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CFP Exam 1 > Practice Questions > Flashcards

Practice Questions Flashcards

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1
Q

3 types of structured communication?

A
  • Interviewing – Predetermined & specific purpose to gather information.
  • Counseling – Develop a plan of where the client wants to be vs where they are now.
  • Advising – Giving specific guidance or suggestions to a client.
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2
Q

What is the importance of structuring communication with clients?

A

Structuring the communication provides both the format and the subject matter.

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3
Q

What are the four social styles?

A
  • Driver – Forceful, direct, power
  • Expressive – Outgoing, enthusiastic, wants recognition
  • Amiable – Easy going, dependent
  • Analytical – Logical, wants respect
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4
Q

Five basic attributes of physically attending are?

A
  • Face the other person
  • Adopt an open posture
  • Lean towards the other person
  • Maintain good eye contact
  • Be relaxed
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5
Q

Three types of understanding responses are?

A
  • Summarization response – reassuring, capturing many scattered messages, check on accuracy, usually at the end of the meeting.
  • Clarifying response – Tends to amplify the speaker’s statement, des not add anything new it simply expands what has already been said, clarify what the speaker had difficulty expressing.
  • Restatement – Letting speakers hear what they have just said encouraging them to continue speaking.
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6
Q

What is the purpose of interviewing?

A

To gather data.

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7
Q

Which method of communication is most often more accurate?

A) Verbal
B) Active listening

A

Active listening

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8
Q

How many steps in the financial planning process and what are they?

A
  1. Establishing and defining the relationship.
  2. Gathering data.
  3. Analyze and evaluate the financial status.
  4. Develop recommendations.
  5. Communicating recommendations.
  6. Implementing recommendations.
  7. Monitoring recommendations.
  8. Practicing within professional and regulatory standards.
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9
Q

Life cycle planning

5 cycles?

A
  • Early Career – Ages 25-35
  • Career development – Ages 35-50
  • Peak accumulation – Ages 50-58/62
  • Pre-retirement – 3-6 years before retiring
  • Retirement – 62/66 & Older
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10
Q

3 obstacles stopping people from gaining control of their finances?

A
  • Human tendency to procrastinate.
  • Living up to or beyond current income.
  • Lack of financial Knowledge.
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11
Q

CFP board consumer survey says the top 3 reasons why people begin financial planning is?

A

1) To build a retirement fund.
2) Health insurance.
3) Debt management.

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12
Q

What are the financial planning topics with the anagram:

R.E.T.I.R.E P.G

A 
R - Risk management
E – Education planning
T – Tax planning
I – Investment planning
R – Retirement savings & Income planning
E – Estate planning

P – Professional conduct
G – General principals

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13
Q

Cash flow management is essentially a euphemism for the budget planning and control process?

True? Or False?

A

True

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14
Q

What is cash flow planning?

A

It involves identifying courses of action that will help optimize (not maximize) net cash flow.

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15
Q

Home equity loans vs lines of credit

A

Home equity loan –
• Low interest rates because of high quality collateral.
• Usually standard fixed interest rates.

Home equity line of credit (HELOC) –
• Low interest rate because of high quality collateral.
• Usually variable rate loans.

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16
Q

Discretionary Expense?

A

A cost that is not essential for the operation of a home or business?

  • Savings.
  • Investments.
  • Household furnishings.
  • Educational savings.
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17
Q

Assets on a financial statement are listed at what type of value?

A

Fair market value

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18
Q

What is a cash flow statement?

A

It summarizes a client’s financial activities over a specified period by comparing cash inflows and cash outflows, it indicates whether the net cash flow for the period is positive or negative.

Income – Expenses = Net Cash Flow

Money in – Money out = Change in Cash Flow

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19
Q

The cash flow statement has 3 basic components, what are they?

A
  • Income
  • Expenses
  • Net Cash Flow
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20
Q

CPI

Consumer Price Index

A

A measure that examines the weighted average of prices of a basket of consumer goods and services such as:

  • Transportation
  • Food
  • Medical care
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21
Q

Risk free rate of return

VS

Risk premium

A

Risk free rate of return –
• What rate could you get or can you get without taking risk. Usually compared to the 3 month U.S. treasury bill.

