HS300 Exam Questions Test 1 Flashcards
Question 1
Which step in the financial planning process comes before “Monitoring Progress and Updating”?
A) Presenting the Financial Planning Recommendation(s)
B) Analyzing the Client’s Current Course of Action and Potential Alternative Course(s) of Action
C) Understanding the Client’s Personal and Financial Circumstances
D) Implementing the Financial Planning Recommendation(s)
The correct answer is (D).
The final step before “Monitoring Progress and Updating” is “Implementing the Financial Planning Recommendation(s).”
Question 2
An example of internal data is
A) The current tax rates.
B) The expected inflation.
C) The client’s goals.
D) The planner’s education.
The correct answer is (C).
Tax rates and expected inflation rates are examples of external data. A planner’s education is neither internal nor external data.
Question 3
Which of the following is NOT considered a critical element of an engagement letter?
A) The agreed-upon scope of the work
B) The time horizon for the completion of the work
C) A description of the fees and costs
D) A summary of the planner’s assumptions
The correct answer is (D).
The scope of the work to be performed, the time horizon for the completion of the work, and a description of the fees and costs are all considered to be critical elements of an engagement letter.
Question 4
In what order should the steps in the financial planning process occur?
I. Understanding the Client’s Personal and Financial Circumstances
II. Presenting the Financial Planning Recommendation(s)
III. Developing the Financial Planning Recommendation(s)
IV. Analyzing the Client’s Current Course of Action and Potential Alternative Course(s) of Action
V. Monitoring Progress and Updating
VI. Implementing the Financial Planning Recommendation(s)
VII. Identifying and Selecting Goals
A) VII, II, I, IV, III, VI, V
B) VII, I, II, III, IV, V, VI
C) I, VII, IV, III, II, VI, V
D) I, II, III, IV, V, VI, VII
The correct answer is (C).
The order of the steps is as follows:
I. Understanding the Client’s Personal and Financial Circumstances
II. Identifying and Selecting Goals
III. Analyzing the Client’s Current Course of Action and Potential Course(s) of Action
IV. Developing the Financial Planning Recommendation(s)
V. Presenting the Financial Planning Recommendation(s)
VI. Implementing the Financial Planning Recommendation(s)
VII. Monitoring Progress and Updating
Question 5
During which step of the financial planning process would a planner prepare and analyze financial statements?
A) Identifying and Selecting Goals
B) Understanding the Client’s Personal and Financial Circumstances
C) Analyzing the Client’s Current Course of Action and Potential Course(s) of Action
D) Developing the Financial Planning Recommendation(s)
The correct answer is (C).
The planner would prepare and analyze financial statements in step 3 of the financial planning process, Analyzing the Client’s Current Course of Action and Potential Alternative Course(s) of Action.
Question 6
The benefits that accrue to a client from using a financial planner to prepare a financial plan include all the following EXCEPT:
A) The financial planner is subjective and knowledgeable.
B) A professional planner will include metrics in the financial plan.
C) A financial planner will identify risks in the process.
D) The use of a financial planner will provide the client with an increased awareness of opportunity costs.
The correct answer is (A).
The financial planner is objective, not subjective.
All of the other statements are correct.
Question 7
Which of the following stated goals of a client is the most workable for financial planning purposes?
A) To have adequate insurance protection
B). To enjoy vacations at various locations outside of the U.S.
C) To get out of debt
D) Of greatest importance, to save enough to pay $10,000 per year for 4 years of college tuition expenses for each of
my three children
The correct answer is (D).
A workable goal for financial planning purposes should be specific, prioritized, measurable, achievable, and realistic. Option (D) is the only choice that meets these criteria.
Question 8
Which of the following is the appropriate standard of conduct for a fiduciary?
A) Act in the brokerage firm’s best interest.
B) Act as a prudent investor.
C) Act on a best-effort basis.
D) Act in self-interest.
The correct answer is (B).
Answer choice (A) is incorrect because while acting in the firm's best interest is important, it may not be enough. You must be able to prove in court that you have done what a prudent investor would have done in that situation. Choice (C) is incorrect because acting on a best-effort basis may not be enough if a prudent investor would have done more. Choice (D) is incorrect because it is never appropriate to act in self-interest unless that happens to coincide with the client's interest.
