Module 1 Flashcards
The Personal Financial Planning Process & The Financial Life Cycle
Which of the following statements is CORRECT regarding financial planning?
I. The financial planner is responsible for implementing the client’s Financial Planning recommendation(s) unless specifically excluded from the Scope of Engagement.
II. The practitioner must communicate to the client any limitations on the scope of the engagement.
III. Recommendations must be written and prepared in a clear, understandable manner.
IV. Unrealistic goals must be discussed.
A. I only
B. I, II, and III
C. II, III, and IV
D. I, II, III, and IV
D. I, II, III, and IV
Kevin and Gina, ages 45 and 43, respectively, have engaged Mei, a CFP® professional, to help them develop their financial plan. All of the following should be considered when developing Kevin and Gina’s financial plan EXCEPT:
A. their current position in the life cycle.
B. their values, goals, and objectives.
C. their ability to provide referrals.
D. their financial position.
C. their ability to provide referrals.
Explanation: The ability to provide referrals should not be a consideration when working with clients to formulate a financial plan. When working with Kevin and Gina, Mei should consider:
their financial situation;
their internal data and life cycle positioning; and
their values, goals, and objectives.
Identify the disclosure requirement that may be delivered either verbally or in writing when Financial Advice is delivered or within a Financial Planning engagement.
A. Privacy Policy
B. Terms of Engagement
C. Payment Arrangement
D. Material Conflicts of Interest
D. Material Conflicts of Interest
Explanation: Disclosure of Material Conflicts of interest can be delivered verbally or in writing in situations where either Financial Advice or Financial Planning are occurring.
According to the Practice Standards, all of the following are approved methods of documentation EXCEPT:
A. CRM software
B. voice memos
C. handwritten notes
D. emails
B. Voice memos
Explanation: The Practice Standards include CRM software, handwritten notes, and emails as approved methods of documentation.
In the data-gathering process, quantitative data may include all of the following EXCEPT:
A. Section 401(k) statements
B. Insurance policies
C. Income tax returns
D. Personal goals and objectives
D. Personal goals and objectives
Explanation: Quantitative data includes information such as assets and liabilities, cash inflows and outflows, insurance data, employee benefits, income tax returns, retirement statements, wills, trusts, business information, and investment data. Personal goals and objectives are considered qualitative data.
Identify information that may be acquired during the client data-gathering process:
I. A partnership agreement
II. Realistic investment return assumptions
III. Copies of disability income insurance policies
IV. Section 401(k) statements
A. I and IV
B. II and III
C. I, III, and IV
D. I, II, III, and IV
D. I, II, III, and IV
Explanation: All of this information may be necessary. A partnership agreement will give details that may help the financial planner with estate planning. The interest rate assumptions used for various needs analyses (e.g., insurance and retirement) must be realistic so that projections are accurate. Copies of disability policies will verify the definition of disability and the amount of benefit the client will receive if the client meets this definition. Section 401(k) statements provide asset allocation information that will help the planner when preparing the client’s retirement plan.
If the practitioner is unable to obtain sufficient and relevant quantitative information and documents to form a basis for recommendations, the practitioner must do which of these?
I. Restrict the scope of the engagement. II. Terminate the engagement.
A. I only
B. II only
C. Either I or II
D. Neither I nor II
C. Either I or II
Explanation: According to the Code and Standards, “If the practitioner is unable to obtain sufficient and relevant quantitative information and documents to form a basis for recommendations, the practitioner shall either restrict the scope of the engagement to those matters for which sufficient information is available; or terminate the engagement.”
Choose the goal-related action(s) that occur in Step 2 of the Practice Standards:
I. Identifying Potential Goals II. Selecting and Prioritizing Goals III. Collaboration to establish personal and economic assumptions IV. Discussion of unrealistic goals
A. I only
B. I and II
C. II, III, and IV
D. I, II, III, and IV
D. I, II, III, and IV
Explanation: All of these actions occur in Step 2 of the Practice Standards.
Identify the CORRECT statements regarding financial strengths and weaknesses:
I. Inadequate retirement savings is considered a financial weakness. II. Very general financial goals are considered a financial strength. III. Determining financial strengths and weaknesses is an objective process. IV. The lack of a valid will is considered a financial weakness if a will is necessary to protect the interest of heirs.
A. I only
B. I and IV
C. III and IV
D. I, II, III, and IV
B. I and IV
Explanation: Inadequate retirement savings is a financial weakness. Vague or unarticulated goals also represent a financial weakness. Determining financial strengths and weaknesses is a subjective process. The absence of a valid will is considered a financial weakness, especially when such an instrument would protect the interest of heirs.