Risk premium – 
•	Risk of lending money.
•	Tax law changes.
•	Borrower default.
•	Inflation may erode principal.
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22
Q

Sinking fund problem?

A

The amount of annual payments/deposits is unknown.

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23
Q

NPV

Net Present Value

A

Net present value of an investment is the present value of a stream of cash inflows minus the present value of the stream of cash outflows.

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24
Q

Familiarity bias VS Availability bias

A

Familiarity bias – People fear risks that are unknown more than risks that are known.

Availability bias – People judge events that are easy to imagine or remember as more probable than they are in reality.

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25
Q

Disintermediation?

A

The withdrawal of deposits from financial institutions (intermediaries) and investment in other products.

  • Reduces reserves in the banking system.
  • Reduces deposits held in the banks.
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26
Q

As a person’s wealth increases which of the following types of risk tolerance have been found to increase?

A) Absolute Risk Tolerance
B) Relative Risk Tolerance

A

Absolute Risk Tolerance

Absolute - $ amount allocated to risk investments.

Relative – Proportion of wealth that is allocated to risky assets.

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27
Q

Which financial statements are prepared for internal and external viewing?

A) Business
B) Personal

A

Both business and personal statement are sometimes prepared for internal and external viewing.

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28
Q

If your address changes you must notify the CFP board within how many days?

A

45

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29
Q

Can a CFP borrow or lend money to/from a client?

A

Generally NO

However, it is likely okay if:
• The client is an immediate family member
• The client/advisor is in the business of borrowing/lending there for it is not the client who is lending it’s the organization they work for.

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30
Q

Compliance VS Ethics

A

Compliance – obedience to the law

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31
Q

When can a CFP disclose a client’s confidential information?

A

When authority is implied by the client agreement

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32
Q

Annuity VS Annuity Due

A

Annuity – A series of equal payments, over a specified period of time, made at the END of each period.

Annuity Due - A series of equal payments, over a specified period of time, made at the BEG of each period.

FYI: In an annuity the period is know i.e. 10 years. Perpetuity is a INFINITE stream of equal payments.

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33
Q

Annuity Due

Simple vs Complex

A

Annuity Due - A series of equal payments, over a specified period of time, made at the BEG of each period.

Simple – Interest payments match the payout period. i.e. payout is monthly, compounding is also monthly.

Complex – Payout and compounding do not match. i.e. Payout is monthly, compounding is annual.

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34
Q

Amortization

A

In early years of a loan more of the repayment goes towards interest, in later years more goes towards principal.

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35
Q

FVSS =

A

FVSS = PVSS x ( 1+ i )n

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36
Q

PVSS =

A

PVSS = FVSS x ( 1 / (1+i)n )

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37
Q

Definition of AUM

A

Defined in Sec. 203A

  • Is the account a securities portfolio?
  • Does the account receive continuous and regular supervisory management services?
  • At least 50% of the portfolio consists of securities. (Cash, note, stock, treasury stock, security feature, bond, debenture.) ALMOST ANYTHING.
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38
Q

Exception from registering under the Investment Advisor Act of 1940

L.A.T.E

A

L – Lawyer

A – Accountant

T – Teacher

E – Engineer

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39
Q

Exempt from registering under the Investment Advisor Act of 1940

A
  • Work for and solely give advice to insurance companies.
  • Private hedge fund advisors.
  • Charity advisors solely
  • Some pension plan advisors
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40
Q

3 test rule for registering as an investment advisor

A.B.C

A

Does/is the person:

A – give ADVICE about securities

B – In the BUSINESS of giving advice about securities.

C – COMPENSATED for giving advice about securities.

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41
Q

National De Minimus Standard

A

Investment advisors may not be required to register in any state unless the advisor has a place of business in that state, or during the proceeding 12 month period, has had more than 5 clients who are residents of that state.

