#What is? Flashcards
1
Q
What is the definition of financial planning?
A
A collaborative process that helps maximize a client’s potential for meeting life goals through FA that integrates relevant elements of the Client’s personal and financial circumstances.
2
Q
What is the notification period to CFP Board regarding adverse conduct?
A
written notice 30 calendar days
3
Q
What is fiduciary duty and when does it apply?
A
- Duty of Loyalty
- Duty of Care
- Duty to Follow Client Instructions
Applies when providing FA
4
Q
What is financial advice?
A
Communication that would be reasonably viewed as recommendation for action with respect to:
-Financial plans
-Valuation of assets
-Investment policies/strategies
-Selection of other Professional Services
OR
Exercising discretionary authority over a Client’s Financial Assets
5
Q
What is the duty of loyalty?
A
- Placing the interest of the Client above the CFP Professional’s Firm.
- Avoid or fully disclose/manage conflicts of interest
- Acting without regard to the interests of anyone other than the Client
6
Q
What should be done in the absence of Competance?
A
- Gain competence
- Seek assistance from someone with competence
- Refer to someone with competence
- Limit/terminate the relationship
7
Q
What is the time requirement for providing information on material changes, disciplinary updates, or bankruptcy to clients?
A
90 days
8
Q
What are the exceptions for borrowing and lending money?
A
- Family members
- Lender is in the money lending business
9
Q
What is step 1 of the FP Process?
A
Understanding the Client’s Personal and Financial Circumstances
10
Q
What is step 2 of the FP Process?
A
Identifying and Selecting Goals
11
Q
What is step 3 of the FP Process?
A
Analyzing the Client’s Current Course of Action and Potential Alternative Courses of Action
12
Q
What is step 4 of the FP Process?
A
Developing the Financial Planning Recommendation
13
Q
What is step 5 of the FP Process?
A
Presenting the Financial Planning Recommendations
14
Q
What is step 6 of the FP Process?
A
Implementing the Financial Planning Recommendations
15
Q
What is step 7 of the FP Process?
A
Monitoring Progress and Updating
16
Q
Who is the CFP Board Counsel?
A
They have the authority to investigate and file a Complaint against a Respondent for alleged violation of the C&S
17
Q
Who is the DEC?
A
The Disciplinary and Ethics Committee is composed of both CFP pros and members of the public. They have the authority to issue a final order that finds facts, determines whether a violation has occurred, and imposes discipline in the form of a sanction.
18
Q
Who is the Hearing Panel?
A
They conduct Hearings for those that may have violated the C&S. Most of the HP must be CFP pros and most must be DEC members. The Chair of the HP has to be a DEC member.
19
Q
How long do you have to respond to a CFP Board Counsel Complaint?
A
30 days
20
Q
How long do you have to provide Hearing Documents, Witness List Written Statements, and Stipulations?
A
Due 45 days before the projected review date (Witness List is 60)
21
Q
How long do you have to respond to a Notice of Hearing from CFP Board Counsel?
A
30 days
22
Q
What happens after a Hearing from CFP Board Counsel?
A
- HP Makes recommendations to the DEC.
- The DEC issues a Final Order.
- You may Appeal to the Board of Directors’ Appeals committee within 30 days
23
Q
What are the forms of Discipline ordered by the DEC?
A
- Private censure
- Public Letter of Admonition
- Suspension
- Revocation
24
Q
What is the possible range of Suspensions issued by the DEC?
A
90 days minimum
5 years maximum
25
What are the general phases of the business cycle?
Expansion
Contraction
26
What are the characteristics of the Peak of a business cycle?
High GDP and Low Unemployment
27
What are the characteristics of the Trough of a business cycle?
Low/negative GDP and High Unemployment
28
What is a recession?
2 consecutive quarters of negative GDP growth
29
What is the formula for GDP?
Y = C + I + G + (X-M)
Y = GDP
C = Consumer spending
I = investment from industry
G = gov't spending
X = exports
I = imports
30
What is an elastic good?
Quantity demanded responds greatly to price changes (discretionary items)
31
What is an inelastic good?
