Sample Test Questions Flashcards
All the following statements concerning a client’s individually owned insurance policies are correct EXCEPT
(A) Life insurance coverage amounts are a factor in the value of the client’s estate.
(B) Property insurance coverage amounts are a factor in the client’s liquidity position.
(C) Disability insurance coverages constitute one element of the client’s resources available for disability needs.
(D) Liability insurance coverages should be analyzed to see if they provide protection against potential liability losses.
The answer is (B).
Property insurance coverages should be analyzed to see if they provide adequate protection against potential property losses. They are not a factor in the client’s liquidity position.
According to a survey conducted by the CFP® Board, the top three financial planning areas of specialization that advisors engage in include all the following EXCEPT
(A) Closely held business planning
(B) Pension/retirement planning
(C) Comprehensive planning
(D) Investment planning/advice
The answer is (A).
Closely held business planning is not one of the top three financial planning areas of specialization engaged in by advisors.
To develop rapport with clients an advisor must create an environment that promotes openness by doing all the following EXCEPT
(A) Alleviating the concerns of clients
(B) Having informal and unstructured meetings with clients
(C) Responding to the social styles of clients
(D) Communicating effectively with clients
The answer is (B).
In any kind of planned and purposeful communication setting, the first element that needs to be attended to is structuring. It serves to determine both the format and the subject matter of the interaction that is to follow. Proper structuring will not only alleviate most of the client’s anxieties about the financial planning process, it will also help to build rapport with the client.
A financial service professional would devise client recommendations during which domain of financial planning?
(A) Communicating the recommendations
(B) Analyzing the client’s current financial status
(C) Developing the recommendations
(D) Gathering information necessary to fulfill the engagement
The answer is (C).
The advisor develops the recommendations during the developing the recommendations domain.
(B), and (D) occur before developing the recommendations and (A) communicating the recommendations, happens after.
Which of the following does not affect the determination of a student’s potential financial aid?
I. 20% of the student’s assets.
II. 529 plan assets with non-parent owners.
(A) I only
(B) II only
(C) Both I and II
(D) Neither I nor II
The answer is (B).
I is incorrect because 20% of student assets affect available financial aid.
II is correct because non-parental (dependent) 529 plans owned by an aunt or grandparent do not affect financial aid.
Which of the following is an appropriate investment for an emergency fund?
(A) A money market mutual fund
(B) Bonds
(C) Real estate
(D) Life insurance
The answer is (A). (B), (C), and (D) are incorrect because these assets are not liquid assets.Emergency fund assets must be able to be quickly converted to cash without loss of value in order to meet the client’s needs. A money market mutual fund is a liquid asset that can quickly be converted to cash without loss of value.
Which of the following college savings vehicles eligibility are (is) limited by income?
I. Section 529 College Saving Plans
II. Coverdell Education Saving Accounts
(A) I only
(B) II only
(C) Both I and II
(D) Neither I nor II
The answer is (B).
Only the Coverdell has limitations
All the following statements concerning guidelines on risk assessment are correct EXCEPT
(A) Results from a questionnaire or other measurement device are only an approximation.
(B) The assessment should begin by looking at the client’s demographic characteristics and personality makeup.
(C) The client’s level of risk tolerance should be ascertained without involving him or her in the assessment.
(D) Biases that distort the client’s true level of risk tolerance may be operating on his or her risk perceptions.
The answer is (C).
Assessing the client’s risk tolerance is a cooperative venture. The advisor should use the information he or she collects to start a dialogue with the client about risk tolerance.
The second financial planning domain (determining goals and gathering data) is related to which of the following Practice Standards?
(A) Defining the scope of the engagement
(B) Defining the monitoring responsibilities
(C) Presenting the financial planningrecommendations
(D) Obtaining quantitative information and documents
The answer is (D).
(A) is incorrect because defining the scope of the engagement is related to domain 1 (establishing and defining the advisor-client relationship) of the financial planning process.
(B) is incorrect because defining monitoring responsibilities is related to domain 6 and 7 (implementing recommendations and monitoring the plan) of the financial planning process.
(C) is incorrect because presenting the financial planning recommendations is related to the fourth and fifth domains of the planning process (developing and communicating recommendations) of the financial planning process.
Which of the following statements concerning types of interviews is correct?
(A) A directive interview usually takes more time than a nondirective interview.
(B) The advisor usually controls the pace and content of a nondirective interview.
(C) A nondirective interview tends to be more flexible than a directive interview.
(D) The client usually controls the pace and content of a directive interview.
The answer is (C).
(A) is incorrect because a nondirective interview takes more time than a directive interview.
(B) is incorrect because the client usually controls the pacing of a nondirective interview through the depth of his or her responses.
(D) is incorrect because the advisor directs and controls both the pace and the content to be covered in a directive interview.
Active listening requires a financial planner to:
(A) Take the lead in a conversation and refrain from personal topics.
(B) Talk over 50 percent of the conversation, and listen less than 50 percent.
