CFP Exam Prep Cards - Section 1 - General Principles of Financial Planning

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The 6-steps of the Financial Planning Process are:: 1.Establish & Define Relationship
2.Gather data / get goals and objectives
3.Analyze Information
4.Develop Plan
5.Implement Plan
6.Monitor Plan
The 7 Principles of Ethics and Prosessional Responsibility: â€¢Principle 1 â€“ Integrity
â€¢Principle 2 â€“ Objectivity
â€¢Principle 3 â€“ Competence
â€¢Principle 4 â€“ Fairness
â€¢Principle 5 â€“Confidentiality
â€¢Principle 6 â€“Professionalism
â€¢Principle 7 â€“ Diligence
What things are found on a balance sheet?: Assets and liabilities at FMV (Full market value) / Net Worth
What are the three types of assets in the Balance Sheet?: 1. Cash
2. Invested Assets
3. Use Assets (residence, furniture, autos)
What are the two catagories of liabilities listed in LIABILITIES on Balance Sheet: 1. Current Liabilities (credit card balances)
2. Long-term liabilities (auto loans, mortgages, life insurance loans)
What are examples of things that increase / decrease Net Worth on balance sheet?: INCREASE
Shares of S&P 500 Index fund increse in value with market

DECREASE
Interest rates have a substatial increase and the client has a big bond portfolio
What are examples events which have NO impact (increase or decrease) of Net Worth?: 1. Paying off debt with cash (repayment of a loan using funds from a savings account)

2. Buying an asset with cash (purchase of an auto 75% financed and 25% down payment - addition of auto increases assets - 25% / down payment decreases cash - 75% / financing increases liabilities - again a wash
To determine if A / L should be on balance sheet it should have 3 characteristics:: 1. A/L fixed and determinable amount
2. Receipt or payment NOT contigent on occurence of particular event
3. Receipt or payment does NOT require future performance or service
Be familiar with examples of liquidity (in order of liquidity): 1. Mutual Funds
2. Cash value life insurance
3. Real Estate residence
4. Jewelry

keep in mind what kind of primary and secondary markets exist for each asset listed
Statement of Financial Condition (Balance Sheet). Use specific date or range?: Specific Date
At OR As of December 31, 2005

NOT

Period beginning / ending Dec 31, 2005
Cash Flow statement: Specific date OR ranges?: Ranges
Cash Flows are snapshots of ranges such as year or quarter
What are INFLOWS on Cash Flow Statements: 1. Gross Salaries
2. Interest Income
3. Dividend Income
4. Rental Income
5. Refunds due (Tax)
6. Other incoming tax flows
7. Alimony recieved
What are OUTFLOWS on a Cash Flow Statement: 1. Savings & Investment - by item
2. Fixed outflows (non-discretionary)
3. Fixed outflows (discretionary)
4. Variable outflows (non-discretionary)
5. Variable outflows (discretionary)
EXAMPLES of Fixed Non-discretionary outflows: House payments
Auto payments
Taxes
EXAMPLES of Fixed discretionary outflows: Club dues
Utilities
EXAMPLES of Variable Non-discretionary outflows: Food
EXAMPLES of variable discretionary outflows: Vacations
Entertainment
Inflows - Outflows =: Net Discretionary Cash Flow
What does a Pro forma statement do?: forecasts future balance sheets and cash flow statements
Budget: Adjustable or firm?: a budget should be adjusted monthly
important consideration in preparing a budget is:: inflation
Individuals close to retirement use budgeting to figure what out?: the best wage replacement ratio for retirement
Consumer Debt Ratio: Consumer debt (credit cards, auto loans and the like) should not exceed 20% of net income (gross income - taxes)
Housing Payment Ratio: Monthly payments on a home (P, I, T, I) should be no more than 28% of gross income
Total Payment Ratio: total monthly payments on all debts should be no more than 38% of gross montly income
Renters expense - less than?: 30% of gross monthly income
Savings and Investment should equal at least:: 5% to 10% of gross income not including reinvested dividend and income
Bankruptcy - Chapter 11: Allowed to reorganize

