DeGroff Final Exam Cumulative Flashcards

To qualify to become a CFP 

Educational requirements

6-hour exam

6000 hours working in a financial planning related position

Pass the “fitness” standard. 

Unacceptable Fitness Behavior 

Felony conviction for financial crimes,

Felony conviction for rape / murder 

Felony conviction for violent crimes within 5 years. 

Revocation of Professional License (for cause). 

• Presumptive Bar 

On its own, these items will prohibit you from becoming a CFP, but extenuating circumstances may mean these items do not automatically disqualify you. 

• 2+ bankruptcies (personal or business) 

• Revocation of a non- (financial) professional license 

• Real estate attorney, etc. 

• Suspension of a financial license (for cause) 

• Felony for non-violent crimes within the last 5 years. 

• Felony for violent crimes 5+ years ago. 

• Other Adverse Conduct 

Items that do not reflect well on you, and if they become a pattern, will disqualify you. 

• Customer complaints 

• Arbitrations and civil proceedings. 

• Non-violent felonies 5+ years ago. 

• Misdemeanors. 

• Employer investigations / terminations.

Code of Ethics 

• Act with honesty, integrity, competence, and diligence. 

• Act in the client’s best interest. 

• Exercise Due Care 

• Giving consideration to all the necessary and relevant information. 

• Maintain the confidentiality and protect the privacy of client information. 

• Act in a manner that reflects positively on the Financial Planning profession and the CFP Certification. 

• “Don’t make me look bad bro” 

Standards of Conduct 

• Duties to clients 

• Adherence to the Code of Ethics and Fiduciary responsibility 

• Adherence to defined FP Practice Standards 

• Professional operating practices 

• Adherence to a defined FP Process 

• Financial Planning Construct: Goals | Tools | Decisions | Plans 

• Duties owed to firms and subordinates 

• Prohibition on Circumvention 

• “If it's wrong for you to do, it's wrong for you to get someone else to do it” 

Ground for Discipline 

Any violation of the Fitness Standards, Code of Ethics, or Standards of Conduct 

Disciplinary Procedures 

• Private Censure 

• Private telling of wrong doings. 

• Public Censure 

• Public announcement of wrong doings. 

• Suspension of License 

• Taking of license with ability to get license back. 

• Revocation of License 

Fiduciary Responsibility 

Fiduciary – operate in the client’s best financial interests. 

• Duty of Loyalty 

• Client first, firm second. 

• Duty of Care 

• Due diligence. 

• Duty to Follow Client Instructions 

Financial planning construct

give on the ability to reach a goal 

4 Steps in Financial Planning Construct

• Turn a goal into a financial goal 

• Determine tools that are needed 

• Decisions we need to make 

• Steps needed to make the plan 

Retirement Accounts 

Individually owned accounts 

        Also known as IRAs 

o  Roth and Traditional options 

Roth accounts are Retirement Accounts that are able to grow without any taxes since they are tax free, while Traditional grows with taxes being taken out as adjustments. 

-          Employer sponsored accounts 

o   401K 

A 401k is an Employer sponsored account for retirement that grows tax-free, and will only be taxed when it is being taken out of the account for Distribution. 

Individual Retirement Accounts 

Portable 

o   Doesn’t matter which employer you work for because it will travel anywhere you go. 

-          More customizable investment options 

When taking an employer sponsored plan, they limit you to certain investments, but with a private account you can invest in almost anything. You will want to have logic in what you are investing in before you invest it though. This way you gain the maximum amount of profit. 

-          Lower contribution Limits 

o  How much you can put into the account each year. 

o  2025 limit = $7,000 

50 and older is able to invest an extra $1,000 for $8,000 in total 

Employer Sponsored Accounts 

Not portable 

o   The account stays with the employer 
When you leave the account does not leave with you. Money can no longer be put into the account. 

-          Limited investment options 

o   Lower costs, but can sometimes simplify the process for less fiscally educated individuals 

High risk and Low risk have defined options for users to follow when making their decision 

-          Higher contribution limits 

o   401(K) Limit : $23,500 per year 

o   Can be better if you’re looking to invest large sums into your account every year 

-          Employer Matching contributions 

o   Employer’s match your retirement contributions 

o  Matching percentage differs from one employer to another. 

Example: Imagine if your employer were to match your investment of 6% every year. If you invest 6% of your paycheck, which in this example would be $3,000, they would also invest $3,000 into your account to make it a total investment of $6,000. 

Money can be better managed from within which retirement account?

an IRA rather than an employer sponsored account 

rollover

When someone leaves an employer, moving the account from the employer account to an individual account is known as

Money

Tangible Currency

Wealth

Aggregate of the Financial Resources available to you

Personal Returns

• 1. Your first job is to get a job 

Don’t be ashamed of a “bad job.”  (no job < bad job < dream job) 

• 2. Be a saver. 

