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CFP Exam > General Principles / Conduct > Flashcards

General Principles / Conduct Flashcards

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1
Q

Behavioral Finance

Which bias occurs when we ask our coworkers for investment advice and make an allocation based on the average of that survey?

A

Herd mentality
aka Bandwagon Effect

Because we seek comfort in groups / numbers.

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2
Q

Behavioral Finance

An approach to problem-solving that employs gut feel to approximate outcomes is known as what?

A

Heuristic

Attempting to reach a short-term goal or approximation through rules of thumb, educated guesses, trial & error.

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3
Q

Behavioral Finance

Can make investors focus more on the current events, leading to faulty predictions that this is always how it will always be.

A

Recency bias

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4
Q

Behavioral Finance

Which bias leads investors to sell winners too quickly and hold on too long?

A

Disposition effect

People seek pride and avoid regret. Selling winners too quickly confirms correct choice and holding losers too long avoids confirming incorrect choice.

Ron

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5
Q

Behavioral Finance

Which bias is an investor exhibiting if their stock drops after purchasing, yet they still think it’s worth what they paid and the market is wrong?

A

Anchoring

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6
Q

Behavioral Finance

People with limited competence in a particular domain overestimate their abilities.

A

Dunning & Kruger Effect

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7
Q

Behavioral Finance

People suffer more greatly from losses than they benefit from gains.

A

Prospect theory
or Loss Aversion

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8
Q

Behavioral Finance

Can lead to exuberance, which can create market bubbles. People can be convinced of trends or patterns that are not actually there.

A

Optimism

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9
Q

Behavioral Finance

Individuals are prone to poor or irrational decision-making when engaging in spending and investment behavior.

A

Mental accounting

AKA ‘money jar mentality’ where an individual mentally accounts for various income and expenses. Since things are not systematic and documented, it can lead to poor financial decision-making.

Can lead to naive diversification.

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10
Q

Behavioral Finance

An employee recently started with a new company and decides to roll $100,000 from their last company’s 401(k) into the retirement plan offered at the new company. There are ten investment options in the plan and they evenly distribute $10,000 into each. What is this an example of?

A

Naive diversification

The assumption that simply investing in enough unrelated assets will reduce risk sufficiently to make a profit.

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11
Q

Behavioral Finance

A client is a former executive at a technology company resulting in a large concentration in that company’s stock. The client is very apprehensive to sell, despite the concentration risk, as they know good things are about to happen. This is an example of which bias?

A

Familiarity bias

The tendency for individuals to be more comfortable with the familiar, dislike ambiguity, and look for ways to avoid the unknown. It could be INDUSTRY-based, based on an individual’s INTERESTS, based on the COMPANY they are employed by, etc.

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12
Q

Behavioral Finance

Choice, task familiarity, information and active involvement all lead to what?

A

Overconfidence

Leads people to overestimate their knowledge, underestimate risks and exaggerate their ability to control events and predict outcomes.

Factors leading to overconfidence:
:: Choice
:: Task familiarity
:: Information (confirmation bias)
:: Active involvement

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13
Q

Behavioral Finance

Which bias is being demonstrated when an investor takes less risk based on past experiences?

A

Snakebite effect

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14
Q

Behavioral Finance

Which bias is being demonstrated when investors have experienced a gain and have chosen to take more risk?

A

House money effect

They fail to fully consider the new money as real or their own; this concept is related to mental accounting.

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15
Q

Behavioral Finance

When an investor experiences a loss in the market, yet decides to take on significantly more risk, which bias are they demonstrating?

A

Break-evenitis or Break-even Effect

Having lost some money, many financial decision-makers are willing to take a double-or-nothing gamble in the hopes of either avoiding losses or recouping realized losses.

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16
Q

An instance of wrongdoing that leads to civil legal liability.

A

Tort

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17
Q

Reverse mortgage loan structure options

4 options

A
  • A lump-sum payout,
  • A fixed monthly payment for life,
  • A credit line account, OR
  • A combination of these options
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18
Q

Fed’s 3 primary tools

A
  1. Discount rate: The rate at which member banks borrow from the government.
  2. Reserve requirement: Percentage of deposits that must be held on reserve.
  3. Open market activities: Fed buys and sells securities in the open market.
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19
Q

COBRA

Maximum coverage continuation period for termination or reduction in hours

A

18 months

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20
Q

COBRA

Maximum continuation coverage for an employee or qualified beneficiary who meets the Social Security definition of disability.

A

29 months

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21
Q

COBRA

How many EEs in the prior year is the ER required to offer COBRA? How are part-time EEs counted?

A

20 employees

Part-time EEs count as 1/2 in the calculation (10 part-time EE’s = 5 full-time EE’s)

Cost cannot exceed 102% of the costs paid by the EE & ER.