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42
Q

CFP Board Principals

A
  1. Integrity
  2. Objectivity
  3. Competency
  4. Fairness
  5. Confidentiality
  6. Professionalism
  7. Diligence
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43
Q

Q -

“Prohibits deceit, misrepresentations and other fraud in the sale of securities. Often referred to as “The truth in securities law”

A

Securities Act of 1933

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44
Q

Q –

“Created the Federal Deposit Insurance Corporation as a temporary agency to insure deposits”

A

Banking Act of 1933

Glass-Steagall Act

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45
Q

Q –

“Created the SEC and regulated authority to create self-regulatory authorities”

A

Securities Exchange Act of 1934

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46
Q

Q –

“Regulates the organization of companies, including mutual funds that engage in primarily investing, reinvesting and trading of securities”

A

Investment Company Act of 1940

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47
Q

Q -

“States that regulation of insurance would remain with the states provided the states actually regulated it”

A

McKarren-Ferguson Act of 1945

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48
Q

Q –

“Required federal reserve approval to establish a bank holding company”

A

Bank Holding Company Act of 1956

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49
Q

Q –

“Requires that employers who establish pension plans meet minimum standards & created the Pension Benefit Guaranty Corporation”

A

Employee Retirement Income Security Act of 1974

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50
Q

Q –

“Deregulated fixed commission prices on brokerage transactions”

A

May Day 1975

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51
Q

Q –

“Established NOW accounts and established the depository institutions deregulation committee”

A

Depository Institutions Deregulation and Monetary Control Act of 1980

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52
Q

Q –

“Permitted adequately capitalized and managed bank holding companies to acquire banks in any state on year after enactment”

A

Reigle- Neal Interstate Banking & Branching Efficiency Act of 1994

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53
Q

Q –

“Delineated the requirements for SEC and state registration of investment advisors and established a national de-minimus standard for state registration of investment advisors”

A

National Securities Market Improvement Act of 1994

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54
Q

Q –

“Created the public Company Accounting Oversight Board (PCAOB)

A

Sarbanes-Oxley Act of 1999

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55
Q

Q –

Regulates over the counter swaps, increased regulatory enforcement and raised SIPC cash coverage to $250,000. Created the Consumer Financial Protection Bureau”

A

Dodd-Frank Wall Street Reform Act

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56
Q

Q –

“Removed the prohibition on general solicitations and advertising related to securities. This allows small businesses to use crowd funding”

A

Jump Start our Business Start-ups (JOBS ACT)

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57
Q

A financial adviser whose activities are included under any one of the three tests in SEC release IA-770 is automatically subject to regulation under the Investment Advisers Act of 1940?

A

False. In order to be subject to the Investment Advisers Act of 1940, a person’s activities must fulfill all three of the tests.

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58
Q

A registered investment adviser may not use the initials RIA or the label Registered Investment Adviser after his or her name on a business card or letterhead?

A

False. Though the use of the initials RIA is prohibited, the SEC does allow the use of the complete phrase Registered Investment Adviser after the practitioner’s name.

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59
Q

FINRA is a self-regulatory organization overseen by the SEC?

True or False

A

True

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60
Q

The size of your overall portfolio will influence the size of your emergency fund?

A

True

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61
Q

The three main credit bureaus are?

A
  • Experian
  • Equifax
  • TransUnion
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62
Q

About one-third of all new car sales involve lease financing?

A

True

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63
Q

GAP Coverage Insurance

A

If a leased car is stolen or

totaled in an accident.

64
Q

CollegeSure CDs

A

keep pace with an index of school costs, not the costs at a particular school.

65
Q

The Savings Bonds for Education program

A
  • There are MAGI limits on the Savings Bond for Education.

* To qualify for the Savings Bonds in Education program the bonds cannot be held in the student’s name.

66
Q

Taxpayers are able to deduct qualified tuition and related expenses even if they do not itemize deductions, although these expenses are subject to phaseout based on modified adjusted gross income.

True or False

A

True

67
Q

Federal Perkins loans are need based.

True or False

A

True

68
Q

The NPV of an investment is?

A

the present value of the stream of cash inflows minus the present value of the stream of cash outflows.

69
Q

An active listener is one who?

A

attempts to see the world from the other’s frame of reference.

70
Q

Accurate Empathy

A

Accurate empathy exists when the advisor’s sense of the client’s world fits the client’s self-image

71
Q

Genuineness

A

Genuineness means the advisor is a real person, that is, there is no façade, no stereotypical role-playing of what a professional advisor is considered to be

72
Q

A person facing death typically passes through five stages:

A
  • Denial
  • Anger
  • Bargaining
  • Depression
  • Acceptance
73
Q

About two-thirds of the total message is communicated via nonverbal channels?

A

True

74
Q

The two main sources of nonverbal behaviors are?

