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General Principles / Conduct Flashcards

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
# Financial Planning Process Which step(s) are you collecting qualitative and quantitative information?
**Step 1**: Understanding the client's personal and financial circumstances AND **Step 7**: Monitoring progress and updating
26
# 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?
30 days to acknowledge (in writing) 45 days to gather documents
27
# CFP Procedural Rules A written reproach of the Respondent’s behavior published in a press release.
Public Letter of Admonition
28
# CFP Procedural Rules How long to respond to a written complaint?
14 days
29
# CFP Procedural Rules An unpublished written reproach mailed by the DEC to a censured Respondent.
Private Censure
30
# CFP Procedural Rules CFP material changes and disciplinary updates (adverse conduct) and bankruptcy must be disclosed to clients within how many calendar days?
90 days
31
# CFP Procedural Rules What happens when a CFP respondent is suspended? What is minimum and maximum suspension?
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
32
After a CFP professional engages in adverse conduct, the CFP professional must provide written notice to CFP Board within how many days?
30 days
33
GDP Formula
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
Real GDP **includes**...
* 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
Real GDP **excludes**...
* 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
The debt resolution rule forces you to repay all your outstanding debt obligations every...
4 years ## Footnote 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
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?
Parents
38
# Financial Aid Distributions that are added back as *income* on the student's financial aid application
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
FDIC coverage limits by account ownership category
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
Chapter 7 bankruptcy
**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
Chapter 13 bankruptcy
**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. ## Footnote 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
# Consumer Protection Law Which law protects an individual's right to know the costs and terms of their credit?
Consumer Credit Protection Act
43
# Consumer Protection Law If a potential borrower is denied credit, which law ensures that an accurate credit report is provided?
Fair Credit Reporting Act
44
FICO Score categories
1. Payment history (35%) 2. Amounts owed (30%) 3. Length of credit history (15%) 4. New credit (10%) 5. Credit mix (10%)
45
FICO score rating
< 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. ## Footnote start with 57 - poor 58 to 67 (9) - fair 67 to 74 (7) - good 74 to 79 (5) - very good 80 - exceptional
46
Another name for an interest-bearing checking account
NOW account (negotiable order of withdrawal)
47
________ are an association of cooperating physicians and hospitals, agree to provide employers with health care services for their employees at discount prices.
PPO
48
Education Funding calculation
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. ## Footnote If child is offered a scholarship, subtract from the big pile of money, then calculate Step 3.
49
# Homeowners Insurance HO-8
Modified Coverage For very old or historical homes. Less coverage as it’s difficult to replace.
50
# Homeowners Insurance HO-4
Renter's Contents only + liability. ## Footnote Remember "4 rent"
51
# Homeowners Insurance HO-6
Condo/ Co-op owners “studs in” - not the roof
52
Home Buying Ratio: Front-end DTI
Housing Cost Ratio (aka Mortgage Debt Service Ratio) PITI ÷ Gross Household Income **Target ≤ 28%**
53
Home Buying Ratio: Back-end DTI
Total Cost Ratio (aka Total Obligation Ratio) PITI + all other debt (credit card debt, student loans) ÷ Gross Household Income. **TARGET ≤ 36%**
54
Consumer Debt Ratio
Monthly Consumer Debt (Non-housing) ÷ *Net* Household Income **Target ≤ 20%**
55
# Expected Family Contribution (EFC) ASSETS owned by **parents** and **students** are included in the Expected Family Contribution (EFC) amount at a maximum rate of...
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
# Expected Family Contribution (EFC) INCOME from parents and students are included in the Expected Family Contribution (EFC) amount at a maximum rate of...
Parents: **22% to 47%** Students: **50%** ## Footnote 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
# Financial Need for college Financial need formula
Cost of Attendance minus the EFC. EFC = Parent Income (btw 22 - 47%) + Student Income (50%) + Parent Assets (up to 5.64%) + Student Assets (20%) ## Footnote Student income included for amount over the ‘protected amount’ ($7600 for 2023-24 academic year).
58
Your car had a collision with a deer. What type of property damage will cover that claim?
Comprehensive ## Footnote 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
# Umbrella Policy Does an umbrella policy extend coverage for personal liability such as libel or slander?
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. ## Footnote Extends to boats or ATVs as well.
60
What valuation is used for assets on a personal balance sheet?
FMV
61
Which financial statement tracks values over a period of time, Statement of Financial Position or Statement of Cash Flows?
A statement of cash flows tells you where your money has come from and where it has gone over a period of time.
62
On the Statement of Financial Position, what are the types of ‘Invested Assets’?
Common stocks Bonds Mutual funds ETFs **Cash value of life insurance** **Deferred annuities**
63
# Market Structure Legislation Which piece of legislation covers the NYSE?
**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
# Market Structure Legislation Which piece of legislation requires registration of IPOs?
Securities Act of 1933
65
# Market Structure Legislation Which piece of legislation extended securities laws to mutual funds?
Investment Company Act of 1940
66
# Market Structure Legislation Which piece of legislation requires registration for and regulates activities of Investment Advisers?
Investment Advisers Act of 1940
67
Lifetime Learning Credit
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
529 ABLE Plans
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
# Supply & Demand A *decrease* in the price of one product will cause an increase in the demand for the other.
**Complements** When peanut butter goes on sale, the demand for jelly will increase.
70
# Supply & Demand A increase in the price of one product will cause an increase in the demand for the other.
**Substitutes** If the price of oil, gas, or propane suddenly rose sharply, the demand for firewood would most likely increase.
71
The rule of thumb is to hold liquid assets equal to how many months of your take-home pay?
3 to 6 months
72
# Retirement Funding Inflation-adjusted Rate of Return (Real Interest Rate or Real Rate of Return)
[(1 + investment return) ÷ (1+ inflation rate) -1] x 100
73
# Calculations When to use BEG mode
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
# Consumer Protection Laws Which law requires lenders to disclose the cost of consumer credit, applicable charges, terms and conditions?
**Truth in Lending Act** It requires that the consumer be provided with the total finance charge and annual percentage rate on the loan.
75
# Consumer Protection Laws Which law provides individuals with the right to have corrections made to credit-related errors?
The Fair Credit Billing Act
76
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?
**Price inelasticity** When demand does not react to significant changes in price, it is considered price inelasticity.
77
# Fitness Standards What happens if a CFP certificant has a felony conviction for non-violent crimes (including perjury) within the last five years?
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
Which of the following only applies to Respondents who are currently not CFP professionals? Temporary Bar Permanent Bar
Temporary Bar and Permanent Bar status only applies to Respondents that are not currently CFP professionals.
79
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?
Conduct deemed unacceptable. The individual would be *permanently* barred from receiving CFP Certification.
80
The Fitness Standards for CFP certification apply to ....
They apply to both candidates for CFP certification, as well as *professionals eligible for reinstatement* (PERs).

CFP Exam (6 decks)

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