Mateo, a CFP® professional, created a financial plan for his client, Emma, a single mother, who asked him to provide recommendations regarding her retirement. During that meeting, Mateo asked Emma if she would like a life insurance analysis. Emma declined, saying she was currently only interested in investing for her retirement. In the letter of engagement, signed by both parties, Mateo noted this. After discussing Emma’s retirement goals, needs, and priorities, and gathering her retirement information, Mateo set another appointment with Emma in which he would present a financial plan for her. Several weeks later, Mateo met with Emma to discuss her financial plan. In it, he provided two recommendations: (1) that Emma purchase an annuity to save for her retirement, and (2) that she purchase a life insurance policy so her young children would be financially secure in the event of her death. Neither recommendation was discussed in the plan. Emma advised Mateo that she does not like annuities as an investment and restated that she’s not interested in life insurance. How were Mateo’s recommendations in the plan inconsistent with the Practice Standards, Step 4: Developing the Financial Planning Recommendations?
I. He failed to adequately define the scope of his engagement with Emma. II. He did not offer alternatives to the annuity for Emma’s retirement investment. III. He did not stay within the scope of the engagement by recommending life insurance for Emma. IV. In the plan, he failed to explain how the recommendation is designed to maximize the potential of Emma meeting her retirement goals.
A. I and III
B. I, II, and III
C. II, III, and IV
D. I, II, III, and IV
C. II, III, and IV
Explanation: By providing a life insurance recommendation, Mateo has failed to stay within the scope of the engagement which, according to the letter of engagement, was for retirement planning only. This letter effectively defined the scope. Under the Practice Standards, Mateo should have provided alternatives to the annuity recommendation. He should have also explained in the plan how his recommendation was designed to maximize the potential to meet Emma’s goals, the anticipated material effects of the recommendation on Emma’s financial and personal circumstances, and how the recommendation integrates relevant elements of her personal and financial circumstances.
Sophia, a CFP® professional, is meeting with Eric and Emily to review the two recommendations included in their financial plan. The first recommendation discussed by Sophia was for Eric and Emily to “purchase term life insurance because it is inexpensive.” When asked why she was suggesting they purchase term life insurance, Sophia responded, “Because you both need it.” Sophia then moved on to talk about her second recommendation that the couple deposit an additional $500 per month in Eric’s 401(k) plan. She showed Eric and Emily a report assuming a 10% interest rate illustrating the retirement income they would receive if they deposited the additional funds. The couple told Sophia that they would do this because they wanted the security of a guaranteed monthly income during retirement. Which of Sophia’s actions did not align with the Practice Standards, Step 5: Presenting the Financial Planning Recommendations?
I. Sophia’s recommendation to “purchase term life insurance” was not clear enough. II. Sophia did not provide Eric and Emily with pertinent facts to make an informed decision. III. Sophia’s response regarding the reason she was recommending term insurance was adequate. IV. Sophia should have advised the couple that the income assumed a 10% interest rate and was not guaranteed.
A. II and III
B. III and IV
C. I, II, and IV
D. I, II, III, and IV
C. I, II, and IV
Explanation: Sophia’s recommendation that the couple purchase term life insurance was not specific and clear. She did not give enough details for Eric and Emily to make an informed decision. The response, “Because you both need it” did not provide a specific, actionable response to the couple’s question regarding the term life insurance. Additionally, no alternatives were given to the recommendations Sophia proposed.
Analyze this scenario. Bari, a CFP® professional, is providing Financial Advice to her client, Jamal. After considering Jamal’s goals, family medical history, tax situation, and financial resources, she develops a financial plan that includes a recommendation for Jamal to purchase disability income insurance. Which statement regarding implementation responsibilities is CORRECT?
I. Bari is not responsible for implementing this planning recommendation because it only involves the purchase of a single product. II. Bari must explain to Jamal the responsibilities she has in implementing the recommendations and the responsibilities that Jamal and any third party may have with respect to implementation. III. If Bari and Jamal have not excluded implementation responsibilities from the Engagement, Bari must recommend one or more disability insurance policies to Jamal and help him select a policy that will meet his needs. IV. If Bari and Jamal have not excluded implementation responsibilities from the Engagement, Bari must identify and analyze policies designed to implement the recommendations and must consider advantages and disadvantages of the disability product relative to reasonably available alternatives.
