MASTER Flashcards
4 Basic Premises of Traditional Finance
- Investors are rational
- Markets are efficient
- Mean-Variance Portfolio Theory Governs
- Returns are Determined by risk
Behavioral Finance Assumptions
- Investors are “normal” (wants/desires/bias) - prone to cognitive mistakes
- Markets are NOT efficient
- The Behavioral Portfolio Theory Governs
- Risk alone does NOT determine returns
Affect Heuristic
judging something whether good OR bad
example = do they like/dislike some company based on NON-financial issues
Anchoring
attaching/anchoring one’s thoughts to a reference point even though there may be no logical relevance or is not pertinent to the issue in question
also known as conservatism OR belief perseverance
Availability Heuristic
relies on knowledge readily available in memory
may cause investors to overweight recent events or patterns while paying little attention to longer term trends
Bounded Rationality
rationality limited by available info, tractability of decision problem, cognitive limitations of their minds, & time available to make decision
decision makers act as “satisficers” seeking a satisfactory solution rather than an optimal one
one consequence = having additional info does NOT lead to an improvement in decision making d/t inability of investors to consider significant amounts of info
Confirmation Bias
“you do not get a second chance at a first impression”
people tend to filter info & focus on info supporting their opinions
Cognitive Dissonance
tendency to misinterpret info that is contrary to an existing opinion or only pay attention to the info that supports an existing opinion
Disposition Effect
also known as “Regret Avoidance” or “faulty framing”
investors do NOT mark stocks to market prices
investors create mental accounts when they purchase stocks & continue to mark their value to purchase prices even after market prices have changed
Familiarity Bias
investors tend to overestimate/underestimate the risk of investments in which they are unfamiliar/familiar with
example = only invested in employer’s stock because that’s what you know
Gambler’s Fallacy
investors often have incorrect understanding of probabilities which can lead to faulty predictions
investors may sell stock when it has been successful in consecutive trading sessions because they may NOT believe the stock is going to continue its upward trend
Herding
people tend to follow the masses or the “herd”
Hindsight Bias
looking back after the fact is known & assuming they can predict the future as readily as they can explain the past
Illusion of Control Bias
people overestimate their ability to control events
example = driving instead of flying even though much more likely to have a car accident vs plane accident because you are driving
Overconfidence Bias
investor mostly listens to themselves
mostly rely on skills/capabilities to do homework & make own decisions
causes many investors to OVERSTATE risk tolerance
Overreaction Bias
common emotion towards the receipt of news or information
Prospect Theory
value gains/losses differently, base decisions on perceived gains rather than perceived losses
investors are “loss averse” & have a symmetric attitude to gains & losses getting less utility from gaining
explains why investors may avoid higher risk investments even w/ strong risk adjusted returns
explains why they over insure against risks through low deductibles
Recency Bias
giving too much weight to recent observations or stimuli
Self-Attribution Bias
give yourself credit for all good outcomes
any bad outcomes d/t outside factors
Similarity Heuristic
used when a decision/judgment is made when an apparently similar situation occurs even though the situations may have very different outcomes
Herd Mentality
process of buying what & when others are
buying & selling
herd mentality LEADS TO buying HIGH & selling LOW
Naive Diversification
also known as 1/n diversification
equal amounts invested in every option available, common in 401(k) & other ER retirement plans
Representativeness
thinking that a good company is a good investment w/out regard to an analysis of the investment
Loss Aversion
investors prefer avoiding losses more than experiencing gains
unwillingness to sell a losing investment in hopes it will turn around
investors feel more pain from losses than enjoying gains
Socialization
process of acquiring values, beliefs, & behaviors that are acceptable &/or expected by society
Social Consciousness
an awareness of & sense of responsibility for problems or injustices that exist w/in society
Multicultural Psychology
recognizes that multiple aspects of identity influence a person’s worldview
both universal & culture specific phenomena should both be considered
What are the 4 main areas of GDP?
