CFP (Certified Financial Planner) Fundamentals Questions & Answers

What are the 4 considerations to determine if Financial Planning?

1. The client's understanding and intent in engaging the certificant.

2. The degree to which multiple financial planning subject areas are involved (generally, two or more).

3. The comprehensiveness of data gathering.

4. The breadth and depth of the recommendations.

May be financial planning even if only one subject area.
example: comprehensive retirement plan

If Financial planning and options are limited (such as proprietary products) what must happen?
Any such limitations must be disclosed in writing

Prior to entering into an agreement including services or material elements of financial planning what should the CFP certificate provide to the client?
Prior to entering the agreement the following should be provided the following information in writing and or via discussion.

a. Obligations of each party
b. Compensation that any party to the agreement or any legal affiliate to the agreement will or could receive under the terms of the agreement.
C. Therms under which the agreement permits the certificant to offer proprietary products
D. Terms under which certificant will use other entities to meet any of the agreement's obligations.

When must a certificant enter into a written agreement with a prospective client?
When the services include financial planning or material elements of financial planning.

What needs to be included in the written agreements?
PTSD and the 4 C's

Parties to the agreement
Terms each party can terminate the Agreement
Services to be provided
Date and duration of the agreement

Compensation
Conflicts of Interest
Competence/Expertise
Contact Information

During financial planning engagements proprietary products are considered what?
Potential conflicts of interest which require written disclosure.

What is the certificant's Duty of Care for a non financial planning engagement?
Put the client's interest first

What is the certificant's Duty of Care for a financial planning engagement?
Fiduciary: Act in the best interest of client

Disclosure requirements for non financial planning engagements?
Compensation, conflicts, other material info, and contact info can be disclosed orally or in writing

Disclosure requirements for financial planning engagements?
Must be in writing

What are the exceptions for confidentiality?
-As required in response to proper legal process
-As necessitated by obligations to a certificant's employer or partners
-To defend against charges of wrongdoing
-in connection with a civil dispute
-As needed to perform the services

When may a certificant borrow money from a client?
The certificant shall not borrow money from a client unless the client is a member of the certificant's immediate family or the client is an institution in the business of lending money and the borrowing is unrelated to the professional services performed by the certificant.

When may a certificant lend money to a client?
The certificant shall not lend money to a client unless the client is a member of the certificant's immediate family or the certificant is an employee of an institution in the business of lending money and the money lent is that of the institution, not the certificant.

Under what circumstances may Alan, a CFP practitioner, commingle assets with his clients?
Only if given explicit written authorization and properly tracked.

As a CFP you have an obligation to the CFP board to notify them in writing of any conviction of a crime except misdemeanor traffic offenses unless the offense involves the use of alcohol or drugs, or of any professional suspension or bar within how many days?
30 calendar days after the date on which the certificant is notified of the conviction, suspension or bar.

What behavior will alwasy bar certification?
-Felony conviction of:
Theft, embezzlement, tax fraud or other financial/tax crimes
Murder or rape
violent crime within past five years

-Revocation of financial professional license
-Exception: Not renewing a license by not paying the fee.

What are the presumeed unacceptable behaviors that will bar certification?
-Two or more personal or business bankruptcies
-Felony Conviction of:
-Violent crimes other than murder or rape that occurred more than five years ago.
-Non violent crimes, including perjury, within the last five years
-Revocation of a non financial professional license.
- Exception: Not renewing a license by not paying the fee

If a behavior falls into the presumed unacceptable who must the certificant petition the bar to?
The Disciplinary and Ethics Commission. The petition must be in writing.

Who is responsible for everything related to a client's personal finances? (Making sure RMDs occure, Making sure a client deposits a 401k rollover check in time etc.)
The CFP professional. The only time a CFP professional is not responsible is when a special license is required to effect a transaction, such as a real estate license.

Under the Dodd-Frank act a firm with assets less thatn $100 million would register with whom?
The State

Under the Dodd-Frank act a firm with assets greater than $100 million would register with whom?
The SEC

Under the Dodd-Frank act can you use the letters RIA after your name?
No! May only use the words "Registered Investment Advisor"

Who are does not need to register as a investment advisor?
Banks and bank holding companies that are not investment companies.

Any broker/dealer whose advisory services are solely incidental to the conduct of business.
Lawyers, accountants, teacher and engineers whose advice is solely incidental to their profession.
Publishers of a Bona Fide newspaper, magazine or periodical of regular circulation.
Advisers whose advice is related strictly to securities guaranteed by the United States

VIPs are SaFE
exempt from registration.

Advisers solely to Venture Capital funds
Advisers whose only clients are Insurance companies
Advisers solely to Private funds less than $150 million.
Advisers Whose clients reside in their State of business and who do not provide advice, services, analysis or reports regarding nationally listed securities traded

Foreign advisers without a place of business in the US

Advisers not providing advice about securities traded on a national Exchange

What type of securities will the series 6 allow you to sell?
Mutual Funds, UITs and variables (life insurance and annuities)

Note- Variable life insurance and annuities sellers must also have a state insurance license.