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22
Q

COBRA

What is the maximum extended period for COBRA?

A

36 months

Qualifying Events for Dependents:
* Employee’s death
* Divorce / Legal separation
* Medicare eligibility
* Child no longer dependent

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23
Q

Sales-Related Compensation includes…

A
  • Revenue-sharing
  • Referral or solicitor fees
  • Spreads
  • Transaction fees
  • 12b-1 fees
  • Commissions
  • Trailing commissions
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24
Q

Financial Planning Process

What are the 7 steps?

A

“Ukuleles In A Dive-bar Presenting Iron Maiden”

Understanding the client’s personal and financial circumstances

Identifying and selecting goals

Analyzing the client’s current course of action and potential alternative course(s) of action

Developing the financial planning recommendations

Presenting the financial planning recommendations

Implementing the financial planning recommendations

Monitoring progress and updating

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25
Q

Financial Planning Process

Which step(s) are you collecting qualitative and quantitative information?

A

Step 1: Understanding the client’s personal and financial circumstances
AND
Step 7: Monitoring progress and updating

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26
Q

CFP Procedural Rules

At the commencement of an investigation, a Respondent must deliver to CFP Board Counsel a document acknowledging receipt of the Notice of Investigation within how many days from delivery to Respondent of the Notice of Investigation?

When asked to present documents, written statements and present stipulations related to a hearing, how many days do you have to respond?

A

30 days to acknowledge (in writing)

45 days to gather documents

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27
Q

CFP Procedural Rules

A written reproach of the Respondent’s behavior published in a press release.

A

Public Letter of Admonition

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28
Q

CFP Procedural Rules

How long to respond to a written complaint?

A

14 days

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29
Q

CFP Procedural Rules

An unpublished written reproach mailed by the DEC to a censured Respondent.

A

Private Censure

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30
Q

CFP Procedural Rules

CFP material changes and disciplinary updates (adverse conduct) and bankruptcy must be disclosed to clients within how many calendar days?

A

90 days

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31
Q

CFP Procedural Rules

What happens when a CFP respondent is suspended?

What is minimum and maximum suspension?

A

Prohibited from using the CFP certification marks, stating or suggesting that they are a CFP professional, or holding out to the public as being certified by CFP Board.

Minimum 90 days; Maximum 5 years

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32
Q

After a CFP professional engages in adverse conduct, the CFP professional must provide written notice to CFP Board within how many days?

A

30 days

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33
Q

GDP Formula

A

Y = C + I + G + (X - M)

C is consumer spending

I is investment made by industry

G is government spending

X-M is excess of exports over imports (aka Net Exports or NE)

34
Q

Real GDP includes…

A
  • Market value of all final goods and services produced within an economy
  • Income of foreigners working in the U.S.
  • Profits that foreign companies earn in the U.S.
35
Q

Real GDP excludes…

A
  • Imports
  • Inflation
  • Transactions where money changes hands but no new goods or services are produced
  • Income of U.S. citizens working abroad
  • Profits earned by U.S. companies in foreign countries
36
Q

The debt resolution rule forces you to repay all your outstanding debt obligations every…

A

4 years

The reasoning of this rule is that consumer credit should be short-term in nature. If it lasts over 4 years, it’s not short-term.

37
Q

College savings plans, Coverdell ESAs, and 529 accounts held in the parent’s names or dependent child’s name are considered assets belonging to whom on the FAFSA?

A

Parents

38
Q

Financial Aid

Distributions that are added back as income on the student’s financial aid application

A

Retirement plan distributions (Roth IRA and Traditional IRA have no penalty, though.)

Student-owned Coverdell ESA (CESA) distribution

Distributions for accounts owned by others (Grandparents)

39
Q

FDIC coverage limits by account ownership category

A

Step 1: Sort out the account categories per bank:
* Single accounts
* Joint accounts
* IRAs
* Revocable Trusts

Step 2: aggregate total amount per category
Remember that Joint accounts are $250k per co-owner and Revocable Trust accounts are $250k per owner per unique beneficiary

40
Q

Chapter 7 bankruptcy

A

Liquidation

Eliminates a consumer’s debt by having a trustee sell some of the debtor’s personal property to repay their creditors.

Most debts are discharged after 115 days from the date of filing for Chapter 7, but certain obligations must still be repaid:
* child support,
* alimony,
* income taxes less than three years past due,
* student loans, and
* secured debt.

Stays on credit report for 10 years.

41
Q

Chapter 13 bankruptcy

A

Repayment (the wage-earner plan)

  • Allows debtors to keep their personal assets, but they are obligated to repay their debt in full over a period.
  • Can stop a foreclosure.
  • No debts are forgiven.