consumer spending
government spending
business investing
net imports/exports
Federal Reserve & Congress 3 Main Goals Fiscal Policy
- maintain long term economic growth
- maintain price levels supported by the economy
- maintain full employment
FDIC - Covered vs NOT Covered
COVERED = any deposit payable in US, CDs
NOT COVERED = any deposit payable outside of US, MM MFs, stocks, bonds, mutual funds
Debts NOT Discharged Through Chapter 7 Bankruptcy
3 years of back taxes
alimony/child support
student loans (unless “undue hardship” - jurisdiction issue)
Emergency Fund
3-6 months Nondiscretionary expenses
EF Ratio = Current Assets / Monthly Nondiscretionary Expenses
Current Ratio
measure of client’s ability to meet ST obligations
CR = Current Assets / Current Liabilities
Housing Ratio 1
no more than 28% of monthly gross income
HR1 = Monthly housing costs (P+I+T+I) / Monthly GROSS Income
Principal, Interest, Taxes (property), Homeowners Insurance
Housing Ratio 2
no more than 36% of monthly gross income
HR2 = [Monthly housing costs (P+I+T+I) + all other recurring debt] / Monthly GROSS Income
Principal, Interest, Taxes (property), Homeowners Insurance
Savings Ratio
performance ratio; target 10-12%, 20-25% if starting late age 45-55
*important to include ER contributions to 401k, profit sharing plans etc
SR = Annual Savings (EE + ER contributions) / Annual GROSS Income
Education & Financial Aid - Student Aid Index SAI
Students considered independent if they are….
- over age 23
- have legal dependents other than a spouse
- married
Financial Aid Programs - NEED Based
Federal Pell Grant
Subsidized Stafford Loan
Financial Aid Programs NOT Need Based
Unsubsidized Stafford Loan
PLUS Loan (depends on PARENTS CREDIT)
Risk Management Guidelines
High Severity High Frequency = Avoidance
High Severity Low Frequency = Transfer (Insurance)
Low Severity High Frequency = Retention/Reduction
Low Severity Low Frequency = Retention
Annuity Withdrawals - LIFO vs FIFO
PRIOR to 1982 = FIFO
AFTER 1982 = LIFO
HMO vs PPO
HMO - cheaper, doctor IN-NETWORK ONLY
PPO - more expensive, more flexible doctor access
SIMILARITIES - no paperwork if in network
LTC “Qualified”
Premiums tax deductible & benefits tax FREE:
- NO surrender value
- limited to qualified LTC services
- dividends to reduce premiums OR increase benefits
- meet consumer protection laws
- does NOT pay for expenses covered under Medicare
HO Insurance - BASIC Named Perils
Fire, Vehicles, Lightning, Smoke, Windstorm, Vandalism, Hail, Explosion, Riot, Theft, Aircraft, Volcano
SLW - FVVVHEART (pronounced slow favorite)
VVV-WEATHR-FS
HO Insurance - BROAD Named Perils
Basic Named Perils 1-12 Plus:
Falling objects, Weight of ice/snow/sleet, Accidental overflow of water (NOT flood), Sudden bursting of appliances, Freezing of system/appliance, Damage from electrical current
Basic + FAS-FWD (pronounced fast forward)
Open Peril Policy
protects against ALL perils EXCEPT those perils that are SPECIFICALLY EXCLUDED from policy
Exclusions include - neglect (termite damage), flood, & earthquakes
General Exclusions for ALL HO Policies
- Movement of ground (earthquake/landslide)
- Ordinance/Law (regulations regarding construction/demolition)
- Damage from water (flood, underground water, sewer backup)
- War/Nuclear hazard (including nuclear power plant)
- Power failure (such as power plant failure causing a loss)
- Intentional act (burning down your own house)
- Neglect (must take reasonable means to save property & mitigate loss)
HO-3 Special Form
provides coverage on DWELLING & OTHER STRUCTURES on an OPEN peril basis resulting in coverage against ALL physical loss other than those SPECIFICALLY excluded
personal property is covered on a NAMED peril basis
OASDI & Medicare Tax
OASDI = 6.2% (BOTH EE & ER) up to wage base $168,600
Medicare = 1.45% (both EE & ER) on UNLIMITED amount of wages
Additional Medicare Tax 0.9% (EE) on income excess of $200k single or $250k MFJ UNLIMITED amount of wages
Social Security Early Benefits Reduction & Delays Increase
REDUCED BY:
- 5/9 of 1% each month 1st 3 years
- 5/12 of 1% each month beyond 3 years
3 years early = 20% reduction
4 years early = 25% reduction
5 years early = 30% reduction
DELAYED:
- increases by 8% annual simple interest (2/3 of 1% monthly) each year delayed until age 70
Social Security Definition of Disability
disability expected to last for 12 months or disability will result in your death AND cannot perform the duties of ANY occupation
What does Medicare Part B NOT Cover?
