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65 Cards in this Set
- Front
- Back
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As a rule of thumb, it is best if consumer debt does not exceed:
A. 20% of net income B. 20% of gross income C. 3-6 months of expenses D. 36% of gross monthly income |
The correct answer is "A." This is a rule of thumb, along with the others that recommend housing debt be limited to 28% of gross income, and total debt not to exceed 36% of gross income.
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Julie Christie has been dollar cost averaging in a mutual fund investing $2,200 at the beginning of every quarter for the past seven years. She has been earning an average annual return of 9% compounded quarterly on this investment. How much is the fund worth today?
A. $20,240.96 B. $86,435.29 C. $84,533.29 D. $248,530.08 |
The correct answer is "B." BEG N=28 i=9/4 = 2.25 PV=0 PMT=2,200 FV=?
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In a situation where an employee has accepted workers compensation benefits, an employer is protected from the following:
A. A suit by the employee's family B. A third party suit C. A suit by the employee D. A suit by the employee's spouse |
The correct answer is "C." Options "A", "B", and "D" are exposures for an employer even when the employee has already accepted Workers Compensation.
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Two fairly common defenses used against charges of negligence have been contributory negligence and:
A. Lack of injury B. Combined negligence C. Assumption of risk D. Lack of negligence |
The correct answer is "C." Today, more and more we are seeing cases presented on a comparative negligence basis. This allows one to collect even if one party did in some way contribute to the accident.
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Cathy and John Gonnerman would like to retire in twelve years. At that time, they would like to have accumulated $350,000 in today's dollars. To achieve this goal, they plan to invest a sum at the end of each year that will remain constant in purchasing power. They anticipate average inflation at 6% and have an after tax investment earning capacity of 9%. What payment is required at the end of the first year for them to reach their goal?
A. $34,806.25 B. $26,394.63 C. $27,978.31 D. $50,104.88 E. $45,563.97 |
The correct answer is "B." N=12 i=[(1.09/1.06)-1]x100=2.83 PMT=24,900 x 1.06=26,394 FV=350,000
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Regulation Z, issued by the Federal Reserve Board, is a part of the Consumer Credit Protection Act. Regulation Z requires that:
A. Lenders must disclose the items purchased. B. Lenders must be given a "cooling off" period. C. The dollar amount of finance charges and the annual percentage rate be disclosed. D. The length of time to pay the debt be disclosed. |
The correct answer is "C." With the advent of Regulation Z, consumers were able to see the actual cost (including finance changes) that they were paying in any transaction they were making.
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In a situation where someone has undertaken activities or actions that bring about extraordinarily hazardous circumstances, the term that would best describe this situation is:
A. Vicarious liability. B. Attractive nuisance. C. Res ipsa loquitor. D. Absolute liability. |
The correct answer is "D." In a situation where someone has undertaken activities or actions that bring about extraordinarily hazardous circumstances, the term that would best describe this situation is absolute liability.
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The client's "Emergency Fund Ratio" reveals:
A. How readily a client would be able to meet all current obligations immediately. B. The level of debt that has been used to finance the present lifestyle. C. The client's level of preparedness for job loss or short-term disability. D. The client's savings and spending patterns over a period of time. |
The correct answer is "C." Option "A" is the current ratio. Option "B" is the debt ratio. Option "D" is provided by budget reconciliation.
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Martina Flower, CFP® is duly registered under the Investment Advisers Act of 1940. For which one of the following activities would this planner be in violation of the act?
A. She received, with the client's knowledge, both a fee for advice given to the client and a commission from the client transactions. B. She included the cost of preparing the client's income tax returns as part of the annual fee charged the client. C. She gave clients planning advice that was NOT achievable, given the current economic conditions. D. She distributed to clients the written disclosure brochure two weeks after an investment advising contract was duly signed. |
The correct answer is "D." This question is challenging because of option "C." However, future planning (holistic and lifecycle planning) is acceptable. It does not imply that her projections were inappropriate. Option "D" is correct because the disclosure brochure must be given to clients within 48 hours prior to entering into an agreement. If not given prior, then it may be given at the time the contract is created, if the client has five days to rescind the agreement.
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The husband of one of your clients had his wallet stolen. He had five credit cards in his wallet when this occurred. He reported the cards as missing the next morning, but the following transactions had already occurred: (Discover Card - $350) (MasterCard - $100) (VISA - $425) (Sears - $25) (Marshall Fields - $685) What is the client's liability for the fraudulent transactions on these cards?
A. $50 B. $225 C. $250 D. $1,235 |
The correct answer is "B." The maximum on any card that the client would have to pay would be $50. But remember the thief only charged $25 on the Sears Card. Therefore, the total is 4 cards times $50 plus $25, which equals $225.
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If a potential client implies that they are unable to confide certain elements of their business to you during the fact finding phase of the interview, what should you do?
