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Topic 1: Financial Planning Process Steps
E G A D I M
Establish Services to be provided
Comprehensive Education planning
Disclose compensation Prior to services In writing Form of compensation
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Topic 1: Financial Planning Process Gather
Collect information Questionnaires
When should client complete? Interviews
Qualitative Attitudes, financial knowledge/experience, lifestyle Who pays the bills? What influences your feelings about money? Open ended questions… If you had five years…if you had $40 billion
Financial risk tolerance Mental ability to withstand investment losses Financial knowledge / current portfolio Financial capacity
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Topic 1: Financial Planning Process Gather
Collect information Documents
Balance sheet / loan application Investment accounts Retirement accounts Summary Plan Description for qualified plans Income tax return Insurance policies Loan statements Wills, Powers of Attorney, Trust Documents
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Topic 1: Financial Planning Process Analyze
Goals Wants
Needs Ranking of goals
Retiring at age 55 versus funding all of child’s college expenses
With time frame Short: < two years Intermediate: 2 – 10 years Long-term: > 10 years
Assumptions: mutually agreed upon… Life expectancy Inflation Move after retire? Rate of return for various asset classes Income tax rates
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Topic 1: Financial Planning Process
Develop Alternatives
Roth versus Traditional IRA versus 401(k)
Term versus permanent life insurance
529 versus UTMA versus Roth for education expenses
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Topic 1: Financial Planning Process
Develop Financial plan: financial checkup
Adequate insurance?Adequate emergency funds?Adequate savings for goals?Comfortable with asset allocation?Understand income tax calculation?Comfortable with plans for eventual
asset transfer?
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Topic 76: Ethics
CFP Board’s Code of Ethics Applies to candidates as well as CFPs Principles
Integrity: don’t mislead Objective: disclose conflicts of interest Competence Fairness: disclose compensation; don’t commingle Confidentiality: don’t disclose unless permitted/required
Can’t notify IRS of tax return issues without client consent Professionalism: don’t use RIA
Notification of CFP Board of crime conviction CFP Board of Professional Review:
Inquiry Panel: probable grounds / Hearing Panel :can appeal to Board of Appeals
Diligence: suitable recommendations
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Topic 76: Rules of Conduct
Mutually define relationship Prior to entering agreement discuss
The obligations and responsibilities of each party under the agreement with respect to: Defining goals, needs and objectives, Gathering and providing appropriate data, Examining the result of the current course of action without changes, The formulation of any recommended actions, Implementation responsibilities, and Monitoring responsibilities.
Compensation Terms under which the agreement permits the certificant to offer
proprietary products. Terms under which the certificant will use other entities to meet any of the
agreement’s obligations.
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Topic 76: Rules of Conduct
A written agreement governing the financial planning services (“Agreement”). The Agreement shall specify: The parties to the Agreement, The date of the Agreement and its duration, How and on what terms each party can terminate the
Agreement, and The services to be provided as part of the Agreement.
Can use ADV Must act as a fiduciary Must also disclose in writing:
Compensation Conflicts
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Topic 76: Rules of Conduct
Client information confidential Keep information secure Get all required information Don’t commingle assets with personal assets if take custody Don’t borrow/lend money from/to client unless bank or family Be competent Notify CFP Board of any crimes
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Topic 77: Disciplinary Rules/Procedures
CFP Commission Review violations of Rules of Conduct, Practice
Standards and Fitness Standards Hearing Panel
Determines if violation occurred Forms of Discipline
Private censure Public letter of admonition Suspension Revocation
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Topic 78: Practice Standards
Applies to CFPs engaged in financial planning Not CFPs who are teaching, for example
E: mutually define scope; compensation Must have in writing financial planning services to be provided Must also determine duration of engagement
G: not enough data, restrict or terminate A: D: I: agree on responsibilities M: mutually agree with client on responsibilities
Regarding scope, goals, implementation and monitoring Planner only responsible for
Developing alternatives and selection of products/services
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13Topic 2: Personal Financial Statements
Statement of Financial Position Use assets: cars, home, etc.
Statement of Cash Flow Accrual versus cash basis
Pro Forma Statements: projections
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Topic 4: Financing Strategies
Mortgage financing Conventional: fixed rate 15- 30 years ARM: adjustable, tied to index
2/5 ARM Lower rate due to less risk for lender Likelihood of living in home for 15 years
Points Cost When to pay them
Interest only Tax, equity perspective
Sale of home: $500,000 gain exclusion MFJ
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Topic 4: Financing Strategies
Home equity loan Amount of equity Percent can borrow
Line of credit Interest on borrowings up to $100,000 deductible
Refinancing Cost of refi: appraisal, title insurance Decrease in interest expense How long own home? Keep payment same?