(C) Listen over 50 percent in a conversation, and talk less than50 percent.
(D) Engage their client and integrate nonverbal and verbal signals.
The answer is (D).
Engaging the client and integrate verbal and nonverbal signals
(A) Is incorrect because financial planning is full of personal discussion. (B) And (C) are incorrect because there is no prescribed percentage of talking and listening.
Which of the following statements concerning nonverbal behaviors is (are) correct?
I. They are linguistic signs used in communication.
II. Active listening is ineffective in interpreting these behaviors.
(A) I only
(B) II only
(C) Both I and II
(D) Neither I nor II
The answer is (D).
I is incorrect because nonverbal behaviors refer to those aspects of communication other than words themselves. They are nonlinguistic signs that convey a wealth of information.
II is incorrect because the active listener responds not only to the verbal message but also to the nonverbal message communicated by the sender’s body, facial expression, and/or tone of voice.
The liquidity ratio is
(A) Total debt payments divided by gross income
(B) Net worth divided by total assets
(C) Liquid assets divided by total current debts
(D) Net cash flow (after tax) plus savings and investments divided by annual after-tax income
The answer is (C).
(A) is incorrect because it is the debt service ratio. (B) is incorrect because it is the solvency ratio. (D) is incorrect because it is the savings ratio.
Mariah (32) is considering attending an accredited university next year. Which of following is most likely to limit the amount of federal student aid she may receive?
(A) $5,000 of gifts received by Mariah from her parents last year.
(B) Mariah’s reported and taxable income this year of $25,000.
(C) Mariah’s savings account (estimated year-end balance of $1,000).
(D) Mariah’s parents estimated income next year.
The answer is (B).
50 percent of the student’s available income is considered part of the expected family contribution for a student and reduces the student’s financial need.
Which of the following statements concerning disintermediation is (are) correct?
I. It reduces reserves in the banking system.
II. It reduces deposits held in banks.
(A) I only
(B) II only
(C) Both I and II
(D) Neither I nor II
The answer is (C).
Both I and II are correct.
All the following individuals may be required to have a fiduciary duty to the client EXCEPT
(A) A CFA® charter holder
(B) A registered investment adviser
(C) A CFP® Certificant
(D) An insurance agent
The answer is (D).
Insurance agents do not have a fiduciary duty to their clients in all instances. Many agents perform a dual role that can lead to conflicts of interest if they are not careful. This dual role finds them as agents for their companies while they are simultaneously serving their clients in an agent-like capacity.
- Which of the following statements concerning client resistance in the financial planning environment is (are) correct?
I. The financial advisor should avoid discussing the client’s marital problems.
II. The financial advisor should deal with covert hostility directly by focusing on the client’s behavior.
(A) I only
(B) II only
(C) Both I and II
(D) Neither I nor II
The answer is (B).
I is incorrect because once a financial advisor recognizes that a couple is having marital problems, he or she should encourage the couple to focus on the problems. Otherwise, if the problems are ignored, whatever decisions are reached will be less valid than those that would have been reached after a full airing of the problems.
A comprehensive financial plan organized to follow the financial planning process should start by
(A) Describing the client’s present situation based on both the personal and financial data gathered from the client
(B) Specifying the client’s stated goals indicating the priority of each one and the time frame for achieving it
(C) Specifying the responsibilities of each party for implementing the plan and carrying it through to completion
(D) Identifying problems that the client would encounter in attempting to accomplish stated goals
The answer is (C).
(A) is incorrect because describing the client’s present situation based on personal and financial data gathered from the client takes place during the second domain of the planning process.
(B) is incorrect because specifying the client’s stated goals indicating the priority of each one and the time frame for achieving it takes place in the second or third domain of the planning process.
(D) is incorrect because identifying problems that the client would encounter in attempting to accomplish stated goals takes place in the third and fourth domains of the planning process.
All the following Practice Standards are related to domain 4 (developing a plan) of the financial planning process EXCEPT
(A) Identifying and evaluating financial planning alternatives
(B) Determining a client’s personal and financial goals, needs, and priorities
(C) Presenting the financial planning recommendations
(D) Developing the financial planning recommendations
The answer is (B).
The Practice Standard of determining a client’s personal and financial goals, needs, and priorities is related to the second and third domains (determining goals and gathering data) of the financial planning process. Practice standards involving regulation are addressed in the fourth planning domain.
All the following statements concerning state regulation of investment advisers are correct EXCEPT
(A) Many states require a minimum capitalization amount as a prerequisite to granting investment adviser registration approval.
(B) Almost every state requires that the participants in the registered investment advisory operation have certain FINRA registrations.
(C) The application of state law has been eliminated with respect to investment adviser representatives of SEC-registered advisers.
(D) State securities commissions may want to see all contracts, disclosure statements, documents, and literature the registered investment adviser used with the client.
The answer is (C).
All but seven states require individual investment adviser representatives—including those who are associated with SEC-registered firms—to pass examinations designed to test minimum competency.