Dental care & Dentures
Cosmetic surgery
Hearing Aids
Eye exams
Routine Physical Exams (per Medicare.gov)
Initial Margin Loan Amount
Loan = 1 - Initial Margin
At What Price Does an Investor Receive a Margin Call Price?
= Loan / (1 - Maintenance Margin)
Research Reports (2)
- Value Line = ranks stocks
- Morningstar = ranks mutual funds, stocks, bonds, & ETFs
Ex-Dividend Date
own/purchase stock PRIOR to ex-dividend date then receive dividend
if purchased on/after then won’t receive dividend
Trade Settlement = T + 1
Ex-dividend date is now same as date of record
latest an investor can purchase & still receive dividend is day before record date
Investment Policy Statement
IPS Covers RR TTLLU
Risk, Return, Time, Taxes, Liquidity, Legal, & Unique Circumstances
***does NOT include investment selection
Price Weighted Average
Dow Jones Industrial Average
single price weighted average
does NOT incorporate market capitalization
Value Weighted Index
S&P 500
value weighted index
incorporates market capitalization of individual stocks into the average
Coefficient of Variation - CV
CV = SD / X (mean)
how many units of risk for one unit of return
standardizes the measure of risk per unit of return
useful when comparing 2 assets w/ different avg returns
higher CV = more risky on investment & less likely an investor is to achieve the avg return
performance metric
EXAM TIP = the asset w/ the LOWER CV (risk/return) has the HIGHER Risk Adjusted Return (return/risk)
relative measure
Arbitrage Pricing Theory
MULTI FACTOR model; take advantage of pricing imbalances
Inputs = factors (F) such as inflation & expected returns & their sensitivity (b) to these factors
**SD & Beta are NOT inputs
R = a + bF + bF + bF + e
Holding Period Return - HPR
= [SP - PP +/- CFs] / PP or Initial Equity
*NOT a compounded ROR
*NO consideration for TIME investment was held
tax implications on NUMERATOR
If required ROR DECREASES, the stock price will?
Increase!
If dividend expected to INCREASE, the stock price will?
Increase!
If required ROR INCREASES the stock price will?
Decrease!
If the dividend is expected to DECREASE, the stock price will?
Decrease!