To be eligible to file for Chapter 13 bankruptcy, an individual must have no more than $419,275 in unsecured debt, such as credit card bills or personal loans. They also can have no more than $1,257,850 in secured debts, which includes mortgages and car loans. Both unsecured debts and secured debts must be paid off over a period under Chapter 13 bankruptcy. No debts are forgiven.

42
Q

Consumer Protection Law

Which law protects an individual’s right to know the costs and terms of their credit?

A

Consumer Credit Protection Act

43
Q

Consumer Protection Law

If a potential borrower is denied credit, which law ensures that an accurate credit report is provided?

A

Fair Credit Reporting Act

44
Q

FICO Score categories

A
  1. Payment history (35%)
  2. Amounts owed (30%)
  3. Length of credit history (15%)
  4. New credit (10%)
  5. Credit mix (10%)
45
Q

FICO score rating

A

< 579 = Poor. Risky borrower.

580 to 669 = Fair. Many lenders will still approve loans.

670 to 739 = Good. Most lenders consider this a good score.

740 to 799 = Very Good. Dependable borrower.

800+ = Exceptional borrower.

start with 57 - poor
58 to 67 (9) - fair
67 to 74 (7) - good
74 to 79 (5) - very good
80 - exceptional

46
Q

Another name for an interest-bearing checking account

A

NOW account (negotiable order of withdrawal)

47
Q

________ are an association of cooperating physicians and hospitals, agree to provide employers with health care services for their employees at discount prices.

A

PPO

48
Q

Education Funding calculation

A
  1. Step 1 (INFLATING TUITION): Inflating the current tuition cost to its value on Day 1 of College. Use education inflation rate for i (not CPI). Time (n) is college age (assume 18) minus the student’s current age. PV is cost of annual tuition as a negative value (spending the money). PMT is 0. Solve for FV.
  2. Step 2 (COST of BIG PILE of MONEY): Calculating the total cost of college standing at the dorm on Day 1 (big pile of money). Tuition is due at the beginning of the semester, so use BEG mode. Use the inflation-adjusted rate (real interest rate), which uses the education inflation rate (use 4 decimal places). Step 1 answer becomes PMT (as a negative value). n is 4 unless told differently. FV = 0. Solve for PV.
  3. Step 3 (INVESTING): How much the client needs to invest as a lump sum or payment stream. Step 2 answer becomes FV. Use the investment return rate (because you already adjusted for inflation in Step 1). RTFQ as it may ask for monthly, annually or a lump sum.
    Monthly = use g key and solve for PMT.
    Annually = solve for PMT.
    Lump sum = solve for PV.

If child is offered a scholarship, subtract from the big pile of money, then calculate Step 3.

49
Q

Homeowners Insurance

HO-8

A

Modified Coverage

For very old or historical homes. Less coverage as it’s difficult to replace.

50
Q

Homeowners Insurance

HO-4

A

Renter’s

Contents only + liability.

Remember “4 rent”

51
Q

Homeowners Insurance

HO-6

A

Condo/ Co-op owners

“studs in” - not the roof

52
Q

Home Buying Ratio: Front-end DTI

A

Housing Cost Ratio (aka Mortgage Debt Service Ratio)

PITI ÷ Gross Household Income

Target ≤ 28%

53
Q

Home Buying Ratio: Back-end DTI

A

Total Cost Ratio (aka Total Obligation Ratio)

PITI + all other debt (credit card debt, student loans) ÷ Gross Household Income.

TARGET ≤ 36%

54
Q

Consumer Debt Ratio

A

Monthly Consumer Debt (Non-housing) ÷ Net Household Income

Target ≤ 20%

55
Q

Expected Family Contribution (EFC)

ASSETS owned by parents and students are included in the Expected Family Contribution (EFC) amount at a maximum rate of…

A

Parents: 5.64%
Students: 20%

College savings plans, Coverdell ESA and 529 accounts held in the parent’s or dependent child’s name are reported as parental assets on the FASFA.

56
Q

Expected Family Contribution (EFC)

INCOME from parents and students are included in the Expected Family Contribution (EFC) amount at a maximum rate of…

A

Parents: 22% to 47%
Students: 50%

Student income included for amount over the ‘protected amount’ ($7600 for 2023-24 academic year).

Parent’s countable income ranges from 22% to a maximum inclusion rate of 47% fo EFC purposes.

57
Q

Financial Need for college

Financial need formula

A

Cost of Attendance minus the EFC.

EFC = Parent Income (btw 22 - 47%) + Student Income (50%) + Parent Assets (up to 5.64%) + Student Assets (20%)

Student income included for amount over the ‘protected amount’ ($7600 for 2023-24 academic year).

58
Q

Your car had a collision with a deer. What type of property damage will cover that claim?