A. Continue and hope they will answer your questions later. B. Fill in the blank spaces using estimates. C. Call the authorities and report possible illegal activities. D. Thank them for their time, close up the interview and do not engage them as clients. |
The correct answer is "D." If a client does not feel comfortable discussing details which may be pertinent to developing a final plan with a planner, then this is not a relationship that should be pursued.
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One of your clients runs a lawn-care and gardening business. She has just told you there has been a misunderstanding between herself and one of her clients on a contract they wrote and signed. They are both aware of the error and are willing to work together to rectify the situation. The remedy that will best suit this situation is:
A. Reformation. B. Rescission. C. Res ipsa loquitor. D. Revitalization. |
The correct answer is "A." The ideal result here, because both parties agree, would be reformation. Rescission occurs when no agreement can be reached and is usually carried out by a court of law.
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On December 31st Lisa purchased a home with a 20-year mortgage for $150,000 and an 8% annually compounding interest rate. What is Lisa's principal reduction for the first year?
A. $15,278 B. $3,171 C. $12,000 D. $10,635 |
The correct answer is "B." N = 20 x 12 = 240 i = 8/12 = .6667 PV = 150,000 PMT = ? FV = 0 PMT = 1,254.66 12C 12f On the 10BII, enter 1 input, 12 Orange shift AMORT =
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You have approved a prospect and completed your presentation. It is incumbent upon you (based on the brochure rule) to:
A. Provide the client with all of the information as required within 48 hours after the meeting. B. Provide the client with all of the information as required five days before the meeting. C. Provide the client with all of the information as required at the meeting if they are given a 48 hour time period to change their mind. D. Provide the client with all of the information as required at the meeting if they are given a five day time period to change their mind. |
The correct answer is "D." The brochure rule requires that a planner or advisor provide the client with all of the information as required at the meeting if they are given a five day time period to change their mind or 48 hours prior to the meeting.
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Mrs. Hoffman is an 80-year old widow whose liquid assets are on deposit at a small FDIC-insured bank. She has the following on deposit: - $75,000 in various Certificates of Deposit - $50,000 in a Money Market Mutual Fund - $200,000 in an IRA Rollover - $25,000 Passbook Savings (Joint with son) - $25,000 Checking Account (Joint with daughter) How much is currently insured by the FDIC?
A. $100,000 B. $125,000 C. $250,000 D. $375,000 |
The correct answer is "B." The $75,000 CDs are insured under Mrs. Hoffman (Single). The $50,000 Money Market Mutual Fund is not insured by the FDIC. It may be insured under the SIPC but that is not what the question is asking. The $200,000 could be insured but we do not know what the IRA is invested in as it must be cash to receive FDIC coverage. The Passbook Savings is FDIC insured jointly with her son ($12,500 for each Mrs. Hoffmann and her son) for a total of $25,000 coverage. The Checking account is FDIC insured jointly with her daughter ($12,500 for each Mrs. Hoffmann and her daughter) for a total of $25,000 coverage. If the question had asked "how much is Mrs. Hoffman insured for under the FDIC?" the answer would be (A): $75,000 + $12,500 + $12,500 = $100,000.
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Which of the following can the Federal Reserve do to reduce the money supply?
I. Purchase Treasury securities. II. Decrease the reserve requirements for banks.III. Raise the discount rate. A. I only. B. II only. C. III only. D. I and III only. |
The correct answer is "C". Only increasing the discount rate will reduce the money supply. Purchasing Treasury securities and decreasing the reserve requirements for banks will increase the money supply.
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Which of the following is NOT a rule relating to the Principle of Fairness in the CFP Board's Code of Ethics and Professional Responsibility?
A. The CFP designee must disclose to the client material changes in the designee's business. B. The CFP designee must disclose to the client the designee's or firm's basic philosophy of financial planning. C. The CFP designee must disclose to the client the commission rates the designee will earn on any financial products or services the client buys through the CFP designee. D. The CFP designee must disclose to the client any relationships the designee has with third parties that may give rise to commissions for the CFP designee. |
The correct answer is "C." All choices are found in Principle of Fairness with the exception of Option "C." The CFP is required to divulge general compensation information such as sources, but the Fairness Principle does not require the advisor to divulge commission rates.
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The state has set arbitrary guidelines which, if violated, constitutes a clear breach of duty (thus liability) best describes which of the following:
A. Vicarious Liability. B. Res Ipsa Loquitor. C. Parol Evidence Rule. D. Negligence Per Se. |
The correct answer is "D." Option "A" - Vicarious liability is responsibility for another. Option "B" - Res ipsa loquitor, "the thing speaks for itself" means the liability is obvious and negligence need not be proven. Option "C" - A written contract embodies the entire agreement. Future writings that conflict with the contract are forbidden.
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Which of the following is/are true regarding registering as an investment adviser.
I. Exceptions are not governed by the Investment Advisers Act of 1940 at all. II. Exemptions are governed by Section 206 of the Investment Advisers Act of 1940. III. Exceptions include advisers whose only clients are insurance companies. IV. Exemptions include banks and bank holding companies. A. I only. B. I and II only. C. II and III only. D. II and IV only. |
The correct answer is "B." Exceptions are not governed by the Act. Exemptions need not register, but are governed by the "anti-fraud" provision (Section 206) of the Act.