P/E Ratio - Price to Earnings
Expected Price Per Share = Earnings Per Share x P/E Multiplier
PE = stock price / EPS
useful to value stock IF firm pays NO dividends
P/E multiplier = relationship of price to earnings
P/E ratio = P/E multiplier
how much an investor is willing to pay for each dollar of earnings
stock price as a multiple of company earnings
example = if P/E = 3 then trading @ 3 times its value
Dividend Payout Ratio - DPR
DPR = Common Stock Dividend / Earnings Per Share
= 1 - Retention Ratio
relationship b/t amount of earnings paid to shareholders in the form of a dividend, relative to earnings per share
HIGHER DPR = more mature the company; may also indicate possibility of dividend being reduced
Return on Equity - ROE
ROE = Earnings Per Share / Stockholders Equity Per Share
SEPS = Total Equity / Shares Outstanding
measures overall profitability of a company
direct relationship b/t ROE, earnings & dividend growth
Dividend Yield
DY = Dividend Per Share / Stock Price
states the annual dividend as a percentage of the stock price
EMH - WEAK Form
HISTORICAL INFORMATION will NOT help investors achieve above market returns
rejects TECHNICAL analysis
EMH - SEMI Strong Form
NO help from HISTORICAL OR PUBLIC information to achieve above average returns
rejects BOTH TECHNICAL & FUNDAMENTAL analysis
EMH - STRONG Form
NO help from HISTORICAL, PUBLIC, or PRIVATE information to achieve above avg returns
rejects TECHNICAL, FUNDAMENTAL analysis & INSIDE information
diversify stocks randomly or merely go w/ an index
After Tax Yield
ATY = Corporate Rate x (1 - Marginal Tax Rate)
NOT ON FORMULA SHEET
Bond Yield Summary - Premium & Discount
PREMIUM: High to Low:
CR - CY - YTM - YTC
DISCOUNT: Low to High:
CR - CY - YTM - YTC
Preferred Stock - Stated/Fixed Dividend Qualities (Debt/Equity Features)
DEBT = stated par value; stated dividend rate as a percentage of PAR
EQUITY = price of a bond may generally move w/ price of common stock
Preferred Stock Differences (2)
- dividend does NOT fluctuate like a common stock dividend
- NO maturity date like a bond
Preferred Stock Tax Advantages
*for tax years beginning AFTER 12/31/17
70% dividends received deduction reduced to 50%
80% dividends received deduction for 20% or more owned corporations reduced to 65%
same deduction applies to common stock dividends as well
Convertible Bonds - Conversion Value
Conversion Value = value of convertible bond in terms of the stock into which it can be converted
= (Par / CP) x Ps
CV - represents conversion ratio; how many shares can the convertible be converted into
Black/Scholes
Model to determine value of a CALL option
Considers the following variables:
1. Current price of underlying asset
2. Time until expiration
3. Risk-free ROR
4. Volatility of underlying asset
5. Strike (exercise) price
*ALL variables have DIRECT relationship on PRICE of the option EXCEPT STRIKE price; higher the strike price the smaller the call option premium
Put/Call Parity
attempts to value a PUT option based on the value of a CALL option
Binomial Pricing Model
attempts to value an option based on the assumption that a stock can only move in ONE of TWO directions
Donee’s Basis Gifted Loss Property - At date of gift if FMV < Donor’s Basis
Double Basis Rule
- If Sales Price > Donor’s Basis = carryover basis & HP
- If SP < FMV @ date of gift, Donee’s Basis = FMV @ date of gift, NEW HP starting @ date of gift
- If SP is b/t Donor’s basis & FMV (from date of gift) = NO gain OR loss for Donee
Donee’s Basis - Appreciated Property w/ Gift Tax Paid
Donee’s Basis = Donor’s Basis + [(Net Appreciation in Gift / Taxable Gift) x Gift Tax Paid]