Saving is NOT synonymous with spending.  Spending unnecessary money because it is on sale does not equal saving money. 

Intentionally put money away instead of just keeping it 

• 3. Cash Flow Management 

Learn to Budget 

• 4. Have an avenue to earn extra money 

This could be anything like maybe a side hustle. Degroff has teaching as well as his business! 

Structural Returns 

Come as a result of your Portfolio’s Allocation 

Natural Returns 

Your intrinsic rate of return on things 

Opportunistic Returns 

Irregular opportunities that come your way 

Threat 1: Lack of Liquidity 

Not having access to money when needed 

Lack of Liquidity Scenarios

Unexpected Expenses 

Job Loss/Job Change 

Asset Acquisition 

Opportunities 

How can liquidity be created? 

1. Cash 

2. Credit Card 

3. Whole life insurance 

4. Qualified Retirement Account 

5. Roth IRA 

6. Equity from house/business, etc. 

7. Non-qualified investment account 

Threat 2: Cash Flow interruption 

1. If something interrupts your cash flow, it interrupts your financial life. Ensuring consistent cash flow is the first job of financial planning.  

1. Positive Cash Flow increases liquidity 

2. Negative cash flow decreases liquidity 

Cash Flow interruption scenarios

1. Job loss 

2. Disability 

3. Inconsistent income 

4. Reduced cash flow 

Cash Flow interruption solutions

1. Liquidity 

2. Insurance products 

Threat 3: Growth Impediments 

1. Taxes 

2. Debt  

3. Poor management 

4. Emotion 

Threat 4: Lack of Extrinsic resources  

1. Access to credit 

2. Insurance 

Debt

Money owed by one party to another; often arises from a lack of accessible cash.

Liquidity

The availability of liquid assets to a market or company; a measure of how quickly assets can be converted to cash.

Net Change to Cash

The difference between cash inflows and outflows over a specific period; important for assessing financial health.

Umbrella Policy

A type of liability insurance that provides additional coverage beyond existing policies, often covering legal fees and damages.

Term Life Insurance

A life insurance policy that provides coverage for a specific period, with lower premiums compared to whole life insurance.

Disability Waiver of Premium

A provision in a policy that waives the premium payments if the insured becomes disabled.

Beneficiary

A person or entity designated to receive the benefits of a life insurance policy or trust.

Deductibles

The amount paid out of pocket before an insurance policy begins to pay for covered expenses.

Four Focus Areas

1. Cash Flow

2. Risk Management

3. Wealth Accumulation

4. Wealth Utilization

Allows you to prioritize your decisions that have the highest impact to your financial stability.

What is the advantage of grouping financial products into the four focus areas?

Ensure a stable and consistently positive cash flow.

What is the objective for the Cash Flow focus area?

Elements of Cash Flow

1. Structured Bank Account (account with a purpose)

2. Predictable Income

3. Predictable Expenses

Elements of Opening a New Bank Account

1. Seperate inflows and outflows

2. Seperately Managed

3. Like kinds of money

Create a positive net change to cash

One month outflows liquid

What is the liquidity goal for the cash flow focus area?

1. Free Cash Flow

2. Diminishes unhealthy focus on debt

What are the benefits to reducing credit card payments to minimums?

Puts debt on an amoritization schedule.

How does FP turn the disadvantages of reducing credit card payments (increased interest costs; longer payback periods) into advantages?

Allows you to see the bigger picture by creating a manageable target for expense reduction.

What is the benefit of summarizing budget categories?

1. Low Hanging Fruit

   1. duplicate expenses

   2. irrelevant expenses

   3. unnecessary luxuries

2. Extend Student Loan Terms

3. Reduce Retirement Contributions

Other tips to increasing net change to cash?

1. Increasing Net Change to Cash

2. Increasing Liquidity

How are debt problems solved?

positive cash flow

Apart from ____ you will always be financially unstable.

financial stability

Your financial growth is the result of your _____.

To protect against the statistically probable threats to financial stability.

What is the objective of the risk management focus area?

• 3 months outflows liquid

  • Keep in a HYSA

Managing Job Loss

• Umbrella Policy

  • 1 Million

Managing Injury Liability

• Home / Renter’s Insurance

  • Renters doesn’t cover dwelling (the structure itself)

• Contents Coverage

  • Replacement Value

• 300k+ liability

• Scheduled coverage for high dollar items

Managing Property Damage: Dwelling

• Comprehensive and Collision Coverage

• 250/500/100 Liability

  • Bodily per person / per incident / property

• Under/Uninsured Motorist

Managing Property Damage: Auto

limits over deductibles

If premiums are an issue, prioritize ____ over ____.