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A young couple, John and Mary Bartlett, are thinking about purchasing a new home using one of the following mortgages: Mortgage #1 - 8.5% interest with 4 discount points to be paid at the time of closing. Mortgage #2 - 9.5% interest with 2 discount points to be paid at the time of closing Assuming the couple could qualify for both mortgages, which of the following aspects should be considered in deciding between these two mortgages?
I. Gross income of the couple. II. Estimated length of ownership. III. Real estate tax liability. IV. Cash currently available. A. I and II only. B. II only. C. II and IV only. D. I, II, III and IV. |
The correct answer is "C." The question tries to eliminate the need to include gross income as part of the answer by stating that the couple could qualify for both mortgages. Real estate taxes will be the same regardless of their financing.
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Suppose you have structured a budget with monthly periods as your budget intervals. Since certain expenditures such as auto insurance or a Thanksgiving charity donation do not occur every budget interval, they may be best incorporated by:
A. Estimating them into every budget interval. B. Estimating them in the budget only when incurred. C. Counting on increases in income. D. Using tax refund. |
The correct answer is "B." These types of varied or periodic expenses are extended only when they are incurred.
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A shift "up and to the left" of the supply curve occurs when:
A. Some firms leave the industry. B. Government reduces regulations on production. C. The cost of inputs goes down. D. Taxes go down. E. Competition increases. |
The correct answer is "A". The supply curve shifts up and to the left, resulting in a decrease of a good or service being supplied, when firms leave an industry or market. When firms leave an industry, less of a good or service is produced at all price levels.
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Becca applied for CFP Certification and was denied. Her prior conduct falls under the "presumed" list and she wants to appeal. All of the following are true regarding the review process EXCEPT:
A. She must submit a written petition for reconsideration to Professional Review staff and sign a form agreeing to CFP Board's jurisdiction. B. A fee will be charged to all candidates submitting a reconsideration request. C. Staff will review the request to ensure the transgression falls within the "always" bar list. D. She may appeal this decision to the Appeals Committee of the Board. |
The correct answer is "C." All other statements are true. Staff will review the request to ensure the transgression falls within the "presumed" list. The "always" bar list cannot be petitioned unless the revocation of a license is vacated or a felony conviction is overturned.
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If a prospective client implies that they are unable to reveal certain sources of their income to you as you begin undertaking the process of building and developing their Statement of Earnings, what should you do?
A. Terminate the interview immediately and do not engage them as a client. B. Continue the questioning and assume that they will answer your questions later when they are more comfortable with you and know you better. C. Estimate from previous information and assign any additional income to previously identified sources. D. Call the authorities and report your suspicions of possible illegal activities such as money laundering or drug dealing. |
The correct answer is "A." This would not be a favorable client. Anyone who cannot provide you with adequate information to assist them in formulating a plan represents an unacceptable risk!
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All of the following economic activities represent governmental fiscal policy EXCEPT:
A. The government increases purchases of goods and services. B. The government cuts taxes. C. The government cuts the Federal Funds Rate. D. The government uses higher taxes to dampen consumption and private investment. |
The correct answer is "C". The Federal Reserve sets the discount rate, upon which the Federal Funds Rate is based. The Fed will lower the discount rate when it wants to increase the money supply. Choices "A" and "B" represent expansionary fiscal policy. Choice "D" represents restrictive fiscal policy.
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For CFP Board certificants and registrants, the Principles of the Code of Ethics are:
A. A means to avoid disciplinary action. B. Norms of practice to follow in providing financial planning services. C. A guide to the personal financial planning process. D. Aspirational in character and provide a source of guidance for certificants and registrants. |
The answer is "D." "[The] Principles are general statements expressing the ethical and professional ideals certificants and registrants are expected to display in their professional activities. As such, the Principles are aspirational in character and provide a source of guidance for certificants and registrants."
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Which of the following statements are true regarding Form ADV and the disclosure requirements.
I. An investment advisor is able to use their Form ADV Part II to meet the disclosure requirements. II. An investment advisor may provide the client Form ADV Part II 48 hours prior to contracting with the client. III. An investment advisor must disclose compensation at least annually. IV. Once Form ADV is approved by the SEC, an investment advisor can describe their disclosure as approved by the SEC and distribute to clients that the disclosure was approved by the SEC. A. I only. B. I and II. C. I, II and III D. I, II, III and IV |
Answer C. Statements I, II and III are correct. Statement IV is incorrect because the SEC approves the applicant as an investment advisor, without regard to any literature that may be used to satisfy the disclosure requirement.
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When you are forming an engagement with a client, what must you provide?
A. Your address and phone number. B. Your date of birth. C. Your citizenship. D. Known aliases. |
Answer: AA planner is required to provide their contact information to the client.B is incorrect because a planner is not required to provide their date of birth, only their contact information. C is incorrect because a planner is not required to provide their country of citizenship, only their contact information. D is incorrect because a planner is not required to provided known aliases to a client, only their contact information.