A. I and II
B. II and III
C. II, III, and IV
D. I, II, III, and IV
C. II, III, and IV
Explanation: Bari is responsible for implementing the recommendations unless implementation is specifically excluded from the scope of the engagement.
A person in the conservation or protection phase of the financial life cycle is likely to have which of the following goals?
A. Long-term goals, such as investing for retirement
B. Short-term goals, such as saving for a down payment on a home
C. Long-term goals, such as education planning and preservation of capital
D. Short-term goals, such as protection and maintenance of current lifestyle
A. Long-term goals, such as investing for retirement
Explanation: In the accumulation phase of the financial life cycle, individuals have only limited discretionary income and, as a result, they are likely to focus on short-term, cost-of-living goals. In the conservation or protection phase, individuals’ financial goals are likely to change to longer-term goals, such as investing to provide for future retirement income. Finally, in the distribution or gifting phase, estate planning and capital preservation become most important.
Which of the following uses of the CFP® certification marks is CORRECT?
I. John Doe, C.F.P. II. John Doe, a CFP III. John Doe, CERTIFIED FINANCIAL PLANNERTM IV. John Doe, CFP®
A. IV only
B. I and III
C. II and IV
D. III and IV
D. III and IV
Explanation: Whenever a CFP® certificant uses the initials after his name (e.g., on a business card), the initials must be followed by the ® symbol. If the words CERTIFIED FINANCIAL PLANNER are used, they must be followed by a TM because the words are subject to trademark law. The initials should not include periods.
As a member of a team of financial advisors, a financial planner’s responsibilities for a client typically includes which of the following?
I. Helping the client identify financial goals II. Preparing tax returns for a small-business owner client III. Analyzing the client’s current financial status IV. Monitoring whether the client is complying with a plan after implementation
A. I and III
B. III and IV
C. I, III, and IV
D. I, II, III, and IV
C. I, III, and IV
Explanation: Unless a financial planner is also a tax professional with an IRS preparer tax identification number (PTIN), the planner should not engage in unauthorized tax preparation.
Which of the following is an example of qualitative data?
A. A copy of a client’s Will or trust documents.
B. The client’s statement of financial position.
C. A list of a client’s financial goals and objectives, ranked in order of importance.
D. Discretionary cash flows.
C. A list of a client’s financial goals and objectives, ranked in order of importance.
Explanation: A list of a client’s financial goals and objectives, ranked in order of importance, is an example of qualitative data because it indicates, in part, how a client feels about certain goals. The other choices are examples of quantitative data which can be expressed as a quantity or number (or document).
Bertha, age 55, plans to retire in 10 years. Currently, her cash flow and net worth are steadily increasing as her debt is decreasing. Based on Bertha’s current financial life cycle phase, which of the following goals is she likely to have?
A. Long-term goals, such as investing for retirement.
B. Short-term goals, such as saving for a down payment on a home.
C. Long-term goals, such as estate planning and preservation of capital.
D. Short-term goals, such as protection and maintenance of current lifestyle.
A. Long-term goals, such as investing for retirement.
Explanation: Bertha is in the conservation/protection phase of the financial life cycle. As such, her goals are likely longer-term goals, such as investing to provide for future retirement income. In the accumulation phase of the financial life cycle, clients have only limited discretionary income, and as a result, they are likely to focus on short-term, cost-of-living goals. Finally, in the distribution/gifting phase, estate planning and capital preservation are usually most important.
During the development of a client’s comprehensive financial plan, input from a team of financial advisors may be needed. This team of financial advisors, employed by the client, may include which of the following professionals?
a. A mortgage banker b. A licensed attorney c. A life insurance agent d. A Certified Public Accountant (CPA)
1) A & D
2) B & C
3) C & D
4) A, B, C, & D
4) A, B, C, & D
Explanation: A team of financial advisors may include all of these professionals. This team may also include other financial professionals, such as a property and casualty insurance agent or a personal banker.
Joy has become more risk averse and is not focused on accumulating assets, but maintaining the values of the ones she has. Joyce is in which financial life cycle phase?
A) Preretirement phase
B) Asset accumulation phase
C) Conservation/protection phase
D) Distribution/gifting phase
C) Conservation/protection phase
Explanation: People generally become more risk averse in the conservation/protection phase and become aware of the risks that were ignored in the asset accumulation phase.
Developing a financial plan often involves input from a team of financial advisors employed by the client. Members of this team may include which of the following professionals?