Question 9
You are a relatively new financial planner. You have been working for an investment firm in the United States and have decided that you would like to add more credibility to your practice. Which of the following professional credentials would provide you with the most credibility since it is the oldest and best known?
A) CFP®
B) ChFC®
C) EFP
D) ICFP
The correct answer is (A).
The CFP® certification is the oldest and best-known certification for financial planners.
Question 10
Which of the following statements correctly describes the regulatory environment of the financial planning profession?
A) A comprehensive financial planner may be subject to regulations from many state and federal regulators across a
variety of planning agencies.
B) The U.S. Securities and Exchange Commission (SEC) is the primary regulatory authority of the financial planning
industry and, for most advisors, the only relevant authority.
C) Independent advisors must decide whether to be subject to state or federal regulatory authorities.
D) The Dodd Frank Act of 2010 unified and centralized regulation of the financial planning industry at the federal
level.
The correct answer is (A).
The financial planning industry covers areas across a variety of regulatory agencies at both the federal and state level. For example, insurance is generally regulated state-by-state, whereas investing may be regulated at both federal and state levels and certain qualified retirement plans are regulated almost exclusively at the federal level.
Question 11
All the following statements are true regarding the step in the financial planning process called “Developing the Financial Planning Recommendation(s)” EXCEPT:
A) This step occurs before recommendations are communicated.
B) During this step, the client’s current financial status is analyzed.
C) During this step, the planner devises recommendations for the client.
D) This step occurs after all necessary information is gathered.
The correct answer is (B).
The advisor develops the recommendations during step 4, Developing the Financial Planning Recommendation(s). All information should have been gathered and analyzed in previous steps. The recommendations are only communicated after they have been developed.
Question 12
All the following behaviors would be considered part of step 6 in the financial planning process, Implementing the Financial Planning Recommendation(s), EXCEPT
A) selling a client a life insurance policy.
B) buying or selling securities to adjust a client’s asset allocation.
C) agreeing upon an implementation schedule and responsibilities.
D) updating a client’s goals after a follow-up meeting.
The correct answer is (D).
Updating a client’s goals after a follow-up meeting is part of step 7, Monitoring Progress and Updating. All other options are considered implementing recommendations.
Question 13
All of the following are considered to be in line with the developmental paradigm, or the developmental school of thought, EXCEPT:
A) Human development occurs in stages over time.
B) Humans develop and progress in a predictable sequence.
C) Results of disruptions in any stage of an individual’s development are completely unpredictable.
D) Being mindful of a client’s age and life situation can help inform a planner’s recommendations and communication
style.
The correct answer is (C).
The developmental paradigm assumes that all humans develop and progress in a predictable sequence. Regardless of their cause, disruptions at a particular stage of that individual’s development will result in predictable problems, symptoms, and behavior.
Question 14
All the following statements concerning guidelines on risk assessment are correct EXCEPT:
A) Objective measures, such as job and income history, can help determine a client’s risk tolerance.
B) The assessment should begin by examining the client’s demographic characteristics and personality makeup.
C) The client’s level of risk tolerance should be ascertained without involving him or her in the assessment.
D) Biases that distort the client’s true level of risk tolerance may be influenced by his or her risk perceptions.
The correct answer is (C).
Assessing the client’s risk tolerance is a cooperative venture. The advisor should use the information he or she collects to start a dialogue with the client about risk tolerance.
Question 15
The developmental, humanistic, and cognitive-behavioral approaches to counseling are commonly applied in the financial planning context. Which of the following skills or behaviors is uniquely found among planners who employ the humanistic approach?
A) Active listening
B) Emphasizing freedom of choice and personal responsibility
C) Identifying environmental causes of behavior
D) A focus on childhood experiences
The correct answer is (B).
Financial planners who use the humanistic approach are most likely to emphasize a client’s freedom of choice and personal responsibility. The other approaches instead tend to emphasize the relative importance of the environment (cognitive-behavioral) or past family dynamics (developmental). All approaches support active listening, reflection, and the supportive challenging of clients’ ideas and behaviors.
Question 16
One of the most-reported interruptions or disruptions in passive listening is when
A) a seminar moderator interrupts the presentation.
B) a friend asks you questions about the presenter’s speech.
C) instead of actively listening, the listener is thinking about what he or she may say in response to what is being
discussed.
D) the speaker takes too many breaks.
The correct answer is (C).