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A CFP professional's client, Jim, was previously married and had 2 children. He set up an irrevocable trust for those two children, naming his brother Harry as the trustee. Jim remarries a woman named Laura who has no children. Laura comes into the CFP professional’s office saying that Jim is concerned about losing money in the trust due to the recent drop in the market, so he wants to change some things. What should the professional do?
A. Provide her with the trading forms that will require Jim’s signatures, allowing her to make the changes requested. B. Tell her that because she is not the trustee, she is not authorized to make any charges. C. Tell her that he will contact Harry, the trustee, and let him handle it. D. Contact Jim to discuss the meeting with Laura. |
Answer: DSince Jim is the client, all conversations regarding the irrevocable trust must be held with Jim, until such time the engagement is modified with Jim to include Laura.A is incorrect because Jim is the client and the planner owes the duty of a fiduciary and confidentiality to Jim since Laura is not the client. B is incorrect because the CFP® professional may only speak to the client about the trust. C is incorrect because the CFP® professional must talk to the client about the trust, not Laura or Harry, unless Harry instructs the CFP® professional differently.
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A married couple, who both work, recently had a baby. What should be their primary financial concern?
A. To purchase life insurance B. To save up 3 months of cash reserves C. To prepare a long-term retirement plan D. To create an education fund for their child |
Answer: ASince both parents work, there is likely a need for both incomes. The biggest financial risk that they face is likely premature death of one of the wage earners, therefore purchasing life insurance is likely the primary financial concern.B is incorrect because the married couple may have other funds to access for an emergency fund. It’s also a smaller financial risk than premature death of a primary wage earner. C is incorrect because it’s likely they already have some sort of retirement savings plan in place, through their employers. D is incorrect because we do not know if the married couple has intention of paying for the child’s education. In addition, if there is a premature death of a primary wage earner, funding a college education may become significantly more difficult without a life insurance policy in place.
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When should you provide your client with Form ADV?
A. Prior to entering into an agreement to provide financial planning. B. As part of the engagement letter agreement. C. Prior to purchasing any securities as part of the plan implementation. D. As part of the data gathering process. |
Answer: BForm ADV is appropriate to be part of multiple written documents governing the financial planning services that will be provided, as part of the engagement letter.A is incorrect because a CFP® professional is required to make certain disclosures prior to entering into a financial planning agreement. All required disclosures are not satisfied by providing Form ADV. Disclosures required that govern financial planning services to be provided in an engagement letter may be satisfied by Form ADV. C is incorrect because Form ADV is appropriate during the defining the client planner relationship and not the implementation phase. D is incorrect because Form ADV is not appropriate during the data gathering phase. Form ADV is appropriate when defining the relationship (and engagement) between the client and planner.
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Billy Smith, age 55, has been a member of the union for 30 years, and as a result, has been excluded from his employer's retirement plan. Billy has been offered a management position with his firm, which will make him eligible to participate in the company's 401(k) plan. Billy's objective is to retire at age 65 with $2,000 in monthly retirement income, exclusive of Social Security benefits. He assumes a life expectancy of age 95. The union retirement plan will provide him with $1,000 monthly. (There are NO matching contributions from Billy's employer to the 401(k) plan and his income is adequate to have the required level of contributions fall within the deferral limits of the 401(k) plan. Contributions and payments, as appropriate, are made at the beginning of each month.) If the return in the company's 401(k) plan is 10%, what monthly amount will Billy have to contribute to that plan for 10 years to meet his objective?
A. $556 B. $566 C. $576 D. $747 |
The correct answer is "A." This question is intended to test several time-value-of-money calculations, and is NOT intended to imply a level retirement income or savings approach. Set calculator on "Begin" mode. N = 30 x 12 = 360; i = 10 / 12 = .833; PV = ?; PMT = 1000; FV = 0. Solve for PV of annuity due ($114,900). Then use the PVAD figure of 114900 as a FV, where N = 10 x 12 = 120; i = 10 / 12 = .833; PMT = ?; FV = 114900; Answer = $556.
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When is a client responsible for contacting their CFP® Professional?
A. When the client has an additional child. B. If there is a change in the client’s marital status. C. If there is a change in the client’s tax rate. D. If there is a change in the client’s employment. |
Answer: BThis is a difficult question to choose one correct answer. The best answer is B, as a change in marital status likely results in a major impact to current and future financial planning.A is incorrect because the client should contact their CFP® professional regarding a new child at least as early as when a pregnancy is known. The client should inform that CFP® professional that they intend to have a child and approximately when, so that planning can begin immediately. C is incorrect because a change in tax rates is likely expected, unless it’s related to a significant change in income. D is incorrect because simply changing jobs is immaterial, unless it accompanies a significant change in insurance benefits and/or income.