Quantity demanded responds little to price changes (e.g. gas)
32
What is a substitute?
An increase in the price of one item will cause an increase in demand for another (e.g. propane vs firewood)
33
What is a complement?
A product that is usually consumed jointly with another (PB & J)
34
What is marginal utility?
The additional benefit (utility) received from the consumption of an additional good
35
Who controls fiscal policy?
Congress
36
What the the levers available to control Fiscal Policy?
1. Gov't spending
2. Taxation
37
Who controls monetary policy?
The Federal Reserve Bank
38
What are the levers available to control Monetary Policy?
1. The Discount Rate
2. Reserve Requirements
3. Open Market Operations
39
What is the discount rate?
the rate at which member banks borrow from the gov't
40
List the details for Medicare coverage for nursing home skilled care
Days 1-20: $0 co-pay
Days 21-100: $204 coinsurance
Days 101+: patient pays all costs
41
Name the Activities of Daily Living
Bathing
Eating
Dressing
Continence
On<>Off the Toilet
Transferring
42
What is Any-Occupation Disability Income Insurance?
the benefits are payable only if the individual is disabled enough that they cannot engage in any occupation
Least favorable; less expensive
43
What is Own-Occupation Disability Income Insurance?
benefits are payable if the individual cannot perform their occupation
Most favorable; very expensive
44
What is Modified Own-Occupation Disability Income Insurance?
Hybrid approach. Own Occ for part, then Any occ for the balance of the period
45
What is the SS definition of Disability?
Not able to perform any occ and the medical condition is expected to last no less than 12 months or result in death
5 mo elimination period
46
What are the components of the U.S. financial market?
Money market - short-term debt
Captial market - long-term debt and equity
47
What are the components of capital markets?
1. Primary - new securities
2. Secondary - previously issued securities
48
What legislation was made for the regulation of primary markets?
Securities Act of 1933
49
What legislation was made for the regulation of secondary markets?
Securities Act of 1934
50
What are the top 5 systematic risks?
Non-diversifiable: PRIME
Purchasing Power
Reinvestment
Interest Rate
Market
Exchange Rate
51
What are the top 5 unsystematic risks?
Diversifiable:
Business
Financial
Default/Credit
Regulation
Sovereignty
52
What is risk?
Realizing an outcome different than the expected outcome, measured by standard deviation
53
What are the factors that influence an investor's capacity for risk?
1. Time horizon
2. Liquidity needs
3. Total investable assets
54
What is the probability of a 1 sigma outcome?
68%
55
What is the probability of a 2 sigma outcome?
95%
56
What is the probability of a 3 sigma outcome?
99%
57
Which direction is the tail in a positively skewed distribution?
Right
58
Which direction is the tail in a negatively skewed distribution?
Left
59
What is kurtosis?
How much a distribution is more or less peaked than normal
60
What is skewness?
The extent to which a distribution is not symmetrical
61
What is a mesokurtic distribution?
normal
62
What is a leptokurtic distribution?
More peaked (slender)
63
What is a platykurtic distribution?
Less peaked (broad)
64
What is the strong form of EMT?
Market is efficient: technical analysis, fundamental analysis, and inside info can't get you to outperform
65
What is the semi-strong form of EMT?
Only inside information can get you to outperform
66
What is the weak for of EMT?
Both insider information and fundamental analysis can be used to outperform
67
What are the anomalies to the EMT?
1. Low P/E effect
2. Small firm effect
3. Neglected firm effect
4. January effect
5. Value line phenomenon
68
What is the purpose of the efficient frontier?
To identify the optimal amount of return given a unit of risk taken
69
What are the 4 common refundable credits?
Earned Income Credit
Additional Child Tax Credit
American Opportunity Credit
Premium Tax Credit
70
What are the 4 common nonrefundable credits?