Debtor remains in possession of assets

subject to oversight of court
Bankruptcy - Chapter 13: Allowed to set up repayment plan

Allowed to hold on to property as long as making regular payments

file for 13 if faced with foreclosure

debts that cannot be discharged through chapter 7 can be done through 13
Bankruptcy - Chapter 7: has to do with liquidation (voluntary or involuntary)

extinguishes debtors responsibility for DISCHARGEBL debt
What kind of debt is NOT dischargable through Chapter 7 bankruptcy?: 1. Back taxes (3 years)
2. Those based on fraud
3. Alimony & Child support
4. Student loans
Supreme Court ruled recently that creditors cannot take what kind of asset from debtors in bankruptcy?: Retirement plan assets
Lifetime Learning credit allows how much of a credit per return? (2006): up to $2,000 (20% of first $10,000)
Lifetime Learning credit avaliable for what level of education?: Available for all years of postsecondary education and for courses to acquire or improve job skills
Lifetime Learning Credit avaliable for how many years?: unlimited
Lifetime Learning qualified expenses include tuition. What is not qualified?: Books and supplies do not qualify unless condition of enrollment
How much credit is avaliable for HOPE Scholarship credit? (2006): Up to $1,500 credit per eligible student
HOPE Scholarship Credit how long can credit be taken? (2006): 1st & 2nd year of undergrad studies

Must be enrolled at least part-time
Coverdell (ESAs) must be withdrawn by what age?: 30
Coverdell (ESAs) maximum contribution amount?: $2,000
Savings Bonds interest exempt from what if used for qualified edu costs in same year cashed in?: FEDERAL TAX - always excempt from State Tax
Quanitative Data: data tells you where the client is and what it will take to get him where he wants to go.
Fact finding interview
Qualatative Data: data tells you why the client wants to reach the goal. Found using a gols and objectives interview
Emergency Fund Planning: Marketability: the ease with which an asset may be bought or sold
Emergency Fund Planning: Liquidity: the ease with which assets can be converted into cash with little risk of principle
Emergency Fund Planning: Real Estate Is it liquid? Is it marketable?: 1) Considered illiquid because it may take a while to sell and asking price need to be lowered
2) Marketable because it is relatively easy to sell a house if priced below market value
Emergency Fund Planning: Adequacy of reserves - One-income family? Two-income family?: One-income family - 6 months
Two-income family - 3 months
What are the four life cycle phases?: 1) Accumulation
2) Consolidation
3) Spending
4) Gifting (may mirror spending phase)
Pell Grants: 1) given on basis of financial need

2) maximum of $3750 (undergrads only)
Federal Supplemental Education Opportunity Grants (FSEOGs): 1) given on basis of financial need

2) max amount $4,000
Perkins Loans: 1) funded by Feds, administered by schools

2) limit $4000 undergrads

3) limit $6000 grads

4) 5% w/ 9 mo grace period
CollegeSure CD: 1) Gauranteed to keep up with cost of college
2) Minimum 4%
3) if scholarship parents recieve $ back
Education Savings: Ownership of assets - Financial Aid What is methodology for formula known as expected family contribution?: Parents - as much as 47% of income - only 5.6% of assets

Students - 35% of assets
Section 2503(c) Minors Trust: *Allows the transferred trust property to be treated as if it were a gift of present interest to child
Why is a 2503(c) Minors Trust used?: * Grantors income tax bracket is high and recipients tax bracket is low

* Grantor doesnt want an appreciated asset included in his gross estate
How is 2503(c) taxed?: If income is distributed every year - tax to recipient

If income accumulates - taxed to the trust
Margin cost: the cost to produce one more unit of product
Variable cost: cost that fluctuate with some cost driver (e.g. units produced)
Fixed costs: costs that do not change as a result of producing additional units (e.g. rent)
Cost of Capital: internal measure of a companies borrowing cost from stockholders or outside creditors
Law of demand: the lower the price the more consumers will buy
LAW OF DEMAND As price of a product increases what happens: consumer will be able to find more substitutes and will be more responsive to price when more viable substitutions are avaliable
LAW OF DEMAND What is the difference between Change in Demand vs. Change in Quantity Demanded?: Change in deman is a shift in the entire demand curve