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Becca, age 24, applied for CFP Certification. The Disciplinary and Ethics Commission denied her application because she had been convicted of assault and battery and served nine months in the county jail at the age of 18, while she was a member of a street gang. She has served her time, graduated from college and has decided to appeal the decision of the Disciplinary and Ethics Commission. All of the following are true regarding the review process EXCEPT:
A. She must submit a written petition for consideration to Professional Review staff and sign a form agreeing to CFP Board's jurisdiction. B. Staff will review the request to ensure the transgression falls within the "presumed unacceptable" list. C. Her prior conduct falls under the "presumed unacceptable" category and therefore, she may appeal the denial of certification. D. The Disciplinary and Ethics Commission's decision regarding a petition for consideration is final. |
Correct Answer: D Reason: The DEC's decision regarding a petition for consideration may be appealed to the Appeals Committee of the Board of Directors, in accordance with Article 11 of the Disciplinary Rules and Procedures. All the other statements are true.
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Sally, age 28, is a CFP® professional and is just starting her own financial planning practice. Sally is concerned about the liability associated with practicing financial planning and would like to take the appropriate steps to minimize her liability. Which action should Sally take that would help her to minimize her liability?
A. Sally should use a suitability standard when evaluating and recommending investment alternatives, and other financial planning advice, for clients. B. Sally should partner with other CFP® professionals and offer financial planning services as part of a team of practitioners to minimize her liability. C. Sally should purchase a general liability insurance policy and an errors and omissions policy. D. Sally should provide services with the duty of a fiduciary. |
Answer: D According to the CFP Board’s Standard of Professional Conduct FAQs, the CFP Board believes that compliance with the Standards, including the requirement that financial planning services be provided with the duty of a fiduciary, is a way to reduce liability. Answer A is incorrect because CFP® practitioners must use a fiduciary standard of care, not a suitability standard. Answer B is incorrect because a team of practitioners will not limit her liability. She will likely be responsible for the acts of her partner practitioners when practicing with others. Answer C is incorrect because purchasing an insurance policy is used to transfer risk. Minimizing risk of liability is different from minimizing risk of loss. Although it’s a possible answer, it’s not the best answer.
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Ruby, a CFP® professional works for a life insurance company and sells only life insurance products. She met with her new client Sally, a single parent, for the first time today. She had already collected data from Sally concerning her income, needs and age of her children. During the meeting, Ruby discussed the distinctions between term, universal and variable life insurance with Sally. She subsequently evaluated Sally’s needs concerning life insurance and plans to discuss the advantages and disadvantages of two approaches: (1) purchasing a universal policy designed to provide sufficient coverage for Sally’s insurance needs while building cash value for the long term, and (2) purchasing a term policy to cover insurance needs until her children become independent and recommending another CFP® professional who Ruby is confident could assist Sally with building her investment portfolio for the long term. Which of the following would be correct under the CFP Board’s Practice Standards?
A. Ruby is providing material elements of financial planning if Sally chooses option (1) because a universal insurance product combines insurance and investment components and therefore her engagement covers two or more of the subject areas of financial planning. B. Ruby is not engaged in financial planning if Sally chooses option (1) because she is limiting her engagement to only one financial planning subject area. C. Ruby is engaged in financial planning if Sally chooses option (2) because although term life only concerns insurance, Ruby gathered information and conducted a needs analysis, two of the steps of the financial planning process. D. Ruby is providing material elements of financial planning if Sally chooses option (2) because although term life only concerns insurance, Ruby gathered information and conducted a needs analysis, two of the steps of the financial planning process. |
Correct Answer: B According to the CFP Board’s Standard of Professional Conduct FAQs (1-12), if a “needs analysis” is focused on a limited component of the client’s financial situation, and does not involve other services related to financial planning, that analysis may not rise to the level of financial planning. For instance, if a client hires a CFP® professional solely to purchase life insurance, the CFP® professional will by necessity obtain information about the client sufficient to ensure that any policies recommended meet the client’s needs. If the “needs analysis” is focused solely on factors related to the client’s life insurance needs, that analysis may not rise to the level of financial planning. It is irrelevant which option Sally chooses. In both cases, Ruby is neither engaged in financial planning nor providing material elements of financial planning.
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Tom is a CFP® professional and is working with a husband and wife on their financial plan. One of the recommendations is for the couple to purchase a $500,000 whole life insurance policy, for which Tom is to receive a commission. During a telephone interview with the clients, Tom completes the application based on the couple’s responses to his questions. A question asks if the husband or wife have ever been convicted of driving under the influence within the past five years. Based on the CFP Board’s code of ethics requiring a CFP Board designee to provide services diligently, what should Tom do after completing the insurance application?