I. A trust officer II. An estate-planning attorney III. A property and casualty agent IV. A Certified Public Accountant (CPA)
A) I, II, and IV
B) I, II, III, and IV
C) I and IV
D) I and II
B) I, II, III, and IV
Explanation: A team of financial advisors may include all of these professionals. This team may also include other financial professionals, such as a life insurance agent.
Identify the responsibilities a CFP professional must uphold while working with another professional on a client’s behalf:
I. Communicate with the other professional about the services each will provide. II. Monitor the professional to ensure their compliance with the Code and Standards. III. Communicate respective responsibilities. IV. Inform the client in a timely manner if the other professional did not perform the services in accordance with the scope of services.
A) I, II, III, and IV
B) II, III, and IV
C) I, III, and IV
D) I only
C) I, III, and IV
Explanation: Standard A. 13 (Duties When Recommending, Engaging, and Working with Additional Persons) states that when working with another professional on a client’s behalf the CFP professional must:
* Communicate with the other professional about the services each will provide and their respective responsibilities; and * inform the client in a timely manner if the other professional did not perform the services in accordance with the scope of services to be provided and the allocation of responsibilities.
CFP® professionals do not have to monitor the professional to ensure compliance with the Code and Standards.
Which of the following best describes data that is measurable or conveyed as a quantity?
A) Qualitative data
B) Quality data
C) Qualified data
D) Quantitative data
D) Quantitative data
Explanation: Examples of quantitative, or objective, data include current financial statements, copies of wills and trusts, and a list of current investments.
In which step of the financial planning process is a planner charged with providing the client ongoing support?
A) Identifying and selecting goals.
B) Implementing the financial planning recommendation(s)
C) Monitoring progress and updating
D) Developing the financial planning recommendation(s)
C) Monitoring progress and updating
Explanation: It is within step seven, Monitoring Progress and Updating, that the planner is charged with providing the client ongoing support.
A financial planner’s responsibilities when acting as a member of a team of financial advisors for a client typically include all of the following EXCEPT:
A) Monitoring whether the client is complying with a plan after implementation.
B) Analyzing the client’s current financial status.
C) Helping the client identify financial goals.
D) Drafting a power of attorney for the client.
D) Drafting a power of attorney for the client.
Explanation: Unless a financial planner is also a licensed attorney, the planner should not draft legal documents, such as powers of attorney and wills to avoid the unauthorized practice of law.
Which of the following is NOT a correct use of the CFP marks?
A) CFP® certificant
B) CFP® planner
C) CFP® exam
D) CFP® practitioner
B) CFP® planner
Explanation: The Guide to Use of the CFP Certification Marks clearly lists the correct usage of the marks. CFP® certification marks must be followed by one of the approved nouns: “certificant,” “professional,” “practitioner,” “certification,” “mark,” or “exam.”
Jacoby Jones recently passed his CFP® Examination and fulfilled all of the CFP Board certification criteria. Identify an approved display of his name on an updated business card:
A) Mr. Jacoby Jones, CFP®
B) Jacoby Jones CFP® Advisor
C) Mr. Jacoby Jones, C.F.P.®
D) Jacoby Jones, Certified Financial Planner®
A) Mr. Jacoby Jones, CFP®
Explanation: “Advisor” is not a CFP Board approved noun. Periods should not be used in “CFP.” Capital letters or small-cap font along with a trademark symbol, should be used when CFP is spelled out.
Alan and Gretchen are completing a data survey form for their financial planner to use in reviewing their financial plan. Their planner has explained that a step in the financial planning process is understanding the client’s personal and financial circumstances. During this step, the planner obtains qualitative and quantitative information. Which of these is qualitative rather than quantitative data?
A) Employee benefits and pension plan information
B) Projected Social Security benefits statements
C) Education or other accumulation goals
D) Wills and trust documents
C) Education or other accumulation goals
Explanation: Education or other accumulation goals are qualitative wants and/or desires. Completed documents, such as a will or trust, Social Security statements, and business-sponsored employee benefit plan information involve measurable amounts, and are therefore quantitative.
According to the rules established by CFP Board, which of the following uses of the certification marks are CORRECT?
I. Frank Smith, C.F.P. II. Frank Smith, CFP® III. Frank Smith & Co., PA, CFPs IV. Frank Smith, CERTIFIED FINANCIAL PLANNER™
A) I, II, and IV
B) I, II, and III
C) II only
D) II and IV
D) II and IV
Explanation: The CFP® marks should never contain periods. In addition, the marks should not be used as part of or incorporated in the name of a firm.