Miscellaneous Itemized Deductions NOT Subject to 2% AGI Threshold
- IRD
- Gambling losses to extent of gambling winnings
- Impairment related work expenses for handicapped
- Annuity losses for decedent annuitant
RIA EXEMPTIONS to Registration
Meet definition, need NOT register, subject to antifraud provisions of act
VIPs are SaFE from exemptions
1. Advisers all INTRASTATE business
2. NOT providing advice re securities traded on national exchange
3. Advisers whose ONLY clients are INSURANCE companies
4. Advisers solely to venture capital funds
5. Advisers solely to private funds less than $150MM
6. Foreign advisers w/out place of business in U.S.
RIA EXCEPTIONS to Registration
Need NOT register, generally NOT regulated by Advisers Act
Incidental TABLE
1. Banks/bank holding companies NOT investment companies (loans/deposits only)
2. Any BD advisory services solely incidental to conduct of business (primary business is trades)
3. Lawyers/Accountants/Teachers/Engineers whose advice solely incidental to their profession – LATE
4. Bona fide newspaper, publisher, magazine, periodical of regular circulation
5. Advisers whose advice/services related strictly to securities guaranteed by United States
6. NOT w/ intent of law as SEC may designate
Financial Planning Definition
A collaborative process that helps maximize a client’s potential for meeting life goals through Financial Advice that integrates relevant elements of the Client’s personal & financial circumstances
Know this definition!
Taxable Group Term Life Insurance Including Table 1 Rate
First 50K DB NOT taxable, cost of excess determined Table 1 cost
total amount deductible for ER
- DB - 50K = ADB (Adjusted Death Benefit)
- ADB x Table Cost / 1,000 x 12
- Subtract off any premiums deducted from EE’s paycheck (if any) to arrive @ taxable amount
Series EE Bonds Exclusion from Income Qualified Education Expenses
if ALL interest used for qualified education expenses no tax
Exclusion from income = (Qualified Education Expenses / Redemption Value) x Gain
END Mode
Save @ end, Spend @ beginning
ALWAYS mortgage & loan pmts even if it says pmt due 1st of the month
ordinary annuity
ALL loans (including mortgage) - 1st pmt due 30 days AFTER closing
savings (unless told otherwise)
BGN Mode
Save @ end, Spend @ beginning
ADLER
A - Annuity Due
D - Due
L - Leases
E - Education (tuition pmts)
R - CFs during retirement
How do I remember all the coverages in HO Policies?
Coverage A = ATTACHED structures
Coverage B = space BETWEEN - covers detached garages etc
Coverage C = covers my CRAP
Coverage D = DAMAGE so bad I cannot live there (pays for housing elsewhere during repairs)
Coverage E = Eeekkkk I am in trouble (liability)
Coverage F = someone FELL & I owe them medical payments (LIFE ALERT)
Like Kind Exchanges 3 Rules
- Must recognize gain to extent boot received
- If liability assumed from you, count as boot (debt relief = boot)
- If parties are related, RED FLAGS GO OFF, if either party sells the asset w/in 2 years of exchange then BOTH have to RECOGNIZE deferred gain in transaction
BTL Deductions Schedule A (FROM AGI)
“ccommit” spelled badly
C - Charity
C - Casualty losses
M - Medical
M - Miscellaneous
I - Interest
T - Taxes
ATL Deductions (FOR AGI)
IRA
Alimony
1/2 Self employment taxes
DOUBLE CHECK
Community Property
Estate = 50% deemed contribution rule
YES 50% of value included in PROBATE
NO auto survivorship feature
YES qualifies for unlimited marital deduction IF spouse is heir/legatee
Property NOT partitionable w/out consent of joint owner
Tenancy By the Entirety
Estate = 50% deemed contribution rule
NO PROBATE
YES auto survivorship feature
YES qualifies for unlimited marital deduction
Property NOT partitionable w/out consent of joint owner
JTWROS
Estate = actual contribution rule, % owned, UNLESS spouse, ALWAYS deemed to have contributed 50%
NO PROBATE
YES auto survivorship feature
YES qualifies for unlimited marital deduction IF spouse is joint owner
Property IS partitionable w/out consent of joint owner