A. Tom should review government motor vehicle records to corroborate and verify the answers on the client’s policy application. B. Tom should forward the completed application to the clients for the clients to sign application and pay the first premium. C. It's a violation of due diligence to take a phone interview for a life insurance application, so Tom should invite the clients to his office for them to complete the application and sign it or forward a blank copy of the application for the clients to complete and sign. D. Tom should provide a copy of the application to the client for signature, along with a policy illustration. |
Answer: A According to anonymous case #17554, the planner should corroborate and verify the client’s answers regarding potential DUI convictions. If the client dies in an accident the insurance company will not pay a claim on the life insurance policy if the client was in fact, convicted of DUI in the past five years. The Disciplinary and Ethics Commission found this planner negligent in failing to review governmental motor vehicle records and violated Rule 701 of the CFP Board’s Code of Ethics - A CFP Board designee shall provide services diligently. Choice B is incorrect, because the planner must first verify the information within the application. Choice C is incorrect, because the planner may take an life insurance application over a phone interview, but is responsible for verifying the information in the application and giving the client an opportunity to review the information contained in the application. Choice D is incorrect because the planner should corroborate the client’s answers as the next step. A policy illustration should have already been provided to the client before the client agreed to implement the recommendation of purchasing a whole life insurance pol
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Ralph, a CFP® professional, was the financial advisor for Sue and her husband Bob, who had recently passed away. Bob’s assets included an IRA with Sue as the named beneficiary. Ralph advised Sue that she could disclaim her interest as beneficiary of the IRA, which would allow its value to pass to her two children. However, Ralph did not notify the custodian issuer of the IRA that Sue had disclaimed her interest in the IRA. Ralph acknowledged during his hearing with the Disciplinary and Ethics Commission that he could have annuitized the existing annuity in the IRA, which would have been less costly for Sue than purchasing a new annuity for each of her children. The Commission determined that annuitizing the existing annuity would have avoided early withdrawal penalties and the effects on taxable income on Sue’s children, and issued a Public Letter of Admonition to Ralph. The Commission ordered Ralph to complete, in addition to the 30 hours of continuing education for renewal, 12 hours of continuing education, including four hours each in estate planning, investments and estate distributions. Ralph violated all of the following provisions of the Practice Standards EXCEPT?
A. Failed to exercise reasonable and prudent professional judgment in providing professional services. B. Failed to act in the best interest of the Client. C. Failed to modify the scope of the agreement and to bring in an estate planning attorney. D. Failed to make and/or implement only recommendations that were suitable for the Client. |
Correct Answer: C. (Anonymous Case History 19334) C is incorrect because there was no information provided to indicate that Ralph’s services were outside the scope of the existing agreement. Although you could argue that Ralph should have referred Sue to an estate planning attorney since he was not competent in this area, the Board does not require CFP’s to employ third parties, only that they restrict their services to areas of competence, which Ralph should have done. A is correct because he failed to timely notify the IRA issuer that Sue had disclaimed her interest in the IRA. B is correct because he recommended and implemented an approach that imposed more cost on Sue and her children. D is correct because he recommended and implemented an approach that imposed more cost on Sue and her children.
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Hershel, a client of Jonah, deposited $40,000 into a securities account at Jonah’s firm. At the time, Jonah’s only services to Hershel involved investment recommendations and executing transactions. Over the next two years, Jonah conducted numerous trades in Hershel’s account without Hershel’s approval, including during a month when Hershel was hospitalized. Jonah and the Firm received commissions from the trades that exceeded Hershel’s initial deposit. By this time, Hershel’s account was only worth $15,000. The New York Stock Exchange (“NYSE”) initiated an inquiry regarding Hershel’s matter. Jonah and the NYSE entered into a Stipulation and Consent to Penalty. Jonah consented to the following findings: 1. Respondent engaged in conduct inconsistent with just and equitable principles of trade when he: 1) recommended transactions in the accounts of a customer which were unsuitable in light of his investment objectives, investment experience and/or financial resources; and 2) effected excessive transactions in the accounts of a customer of his member firm employer; and 2. Jonah violated NYSE Rule 408(a) when he exercised discretion in the accounts of a customer without first obtaining written authorization from him. Following the events above, Jonah completed the requirements and became certified to use the CFP marks. At his hearing with the Disciplinary and Ethics Commission, Jonah: ・ expressed a commitment to the financial planning process; ・ noted that his actions took place several years before he began to pursue CFP® certification; ・ had made changes to his practice to prevent similar occurrences in the future; and ・ advocated CFP® certification to employees under his supervision. Jonah’s conduct violated all of the following provisions of the Rules of Conduct EXCEPT?
A. A certificant shall treat prospective clients and clients fairly and provide professional services with integrity and objectivity. B. A certificant shall be in compliance with applicable regulatory requirements governing professional services provided to the client. C. A certificant shall exercise reasonable and prudent professional judgment in providing professional services to clients. D. A certificant shall make and/or implement only recommendations that are in the best interest of the client. |
Correct Answer: D. Since at the time of the conduct Jonah was not a CFP® professional and was not engaged in financial planning, he was not held to the duty of care of a fiduciary to act in the best interest of the client. The Commission issued a Private Censure to Jonah and considered the mitigating factors Jonah provided at his hearing. All of the other Rules were clearly violated by Jonah.