The Watsons are recently retired and ready to take a vacation to Europe to celebrate their 40th wedding anniversary. When they return, they would like to meet with their financial planner to discuss setting up a family foundation to continue their lifelong philanthropic endeavors. The Watsons are currently in which life cycle phase?
A) Protection phase
B) Conservation phase
C) Distribution phase
D) Asset accumulation phase
C) Distribution phase
Explanation: The distribution/gifting phase begins subtly when a couple realizes that they can afford to spend on things they never believed possible. The asset accumulation and conservation/protection phases make this phase possible. For many people, there is a period when they are being influenced by all three phases simultaneously, though not necessarily to the same degree.
Analyze the scenario. Ling, a CFP® professional, is providing financial advice to her client. After considering the client’s goals, family medical history, tax situation, and financial resources, she develops a financial plan that recommends that the client purchase long-term care insurance. Which statement regarding implementation responsibilities is NOT correct?
A) Ling must explain to the client the responsibilities she has in implementing the recommendations and the responsibilities that the client and any third party may have with respect to implementation.
B) If Ling and the client have not excluded implementation responsibilities from the Engagement, she must recommend one or more long-term care insurance policies to the client and help her client select a policy that will meet the client’s needs.
C) Ling is not responsible for implementing this planning recommendation because it only involves the purchase of a single product.
D) If Ling and the client have not excluded implementation responsibilities from the Engagement, she must identify and analyze policies designed to implement the recommendations and must consider advantages and disadvantages of the insurance product relative to reasonably available alternatives.
C) Ling is not responsible for implementing this planning recommendation because it only involves the purchase of a single product.
Explanation: Ling is responsible for implementing the recommendations unless implementation is specifically excluded from the Scope of the Engagement.
A client is usually in what phase of the financial life cycle from approximately age 45 to 60 or immediately preceding the client’s planned retirement date?
A) Distribution phase
B) Gifting phase
C) Asset accumulation phase
D) Conservation/protection phase
D) Conservation/protection phase
Explanation: This defines the conservation/protection phase of the financial life cycle. In the asset accumulation phase, a client is usually age 45 or younger; however, this phase may occur later if the client’s children are not yet independent. A client is usually in the gifting, or distribution, phase from approximately age 60, or the planned retirement date, until the date of death.
In developing a client-planner relationship, a CFP® certificant is allowed to do, or is governed by, which one of the following?
A) As a CFP® certificant, the planner has the authority to represent the views of the CFP Board.
B) A CFP® certificant is free to promote the stability and long history of any organization with which they are affiliated as if it applies to the financial planning practice.
C) A CFP® certificant is not prevented from advertising the size, scope, and areas of competence of their financial planning practice.
D) In an effort to attract a client base, a CFP® certificant may make any statements about the benefits of working with them, as long as any limitations of the practice are disclosed in writing prior to signing a contract for planning services.
C) A CFP® certificant is not prevented from advertising the size, scope, and areas of competence of their financial planning practice.
Explanation: The size, scope, and areas of competence of a financial planning practice are appropriate types of information to be used in advertising. All of the other statements violate the rules and principles.
Which of the following are primary reasons why a financial planner will ask for each family member’s date of birth during the information gathering process?
A) To help determine retirement planning needs
B) To calculate Social Security “blackout periods” preretirement benefit amounts for qualifying individuals
C) To calculate insurance policy internal rates of return
D) To determine how future legislation will affect funding for children’s education
A) To help determine retirement planning needs
Explanation: A person’s birth date has little or nothing to do with preretirement Social Security benefit determination. If they have qualified for benefits, then the amount is determined by the formula independent of their age. However, a person’s birth date does have an effect on other potential Social Security benefits. Birthdates also have little to do with calculating an insurance rate of return. Because future legislation is uncertain, it is impossible to determine how it will affect the funding for children’s education.
As a member of a financial adviser team, a financial planner’s responsibilities for a client typically include which of the following?
I. Drafting a will for the client II. Assisting the client identifying financial goals III. Analyzing the client's current financial status IV. Monitoring whether the client is complying with a plan after implementation
A) II, III, and IV
B) II and III
C) I, II, III, and IV
D) I and IV
A) II, III, and IV
Explanation: Unless a financial planner is also a licensed attorney, the planner should not draft legal documents such as powers of attorney and wills to avoid the unauthorized practice of law.
