned by the payor spouse an used by the payee don’t qualify
4) if payee spouse owns the policy on the life of the payor spouse the payment made by the payor will qualify as alimony, if made under divorce instrument
Child Support
not taxable to payee and non deductible by the payor
any amt tied to a contingency of occurrence f an event relating to a child it considered to be child support and not alimony
Monetary Winfalls
Structure Settlement = tax free pmt
Compensatory damage = generally tax free, int earned on award is taxable
Punitive Damages = tax free, wrongful death
annuity = fully taxable
prizes and awards = fully taxable
Economic Concepts
Fiscal policy - federal taxation and spending designed to level out the business cycle
Monetary Policy = Fed Reserve Board influences the growth of the money supply
Repo vs Reverse Repo
Repo - feb buys securities - expansionary / easy money policy
Reverse Repo- fed sells securities - contractionary / tight money policy
Recession vs Depression
Recession = 2 consecutive quarters of decline in Real GDP
Depression = severe or long recession (6 qtrs)
Inflation
Deflation
Stagflation
Inflation = rise in prices of good and services
Deflation = decline in prices of goods and services
Stagflation = combination of slow economic growth and high unemployement with rising prices
Business Cycle
expansion, peak, contraction/recession, trough, recovery/expansion
Yield Curve
the curve shows the market rates of interest for bonds of different maturities with the same credit rating.
the relationship b/t the int rate and the time to maturity of the debt for a given borrower in a given currency
buy vs lease/rent
Buy home Adv - tax ded for interest and property taxes cap gai on the sale of the home on the excess of the exclusion (500,000 MFJ)
Rent a home Adv - maybe lower than mort payment
higher tax bracket = greater adv to own home.
EXCEPTIONS to being required t filing as Investment Advisor…
Banks Lawyers Accountants Teacher - advice is incidental No compensation for advice newspaper gives advice only relating to U.S. govt securities
EXEMPTIONS to being required to filing as Investment Adivser
Advisers clients in one state
Adviser whose only clients are insurance companies
the family office
How does an Investment Advisor register with the SEC?
file form ADV part 1 and part 2 with the SEC
Pays fee of $150
submits part 1 adv and schedule I updates on an annual basis
FINRA Registration Process
formerly knows as NASD
anyone seeking to sell securities Associated with Broker/Dealer Reg with FINRA through B/D on form U-4 Pass exams Receives CRD #
FINRA key Licenses
6 - sell MF, UIT and Variable (only new UITs)
7 - sell all securities except commodities and certain options
63 - state law exam
65 - Inv Adv Law Exam
66 - Comb - securities agents and adviser rep
components of a legal contract - insurance
agreement - offerer and acceptor
consideration - something of value
competent parties - legal capacity not intoxicated
legal form- lawful purpose
agent vs broker
Agent - rep the insurance company
Broker - rep the client/insured
Law of Agency - insurance
express authority - written, explicit direction from principal to agent
Implied authority - agent to the public
apparent authority - negligence of the principal in allowing the agent appear to have authority b/c certain action of agent in the past.
Types of Bankruptcy
Chapter 11 - no source of income
Chapter 13 - reorganization, can keep the stuff
Chapter 7 debtor to claim federal or state exemptions
not cancelable - student loans, govt loans, child support or alimony
Fiduciary
Assets held in trust of a beneficiary
charged with the responsibility of investing money wisely
ex: executors of will and estates, trustee, underaged, or incompetent
If NPV of investment is 0 then …
IRR is equal to the interest rate
What is dollar weighted return?
-100,000 \+6000 \+7000 \+126,000 solve for IRR/yr
Phase out for
EE
UTMA/UGMA
EE= 109,000-139,000
UGMA/UTMA = 109,250-139,250…. the point is that these are close
ESA/Coverdell
eligible for …
elementary
secondary
college
100,000
60,000 assets grew by
30,000 saved out of earned income
what is the change in Liab?
10,000
Fiscal vs Monitary
Fiscal - Prez, tax legislation
Monetary changes - lower fed funds rate, bank reserve requirements,
bankruptcy - as it relates to education - Coverdell and 529?
protected from creditors if older than 2 years old
Register as and RIA in the state of domicile if….
under 100 Mil under mgment
RIA over 100 MIL
REG with SEC
Principles of the CFP Board
Integrity Objectivity Competency Fairness Communicate Professionalism Discipline