Change in quantity demanded is a movement along the same demand curve in response to a price change
LAW OF DEMAND What are examples of Change in Demand? (shift in curve): Changes in:
Consumer income
Consumer expectations
Demographic Changes
Consumer taste and preferences
# of consumers in a market
LAW OF DEMAND What are examples of Change in quantity demanded (movement along demand curve)?: Gasoline consumption increases as some of the taxes on gasoline are lowered
Law of Supply: the higher the price the more producers will produce
LAW OF SUPPLY Elasticity:: Supply curve is elisatic when a price change leads to a great change in quantity supplied (think of rubber band)
LAW OF SUPPLY Inelasticity:: Supply curve is inelastic when a price change produces only a small change in supply (think of rubber band)
LAW OF SUPPLY Factors that SHIFT the supply curve include:: (a) Changes in resource prices
(b) Changes in technology
(c) Natural disasters
(d) other disruptive events
LAW OF SUPPLY An inferior good will have:: negative income elasticity (as income increases, the quantity demanded will decrease)
LAW OF SUPPLY A normal good will have:: positive income elasticity (as income increases, the quantity demanded will increase)
Price controls: the attempt to adjust the balance between supply and demand
Market price: the price at which a willing buyer and a willing seller acheive their objective
Supply-side economics: a belief that offering incentives to produce can accomplish stated results
Monetary Policy: The Federal Reserve Bank (Fed) controls the supply of money enabling it to significantly impact interest rates
Who controls Monetary policy?: The Federal Reserve (Fed)
MONETARY POLICY Easy Monetary Policy: The Fed will follow a loose, or easy, policy when it wants to increase the money supply to EXPAND the level of income and employment
MONETARY POLICY Tight Monetary Policy: In times of inflation and when its wants to contrict the supply of money, the Fed will follow a tight monetary policy
MONETARY POLICY The Fed has 3 methods of controlling the money supply:: (1) Reserve Requirements
(2) Reserve Discount Rate
(3) Open Market Operations
MONETARY POLICY Reserve Requirements:: Minimum amount that a bank is allowed to have in its reserves
MONETARY POLICY Open Market operation:: Buys and sells government securities
MONETARY POLICY Reserve discount rate:: Adjusts discount rate which is the interest rate chanrged to member banks when they borrow money from the FED
MONETARY POLICY Prime Rate: THE FED DOES NOT USE PRIME RATE TO CONTROL THE MONEY SUPPLY
MONETARY POLICY EASY OR TIGHT? Reserve Requirements:: Easy - when this ratio is lowered mony supplies increase

Tight - when this ratio increases money supplies shrink
MONETARY POLICY EASY OR TIGHT? Open Market Operations:: Easy - Buy Treasuries (more $ supply to street)

Tight - Sell Treasuries (less $ supply to street)
MONETARY POLICY EASY OR TIGHT? Reserve discount rate: Easy - lower rate

Tight - raise rate
Fiscal Policy: influence taken by Federal Government to influence economy by raises and lowering government spending and taxes
FISCAL POLICY Expansionary fiscal policy =: Increase spending and lower taxes =

Increased GDP and price levels
FISCAL POLICY Restrictive fiscal policy =: Decrease spending and raise taxes =