A

The body & the voice

75
Q

Attending is primarily a physical activity?

A

False. Attending is not only a physical activity but also a psychological activity involving active listening.

76
Q

A clarifying response

A

A clarifying response is a understanding response that tends to amplify the speaker’s statement.

77
Q

How should a comprehensive financial plan be presented?

A

A comprehensive financial plan should only be communicated to the client in the form of a written report to follow the eighth planning domain and satisfy compliance considerations

78
Q

One result of market volatility of the past decade is?

A

an increase in the sophistication of planners.

79
Q

A trend creating opportunities for financial planning advisors is the falling median age of Americans?

A

False. A trend creating opportunities for financial planning advisors is the rising median age of Americans, which has risen more than 7 years in the past 3 decades and continues to rise as baby boomers face retirement.

80
Q

According to a survey conducted by the CFP ® Board, the main reason people begin financial planning is to?

A

Generate retirement income.

81
Q

According to a study of baby boomers, only 10 percent of them will continue to work during retirement?

A

False. According to a study of baby boomers conducted by Allstate, more than 70 percent of them will continue to work during retirement.

82
Q

Planning Steps

A

1) Establish & Define
2) Gather Information
3) Analyze & Evaluate
4) Develop Recommendations
5) Communicate Recommendations
6) Implement Recommendations
7) Monitor Recommendations
8) Practice Professionally

83
Q

Life Cycle Planning

A

1) Early Career
2) Career Development
3) Peak Accumulation
4) Pre-retirement
5) Retirement

84
Q

Disintermediation

A

The withdrawal of deposits from financial institutions and investment in other products. Reduces reserves in the banking system. Reduces deposits held in banks.

85
Q

Monetary Policy

A

Setting reserve requirements on deposits accounts, Setting margin requirements on brokerage accounts, increasing or decreasing reserves in the banking system. Federal reserve manages.

86
Q

Planning Topics

A 
R. isk management
E. ducation planning
T. ax planning
I. nvestment planning
R. etirement savings/income
E. state planning

P. rofessional conduct
G. eneral principles

87
Q

David Merrill 4 Social Styles

A

Driving – Forceful, Direct

Expressive – outgoing, enthusiastic, wants recognition

Amiable – Easy going, dependable, needs approval

Analytical – Logical, quiet, wants respect

88
Q

Bankruptcy - Chapter 7

A

Straight bankruptcy. Liquidation proceeding. Stays on credit report for 10 years. Can be voluntary.

89
Q

Bankruptcy - Chapter 13

A

Available to people not corporations. Petitioner proposes repayment plan based on income after reasonable expenses, plans are for 3 years but can be extended to 5. Stays on credit report for 7 years. Petitioner is “making best efforts”.

90
Q

Bankruptcy - Chapter 11

A

Reorganization/restructuring of debt proceeding. The debtor retains control of assets. Can be voluntary or involuntary.

91
Q

3 Rule Test rule for Investment Advisors Act of 1940

A

A. Does someone give ADVICE about securities.
B. Are you in the BUSINESS of giving advice about securities.
C. Are you COMPENSATED for giving advice about securities.

92
Q

Liquidity Ratio =

A

Liquid Assets / Total Current Debts

93
Q

Solvency Ratio =

A

Net Worth / Total Assets

94
Q

Savings Ratio =

A 
                  Annual After-tax Income
95
Q

Debt Service Ratio =

A

Mortgage Payments + Debt Repayment / Net Income

96
Q

529 Plan

A
  • For qualifying higher educational expenses.
  • State operated.
  • Contribution limits are high.
  • Generally, account limits are around $250,000.
  • Must be at least a half time student.
  • No income cap/phase out.
  • Investments grow tax deferred (and are distributed as such, if used for qualifying expense).
  • Not transferred into the name of the child at 18.
  • If parents are owners can change beneficiary to immediate family member. Other children, siblings, or cousins.
  • 529 plan distributions cannot be used for Hope Scholarship or Lifetime Learning credit.
97
Q

Zero Coupon Bond

A
  • Sold at a substantial discount to face value because they do not pay interest. This does however lock in interest rate for the life of the bond.
  • Price is more volatile.
  • Buyer must report income each year even though none is actually received.
98
Q