What type of securities will a series 7 allow you to sell?
Everything except commodities and futures.

What is Quantitative data?
Names and Numbers
-Children's names and Spouses age
-Income / Expenses / Budget
-Assets, liabilities, current investments
-Insurance Policies (Life, Health, DI, HO, LTC)
-Estate Plan

What is Qualitative data?
Conditions, Aspirations, Hopes and Dreams
-Client's health
-How client FEELS about things
-What do they Love about their Life and Money
-Lifestyle changes
-Education
-Retirement Life
-Risk Tolerance
-Behavioral Finance

What will cause the demand curve to shift?
A change in demand due to an increase or decrease in:

-Income
-Taxes
-Savings Rate
-Disposable Income

What affect will an increase in discretionary income have on the demand curve?
An increase in discretionary income such as Increased income, lower taxes or lower savings rates will shift the demand curve up and to the right.

What affect will a decrease in discretionary income have on the demand curve?
Decreases in discretionary income such as decrease income, higher taxes, or a higher savings rate will cause the demand curve to shift down and to the right.

What causes the supply curve to move?
Technology
Competition
Anything other than price

What affect will an improvement to production have on the supply curve?
The supply curve will shift down and to the right. Firms can produce more goods at a lower cost

What affect causes the supply curve to shift up and to the left?
anything that causes an increase in production costs or supply to decrease. For example firms producing less at a higher cost.

During the expansion phase of the business life cycle what is happening?
GDP, Inflation and interest rates increasing
Unemployment decreasing

During the peak phase of the business life cycle what is happening to the economy?
GDP is at its highest
Inflation and interest rates are peaking
unemployment is at its lowest levels

During the contraction phase of the business life cycle what is happening to the economy?
GDP begins to slow
Inflation and interest rates begin declining
Unemployment begins to increase

During the Trough phase of the business life cycle what is happening to the economy?
GDP, inflation and interest rates are at their lowest levels
Unemployment is at its highest.

Who establishes Monetary Policy?
The Federal Reserve

Who establishes Fiscal Policy?
Congress

What are the main goals of the Federal Reserve?
Maintain long term economic growth
Maintain price levels supported by the economy
Maintain full employment

How does the Fed ease monetary policy?
Increase Money Supply
Decreasing Interest Rate

How does the Fed Tighten monetary policy?
Decreasing Money Supply
Increasing Interest Rate

What are the 4 tools the Fed has to influence money supply and interest rates?
Reserve Requirements
Discount Rate
Open Market Operations
Excess Reserve Rate

What is the Reserve Requirement and how does it affect monetary policy?
The reserve requirement is the percentage of deposits a bank must maintain in cash. If the Fed increases requirements they are tightening monetary policy. There's less cash available to lend, therefore interest rates will increase. If the Fed lowers the reserve requirement the money supply increases, therefore interest rates will decrease (easing monetary policy).

What is the Discount Rate and how does it affect monetary policy?
The discount rate is the overnight interest rate at which member banks can borrow from the Federal Reserve to meet their reserve requirements. Short term interest rates have a direct relationship with the discount rate.

How does the federal funds rate differ from the discount rate?
Fed Funds rate is the rate at which member banks borrow form each other. Discount rate is the rate member banks borrow from the Fed Reserve to meet their reserve requirements.

How does the Fed use Open Market Operations to influence monetary policy?
Open Market Operations is the buying or selling of gov. securities to influence the money supply.

buy securities-increase money supply-decrease interest rates
Sell securities-decrease money supply-increase interest rate

How does the excess reserve rate influence Monetary policy?
The excess reserves are monies that banks hold at the federal reserve in excess of the required reserve. An increase in excess reserve rate will cause more banks to keep excess reserves, thus limiting the money available for loans. Decreasing the excess reserves will cause fewer banks to keep excess reserves, thus increasing the money available for loans.

Who influences fiscal policy and what are their goals related to it?
Congress

-Maintain the economic growth
-Maintain price stability
-Full employment

What are the three tool congress uses to influence fiscal policy?
Taxation
Spending
Debt Managment

How does Congress use taxation to influence Fiscal Policy?
an Increase in tax rates will reduce money available for spending, therefore increase interest rates.

How does Congress use spending to influence fiscal policy?
Through government spending, congress can increase the money supply, thereby decreasing interest rates.

How does Congress use debt management to influence fiscal policy?
Deficit spending is when Congress spends more than the tax revenue collected. Because of deficit spending, Congress must borrow to continue spending. As congress borrows more, it places increasing pressure on interest rates.

What is the fair credit reporting act?
The fair credit reporting act if refused credit or employment, the consumer must be provided with the information in the report. It also gave consumers the right to a free credit report once a year.

What is the Fair Debt Collection Act?
Made it to where creditors can not harass or threaten a lawsuit if not intended and cannot contact you at work. It also limited telephone calls to between the hours of 8 a.m. and 9 p.m.