Tenants in Common - TIC
** NO deemed contribution rule for spouse
Gross Estate = % owned
Probate = % owned
NO auto survivorship features
YES qualifies for unlimited marital deduction IF spouse is heir/legatee
Property IS partitionable w/out consent of joint owner
Sole Ownership, Fee Simple
100% in GROSS ESTATE & PROBATE ESTATE
NO auto survivorship feature
Qualifies for unlimited marital deduction IF spouse is legatee/heir
Pooled Income Funds
Good for SMALL gifts
charitable gifts of a split interest
contributions pooled in a trust maintained by the charity
income for LIFE to DONOR, remainder to charity
Earnings Per Share
= [Net Income - PF Dividends] / Avg # Outstanding Common Shares
Section 179 Election to Expense Assets
can immediately expense up to $1,220,000 of business tangible property placed in service during year
dollar for dollar reduction amounts over $3,050,000
election cannot exceed taxable income (before 179), excess can be carried over, reduces basis currently
Section 179 applies BEFORE MACRS
Max Estate Tax/Taxable Gains
FIRST $1,000,000 = $345.800
Amount OVER $1MM taxed at 40%
Highly Compensated
- GREATER than 5% Owner
- Comp > $155,000 & top 20% EEs ranked by salary
- Comp > $150,000 2023 for prior plan year, $135k lookback
Key Employee
- GREATER than 5% Owner
- GREATER than 1% Owner & Comp > $150,000
- OFFICER & Comp > $220,000
ISO Cashless Exercise
a cashless exercise IS a disqualifying disposition
an executive exercises an option w/out cash, very common
3rd party lends executive needed cash
executive repays lender almost immediately w/ proceeds & has w-2 income for excess over exercise price
ISO Disqualifying Disposition
Disqualifying Disposition - NOT taxed advantaged; taxed like NQSO retroactively
sell stock NOT satisfying 2/1 rule
W-2 income appreciation over exercise
ER has tax deduction equal to executive’s W-2 income
ISO AMT
GRANT - no tax
EXERCISE - AMT adjustment (income) (FMV - Exercise Price)
BASIS - FMV @ exercise
SALE - AMT deduction = the AMT income previously included
ISO REG
If aggregate FMV of grants > $100k then treated as NQSO
Sale = 2 years from grant, 1 year from exercise
can ONLY be gifted AFTER exercise
taxation for ISOs depending at SALE!
GRANT - no tax if issued current or greater than share price
EXERCISE - no income (AMT ONLY)
BASIS - strike price @ exercise, adjustments?
SALE - 2/1 met = LTCG; NOT = w-2 income, CG LT/ST HP since EXERCISE
NQSO
GRANT - no tax if issued @ current or greater share price
EXERCISE - w-2 income (FMV - Exercise Price)
BASIS - FMV @ exercise
SALE - capital gain or loss; LT or ST = HP since EXERCISE
ER tax deduction IF EE GIFTS
83(b) Election
EE election, stock in taxable income @ grant instead of vesting or when restrictions lifted
any gain over grant date = capital gain
if EE does NOT vest = NO tax deductible loss
30 days to file AFTER stock transferred
EE MUST file WRITTEN statement w/ IRS
SCIN
Self-Cancelling Installment Notes
payments interest & principal over term, SCIN premium paid to cancel note @ seller’s death, SECURED
NO gift IF PV of Note = value of underlying property & SCIN premium is APPROPRIATE
interest CAN be deductible depending on property
used when SELLER in POOR health
term set by seller
buyer’s adjusted basis = purchase price of property
YES collateral interest
Private Annuity
UNSECURED promise from buyer to make payments to annuitant for annuitant’s LIFE
risk = SELLER lives LONGER
effective = life expectancy < IRS table (SELLER in POOR health)
3 components = interest @ sale 7570, capital gain, tax free basis
CG (yearly) = [FMV - adjusted basis] / # expected payments
Basis = sum of annuity payments made
interest = subtract off CG & basis portion
NO deduction for interest
HSA Penalty & Other Considerations
age 55 & older catch up = $1,000
distributions NQ medical expenses = income tax + 20% penalty under age 65; age 65 & older = income tax only
completely tax free for qualified medical expenses
Alimony
NOT discharged in bankruptcy, IS a protected asset