Series EE & Series I US Savings Bonds

A
  • Fully or partially tax exempt if used for qualifying higher educational expenses. Limited by AGI.
  • Poor hedge against inflation.
  • Considered free from the risk of default.
  • Federal income tax is deferred until redemption.
  • Can be placed in the name of the child and circumvent the kiddie tax.
  • Savings bonds are exempt from state income tax (appealing to high income earners).
99
Q

Pre-paid Tuition Plans

A
  • Typically allow parents to by tuition credits at the current cost. Locking in the price.
  • Pre-paid tuition credits do not guarantee enrollment to school.
  • Schools usually offer refunds without interest.
100
Q

PLUS Loan (Parent Loans for Undergraduate Students)

A
  • Available through Direct and FFEL programs.
  • Not need based but cannot have bad credit.
  • Can borrow up to the entire cost of college, less other financial aid or scholarships.
  • Interest rates are variable.
101
Q

Federal PELL Grants

A
  • Need based.
  • Up to $5,815 per year. Amount, received is based on need, cost of school and full time or part time.
  • Limited to receiving 600% of the Pell grant over a lifetime.
102
Q

Lifetime Learning Credit

A
  • Up to $2,000 credit per return
  • Available for all years of postsecondary education and for courses to improve job skills.
  • Available for an unlimited number of years.
  • Felony/drug conviction rule does not apply.
103
Q

American Opportunity Credit (Hope Scholarship)

A
  • Up to $2,500credit per eligible student.
  • Available only up to the first 4 years of postsecondary education.
  • Student must be pursuing undergraduate degree, or another recognized educational credential.
  • Student must be enrolled at least half time for one academic period beginning during the year.
  • No felony/drug conviction on students record.
104
Q

Deductibility of Higher Educational Expenses

A
  • Beginning in 2004, taxpayers can deduct qualified tuition and related expenses even if they do not itemize deductions.
  • $4,000 per individual tax payer.
  • Cannot take deduction if AGI is above $80,000.
105
Q

Under the Fair Credit Billing Act a consumer’s responsibility for unauthorized charges on credit cards is limited to what amount?

A

$50 per card

106
Q

Orientation to values

A

One’s orientation to values is learned and developed over a period of years

107
Q

Under the Rules of the CFP Board’s Code of Ethics and Professional Responsibility, a CFP Board designee’s compensation shall be determined by what standard?

A

Fair and reasonable compensation

108
Q

Absolute risk tolerance vs Relative risk tolerance

A

Absolute risk-tolerance, measured by the dollar amount allocated to risky investments, appears to increase as wealth increases.
relative risk tolerance, measured by the proportion of wealth that is allocated to risky assets as wealth increases.

109
Q

SEC Release No. IA-770 sets forth a compensation test for investment advisers. Which of the following statements concerning the compensation test is (are) correct?

I. The test is met if the adviser is compensated by commissions rather than a separate fee for advice on securities.
II. A professional who provides advice about securities may meet the test even if he or she receives no compensation for the advice.

A

I only

because the compensation test requires that the investment adviser receive compensation in some form.

110
Q

Which of the following persons must register with the SEC as an investment adviser?
I. an accountant who renders investment advice only incidental to his or her practice of accounting
II. an adviser who advises 10 clients on securities investments but who does not hold himself or herself out to the public as an investment adviser

A

Neither
An accountant who renders investment advice only incidental to the practice of accounting qualifies under one of the exceptions to registration. An adviser who advises 10 clients on securities investments but who does not hold himself or herself out to the public as an investment adviser qualifies for the private adviser exemption.

111
Q

Which of the following statements concerning a CFP Board designee’s responsibility for a client’s funds is (are) correct?

I. Commingling of one client’s funds with the funds of other clients is not permitted.

II. The standard of care required of a CFP Board designee who takes custody of client funds for investment is to commit no gross negligence in caring for the property.

A

Neither
Commingling of one client’s funds with the funds of other clients is permitted provided accurate records are kept and there is compliance with legal requirements. A CFP Board designee who takes custody of client funds for investment is required to exercise the care of a fiduciary. This standard is higher than avoiding gross negligence.

112
Q

Under the CFP Board’s Financial Planning Practice Standards, which of the following statements concerning the first step of defining the scope of the engagement is correct?

I. The scope of the engagement need not be in writing.

II. The financial plan requires comprehensive data from the client so the scope of the engagement should not be limited to specific activities.