Child and Dependent Care Credit
Child Tax Credit
Retirement Savings Contribution Credit
Lifetime Learning Credit
71
Estimated Tax Q1
Payment Period: Jan 1 - Mar 31
Due: Apr 15
72
Estimated Tax Q2
Payment Period: Apr 1 - May 31
Due: Jun 15
73
Estimated Tax Q3
Payment Period: Jun 1 - Aug 31
Due: Sep 15
74
Estimated Tax Q4
Payment Period: Sep 1 - Dec 31
Due: Following Jan 15
75
Minimum Estimated Tax
Lesser of:
1. 90% current year tax liability
2. 100% of the prior year tax liability (110% at AGI > $150k)
76
What are the situations in which no tax penalty will be imposed for missing estimated tax payments?
-Estimated tax for the current year is <$1000
-No tax liability for the previous year
77
What is the special catch-up rule for 403(b) plans?
1. 15 years+ of service
2. Up to $3000 extra per year
3. Stacks with Age 50 Catch Up (Max $33,500 total)
78
What can you invest in inside of a 403(b) Plan?
Mutual Funds or Annuities
79
What is the special catch-up rule for 457(b) plans?
1. Last 3 years of service (based on plan normal retirement age)
2. Using unused deferrals from past service
3. Up to 2x the normal contribution limit (max $46,000)
4. No stacking with Age 50 Catch Up
80
What are the things that make a 457(b) plan unique?
1. Special Catch Up
2. No Deferral Aggregation
3. No "Active Participant" status
4. No early withdrawal penalty
81
What is the legal requirement for someone to execute a will?
Testamentary capacity:
1. Be 18+
2. Know they are executing a will
3. Must be aware of what assets they own
4. Must know and remember their relationship to their beneficiaries
82
What are the reasons that a will can be invalidated?
1. Fraud
2. Undue influence
3. Mistakes in clauses
4. No properly executed, signed, or witnessed according to state law
83
What is a mutual will?
a will made in agreement with another person to dispose of certain property interests
84
What is a reciprocal will?
each person's will designates that all property be distributed to the other person
85
What is a holographic will?
a handwritten will
86
What is an nuncupative will?
an oral will
87
What is a survivorship clause?
Beneficiaries in a will cannot inherit property unless they live for a period after the will-maker dies (5-60 days)
88
What are the advantages of probate?
1. Court-supervised distribution of property to heirs
2. Estate debt is paid to creditors
3. Bars future creditor claims against the estate
4. Documentation for the transfer of property to others
89
What are the disadvantages of probate?
1. Time (typically 9 mo - 2 yr)
2. Costs (attorney/court fees, executor fee if applicable)
3. Privacy
90
What is ancillary probate?
property owned in a different state that the state of domicile
91
Property that is transferred via a will that is subject to probate
1. Solely owned
2. Tenancy in common
3. Community property
4. Property passing from the will into a testamentary trust
5. Property transferred by a pour-over will into a trust
6. Life insurance policy owned by the decedent who was not the insured
92
Property not transferred by a will that is subject to probate
1. Intestate property
2. Life insurance/annuities payable to the estate
3. Homestead and exempt property allowances
93
What are the different kinds of will substitutes?
1. Trusts
2. Operation of Law (JTWROS, Tenancy by the Entirety, Joint accounts, POD/TOD, life estates)
3. Contract (named beneficiaries on life insurance, pensions, IRAs, annuities)
94
What does it mean to transfer assets per capita?
according to the number of individuals (equal distribution)
95
What does it mean to transfer assets per stirpes?
according to the family tree (split evenly among "branches")
96
What does it mean to transfer assets per capita by generation?
even split of the remainder
97
What is general power of attorney?
Grants the agent authority to make a broad array of decisions, including financial, legal, or business matters. Lapses at disability or incapacitation.
98
What is special power of attorney?
The agent only acts on behalf of the principal for a specific matter. Once the task or action is completed, or a period has passed, the authority expires.
99
What is Non-durable power of attorney?
The power of attorney remains active until incapacitation. Also used if a principal needs the agent to complete a specific task on their behalf (e.g., signing a form while the principal is on vacation).
100
What is springing power of attorney?
This does not become operative until the principal becomes legally incapacitated. However, the principal's state of incapacitation must be confirmed, which may take time, potentially delaying decisions.
101
What is durable power of attorney?
The agent can act immediately on behalf of the principal. The agent's power of attorney does not lapse even if the principal becomes incapacitated or disabled.