Term Life Insurance

• Long Term

  • Annually renewable or 30 year term when younger.

• Death Benefit

  • Covers: Funeral Expenese, Debt, Income Replacement, Legacy Objectives

• Convertible to WL

• Disability Waiver of Premium

• Mutual Company

Managing Premature Death

1. Funeral Expenses

2. Debt

3. Income Replacement

4. Legacy Objectives

What are the four needs death benefit should cover?

YOU receive dividends from the company.

Why should you buy from a mutual company?

Personal Disability Insurance Policy

• Benefit Amount

  • 65+% of Gross Income

• Benefit Period

  • “To age 65”

• Elimination Period

  • 3/6/12 months dependent on your savings

• Definition of Disability

  • “Own Occupation”

Managing Long Term Disability

Prioritize Life / Disability Insurance

• Purchase as much as you can as early as possbile.

Managing Uninsurability

Loan + PMI + Property Taxes + Homeowners Insurance

Mortgage Payment = ???

1. Over the FDIC insured limit

2. Business / Personal Accounts

3. Joint / Personal Accounts

What are three situations for having multiple checking accounts?

comprehensive and collision

Auto Coverages: ____ is not my fault, ____ is my fault.

down

If deductible goes up, then premium goes ____?

up

If limits go up, then premium goes ___?

savings, budget, credit, CD

Cash Flow (Engine) Examples

health, disability, home, term, auto

Risk Management (Protect) Examples

401(k), IRA, 529, HSA, WL

Wealth Accumulation (Provides) Examples

passive income, investors, opportunities

Wealth Utilization (Profits) Examples

guaranteed insurability

What is the benefit of an employer policy disability insurance?

Wealth

The aggregate of the resources available to you.

To increase wealth.

Purpose of Wealth Accumulation?

• Increase Money

• Increase Capacity for Money

Two Ways to Increase Wealth?

Retirement

___ a time when people must rely upon their financial resources for creating an ongoing income.

Withdrawal Rate

___ rate at which assets are withdrawn from an investment portfolio.

High

• higher income, higher risk of not lasting

Low

• lower income, likely money lasts

High vs. Low Withdrawal Rates?

The 4% Rule.

A person can withdraw 4% of initial investment portfolio balance and take inflationary raises and reasonably expect the portfolio to last for retirement.

the initial portfolio balance

The 4% Withdrawal Rate is based upon . .

• Inflationary Raises Added Each Year

• 50/50 Stock Bond

• Excludes Management Fees

• Portfolio to Last 30-50 Years

4% Rule Assumptions?

• Increased Taxes

• Increased Retirement Expenses

• Bear Markets

• Legacy Objectives

Situational Factors that Affect Withdrawals?

• Roth IRA

• Roth 401(k)

• WLI

Avoid Taxes Through Tax-Free Income Sources Such As:

• Income Needs are Larger in Early Retirement Years

• If Tax Rates Increase

Prioritize Tax-Free Income When:

• Income Needs are Lower in Later Retirement Years

• Periods of Low Tax Rates

Prioritize Taxable Income When:

• Assets that are growing when the market is declining

• Assets that are income producing

Avoid Bear Markets with:

• WLI

• Savings Account

Assets that are growing when the market is declining?

• Bonds

• Dividend Paying Stocks

• Rental Properties

Assets that are income producing?

• Occur once every 9 years

• Last for 3 years

Bear Market Facts:

WLI

Complete Legacy Objectives Through?

• Death Benefit Passes Tax Free to Beneficiaries

• Short Amount of Time (couple weeks)

• More Costly to Purchase When Older

Whole Life Insurance Realities:

Cash Flow

Increased Stability Through Increasing NCC

Risk Management

Increased Stability Through Protecting Against Statistically Probable Events

Wealth Accumulation

Increased Stability Through Accumulating Wealth

• Short Term Stability​

  • ~5 years​

• Mid Term Stability​

  • Next 20+ years.​

• Long Term Stability​

  • ~Retirement+​

Time Periods for Short, Mid, and Long Term Stability?

• Buying a house​

• Increasing Cash Flow Fund to 6 months.​

• Marriage, etc.​

• Reduction of Non-leveraging debt.​

Common Short Term Goals?

• Larger purchases​

• Financial Opportunities

Common Mid Term Goals?

• Viable Retirement lifestyle​

Common Long Term Goals?

Equity

___ is your [ownership] claim on an asset

liquidity

Equity can be borrowed against to create ____?