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John, a CFP® professional, works for a firm requiring that any investment products offered to a client be proprietary products of the firm. Jack, his client, is 55 years old and has a moderate risk tolerance. John’s firm has an S&P500 index fund with a reasonable fee structure. John has discussed the fund’s performance and costs with Jack and they have agreed that 60% of his equity portfolio will be allocated to this index fund. Which of the following is true according to the CFP Code of Ethics?
A. John is prohibited from providing financial planning or material elements of financial planning because he may not be able to offer the client the best available option. B. John may provide financial planning or material elements of financial planning as long as the limitations concerning the proprietary products are discussed with Jack. C. John may provide financial planning or material elements of financial planning but the limitations concerning the proprietary products must be disclosed and it must be in writing to Jack. D. John could enter into a limited engagement related to Jack’s specific insurance needs next year with no written disclosures other than those required by regulatory bodies. |
Correct Answer: C. A is not correct because the Board’s definition of ‘best available options’ in connection with the fiduciary standard associated with a financial planning engagement allows for limitations on the certificant’s recommendations (such as proprietary products) as long as they are disclosed to the client. B is not correct because although Rule 1.2 states the disclosure may be oral or written, Rule 2.2 (b) requires disclosure of conflicts of interest (which would include proprietary products) and Rule 2.2 (e) requires written disclosure for items 2.2 a-d when engaged in financial planning. C is correct since it notes that the proprietary products disclosure must be in writing, in accordance with Rule 2.2 e. D is not correct once a client becomes a financial planning client, subsequent limited engagements, would be considered a part of the continuing financial planning engagement.
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Snidely, a CFP® professional, met with Dudley and Geezer, Dudley’s father. During the meeting, Snidely entered into an oral agreement with Dudley to manage Geezer’s financial affairs. Snidely did not complete a client profile of Geezer. Snidely offered to review and make recommendations on Geezer’s then-current living trust. Snidely prepared a Last Will, Revocable Trust and Durable Power of Attorney for management of Property and Personal Affairs, and charged Geezer $400 per hour for preparing the documents. Geezer had not requested such documents. Geezer asked Snidely to provide him with all the documents pertaining to his investments. As of the hearing date with the Disciplinary and Ethics Commission, Snidely had not provided the requested documents to Geezer. The Commission issued an Order to Revoke Permanently Snidely’s right to use the CFP®, CERTIFIED FINANCIAL PLANNER™ and certification marks. The Commission ordered Snidely to verify that he was not using the marks by submitting copies of letterhead and business cards within 30 days of the Order. To comply with the Code of Ethics, before providing any services to Geezer, Snidely was required to take all of the following steps EXCEPT:
A. Provide a written agreement outlining the mutually defined obligations and responsibilities of each party. B. Gather appropriate data to assess Geezer’s financial situation, needs and objectives. C. Provide a written agreement outlining Snidely’s compensation and potential conflicts of interest. D. Provide a written agreement outlining how and on what terms each party can terminate the agreement. E. Snidely must do all of the above. |
Correct Answer: A. Although the obligations and responsibilities of each party are required to be mutually defined, this is not required to be in written form. [Rule 1.1 & 1.2] B is required by Rule 1.2 a. Since this is a financial planning engagement, C is required by Rule 2.2 e. Since this is a financial planning engagement, D is required by Rule 1.3.
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Ralph, a CFP® professional, has been working with his new client Jack over the last few months. He has completed all required disclosures and provided all written documents required for a financial planning engagement. Jack is 32, married, and has 3 children. Ralph discussed Jack’s insurance coverage following a thorough review of Jack’s policies and recommended Jack purchase a disability policy, additional term life insurance through his employer and a personal liability umbrella policy. Ralph is in the process of performing a retirement needs analysis and developing an investment plan he believes will help Jack achieve his goals. While talking to Jack on the phone about his current company retirement plan, Jack mentioned that his father had been diagnosed with cancer and Jack thinks he and his sister might inherit a large sum of money sometime in the next couple of years because his father has more than enough money to provide for his second wife and still leave some to his children. Jack did not know the specifics of the estate and was uncomfortable contacting his father right now about the details. To comply with the Practice Standards of the Code of Ethics, Ralph’s best course of action would be to:
A. Contact Jack’s sister to see if she know how much they would inherit so that Ralph would have adequate information upon which to form an opinion. B. Inform Jack that without more information on the potential inheritance Ralph will not be able to properly address his situation and restrict the scope of the engagement to the already completed insurance review. C. Inform Jack that without more information on the potential inheritance Ralph will not be able to properly address his situation and terminate the engagement. D. Inform Jack in writing that the potential inheritance could affect Ralph’s conclusions and recommendations regarding the retirement and investment plan. |
Correct Answer: D. PS 300-1 B states that when practitioners identify other issues that should be addressed during the analysis and evaluation stage “it may be appropriate to amend the scope of the engagement and/or to obtain additional information.” However, Jack is far from certain that the inheritance will occur and how much, if any, he will inherit. Therefore, Ralph is under no obligation to restrict or terminate the engagement, as indicated in answers B & C. Ralph should clearly communicate the potential impact on his conclusions and recommendations based on the currently available information in accordance with PS 200-2 D. Although this isn’t required to be in written form, there is no problem in doing so. Answer A is not the best choice. Ralph should obtain Jack’s permission should he decide to do this to protect the confidentiality of his client’s information.