A

I only

The scope of the engagement need not be in writing. The scope can be limited to specific activities.

113
Q

The CFP Board’s Financial Planning Practice Standards apply to which of the following groups?

I. CFP designees who perform tasks not involving personal financial planning.

II. CFP designees who are compensated by commission rather than fee only.

A

II only
The standards apply to CFP designees when performing personal financial planning regardless of the method of their compensation.

114
Q

All CFP® professionals’ financial planning engagements must be outlined in writing prior to making recommendations.

A

False

115
Q
  • CFP® professionals must obtain client statements and financial information when analyzing quantitative goals.
  • CFP® professionals must analyze the client’s information to gain an understanding of the client’s financial situation.
  • CFP® professionals must consider sufficient and relevant alternatives to the client’s current course of action in an effort to meet the client’s goals.
A

True

116
Q

restrictions on a registered investment adviser under the Investment Advisers Act of 1940

A

RIA must provide in the advisory contract that no assignment is permitted without the client’s consent. An RIA must disclose all material facts in connection with a securities transaction. An RIA must file a form annually to update information filed on Form ADV with the SEC. An RIA must maintain records of transactions with clients and other documents for 5 years.

117
Q

characteristics of Perkins loans

A

(A) Administered by the student’s college

(B) Federally supported

C) Available to undergraduate and graduate students

118
Q

Janice Miller, a CFP professional, is preparing a brochure to give to prospective clients to disclose information about her firm. According to the Code of Ethics and Professional Responsibility adopted by the Certified Financial Planner Board of Standards, all the following information must appear in the brochure

A

The identity of the insurance companies that the firm represents and any commission arrangements with those companies

(B) A statement of whether the firm’s compensation will include commissions or fees only

(C) Resumes of the firm’s employees who will provide financial planning services to the client

119
Q

Maximum account balances in a sec.529 plan

A

Maximum account balances vary by state; they are generally around $250,000

120
Q

Chapter 7 Bankruptcy

A

“Straight Bankruptcy”
Can be voluntary, can be an individual, a married couple, partnership or corporation.
A debtor can only use this method to discharge debt once every years.
Exempt from the bankruptcy estate (not subject to creditors claims) are: pensions, annuities, life insurance, certain household goods, tools of a trade or profession.
Can be classified as non-dischargable or dischargable. Non-dischargable debt are debts incurred in anticipation of filing for bankruptcy, i.e. recent credit card debt.

121
Q

Chapter 13 Bankruptcy

A

A voluntary petition available to natural persons but not corporations.
Petitioner must have a regular income that exceeds his or her reasonable living expenses.
Debtor proposes a repayment plan based on how much income is available after expenses and is protected against collection actions.
Plans are designed for 3 years and can be extended to 5 years.
If the plan is adhered to strictly at the end some of the debt left can be discharged. Except things like taxes and child support.
Creditors do not vote on the plan, a court determines if the plan meets the following tests:
1) must be in good faith
2) must be in the best interest of the creditors
3) petitioner is making “best efforts”

122
Q

Chapter 11 Bankruptcy

A

“re-organization proceeding” typically used by corporations and partnerships. Individuals can also use however.
Debtor remains in control of his/her assets and maintains business during he proceedings.
The repayment plan must be approved by a majority of the creditors in each class and by enough creditors in each class to equal 2/3rds of the indebtedness to that class.
Individuals whos debt exceeds limits for chapter 13 bankruptcy usually choose chapter 11. If needed chapter 11 can be converted to chapter 7 bankruptcy (liquidation).

123
Q

SEC release IA-770

SEC release IA-1092

A

IA-770 - 3 test approach to know whether a financial advisor is subject to regulation under the investment advisors act of 1940. A. B. C rule.

IA-1092 - reaffirms the 3 test rule in IA-770. Any financial services professional who, by his or her activities, answers all three tests in the affirmative is subject to regulation under the Investment Advisors Act of 1940.

124
Q

What are the 6 specific exclusions for being regulated under the Investment Advisors Act for professionals who otherwise would meet the 3 tests rule.