A

Comprehensive

The exam question will likely use the ‘collision’ phrase to throw you off but it is in fact comprehensive as collision does not cover when you strike animals.

59
Q

Umbrella Policy

Does an umbrella policy extend coverage for personal liability such as libel or slander?

A

Yes. PLUP covers the same bodily injury and property damage exposures as the underlying policies but also typically extends coverage for personal liability (such as libel or slander). And it typically covers the cost of defense.

Does not extend coverage for business interests of the insured.

Extends to boats or ATVs as well.

60
Q

What valuation is used for assets on a personal balance sheet?

A

FMV

61
Q

Which financial statement tracks values over a period of time, Statement of Financial Position or Statement of Cash Flows?

A

A statement of cash flows tells you where your money has come from and where it has gone over a period of time.

62
Q

On the Statement of Financial Position, what are the types of ‘Invested Assets’?

A

Common stocks
Bonds
Mutual funds
ETFs
Cash value of life insurance
Deferred annuities

63
Q

Market Structure Legislation

Which piece of legislation covers the NYSE?

A

Securities Act of 1934

Also requires companies with previously issued securities to keep information current.

And requires brokers and dealers to register with the SEC.

64
Q

Market Structure Legislation

Which piece of legislation requires registration of IPOs?

A

Securities Act of 1933

65
Q

Market Structure Legislation

Which piece of legislation extended securities laws to mutual funds?

A

Investment Company Act of 1940

66
Q

Market Structure Legislation

Which piece of legislation requires registration for and regulates activities of Investment Advisers?

A

Investment Advisers Act of 1940

67
Q

Lifetime Learning Credit

A

Unlimited years and does not need to be in a degree program.

Covers 20% of the first $10,000 of the qualified educational expenses you paid during the taxable year for all individuals.
Total per return is $2000 max.

MAGI phaseouts.

Non-refundable.

68
Q

529 ABLE Plans

A

No gift-splitting.

Total annual contributions are limited to annual gift tax exclusion ($17,000 for 2023), including rollovers from a 529.

Balances at or below $100,000 are not reported as an asset on FAFSA.

69
Q

Supply & Demand

A decrease in the price of one product will cause an increase in the demand for the other.

A

Complements

When peanut butter goes on sale, the demand for jelly will increase.

70
Q

Supply & Demand

A increase in the price of one product will cause an increase in the demand for the other.

A

Substitutes

If the price of oil, gas, or propane suddenly rose sharply, the demand for firewood would most likely increase.

71
Q

The rule of thumb is to hold liquid assets equal to how many months of your take-home pay?

A

3 to 6 months

72
Q

Retirement Funding

Inflation-adjusted Rate of Return (Real Interest Rate or Real Rate of Return)

A

[(1 + investment return) ÷ (1+ inflation rate) -1] x 100

73
Q

Calculations

When to use BEG mode

A

Remember ‘ADLER’

AD = annuity due
L = lease payments
E = education payments are due to college before classes start
R = retirement needed at day 1 of retirement

Any type of loan would be calculated in END mode. You receive the loan and do not have to make your first payment for one month, so you’re technically paying for the prior month. This includes mortgages, auto loans, etc.

74
Q

Consumer Protection Laws

Which law requires lenders to disclose the cost of consumer credit, applicable charges, terms and conditions?

A

Truth in Lending Act

It requires that the consumer be provided with the total finance charge and annual percentage rate on the loan.

75
Q

Consumer Protection Laws

Which law provides individuals with the right to have corrections made to credit-related errors?

A

The Fair Credit Billing Act

76
Q

Due to many geopolitical events, gasoline prices in the U.S. have more than doubled. During the same period, Americans’ driving habits have not changed. This scenario is an example of price elasticity or price inelasticity?

A

Price inelasticity

When demand does not react to significant changes in price, it is considered price inelasticity.

77
Q

Fitness Standards

What happens if a CFP certificant has a felony conviction for non-violent crimes (including perjury) within the last five years?

A

It is a presumptive bar from certification unless the individual petitions the Disciplinary and Ethics Commission (DEC) and the DEC grants the petition or permits the individual to reapply for certification later.

78
Q

Which of the following only applies to Respondents who are currently not CFP professionals?

Temporary Bar
Permanent Bar

A

Temporary Bar and Permanent Bar status only applies to Respondents that are not currently CFP professionals.

79
Q

If a Candidate for CFP Certification had a prior felony conviction for embezzlement, how would CFP Board categorize their conduct using the Fitness Standards guidelines?

A

Conduct deemed unacceptable.

The individual would be permanently barred from receiving CFP Certification.

80
Q

The Fitness Standards for CFP certification apply to ….

A

They apply to both candidates for CFP certification, as well as professionals eligible for reinstatement (PERs).

CFP Exam (6 decks)

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