General Principles CFP

Understanding The Client's Personal and Financial Circumstances

Step 1; obtain quat/qual information, analyze information, address incomplete information

Identify and select goals

Step 2; Help client select/prioritize goals

Analyze current course of action and potential alternatives

Step 3

Develop financial planning recommendations

Step 4; consider assumptions, basis, timing/priority, whether independent or with other recs

Presenting the financial planning recommendations

Step 5; present recs and info required to be considered when developing

Implementing the Financial planning recommendations

Step 6; address responsibilities, identify/analyze/select products/services and implement

Monitoring progress and updating

Step 7; establish monitoring responsibilities, update goals

Unacceptable Conduct

Cannot petition DEC; revocation of financial license, violent crime within last 5 years

Conduct presumed unacceptable

May petition DEC; Two or more bankruptcies, revocation of non-financial license, suspension of financial license

CFP Board Counsel

Has authority to investigate and issue a complaint against the respondent for violations against the code of ethics and standards of conduct

Disciplinary and Ethics Committee (DEC)

CFPs and members of public; has authority to issue a final order and impose discipline

Hearing Panel

Conducts hearing and is at least 3 people; most must be CFPs, majority must be DEC; DEC member must be chair

Length of time to acknowledge CFP board investigation

14 days

Length of time to decide between settlement and hearing review+fee

30 days

Length of time before review date to submit documents and statements

60 days

Notice of hearing from CFP board counsel before hearing

30 days

Length of time to file appeal after DEC order

30 days

Private Censure

Unpublished written reproach mailed by DEC to CFP

Public Letter of Admonition

Written reproach of the CFP's behavior in press release

Suspension

Minimum 90 days; max 5 years

Recession

Two consecutive periods of negative GDP growth

GDP formula

consumer spending + gov & industrial investment + government spending + Net exports

Price elasticity

Sensitivity of quantity demanded in response to Price

Fed’s 3 tools:

Discount rate; reserve requirement; open market activities

Discount rate

Rate at which member banks borrow from the government

Reserve Requirement

Percentage of deposits that must be held on reserve

Open market activities

Fed buys and sells securities in the open market— SELLS to CONTRACT (decrease money supply)

Valuation of business assets on balance sheet

lower of cost or FMV

Current Ratio

Current assets / current liabilites

Quick Ratio

Current assets - inventories / current liabilities

Working capital

Current assets - current liabilities

Debt to Equity

Total Long term debt / equity

Times interest earned

EBIT / interest expense

Debt ratio

Debt / assets

Emergency Fund Ratio

Monetary assets / Monthly living expenses

Target emergency fund ratio

3 - 6 months living expenses

Acceptable emergency fund investments

Cash value life insurance, lines of credit, HELOCs

When/how to advise firm of discipline by CFP board

Promptly, in writing

When/how to tell CFP board about adverse conduct

30 days, in writing

Duties when providing financial advice

FIDUCIARY DUTY, disclose conflicts interest, vet addl. persons

Duties when providing Financial Planning

Practice standards (steps), information in writing— all needed even if client had basis to think there was fin planning

Fiduciary Duty

Loyalty, care, follow client instructions

Financial Advice

Anything reasonably viewed as a recommendation

Req in writing for Fin Plan, oral for Fin Advice

Privacy policy; services & products; how to pay; how we are compensated; public discipline & bankruptcy; referral compensation; terms of engagement (for fin plan)

Material conflicts of interest disclosure method?

Can always be verbal

Steps if not competent in Fin Plan

Limit scope, gain competence, refer, bring on counsel

When to disclose material changes, disciplinary updates, bankruptcy to client

Within 90 days

Fee based compensation

Must clearly state “fee and commission”

Sales related compensation

From client sale, holding, referral to other firm

Steps when using addl persons

Have reasonable basis, disclose fee arrangements, communicate scope, inform client if bad

FDIC amount

$250k per person, per bank, per ownership category

Chapter 7 bankruptcy

Liquidation, trustee sells assets, most debts discharged 115 days after filing, except for child support, alimony, income taxes <3 years due, student loans, secured debt; income must be below certain level

Chapter 13 bankruptcy

Keep personal assets, but must repay debt over a period. Must have no more than 526,700 in unsecured debt or 1,580,125 in secured debt; 3-5 years