A

1) Any bank or bank holding company defined in the bank holding company act of 1956 that is not a investment company.
2) L.A.T.E - any lawyer, accountant, teacher or engineer whos advice is solely incidental.
3) any broker, dealer, register rep whose performance of advisory services Is solely incidental and receives no special compensation for his or her services.
4) the publisher of any newspaper, news magazine or business/financial publication of general or regular circulation.
5) any person whos advice, analyses or reports relate only to direct obligations or are guaranteed to principal by the united states government.
6) any other persons not within the intent of the law as the securities exchange commission may designate by rules and regulations or order.

125
Q

Five categories of individuals who are exempt from registration under the investment advisors act of 1940.

A

1) any investment advisor who clients are all residents of the state of which the investment advisor maintains the principal office and place of business.
2) any investment advisor whose clients are insurance companies.
3) any investment advisor who, during the course of the preceding 12 months has had fewer than 15 clients and who neither presents himself or herself to the general public as an investment advisor.
4) any investment advisor that is a charitable organization or is employed by a charitable organization.
5) any advisor who provides advice, analysis or reports only to charitable organizations, or to funds operated for charitable purposes. any advisor who provides advice solely to church employee pension plans.

126
Q

Investment Advisors supervision and Co-ordination Act of 1997 added Sec.203A of the Advisors Act. what are the four types of advisors who are not prohibited from SEC registration, which effectively requires them to register at the federal level?

A

1) Advisors that have “AUM” of $100M or more
2) Advisors to registered investment companies
3) Advisors that are not regulated or required to be regulated as investment advisors in the state where they maintain their principal office and place of business.
4) advisors that are exempt from the prohibition by SEC rule or order.

127
Q

Fiduciary

A

A fiduciary has the obligation to place the clients interests ahead of his/her own and is held to a standard of prudence in the financial management of a clients affairs.

128
Q

Basic principals of communication

A

1) Communication is learned through experience , experience on its own does not make someone a good communicator.
2) words do not mean - people do. words are merely symbols. words can have many meanings.
3) language is learned
4) no word (symbol) can be interpreted the same way.
5) it is impossible for any individual to encode or process all parts the message.
6) some experts claim the single biggest problem with communication is the assumption of it. too many people assume their message is understood.
7) we are constantly communicating and it constantly being interpreted.
8) listening is communication too.
9) the most effective communication is when the receiver gives understanding responses.
10) personalizing messages enhances the communication process.

129
Q

Non-verbal communication methods

A

1) Body positions
2) Body movements
3) Gestures
4) Facial expressions
5) Eye contact
6) Voice tone
7) Voice pitch

130
Q

5 basic attributes of physically attending are?

A

1) face the other person
2) adopt an open posture
3) lean towards the other person
4) maintain god eye contact
5) be relaxed while attending

131
Q

The four types of leading responses are?

A

1) explanatory response
2) interpretive response
3) re-assuring response
4) suggestive response

132
Q

Seven principles in the code of ethics and professional responsibility of the CFP Board of Standards?

A

1) Integrity
2) Objectivity
3) Competence
4) Farness
5) Confidentiality
6) Professionalism
7) Diligence

133
Q

What famous rule does the American College’s professional pledge require it’s designation holders to follow?

A

“Do unto others as you would have them do unto you”

134
Q

Characteristics that define a professional?

A

1) specialized knowledge not generaly understood by the public
2) threshold entrance requirement
3) sense of altruism
4) code of ethics

135
Q

Altruism?

A

characteristic that facilitates adherence to the code of ethics. unselfish regard for the welfare of others nd thus requires the professional to adhere to ethical standards unselfishly and to take others’ needs and views into account.

136
Q

The CFP boards Financial Planning Practice Standards are intended to?

A

1) Assure that the practice of financial planning by CFP professionals is based on established norms of practice.
2) Advanced professionalism in financial planning.
3) Enhance the value of the financial planning process.

137
Q

FICA tax

A

the Federal Insurance Contributions Act (FICA) tax is a payroll tax on both employees and employers to fund Social Security and Medicare

138
Q

SECA tax

A

the Self-Employment Contributions Act (SECA) tax is a tax on self-employed individuals to fund Social Security and Medicare

139
Q

taxable wage base

A

Social Security taxes for OASDI benefits (currently 6.2 percent for both an employee and employer) are paid on wages up to the current year’s taxable wage base.

