Unit 19: Client Profile Flashcards
A family balance sheet is used to:
determine the overall net worth and liquidity of that client. It only includes assets and liabilities, not income, such as salary, dividends, or interest, or amounts paid for expenses.
An individual’s net worth is
the difference between the individual’s assets and the individual’s liabilities.
Behavioral finance
the theory that people frequently fail to fully analyze situations where they must make complex judgements
Overconfidence
experienced investors tend to overestimate their abilities
Conservatism
many investors have a hard time changing their existing beliefs, even when new information is presented to them
Herd behavior
A market drop may be followed by panic selling
Anchoring
the tendency to base expectations upon the first information received which may or may not be accurate. Once a thought has anchored in your mind, it is difficult to move away from it.
Regret aversion
The investor prepares himself in such a way as to avoid distress over an adverse outcome.
Aggressive Risk Tolerance
Investors are willing to risk greater amounts and withstand market volatility in exchange for the change to realize substantial returns
- May be willing to sustain losses of 10%, 25%, or even 50% on an investment
Moderate Risk Tolerance
Investors can tolerate some loss but not nearly at the level of the aggressive investor
Conservative Risk Tolerance
want the relative safety of guaranteed income with low risk to loss of principal
Preservation of Capital
bank-insured CDs, savings accounts, and money market funds
Investor is sacrificing the opportunity for higher income and is exposed to inflation (purchasing power) risk.
Bank Insured CDs
- Eliminate interest rate risk (value remains constant)
- They are NOT savings accounts with a maturity date
- They would be included as an asset on a family balance sheet
- They are insured by the FDIC up to the current limit (limits are not tested)
- Each bank sets the interest rate it will pay on those CDs with smaller banks typically offering more competitive rates
On the exam, the first choice for the preservation of capital should always be:
bank-insured CDs
Current Income
investors seeking current income will normally focus on individual securities or mutual funds that invest in fixed-income investments such as: government bonds/notes and agency bonds, corporate bonds, preferred stock, and utility company common stock.
Capital growth
common stock investments generally provide a means to preserve and increase the buying power of an investors money over and above the inflation rate.
Although subject to short-term volatility, the equity market tends to provide investment returns over time.
Speculation
speculative investments offer the opportunity to earn substantial returns but carry a commensurate amount of risk
- High volatile stocks, high-yield junk bonds, options on stocks or stock indexes, commodity futures
College Tuition
- Investors planning for college tuition often invest in 0-coupon bonds that mature when the tuition expenses are due
- Coverdell ESAs and Section 529 plans because of their tax advantages
Old-Age Survivors and Disability Income (OASDI)
provides monthly benefits designated to replace, in part, the loss of income due to retirement, disability, or death
To receive Old-Age Survivors and Disability Income (OASDI):
- To qualify for full benefits, an individual must have at least 40 quarters of employment
- Waiting until age 70 to claim benefits gives the individual an 8% compound return from full retirement age. If you don’t need the funds and are in health, it is generally worth the wait.
Benefits for an ex-spouse.
- If a person has an ex-spouse and a current spouse, both spouses are entitled to the benefits when the man is still alive and both can be entitled to survivor’s benefits.
- If you’re divorced and were married to the man for at least 10 years, you’re eligible for some of your ex’s Social Security. But you you must be unmarried at the time you become eligible to claim on your ex’s Social Security.
Any benefits paid to a divorced spouse do not reduce any payments due the ex’s current spouse if he remarried. That can mean two (or more) spouses receiving identical benefits while the man receives his as well
Capital Needs Analysis
used to determine how much life insurance is necessary to meet future needs. Factors used for computation:
- Project client’s future earnings
- Estimate life expectancy
- Account for inflation
- Existing assets
Should a client become disabled, there are 3 possible sources of replacement income:
workers comp, social security, disability insurance
Workers’ Compensation
if an employee is injured on the job, WC can provide protection to cover medical expenses, replace lost income, and provide death benefits to the family