Reverse mortgage Receive monthly income increasing mortgage balance
Income tax implications? At death, home is sold to pay mortgage balance
Loss of Medicaid eligibility if sell before death
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Topic 5: Financial Institutions
Banks FDIC insurance
$250,000 per account Joint
Your share of joint accounts up to $250,000 Mr. X and Mrs. X, JROS account of $300,000 Mr. X owns $150,000; fully insured as long as his share of
other joint accounts is < $100,000 Also, separately insured
Retirement account Irrevocable trust POD and Totten trusts
Not separately insured Custodial accounts, revocable trusts, checking/savings
per bank Brokerages SIPC insurance: $500,000/$250,000 max for cash
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Topic 5: Financial Institutions
Credit unions No tax
Better interest rates for consumers Not FDIC insured Membership requirement
Brokerage companies Insurance companies Mutual fund companies
In 2009, Federal government is insuring money market mutual funds Trust companies
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Topic 73: Special Circumstances
Divorce Division of assets
Tax basis Child support/alimony
Nontraditional families No unlimited marital deduction
Use of trusts, naming beneficiary Special needs children
Establish trust to assist with needs Properly drafted, won’t impact ability for public assistance Trust can only be used for “extras”
Transportation, therapy and day care Not food, clothing or housing
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Topic 8: Economic concepts
Supply and demand Increase in supply/demand: impact on prices
Fiscal policy Taxes and spending by federal government
Appropriate strategy during recession? Monetary policy: Federal Reserve
Reserve requirement: nuclear weapon Discount rate: borrowing from Fed
Fed funds rate: borrowing between banks Open market operations
Used most often; buy/sell Treasuries Appropriate strategy during recession?
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Topic 8: Economic concepts
Leading indicators: future of economy Stock prices Size of money supply New claims for unemployment Weekly hours worked by factory workers Building permits for new homes (not starts)
Stagflation: slowing economy but rising prices Durable goods: cars, couches, etc. vs. nondurable Yield curve
Normal Inverted Increasing interest rates: impact on dollar
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Topic 9: Time Value of Money
Annuity due Start of period
Investing $1,000 for 10 years at beginning of year instead of end Calculations
Changing from begin to end and back NPV and IRR
Required return 7%, NPV $1,000 for $20,000 investment. IRR? Investment with highest NPV will also have highest IRR
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Topic 9: Time Value of Money
Serial payments Increase in asset value net of inflation (I = Rate of return/ Education Inflation Rate – 1) x 100
Education inflation Calculating PV needed at start of college
Retirement income Calculating PV needed at start of retirement
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23Topic 10: Financial Service Regulations
Investment Advisers Act of 1940 Investment adviser
Provide advice/analysis on securities In the business of doing this Receive compensation for advice/analysis
Must meet all three tests
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24Topic 10: Financial Service Regulations
Investment adviser Exceptions
Banks Lawyers, teachers, accountants, engineers
If incidental Brokers
Incidental Just executing trade…
Publisher of financial newsletter Less than 15 clients and don’t advertise being
investment adviser
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25Topic 10: Financial Service Regulations
Investment adviser Must register with either
SEC More than $100 million ADV: registration statement filed with SEC Adviser has fiduciary obligation
State Less than $100 million
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26Topic 10: Financial Service Regulations
Investment adviser Don’t use initials RIA
Registered Investment Advisor permitted Register with SEC requires filing ADV
Part I: background on firm and clients Part II:
Fees Balance sheet
Brochure Prior to providing advisory services
Client has five days to cancel Annually to clients
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27Topic 10: Financial Service Regulations
FINRA (formerly NASD) Self regulated Must register if selling stocks, bonds,
options, mutual funds Must be sponsored by broker/dealer Pass exam
Series 6: mutual funds, variable products Series 7: everything but commodities, options Series 65: investment adviser
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28Topic 10: Financial Service Regulations
FINRA (formerly NASD) Disputes between advisers/clients go to arbitration
Insurance sales Regulated by states
Life insurance rates, capital, claims practices Must have a license in each state doing business
NAIC promotes model state laws, accredits state insurance offices –
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Topic 11: Business Law
Contract requires: Offer and acceptance Competent parties Consideration Lawful
Agents Must be loyal to principal Carry out principal’s instructions with
reasonable care and diligence
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Topic 11: Business Law
Principal’s duties to agent Opportunity to work Pay agent Reimburse agent for authorized expenses Keep accurate financial records Indemnify agent when acting for principal
Agent’s authority Express, implied and apparent
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Topic 11: Business Law
Bankruptcy Property debtor can keep
Retirement plans including IRAs IRAs limited to $1 million IRA, 529 and Coverdell exempted if made more
than a year ago Life insurance Home (varies) Limited amount of property
Debts not discharged Taxes Alimony., child support Student loans Fines and penalties
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Topic 11: Business Law
Bankruptcy Reform Act 2005 Requires debtor to be offered
Credit counseling Budgeting assistance Financial management course
Chapter 7 bankruptcy Voluntary or involuntary Allowed to keep some assets, remainder used to pay
creditors Keep life insurance, qualified plans and perhaps home
Pass means test to see if debtor has income to pay debts
Creditors cam object if above average income
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Topic 11: Business Law Chapter 13
Voluntary Debtor restructures debt and keeps assets Creditor can’t foreclose or harass debtor
Fair Credit Reporting Act Have right to see and correct credit reports Disclose cost of credit life insurance
Consumer Credit Protection Act Maximum liability for lost/stolen credit card $50 Lender must provide borrower with APR Three days to rescind any contract involving home
used as collateral
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Topic 11: Business Law Foreclosure Relief
Can exclude up to $2 million in debt forgiven on primary residence in foreclosure Also applies to
mortgage reduction short sale
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Topic 11: Business Law
Identity theft Shred all documents containing
Social security numbers Credit card numbers Usernames/passwords
Don’t disclose this information unless you initiated contact