What is the Fair Credit Billing Act?
This act gave creditors 30 days to acknowledge receipt of billing dispute and explain or correct errors within 90 days. Also limited consumer liability for a lost or stolen cared to the lesser of the charges or %50 if notice is given to the credit card company.

What is the truth in lending act?
Lenders must disclose the total cost of financing

What changes did the Affordable care act have on consumer protection laws?
Children can stay on parents policy until their 26th birthday.
No lifetime caps on medical insurance.

What limitation did the CARD Act of 2009 put on credit card companies?
Made the minimum age to get a credit card in your own name 26. Also limited late fees to $25.

What is the per type limit on FDIC Insurance?
$250,000 per account type. Each person is deemed to own 50% of a joint account.

What is not covered by FDIC Insurance?
-Deposits only payable outside of the US
-Money held in money market mutual funds
-stocks, bonds, and mutual funds

Under chapter 7 bankruptcy laws what debts are not discharged?
3 yeas of back taxes
Alimony and child support
Student loans unless "undue hardship"

What assets are protected from
-Rollover IRAs have unlimited protection
-IRA and Roth are exempt up to $1.2 million
-Alimony & Child Support
-Pensions, life insurance & annuities

What is chapter 11 bankruptcy?
Relief through reorganization for business or self-employed

What is chapter 13 bankruptcy?
Relief through adjusting debts

Workers Compensation?
An absolute form of liability. Regardless of fault if injured at work, employee collects benefits and those benefits are not subject to income taxation.

Unemployment compensation?
Collect benefits if employee loses their job. The program is funded by tax on employers, and benefits are included in gross income.

What is the Balance Sheet?
A snapshot of account balances at a "moment in time". The proper dating is "As of Month Day, 20XX".

Assets-Liabilities= Net worth

What is the Statement of Income and Expenses?
A financial statement that presents income and expenses over a period of time. List the sources of Income, Savings, and Expenses (both variable and fixed)

What is the formula for the current ratio?
current ratio = current assets/current liabilities

What is the formula for the emergency fund ratio? and what is the ideal need for the emergency fund?
Emergency fund = Current Assets/Monthly Non Discretionary expenses

Need is 3-6 months. 3 months for a dual wage earner family, 6 for a single wage earner family.

What should the housing ratio be?
Less than or equal to 28% of GROSS income

Monthly Housing Costs (Principal+Interest+Taxes+Homeowners Insurance)
----------------------------------------------------------------
Monthly Gross Income

What should the housing plus all other debt ratio be?
Less than or equal to 36% of GROSS income

Formula is the same just add all other recurring debt to the monthly housing costs

What is HUD-1?
A mortgage loan document. It describes the type of loan and itemizes services and fees charged by the lender when applying for a loan or refinancing.

When is a reverse mortgage appropriate?
A reverse mortgage is appropriate when income needs to be generated for elderly homeowners. Reverse Mortgages are available to home owners 62 or older. They pay a monthly payment or lump sum and allow the home owner to retain rights to live in the house. Repayment occurs at death of the homeowner.

What is the target for the savings ratio?
10-12% depending on age when you start saving. If the client waits to start saving between the age of 44 or 55 the rate may be closer to 20-25%.

How is the savings ratio calculated?
Annual savings (employee + Employer Contributions)/Annual Gross Icome

For FASFA purposes what is considered an independent student?
-Over age 23
-Married
-Working on Masters or Doctorate
-Veteran of the U.S. armed forces

What are the characteristics of the Federal Pell Grant?
Free money-not a loan. The Grant is based on a student's financial need as determined by the EFC. This grant is only available to students that have not earned a bachelors or professional degree yet.

What are the characteristics of Stafford loans?
Stafford Loans can be either subsidized or unsubsidized. Subsidized loans don't charge interest until graduation, leaving school or falls below half-time status. Unsubsidized charge interest when the loan is disburse. The interest may be capitalized or paid as accrued.

What are the characteristics of PLUS loans?
Parents borrow the money based on their own credit, not the students need. These loans must be repaid within 10 years with payments beginning within 60 days of the final disbursement. Only available for undergraduate students.

What is the Federal Supplemental Education Opportunity Grant (FSEOG)?
A campus based financial aid option. It's awarded to students with a low EFC, and is only paid if funds are available from the university.

What are Federal Perkins Loans?
Student loans where the school is the lender. Perkins loans are only paid if funds are available, and are awarded to students with exceptionally low Expected Family Contributions.

What are prepaid tuition plans?
A college savings tool that allows parents to pay for in-state college credit at a fixed cost. Its locks in cost in today's dollars. For FASFA purposes this is an asset of the parent.

What are the disadvantages of the Prepaid State Tuition Plans?

1. Only earns a return equal to tuition inflation

2. If a student receives a scholarship only the principal is given back.

3. If student does not attend the selected university, you generally only receive the return of principal back.