102
What counts as a present interest gift for a minor? (annual exclusion applies)
1. UGMA/UTMA
2. 529s
3. 2503(b) trust - multiple beneficiaries, annual distributions
4. 2503(c) trust - one beneficiary, income accumulates until age 21
103
What counts as a future interest gift? (annual exclusion does not apply)
1. Remainder interest in property
2. Trust that accumulates income (exception 2503(c) trust)
3. Non-income producing property in trusts
4. Trust has a sprinkle/spray provision
104
How do you know when to file form 709?
1. Gift is <$18k, no filing
2. Gift is between $18k and $36k, one form 709
3. Gift is >$36k, two form 709s
105
What are the transfers that are not considered taxable gifts?
1. IRS-approved charities
2. Gifts to a U.S. citizen spouse
3. Direct payments for someone's medical service
4. Direct payments for someone's tuition
106
What are the requirements for a qualified disclaimer?
1. In writing
2. 9 months after either:
a. date on which the transfer creating the interest is made or
b. date the person disclaiming reaches age 21
3. the person disclaiming must not have accepted any interest/benefits
4. some other than the disclaimant needs to receive it (person disclaiming has no influence)
107
What is QBID?
The Tax Cuts and Jobs Act of 2017 introduced a 20% Qualified Business Income Deduction for pass-thru (non-corporate entities under IRC Section 199A.
Those entities:
1. Sole proprietors
2. S-corps
3. Partners in an LLC or partnership entity
The 20% is the lesser of:
-QBI
-Taxable income (not including cap gains)
108
What are the characteristics of the Real Estate asset class?
Pros:
1. low levels of correlation with other asset classes
2. likely to keep pace with inflation
Cons:
1. can be illiquid
109
What are the characteristics of the Commodities asset class?
Pros:
1. Low correlation with equities
2. A hedge against inflation
Cons:
1. No natural income
2. Can be highly volatile
110
What are the characteristics of the Cash asset class?
Pros:
1. No capital loss
2. Highly liquid
Cons:
1. Typically a low return
2. Value is eroded by inflation
111
What are the characteristics of the Equities asset class?
Pros:
1. Historically outperforms cash and bonds
2. Benefits from economic growth
Cons:
1. Potentially high volatility
2. Potentially periods of negative return
112
What are the characteristics of Gov't and Investment Grade Bonds as an asset class?
Pros:
1. Less volatile than equities
2. Stable income delivery
Cons:
1. Historically lags equities
2. Returns are driven by interest rates
113
What are the characteristics of Alternatives as an asset class?
Pros:
1. Low correlation with other assets
2. A variety of drivers & return characteristics
Cons:
1. Can be illiquid
2. Can be complex
114
What are the characteristics of High Yield and Emerging Market Bonds as an asset class?
Pros:
1. Diverse asset class
2. Can provide higher yield and inflation protection
Cons:
1. Riskier than government bonds but less risky than equities
115
What is the Child and Dependent Care Credit?
This nonrefundable credit provides relief for taxpayers who incur child and dependent care expenses because of employment activities.
Requirements:
1. Child or dependent care expenses must be incurred to enable the taxpayer to be gainfully employed
2. The taxpayer must maintain a household for a dependent under the age of 13 or an incapacitated dependent/spouse
Credit is phased down from 35% ($15,000 AGI) to 20% ($43,000 AGI) of qualifying expenses up to $3,000/$6,000.
116
What is the Child Tax Credit?
This credit is available to parents with dependents under 17 at the end of the year who meet certain eligibility requirements.
117
What is partnership long-term care insurance?
The partnership is between states and insurance companies for qualified LTCi. It provides additional asset protection if LTCi benefit is exhausted and insured files for Medicaid. The total amount paid under LTCi is added to Medicaid spend-down limit and protected.
118
What are the 4 different tax treatments for disability income insurance benefits?
1. ER paid premiums: taxable benefits
2. EE paid premiums with AT $: tax-free benefits
3. ER paid premiums but includes it as comp to the EE: tax-free benefits
4. EE paid premiums with pre-tax $: taxable benefits
119
What are the features of term life insurance?