ATL deduction, included in income, earned income, IF signed before 2019 & not materially modified after
do NOT extend beyond death of payee
starting 2019 = alimony is NO longer deductible OR taxable
Active Participant - IRA Deductibility
DC = $ into account (whether theirs or the company’s)
DB = active when you are ELIGIBLE since you begin accruing benefits once eligible
Margin Equity Position/Value
= Equity / FMV
Capital Market Line Formula - CML
uses STANDARD DEVIATION
Security Market Line - SML
uses BETA
risk & return defined by CAPM
securities above SML = undervalued, BUY
securities below SML = overvalued, SELL short
intersects w/ Y Axis @ risk free ROR
TEY Double Tax Free Bond IF Client Itemizes Deductions
= Tax Exempt Yield / [1 - (Federal Tax Rate + State Tax Rate(1 - Federal Tax Rate))]
Margin Call Amount
Loan/Margin Amount = initial share price x initial margin %
Actual Equity = current price - loan amount
Required Equity = current price x maintenance margin
Deposit = (Required Equity x # of shares) - equity if any
AMT Formula
Regular Taxable Income
+- Adjustments
+- Preferences
———————–
Less AMT Exemptions (on tax sheet)
AMT Tax Rates on tax sheet
Tax Formula
Income
Less: exclusions from gross income
Gross Income
Less: deductions FOR AGI
AGI The Line
Less: greater of itemized or standard deduction
OBI less deduction for pass through entity if applicable
Taxable Income
Tax on Taxable Income
Less: credits including Fed income tax withheld
Tax Due (or Refund Due)
Coverage A - Dwelling Coinsurance Formula
IF less than 80% of replacement cost covered, insured receives payment for partial losses as follows (INSURER pays amount):
= [(Amount of Insurance Carried/Amount of Insurance I should have) x Amount of Loss] - Deductible
ROR on Investments - ROI
Performance Ratio
= (Ending Investments - Beginning Investments - Savings - Gifts Received) / Average Invested Assets
Avg Invested Assets = (Beginning Investments + Ending Investments) / 2
Supply/Demand Curve
SUPPLY - bottom left to top right
DEMAND - top left to bottom right
Beta
risk as a measure of volatility relative to that of the market
on formula sheet
measure of systematic risk, volatility of a DIVERSIFIED portfolio
good measure if r squared at least 0.7
Brochure Rule
Form ADV Part 2 makes up client brochure
REQUIRES WRITTEN disclosure to every client of the following:
- Advisory services/fees
- Types of securities
- Education & business standards
- Participation/interest in securities transactions
- Conditions for managing accounts
This info MUST be given to the client AT OR BEFORE the time of entering into a contract
Compliance w/ the brochure rule is accomplished by providing client w/ ADV Part 2 (outlines fees)
EXAM TIP: Tested Frequently!
Tax to Avoid Safe Harbor
Underpayment of estimated tax
Most people can avoid paying estimated tax if their withholding & credits equal 100% of the tax shown on the prior year’s return OR 90% of the current year’s tax liability:
- For taxpayers w/ AGI above $150,000 ($75,000 MFS) they will pay estimated taxes based on 110% of prior year or 90% of current year by January 15th of the following year even though the full tax liability is due April 15th
- Taxpayers may NOT rely on this rule, however, if the taxpayer had a short (less than 12 months) taxable year for the previous year
- In addition, a taxpayer does NOT have to pay estimated tax if the taxpayer had NO tax liability for the previous year; the taxpayer was a US citizen or resident for the entire year; & the taxpayer’s tax year covered a 12 month period
The penalty for underpayment of estimated tax is figured the same as interest
First, determine the amount of the underpayment for each period of time & the number of days in that period, then apply an appropriate interest factor; the interest rate is adjusted from time to time based on market interest rates
The due dates for estimated tax payments are April 15, June 15, September 15, & January 15
Personalty
refers to personal (NON real estate) property