Lower GDP and price levels
FISCAL POLICY Deficit spending: occurs when expenditures exceed revenues of the govt.
FISCAL POLICY Effects of deficit spending:: by selling securities to public to finance deficits, Treasuries compete with other securities (drives prices down - decrease in price causes yields to rise)
SUPPLY OF MONEY M-1: 1) currency in circulation
2) checkable deposits
3) Traveler's checks
SUPPLY OF MONEY M-2: 1) includes everything in M-1
2) plus savings deposits
3) plus time deposits less than $100k
4) plus money market mutual fund shares
SUPPLY OF MONEY What happens if individuals shift money from savings accounts to checking accounts?: money supply is increase in norrow M-1
but unaffected under more braod M-2
The National Bureau of Economic Research (NBER) tablulates a series of economic indicators. The 10 leading indicators are: 1) Stock prices (S&P 500)
2) Average weekly work hours
3) Average unemployment claims
4) Manafacturers new consumer goods orders
5) Manafacturers new orders for non-defense capital goods
6) Vendor performance (companies recieving slower deliveries)
7) New building permits
8) Interest rate spread (difference between the 10yr Treasury and Fed Funds rate)
9) Inflation-adjusted M-2
10) Consumer expectations from Univ of Mich
BUSINESS CYCLE THEORIES Peak:: 1) accompanied by increased rate of inflation
2) results in a period of rising unemployment
3) declining naitonal output
BUSINESS CYCLE THEORIES Recession:: period when Real GDP decliens for two more more successive quarters
BUSINESS CYCLE THEORIES Depression:: Depression is a prolonged and very severe recession
BUSINESS CYCLE THEORIES What is the most common means of measuring economic activity: GDP
BUSINESS CYCLE THEORIES What do most economists use to determine the phase of the business cycle?: unemployment rate
CPI (Consumer Price Index): calculated by Bureau of Labor Statistics

Measures the cost of a basket of goods and services over time
PPI (Producers Price Index): calculated by US Dept of Labor

measures wholesale cost of goods over a period of time
Disinflation: manifested when the rate of inflation decreases; prices are still rising, but at a slower pace
Recession: Real GDP declines for two more more successive quarters
What will the Fed do to try to get economy out of recession?: Put more money into circulation and expand the supply of credit
What will Federal Govt do to get economy out of recession?: Expansionary policy = increased spending - lowering taxes
What kind of assets should one obtain during inflationary times?: AVOID - tangible asset prices will decline (real estate, collectibles and precious metals)

ACQUIRE - short-term liquid assets (conservative) / Long term debt not too bad (agg)
ONLY PURCHASE HIGHT CREDIT QUALITY - many go out of business
The Yield Curve: Graph showing the relationship between term to maturity and yield to maturity
(relationship between interest rates and time)
BUSINESS ORGANIZATIONS Sole Proprietorship: Business owned by an individual who is personally liable for the obligations of the business
BUSINESS ORGANIZATIONS Sole Proprietors: Special forms needed to start SP / special tax forms to file?: No special forms to file

Files a Schedule C with tax forms
BUSINESS ORGANIZATIONS General Partnership - Liabilities (tort brought): If a tort is brought against the partnership all partners are jointly and severally liable
BUSINESS ORGANIZATIONS General Partnership - Pay of GP's: Not entitled to Salary - entitled to a share in the profits
BUSINESS ORGANIZATIONS General Partnership - GP's commings and goings:: Unanimous consent of all partners for admission

Partnership dissolved if:
Partner dies
Goes bankrupt
Dissolved by termination provision
BUSINESS ORGANIZATIONS General Partnership - Tax forms required:: For 1065 to establish