Chapter 11 bankruptcy

Mainly businesses; no requirements, restructuring and paid back over time; 6 months to 2 years

Consumer credit protection act

Right to know costs and terms of credit

Equal credit opportunity act

Right to fair opportunity to obtain credit

Fair credit reporting act

Right to know what’s in your credit file

Fair credit billing act

Right to have billing mistakes resolved

Fair debt collection practices act

Right to be protected from collection agencies

Origination points

May pay points on portgage to lower rate or improve terms

Jumbo Mortgage

Above $832,750— higher rate

PMI

IF less than 20% down. Deductible in 2026, eliminated if 20% equity and two years of on-time payments

Balloon mortgage

Large portion of principal is repaid at once at end of loan

VA loan

No insurance needed, 2.3 to 3.6% funding fees waived if disabled, 0 down payment

FHA Loan

3.5 to 20% downpayment, always insurance for 11 years or life

USDA loan

0 down payment, no insurance, fixed rate only, 1% fee upfront, 0.35% after

Housing cost ratio (front end ratio, mortgage debt service ratio)

PITI (principal, interest, taxes, insurance) / gross household income monthly

Must be <= 28%

Total debt ratio (back end ratio, debt repayment ratio)

(PITI + monthly consumer debt) / monthly gross income)
Must be <= 36%

Consumer debt ratio

monthly consumer debt (non-housing) / monthly net household income
Must be <= 20%

Coverdell ESAs

Beneficiary under 18 or special needs, MAGI < 110k or 220k joint can contribute

Coverdell ESA max investment annual

$2,000 per beneficiary

529 Plan 5-year election period

Can gift up to $95,000 over 5 years (5 times annual exclusion). If annual exclusion increases, can just gift difference between two

529 Plan max investment

Many are over $400,000 per

529 plan qualified expenses

Up to $20,000 for K-12, up to $20,000 in student loans, certifications allowed. NOT for coverdell ESAs

Series EE / I bonds max investment and income limit, age minimum

$10,000 annual, $101 to 116 single, 152 to 182 joint, 24 age

Taxable formula for EE bonds interest

interest x (qualified expenses / total proceeds)

529 ABLE Plan

Blindness or diability ocurred before age 46, limited to one, tax free distributions for disability expenses, Broad

ABLE Plan contribution limit

$20,000 annual; additional if worked but not covered by plan $15,650

Grants (Pell grant)

Scholarship but for need not merit; not available if SAI more than 2x max Pell grant, or COA already covered

SAI (student aid index) parental assets %

5% of parents assets in SAI

Direct subsidized loans

Better terms to help very disadvantaged, US dept of ed pays interest while in school, for 6 months after, or in deferment.

Direct unsubsidized loan

Available to all, student must pay all interest

Direct PLUS loan / Parent PLUS

Parent gets loan from dept of Ed, capped at attendance cost - other aid, undergrad cap 20k per student 65k lifetime

Work Study

Employers must match federal and state monies

AOTC

First $2,000 then 25% of next 2,000 expenses, $2,500 total. $1,000 is refundable. First 4 years post secondary only. Cant expense room and board

LLC

20% of education expenses up to $10,000 so $2,000. Does not need to be pursuing degree, but can only expense tuition

Critical incident Stress Debriefing Process (CISD)

1. Watch for signs of additional support

2. Normalize

3. Talk about facts

4. Understand thought process

5. Ask about emotions

6. Modify plan around crisis event

Risk propensity

Disposition for risk seeking behavior

Risk perception

Subjective judgement of risk- different between clients

Risk composure

Based on client’s previous reactions to losses— how they will respond to downturns

Risk capacity

Ceiling of financial risk one can take based on age, time horizon, income stability, liquidity, liabilities— fact based

Risk attitudes

Natural predisposition to risk

Risk knowledge

Ability to understand probabilities and make informed decisions on them

Heuristic

Approach employing practical methods not the most optimal but sufficient in short term

Anchoring

When an investor sets a value at the initial point of information— relies too much on it

Prospect theory

People suffer from losses more than they benefit from gains

Recency bias

People focus more on current events instead of realistic future

Disposition effect

People seek pride and avoid regret— sell winners quickly, hold losers too long

Break-evenitis

Considering past losses, want to take more risk to break even

Snake bite effect

More risk averse after loss