140
Q

quarters of coverage

A

the method of determining eligibility for Social Security benefits. For 2015, a worker receives credit for one quarter of coverage for each $1,220 in annual earnings on which Social Security taxes are paid. A total of four quarters of coverage can be earned in one year.

141
Q

fully insured status

A

the term used to describe an individual who is eligible to receive Social Security benefits. A person is fully insured for retirement benefits if he or she has 40 quarters of coverage.

142
Q

currently insured

A

a status under Social Security that means that the worker’s decedents are eligible for certain survivors’ benefits. To be currently insured, it is only necessary to have credit for 6 quarters of coverage out of the 13-quarter period ending with the quarter in which death occurs.

143
Q

disability insured

A

the term used to describe an individual who is eligible to receive Social Security disability benefits. Disability-insured status requires that a worker (1) be fully insured and (2) have a minimum amount of work under Social Security within a recent time period.

144
Q

primary insurance amount (PIA)

A

Social Security retirement benefits are based on a formula that is a function of the worker’s average indexed monthly earnings (AIME)

145
Q

average indexed monthly earnings (AIME)

A

the term used to describe the indexed earnings figure used to calculate Social Security retirement benefits. AIME represents the 35 highest years of wages earned by the individual.

146
Q

family maximum

A

a Social Security term referring to the maximum benefit payable when there are three or more family members (including a retired or disabled worker) eligible for benefits based on a single worker’s wages

147
Q

earnings test

A

a participant receiving Social Security benefits prior to his or her Social Security full retirement age will have a reduction in benefits if his or her earnings from employment exceed a specified level. In 2015, Social Security benefits are reduced $1 for every $2 earned in excess of $15,720. There is an exception in the calendar year when the individual attains the full retirement age. In that year, the reduction is only $1 for every $3 of earnings in excess of $41,880. Under the exception, earnings include only amounts earned before the month the individual reaches full retirement age.

148
Q

COLA

A

Cost-of-Living Adjustments: OASDI benefits are increased automatically each January as long as there has been an increase in the CPI for the one-year period ending in the third quarter of the prior year.

149
Q

provisional income

A

a technical term to describe the income counted when determining whether or not Social Security benefits are taxed. Provisional income includes adjusted gross income, tax-free municipal bond earnings, and one-half of the Social Security benefits received.

150
Q

What are the issues facing women in retirement

A 
Less likely to have a pension at work
Lower earnings 
Higher turnover
Greater longevity
Caregivers
More likely to be widowed
Conservative investments
More willing to take advice
151
Q

Describe the expense method approach for determining the income needed in the first year of retirement.

A

Projected expenses for first year of retirement

Appropriate for older clients

152
Q

Describe the flooring approach to retirement income planning.

A

Flooring (also known as essential vs. discretionary)
A portion of the portfolio is put into guaranteed or low-risk products or ladder strategies to create an income “floor” to meet essential expenses
Social Security (when available) creates at least a partial floor—delaying increases floor
Sometimes the essential vs. discretionary approach is thought of as annuitization for the core piece and invest for the rest
Guarantee the basic expenses—allow for upside potential on the discretionary expenses
A challenge can be that clients think of standard of living, not essential vs. discretionary expenses

153
Q

Features of a reverse mortgage

A 
HECM provides FHA insurance
All owners age 62 or older
Applies to principal residence 
Amount based on age, home value, interest rate
No income tax consequences of payment 
Debt grows over the time of the loan
Repayment only at time of sale
Nonrecourse loan—if outstanding balance exceeds value of home, home owner not responsible
If home value exceeds loan amount homeowner or heirs receive difference
Payment options
Lump sum
Line of credit
Monthly payments
154
Q

Medicare

A

Part A—hospital coverage
Part B—doctor’s bills
Part C—managed care alternative
Part D—prescription drug benefit

155
Q

Identify the exceptions to the general rule that distributions from qualified plans, 403(b) annuities, and IRAs are included as ordinary income.

A

Distributions after death of participant
Distributions due to disability
Deductible medical expenses
Substantially equal periodic payments (qualified plans must separate from service)
Qualified plan or 403(b) participant
Who separates from service after age 55
Then all distributions exempt from penalty tax

156
Q

Age 55 Exception

A

Qualified plan or 403(b) participant
Who separates from service after age 55
Then all distributions exempt from penalty tax

CFP Exam 1 (1 decks)

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