1. Lowest premium at issue
2. No cash value
3. May be participating (dividends)
4. May be renewable
5. May be convertible to permanent
120
What are the features of permanent life insurance?
1. Higher premium than term insurance at issue
2. Builds cash value
3. Cash value is accessible by loans or withdrawals
4. May be participating (dividends)
121
What is the difference between Universal Life Options A & B?
Option A: the death benefit remains level
Option B: the death benefit is the face amount plus cash value. (CV in the sub-accounts is not subject to creditors)
122
What are the options for termination of permanent life insurance?
1. Cash Surrender Value
2. Extended Term: use all CV as a single premium for as much term insurance as it will support
3. Reduced Paid-Up: CV is used to buy a paid-up policy of the same type (reduced death benefit but retained CV that can grow at a reduced rate)
123
What is an automatic premium loan?
An alternative to termination of permanent life insurance that allows the insurer to automatically make a loan against the policy's CV for paying the overdue premiums (CV needs to be > premium amount due). This loan is added to any outstanding loans and the unpaid loan plus accrued interest is subtracted from the death benefit.
124
What are the options for participating life insurance policy dividends?
CRAPO
Cash
Reduce the premium payable
Accumulate at interest
Paid-up additions
One year term
125
What is the "50/40 rule?"
Each day of the calendar year, a DB plan must cover the lesser of:
1. 50 EEs
4. 40% of non-excludable EEs
126
What is appreciation factor?
If you give away appreciated property and pay gift taxes on it, the donee will add a portion of the gift taxes paid to their basis.
AF = Appreciation / "Taxable" amount of gift = (FMV - Basis) / (FMV - Annual exclusion if available)
127
What is a skip person?
When you give away property to someone that is considered 2 or more generations below you, that person is called a skip person. This is either:
1. Related people: grand-anything
2. Unrelated people: 37.5 years younger than you
128
What is fiscal policy?
Taxation, expenditures, and debt management by the federal gov't and how these interventions influence the economy
129
What are the levers that Congress can pull to influence the economy?
1. Taxation
2. Government Spending
130
What is deficit spending?
When gov't expenditures exceed revenues (from tax), they will sell Treasury Securities.
131
What is monetary policy?
The Federal Reserve Bank (the Fed) controls the money supply and influences lending rates to influence the economy.
132
What are the levers that the Fed can pull to influence the economy?
1. Adjust the discount rate.
2. Change the Reserve Requirement
3. Open Market Operations.
133
What is the discount rate?
The rate at which member banks can borrow from the government
134
What is meant by the term "reserve requirements?"
This refers to the % of deposits that must be held on reserve by banks
135
What are open market operations?
When the Fed buys/sells securities in the open market. This puts more or less money into current supply.
136
What is a MEC?
A cash value life insurance policy that fails the 7-pay test.
Too much premium paid into it in the first 7 years.
Once it is designated a MEC, it will always be a MEC.
137
What are the unique features of a MEC?
1. LIFO treatment of CV distributions
2. 10% penalty for taxable distributions prior to age 59.5
138
When is the 7-pay test applied?
1. at inception of the policy
2. if there is a material change to the contract
139
What is a viatical settlement?
A transfer of a life insurance policy to a VS company in exchange for cash of a discounted amount of the death benefit.
140
For the purposes of a viatical settlement, what does it mean to be terminally ill?
You have a condition that can reasonably be expected to result in death within 24 months of physician certification
141
For the purposes of a viatical settlement, what does it mean to be chronically ill?
You are unable to perform 2 of the Activities of Daily Living for at least 90 days
142
What are the requirements of a viatical settement?
1. The insured must be terminally or chronically ill
2. The provider must grant a 15-day cooling off period during which the viator (original owner) can rescind the agreement
143
What is the tax treatment of a viatical settlement?
1. Insured: excluded from gross income for the most part. Chronically ill can only exclude LTC services.
2. VS company: the basis is the cash settlement amount + any premiums paid. Upon death, the "gain" is taxable
144
When should you use the Sharpe Ratio?
When r^2 < 0.70
145
When should you use the Treynor Ratio?