Schedule K-1 for each partner yearly
BUSINESS ORGANIZATIONS Limited Partnership - How organized:: One GP and at least one other LP
BUSINESS ORGANIZATIONS Limited Partnership - What is role of LP? (3): 1) Cannot participate in managing business
2) no authority to bind business
3) cannot use last name in name of partnership
BUSINESS ORGANIZATIONS Limited Liability Partnership - (LLP): 1) usually professional partnership (CPA, atty)
2) partners limited liability except personally to malpractice
BUSINESS ORGANIZATIONS Limited Liability Company - (LLC): 1) owners (members) have limited liabilities for debts and claims of business even while participating in mgmt.
2) some states prohibit single member LLCs
BUSINESS ORGANIZATIONS Limited Liability Company - (LLC) - LLCs can be taxed as any of the following:: 1) Sole Prop
2) Partnership
3) S Corp
4) C Corp
BUSINESS ORGANIZATIONS C Corp May be required to pay one of the following taxes in addition to regular federal income tax:: 1) Personal holding company tax
2) Accumulated earnings tax
BUSINESS ORGANIZATIONS S Corporation - Definition:: Corporation with LESS THAN or EQUAL TO 100 shareholders
1) All individuals (US no aliens)
2)Certain estates or trusts
3)NO partnerships or corporations as shareholders
4) no more than one class of stock
BUSINESS ORGANIZATIONS S Corporation - Taxation:: 1) IRS treats shareholders as partners
2) pro rata shares / flow through
3) avoid double taxation
BUSINESS ORGANIZATIONS Professional Corporation (PC) Definition:: 1)Similar to commercial corperation - ownership is restricted to members of a certain profession
2) Continuity beyond death - trasnferred shares or bought up by PC
BUSINESS ORGANIZATIONS Professional Corporation (PC) Liability?: Big advantage is that all members retain limited liability for own actions as well as for those of people directly under their supervision
SELECTION OF BUSINESS When to use Sole Prop:: 1) Single owner in state that does not permit single member LLC
2) when adequate liability insurance is avaliable at acceptable cost
3) owner not concerned with transferring future interests
SELECTION OF BUSINESS When to use GP:: 1) in start-up losses can be passed through to partners without being restrictions of C Corp. Income, gain, loss and deductions are passed through to partners
Federal Truth-In-Lending Act (Consumer Credit Protection Act) is administered by:: The Federal Reserve board
Fair Credit Billing Act ammends what older Act?: The Truth-In-Lending Act
Equal Credit Opportunity Act:: Prohibuts discrimination based upon:
1) race
2) religion
3) national origin
4) color
5) sex
6) marital status
7) age
8) receipt of certain types of income
Investment Advisers Act of 1940: Easy as "A-B-C"
Requires registration with SEC if:
A) Advice
B) in the Business
C) Compensation
ALL ELEMENTS MUST BE PRESENT
Investment Advisers Act of 1940 (EXCEPTIONS): 1) Bank or holding company that is not investment comp.
2) lawyer, accountant, engineer, or teacher when advisory services are incidental
3)publisher of bona fide newspaper
4)only give advise on govt securities
SEC Release #IA-770: Reaffirmed Investment Advisers Act of 1940
Registered Investment Advisors (RIAs) Obligations:: 1) Disclose conf of interest
2) Fiduciary status
3) Performance fees only if managing $750k of clients assets or NW over $1.5 Million
4) Brochure rule (deliver 48 hrs)
DO NOT USE INITIALS RIA
Insider Trading & Securities Fraud Enforcement Act of 1988: Amended Advisers Act of 1940
1) prevents misuse of material
2) non=public information by reg IA or anyone associated with him
NASD Rules of Fair Practice: Prohibits reg rep from engaging in a private securities transaction (cant sell away for compensation)
National Association of Securities Dealers (NASD): 1) NOT ASSOCIATED WITH SEC
2) Started by securities industry in attempt to regulate self
3) anyone selling stocks, bonds, etc. must register with NASD (File U-4 and pass NASD exams)
NASD Exams: All the series 3, 6, 7 ...
Consumer Credit Protection Act: 1) must give "true" rate - APR
2) max liability for stolen CC - $50
3) 3 day right of recission
Kiddie Tax: Unearned income in excess of $1,700 per year (2006) of a child under 14 is taxable at parents top rate
GDP =: GDP = C + I + G + Xn
C = Consumption
I = Investment
G = Govt Spending
Xn = Net exports (Exports - Imports)
Definition of GDP: the total MARKET VALUE of all FINAL goods and services PRODUCED in an economy in one year
Securities Act of 1933: Primarily concerned with new issues of securities (IPOs)
Also prospectus
Securities Act of 1934: Establishment of SEC
Glass-Stegall Act (1933): prohibited commercial banks from acting as investment bankers
Gramm-Leach-Bliley Act (1999): Repealed most of Glass-Stegall

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