One of the most reported interruptions or disruptions in passive listening is when, instead of actively listening, the listener is thinking about what he or she may say in response to what is being discussed.
Question 17
Which of the following is probably the start of a closed question?
A) “How…?”
B) “Isn’t it true that…?”
C) “Why…?”
D) “Please explain whether…”
The correct answer is (B).
Open questions usually begin with words such as “how,” “what,” “when,” “where,” “who,” and “why.” Closed questions lead with “is,” “are,” “do,” “did,” “could,” “would,” “have,” or “is it not true that.”
Question 18
All the following describe anchoring EXCEPT:
A) Anchoring involves attaching one’s thoughts to a reference point even though the reference point may not be
logically relevant or pertinent to the issue in question.
B) Anchoring is also known as conservatism or belief perseverance.
C) Anchoring is fairly common in situations in which decisions are being made that are repetitive and customary.
D) Anchoring is fairly common in situations in which decisions are being made that are novel to the decision maker.
The correct answer is (C).
Anchoring, also known as conservatism or belief perseverance, involves attaching one’s thoughts to a reference point even though the reference point may not be logically relevant or pertinent to the issue in question. Anchoring is fairly common in situations where decisions are being made that are novel, not repetitive, to the decision maker.
Question 19
All of the following are differences between traditional and behavioral finance theories EXCEPT:
A) Only in traditional finance theory is the scientific method applied to understanding investor behavior.
B) Only in behavioral finance theory are investors said to make errors and have biases.
C) Only according to traditional finance theory are markets assumed to be efficient.
D) Only in traditional finance theory are investors said to act rationally.
The correct answer is (A).
The scientific method is applied to both behavioral finance and traditional finance theories. The other answers correctly differentiate the two theories.
Question 20
Which of the following is consistent with the disposition effect?
A) Investors create mental accounts when they purchase stocks, and the investors continue to mark the stocks’
values to the purchase prices even after market prices have changed.
B) Investors acknowledge loss in value, referred to as the paper loss.
C) The normal investor considers the stock a loser if it dips in value.
D) The sale of the stock is irrelevant.
The correct answer is (A).
Under the disposition effect, investors create mental accounts when they purchase stocks, and the investors continue to mark the stocks’ values by the purchase prices even after market prices have changed. The investors mark stocks to the market only when the investors sell their stocks and close their mental accounts. Normal investors therefore do not acknowledge the loss in value, referred to as the paper loss, because an open account means that there is still a chance that the stock price will rise. In their mind, the stock is not necessarily a loser; it may still turn into a gain. The normal investor does not consider the stock a loser until the stock is sold, at which time the loss is technically realized in the mind of the normal investor.
Question 21
Which of the following is (are) premises in traditional finance?
I. Markets are efficient.
II. Investors are rational.
A) I only
B) II only
C) Both I and II
D) Neither I nor II
The correct answer is (C).
Both are premises of traditional finance.
Question 22
The behavioral asset pricing model considers which of the following risk factors when predicting investment returns?
I. The systematic and unsystematic risks that affect the stock or company.
II. Investors’ feelings about the stock or the company.
A) I only
B) II only
C) Both I and II
D) Neither
The correct answer is (C).
When predicting investment returns, the behavioral asset pricing model considers a wide array of factors, such as an investment’s risks, a company’s market capitalization ratios, investors’ likes or dislikes about the stock or company, status factors, social responsibility factors, and so on.
Question 23
One of your clients has a habit of quickly buying and selling obscure investments to try to “get rich quick.” When you ask how he decides what to buy and sell with such a large portion of his assets, he replies that he just relies on his gut instincts. Which bias is this client likely exhibiting?
A) The disposition effect
B) Anchoring
C) Overconfidence
D) Hindsight bias
The correct answer is (C).
This client is clearly exhibiting overconfidence. He makes snap decisions without consulting others or conducting thorough research. You could help this client avoid financial ruin by teaching him to slow down and make more reasoned decisions.
Question 24
If your financial planning client uses phrases like “see what I mean” or “imagine that,” your client’s learning style is most likely
A) verbal/auditory.
B) visual.
C) both verbal/auditory and visual.
D) neither verbal/auditory nor visual.
The correct answer is (B).
The client is a visual learner, as suggested by his choice of verbs.
Question 25
According to the cash-flow approach, each of the following recommendations will have a positive cash-flow impact EXCEPT:
A) Raise insurance deductibles.