When r^2 > 0.70
146
What is Jensen's alpha used for?
To evaluate the benefit of a portfolio manager
147
What is constructive receipt and when is it used?
Cash method - when funds are available without restriction
148
What is cash method accounting?
Recognizes expenses when they are actually paid and revenue when it is actually or constructively received
149
What is accrual method accounting?
Recognizes expenses when liability can be established and when the right to receive revenue exists
150
Name the situations in which accrual method must be used.
1. When a corporation (not S corp) has annual gross receipts for a 3 year period ending with the prior taxable year exceeding $30M
2. When inventory is necessary to account for income
151
What is the hybrid method of accounting?
1. Accrual method is used for inventory and sales
2. Cash method is used for service
152
What are the requirements for depreciable property?
1. Owned by the taxpayer
2. Used in a business/income producing activity
3. Has a determinable useful life
4. Expected to last >1 year
153
What is the useful life for automobiles?
5 years
154
What is the useful life for non-residential commercial RE?
39 years
155
What is the useful life for heavy machinery?
7 years
156
What is the useful life for computers?
5 years
157
What is the useful life for office furniture?
7 years
158
What is the useful life for residential RE?
27.5 years
159
What is the formula for SE tax?
1. Find Net earnings from SE
2. Multiply by 0.9235
3. Multiple by 0.153
160
What is the formula for maximum retirement plan contribution for SE?
1. (Net Earnings from SE) - (50% SE Tax)
2. Find the adjusted rate: ER contribution % / (1+ER contribution rate %)
3. Multiply Step 1 by Step 2
161
What is the maximum SS taxable wage base?
$168,600
162
Who is eligible to set up a SEP IRA?
Any ER with 1+ EEs
163
Who is eligible to set up a SIMPLE IRA?
Any ER with <100 EEs that doesn't have another plan
164
Who contributes to a SEP IRA?
ER only
165
Who contributes to a SIMPLE IRA?
1. EE (salary reduction)
2. ER
166
What is the maximum annual contribution for SEP IRAs?
25% of covered comp (no more than $69,000)
167
What is the maximum annual contribution for SIMPLE IRAs?
EE: $16,000. Age 50 catch up of $3,500
ER: Option 1 - matching EE contributions for the first 3% of comp (can be as low as 1% in any 2 out of 5 years)
Option 2 - 2% of EE comp
168
What are the requirements for ER contributions for a SEP IRA?
ER can decide
169
What are the requirements for ER contributions for a SIMPLE IRA?
Required contributions: either matching or 2% of EE comp
170
What are the minimum EE coverage requirements for a SEP IRA?
EE meets the following:
1. 21+ years old
2. Employed 3 of the last 5 years
3. Earned $750
171
What are the minimum EE coverage requirements for a SIMPLE IRA?
EE meets the following:
1. Earned $5,000 in any 2 prior years
2. Expected to earn $5,000 this year
172
What is the penalty for early withdrawals for a SIMPLE IRA?
10% normally;
25% if done within the first 2 years of enrollment
173
What are the rights provided in the Consumer Credit Protection Act?
Right to know costs and terms of credit
174
What are the rights provided in the Equal Credit Opportunity Act?
Right to fair opportunity to obtain credit
175
What are the rights provided in the Fair Credit Reporting Act?
Right to know what's in your credit file
176
What are the rights provided in the Fair Credit Billing Act?
Right to have billing mistakes resolved
177
What are the rights provided in the Fair Debt Collection Practices Act?
Right to be protected from collection agencies
178
What is a poor FICO score?
<580
Well below average; risky borrower
179
What is a fair FICO score?
580-669
Below average but many lenders will still approve loans
180
What is a good FICO score?
670-739
Nearly or slightly above average; most lenders consider this a good score
181
What is a very good FICO score?
740-799
Above average; dependable borrowrer
182
What is an exceptional FICO score?
800+
Well above average; exceptional borrower
183
What is the weight of payment history in your credit score?
35%
184
What is the weight of the amounts owed in your credit score?
30%
185
What is the weight of the length of credit history in your credit score?
15%
186
What is the weight of new credit in your credit score?
10%
187