Which of the following statements best describes cash flow planning?
(A) It involves identifying courses of action that will help optimize net cash flow.
(B) It is the process of gathering data about an individual’s cash flow situation.
(C) It is the difference between an individual’s income and expenses.
(D) It is the difference between an individual’s total assets and total liabilities.
The answer is (A).
(B) is incorrect because it partially describes cash flow analysis, not cash flow planning.
(C) is incorrect because the difference between income and expenses is net cash flow, not cash flow planning.
(D) is incorrect because the difference between total assets and total liabilities is net worth, not cash flow planning.
All the following statements concerning advisor awareness of values are correct EXCEPT
(A) Advisors should seek to impose their values on clients.
(B) Advisors should be aware of their own value systems.
(C) Advisors should be aware that values can change.
(D) Advisors should be aware that values are deeply internalized.
The answer is (A).
Advisors who are aware of their own value systems have a better chance of avoiding the imposition of their values on the clients. This quality is of vital importance since the advisor wants to help the client make decisions that stem from the client’s own value systems rather than from the advisors.
Which of the following is the appropriate standard of conduct for a fiduciary?
(A) Acting in the brokering firm’s best interest.
(B) Acting as a prudent investor.
(C) Acting on a best efforts basis.
(D) Acting on self-interest.
The answer is (B).
(A) is incorrect because while acting in the firm’s best interest is important, it may not be enough. You must be able to prove in court that you have done what a prudent investor would have done in that situation.
(C) is incorrect because acting on a best efforts basis may simply not be enough if a prudent man would have done more.
(D) is incorrect because it is never appropriate to act on self-interest unless that happens to coincide with the client’s interest.
Financial advisors who are subject to SEC regulation have all the following responsibilities EXCEPT
(A) Record keeping
(B) Recording conversations
(C) Delivering brochures
(D) Assigning contracts
The answer is (B).
Financial advisors who are subject to SEC regulation are not required to record conversations with their clients.
Exceptions to the Investment Advisers Act of 1940 exist for all of the following EXCEPT:
(A) Any accountant whose performances of such services are solely incidental to his profession.
(B) Any insurance agent whose performances of such services are solely incidental to his profession.
(C) A bank or bank holding company that serves or acts as an investment adviser to a registered investment company.
(D) The publisher of any bona fide newspaper, news magazine or business or financial publication of general and regular circulation.
The answer is (C).
The Investment Advisor Act of 1940 applies to banks or holding companies acting as investment advisors.
Which of the following characteristics define Chapter 13 bankruptcy
I. A bankruptcy estate is formed and liquidated after 36 months ofpayments.
II. Debt is restructured and the debtor enters into a repaymentplan.
(A) I only
(B) II only
(C) Both I and II
(D) Neither I nor II
The answer is (B).
Chapter 13 is the wage earners plan wherein debts are restructured and repaid. Liquidation is not a part of Chapter 13.
All the following methods of funding a college education are subject to income restrictions or demonstrated financial need a EXCEPT
(A) Section 529 prepaid tuition plan
(B) Coverdell education savings account
(C) Hope scholarship tax credit
(D) Federal Pell Grant
The answer is (A).
Section 529 prepaid tuition plans have no income restrictions nor do they require a demonstration of financial need.
All the following statements concerning basic communication principles are correct EXCEPT
(A) Communication is learned through experience.
(B) The same word may have different meanings to different people.
(C) Listening is a form of communication.
(D) Communication occurs mainly through verbal discourse.
The answer is (D).
Most sociological research claims that approximately two-thirds of an individual’s total message is communicated via nonverbal channels.
Which of the following types of questions is likely to be the most effective in client counseling?
(A) Open-ended
(B) Close-ended
(C) Leading
(D) Either/or
The answer is (A).
Open-ended questions allow the client to select a response from his or her full repertory.
(B) is incorrect because closed-ended questions limit the client to a specific and narrow response, either a yes or no.
(C) is incorrect because leading questions are a type of closed-ended, manipulative question. More often than not they lead the client toward a conclusion that the counselor (not the client) has already formulated.
(D) is incorrect because either/or questions limit the client to only two options. Clients might prefer both options, neither one, or a third or fourth option. Opening up questions allows the client to respond freely from his or her own frame of reference.
Which of the following statements concerning interviews is (are) correct?
I. They typically take place in a formal and structured setting.
II. Digressions from the subject are encouraged.
(A) I only
(B) II only
(C) Both I and II
(D) Neither I nor II
The answer is (A).
II is incorrect because the subject matter discussed in an interview is specific to the overall purpose of the interview, and digressions from the subject are usually not encouraged.
All the following types of loans are secured EXCEPT
(A) Home equity line of credit
(B) Personal loan
(C) Auto loan
(D) Home equity loan
The answer is (B).
By definition, a personal loan is an unsecured debt. The creditor must rely entirely on the debtor’s promise to repay since there is no collateral.