B) Reduce insurance coverage.
C) Increase insurance coverage.
D) Cancel insurance coverage.
The correct answer is (C).
Of the options listed, the only one that will not have a positive cash-flow impact is increasing insurance coverage.
Question 26
Which of the following approaches involves the client covering the risks and saving and investing in order to reach goals?
A) The pie chart approach
B) Ratio analysis
C) The three-panel approach
D) The strategic approach
The correct answer is (C).
The three-panel approach involves the client covering the risks and saving and investing in order to reach goals. The pie chart approach provides the planner and the client with a visual aid depicting the balance sheet and the statement of income and expenses. Neither the ratio analysis nor the strategic approach represents a methodology that focuses on risk coverage or savings and investments.
Question 27
Using the information in the table, calculate Marie’s savings rate.
Marie’s Expenses and Account Balances
Marie’s Annual 401(k) Plan Contribution - $16,500
Marie’s Annual Salary - $100,000
Current Liabilities - $24,000
Monthly Housing Costs (P&I and T&I) - $2,167
Cash and Cash Equivalents - $18,000
Monthly Non-discretionary Cash Flows - $6,000
Monthly Debt Payments Other than Housing - $500
Marie’s employer makes dollar-for-dollar matching contributions of up to 3% of Marie’s salary in Marie’s 401(k) plan.
A) 16.5
B) 17.5
C) 18.5
D) 19.5
The correct answer is (D).
savings rate = (savings + employer match) ÷ gross pay
[$16,500 + (3% × $100,000)] ÷ $100,000 = 19.5%
Question 28
A client in the asset-accumulation phase has
A) low cash flow and a low debt-to-net-worth ratio.
B) high cash flow and a high debt-to-net-worth ratio.
C) high cash flow and a low debt-to-net-worth ratio.
D) low cash flow and a high debt-to-net-worth ratio.
The correct answer is (D).
A client in the asset-accumulation phase has low cash flow and a high debt-to-net-worth ratio.
Question 29
To identify a client’s life-cycle position, a financial planner must know about all the following aspects of a client’s life EXCEPT:
A) Attitudes and/or beliefs
B) Marital status
C) Dependents
D) Age
The correct answer is (A).
Options (B) through (D) are features that the planner must be aware of in order to determine a client’s life-cycle position.
Question 30
Siobhan met with you recently to make some changes to her insurance needs. You have made several recommendations. Which of these recommendations will have a positive cash-flow impact from an insurance perspective?
A) Cancel an insurance policy.
B) Change the name of the beneficiary on her life insurance policy.
C) Increase coverage on an existing insurance policy.
D) Lower the deductible on her auto insurance.
The correct answer is (A).
Canceling an insurance policy will result in $0 premiums due. Changing the beneficiary of a life insurance policy will not impact the premium or cash flow. Increasing the amount of coverage will increase the premium and negatively impact the cash flow. Lowering deductibles will increase premium payments thus having a negative impact on cash flow.
Question 31
Mina’s annual salary is $80,000. She contributes 10% of her salary to her 401(k) plan, and her employer contributes a 5% match of Mina’s salary to a profit-sharing plan. Mina also contributes $2,500 per year to an IRA. What is Mina’s approximate savings rate?
A) 5%
B) 10%
C) 15%
D) 18%
The correct answer is (D).
savings rate = (savings + employer match) ÷ gross pay
($8,000 + $4,000 + $2,500) ÷ $80,000 = 18.125%
Question 32
In which of the following situations is the family least likely to need help with budgeting to meet its living expenses?
A) The family’s cash-flow statement reveals frequent borrowing to meet normal expenses.
B) The family’s cash-flow statement reveals that assets are being liquidated frequently.
C) The family’s cash-flow statement reveals large amounts being spent on miscellaneous expenses.
D) The family’s cash-flow statement reveals a regular pattern of periodic saving.
The correct answer is (D).
Choices (A), (B), and (C) suggest that the family may be living beyond its means and may need help with budgeting.
A regular, reasonable pattern of saving, on the other hand, suggests that the family is already living within its means.
Question 33
All the following statements are true about savings rates EXCEPT:
A) When calculating the savings rate for a family, any contributions to retirement made by the employer should be included.
B) The required savings rate for retirement tends to increase with age.
