GP Flashcards
Are Attorneys exempt from registering as in investment advisor?
Yes if investment advice is incidental to their practice
Is lump sum punitive damages settlement for wrongful death tax free
Yes, tax free
Can client funds be commingled in a common client investment account?
No, checks must be payable to broker/dealer/custodian and not the financial planning firm
Which industry outperforms when economy passes through trough into recovery?
Auto sales historically lead the business cycle into expansion
Financial Planner makes recommendation to buy a stock based on gut feeling with no research. What are they guilty of?
Negligence (unintentional tort), tort, and violation of fiduciary responsibility
What is included in emergency fund?
3 or 6 months of fixed and variable expenses (not taxes).
5 Basic Components of legal contract (insurance)
1) Offer and Acceptance
2) Consideration
3) Legal Object/Purpose
4) Competent parties
5) Legal form
3 Type of Agency/Authority (Insurance)
1) Express Authority- written, explicit from principal to agent
2) Implied Authority- public believes individual holds
3) Apparent Authority- agent has been allowed to appear to have authority and is negligent
5 Obligations not cancelable by Bankruptcy
Student loans
Government Loans
Child Support
Alimony
Taxes
Heuristics
Experiences and biases that can facilitate problem solving and probability judgments. Generalizations that can result in inaccurate or irrational conclusions
2 Examples of Heuristics
“Trial and error” and “rules of thumb”
Behavioral Finance
Study of how psychology affects finance
Anchoring
Becoming attached to specific price as the real value
Attachment Bias
Holding investment for emotional reasons
Endowment Bias
Feeling an asset is more valuable and special since it’s yours
Cognitive Dissonance
Reconciling two opposing beliefs
Confirmation Bias
Accept information that confirms position, reject info that does not support
Diversification Errors
Investors diversify evenly across all options presented to them
Fear of Regret
Taking no action rather than risk making wrong choice
Financial Infidelity
Couples or partners being dishonest with finances
Gambler’s Fallacy
A random event is likely to happen following a series of events
What is Herd Behavior
Individuals mimic actions of larger group
Hindsight Bias
Thinking we understand/ should have predicted past event
Inappropriate Extrapolation
Assuming recent events / performance will continue indefinitely
Prospect Theory
Losses have much greater negative impact than similar gain will have positive
Mental Accounting
Looking at sums of money different, depending on source or intended use
Outcome Bias
Made a decision based on desired outcome rather than probability of that outcome
Overconfidence
Placing too much emphasis on own abilities
Overreaction
Investors emotionally react towards new market information
Self-Affirmation Bias
Belief that when something goes right it is because you are smart and made the right decision. If it goes bad, it’s someone else’s fault or bad luck
Status Quo Basis
Investor does nothing when action is called for
4 Money Scripts
Money Avoidance
Money Worship
Money Vigilance
Money Status
Framing Effect
Makes decisions depending on how options are presented (positive or negative)
Money Illusion
People view wealth in nominal dollars rather than real terms including inflation
RIA or Registered Investment Advisor?
RIA is prohibited
C.F.P or CFP®
C.F.P is prohibited
When can CFP release client file? (3)
When attorney or court subpoenas file
At client’s request
As a defense against charges of wrongdoing
Max Housing Expense (PITI)
28% of Gross
Max Total Monthly Debt
36% of Gross
Max Consumer Debt
20% of Net
Current Ratio
Current Assets / Current Liabilities
Current Assets (4)
Cash equivalents
Marketable Securities
Accounts Receivable
Inventory
Current Liabilities (3)
Accounts Payable
Credit Card Debt
Taxes Payable
Securities Act of 1933
Required that new issue purchasers be provided with a detailed prospectus before purchase
Securities Act of 1934
Regulate Secondary market, created SEC.
Investment Company Act of 1940
SEC to regulate Unit Invest Trusts, Managed Investment Companies, and Variable Products
Securities Investors Protection Act of 1970
Established SIPC to supervise securities firms, insures investors against losses from failure of brokerage firm
Max mortgage for deductible interest
$750K joint
$375k single
529 lump sum
$85,000
529 uses
$10k/ year for K-12
$10k student loans (lifetime)
Federal Reserve Repo
Fed buys securities
Expansionary/ Easy Money
BEST
Buy/ Expand Sell/Tighten
Federal Reserve Reverse Repo
Fed sells securities
Contractionary/ tight money
BEST
Buy/Expand Sell/Tighten
GDP
Total dollar value of all goods and services produced within US only
Business Cycle (5 parts)
Expansion
Peak
Recession/ Contraction
Trough
Recovery/Expansion
Recession & Depression
Recession- Two Consecutive quarters of economic decline (negative GDP)
Depression- Six consecutive quarters of economic decline (negative GPD
Exceptions to filing as Investment Advisor (BLAT)
Banks that are not investment companies
Lawyers
Accountants
Teachers
Exemptions to filing as Investment Advisor (2)
Only clients are insurance companies
Family Office
How does Investment Advisor Register with SEC
File ADV part I and II with SEC
Pay $150 fee
File ADV part I and Schedule one annually
How does Investment Advisor Register with FINRA
Files Form U-4 thru Broker/dealer
Takes Exams
Issued CRD Number
FINRA Series 6
Mutual funds, UITs (new only), and variables
FINRA Series 7
General Securities and all UITS
FINRA Series 63
Uniform Securities Agent State Law exam
FINRA Series 65
Uniform Investment Advisor Law exam
FINRA Series 66
Combines 63 and 65
Steps to calculate amount needed to save for education (3):
1: Solve for FV of 1 year tution adjusted for inflation (end mode)
2: Solve for PV of 4 years tuition (PMT) using after inflation rate and 4 (N) (begin mode)
3 Solve for PMT using amount needed from step 2 (end mode)