C) Any income generated by the portfolio is added to the numerator when calculating the savings rate.
D) A couple with many goals will have a higher required savings rate than a couple with fewer goals.
The correct answer is (C).
Income generated by the portfolio is NOT added to the savings rate; rather, it increases the value of the portfolio itself. The numerator of the savings rate only includes savings and employer contributions made to the account. The required savings rate also tends to be higher for older clients with many goals.
Question 34
All the following statements about financial ratios are true EXCEPT:
A) Debt ratios measure how well a client manages debt.
B) Liquidity ratios indicate the ability to meet short-term obligations.
C) Ratios for financial security determine the progress that the client is making toward achieving short-term financial
security goals.
D) Performance ratios determine the adequacy of returns on investments relative to the risk level of the investment.
The correct answer is (C).
Ratios for financial security determine the progress that the client is making toward achieving long-term financial security goals.
Liquidity ratios measure the ability to meet short-term obligations.
Debt ratios indicate how well a client manages debt.
Performance ratios determine the adequacy of returns on investments relative to the risk level of the investment.
Question 35
Which of the following approaches helps the client articulate and reach goals by covering the risks and savings and investing?
A) The pie chart approach
B) Ratio analysis
C) The three-panel approach
D) The strategic approach
The correct answer is (C).
The three-panel approach involves the client covering the risks and saving and investing in order to reach goals.
The pie chart approach provides the planner and the client with a visual aid depicting the balance sheet and the statement of income and expenses. Neither the ratio analysis nor the strategic approach represents a methodology that focuses on risk coverage or savings and investments.
Question 36
Which of the following correctly describe(s) an action that would be taken by a financial planner using the strategic approach to financial planning?
I. Working with a client to develop goals and objectives
II. Drafting a mission statement that captures the big-picture view of the client’s philosophy and plan for the future
A) I only
B) II only
C) Both I and II
D) Neither I nor II
The correct answer is (C).
A financial planner using the strategic approach will work with a client to develop the client’s goals and objectives and then codify them in a mission statement.
Question 37 (1 point)
According to the three-panel approach, all the following would be considered potentially catastrophic risks EXCEPT:
A) A parent of a young child dies prematurely.
B) A client has an insufficient emergency fund.
C) A business owner has insufficient liability insurance.
D) A household’s sole breadwinner becomes totally and permanently disabled.
The correct answer is (B).
According to the three-panel approach, catastrophic risks include the early death of a parent, disability, and insufficient liability insurance. An insufficient emergency fund would be addressed in the second panel.
Question 38 (1 point) Ivan and Samantha are married and have a net worth of $20,000 and total assets of $150,000. What is the amount of their total liabilities?
Question 38 options:
A)
$122,000
B)
$130,000
C)
$138,000
D)
$150,000
The correct answer is (B).
liabilities = assets − net worth
$150,000 − $20,000 = $130,000
Question 39 (1 point) Sally has the following transactions:
Transaction 1: She purchases $5,000 worth of a mutual fund with cash from her savings account.
Transaction 2: She spends $6,000 on vacation with cash from her money market account.
Transaction 3: She spends $10,000 on new furniture and uses her credit card to make the purchase.
What is the combined impact of these transactions on her net worth?
Question 39 options:
A)
A $21,000 decrease
B)
A $6,000 decrease
C)
A $15,000 increase
D)
A $6,000 increase
The correct answer is (B).
Transactions 1 and 3 were net washes in terms of Sally’s net worth. By trading savings for a mutual fund in transaction 1, she was simply changing the nature of the assets. By obtaining furniture by incurring a liability in transaction 3, Sally was increasing her assets and her liabilities by the same amount. Transaction 2 reduced her assets without providing any corresponding financial gain, resulting in a decrease in net worth.
Question 40 (1 point) Claire and Byron are married. Based on the data in this table below, what is Claire and Byron's current ratio?
Their Current Cash and Cash Equivalents $9,243
Their Current Liabilities $6,921
Their Monthly Nondiscretionary Expenses $4,693
Their Annual Combined Income $70,000
Their Annual Debt Payments (excluding monthly housing costs) $22,084
Question 40 options:
A)
0.7958
B)
1.3355
C)
1.9695
D)
5.0387
The correct answer is (B).
current ratio = cash and cash equivalents ÷ current liabilities
$9,243 ÷ $6,921 = 1.3355