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Sue is a CFP® professional with her own financial planning practice. Bob was referred to Sue, as Bob was looking to purchase a disability insurance policy. Sue gathers data from Bob to complete an application to submit to the insurance underwriter. Sue also explains, in detail, the tax implications of purchasing a private disability insurance policy. What duty of care does Sue owe Bob, according to the CFP Board of Standard’s Code of Ethics?
A. Sue owes Bob the duty of a fiduciary. B. Sue is required to place Bob’s interest ahead of her own interest at all times. C. Sue must place Bob’s interest ahead of her own and she owes him the duty of a fiduciary. D. Sue is not engaged in the material elements of financial planning and does not owe Bob any duty of care. |
Correct Answer: B According to the CFP Board of Standards Code of Ethics Rule 1.4, establishes a baseline standard that requires all CFP® professionals place the interest of the client ahead of their own at all times. When providing financial planning or material elements of financial planning, the CFP® professional’s duty of care rises to that of a fiduciary. A CFP® professional’s fiduciary status supersedes the baseline standard of care. Since Sue is providing a transaction, just selling a disability policy, she is not providing financial planning and is required to provide a baseline of care and place the interest of her client ahead of her own. Answer A is incorrect because she is not providing material elements of financial planning and the engagement is simply transactional, by selling of one disability insurance policy. Answer C is incorrect because a CFP® professional cannot be subject to two different standards of care at the same time. Answer D is incorrect because although Sue is not providing material elements of financial planning, she still must place Bob’s interests ahead of her own.
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Robert, a CFP® professional, performed a needs analysis concerning Jack’s life insurance situation last year and sold him a universal life policy under a limited scope engagement. This year, Jack wants Robert to evaluate his investment allocation and recommend some mutual funds. All of the following are required to be provided to Jack according to the Code of Ethics EXCEPT?
A. A written agreement for Robert’s services specifying on what terms the agreement can be terminated. B. An accurate and understandable description of the compensation arrangements being offered, in writing. C. A written summary of likely conflicts of interest between the client and the certificant. D. A written agreement covering the obligations and responsibilities of each party. |
Correct Answer: D Robert must evaluate the entirety of his relationship with a client to determine if he is engaged in financial planning. Generally, engagements that cover two or more of the financial planning subject areas, even if they are separate limited events, should be considered financial planning. All of the items in A, B & C are required for financial planning engagements. (Rules 1.2, 1.3 and 2.2 e.). However, the information in Item D need not be provided in written form.
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Bill is 66, very wealthy and has one child from his current marriage with Hillary. He also has a child from a previous relationship that Hillary is unaware of. Bill’s investment portfolio and pension assets are held in a variety of accounts for which no overall plan has been developed. Bill, being kind and generous, has asked Monica, a CFP® professional, to assist him in minimizing his tax burden, maximizing his children’s inheritance and ensuring that Hillary is financially comfortable for the remainder of her life. All of the following represent disclosure activities that are acceptable by the CFP Board EXCEPT:
A. Mailing the required disclosure documents in advance and discussing them at the initial meeting with Bill to see if he has any questions. B. Discussing compensation when recommending a complex new estate planning product or service to Bill that was not covered in the initial disclosure documents. C. Providing all required disclosures via the certificant’s website and discussing them at the initial client meeting with Bill to see if he has any questions. D. Providing the dollar value of compensation to be earned for a recommended transaction, if Bill asks. |
Correct Answer: B Since this engagement clearly meets the definition of financial planning, several disclosures are required to be in writing. The Rules allow for any form of delivery to clients. Under Rule 1.2, if the disclosures are made in writing, the CFP® professional must encourage the prospective client or client to review the information and offer to answer any questions from the client or prospective client (FAQ 3-3). Thus, Item A is acceptable because of the follow up at the initial meeting. Item B is not acceptable since the Board recommends ongoing disclosure “upon request; before any agreement is signed; or prior to any transaction where the client is expected to pay for a service or product” (FAQ 3-3). Compensation is one of the disclosures required to be in writing. Item C is acceptable for the same reason as Item A. The fact that the disclosures are delivered via the web is irrelevant. Item D is correct since, although the Standards do not generally require disclosure of the dollar value of compensation, “If the client asks a CFP® professional the amount he/she will earn from a specific transaction or service, the CFP® professional must provide this information, to the extent it can be determined.” (FAQ 3-6)
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Sally, a CFP® professional, was discussing the prior year’s investment results with her long standing client Deidra as part of their semi-annual meeting to review the status and progress of a comprehensive financial plan Sally had developed for Deidra a number of years ago. The initial plan included a risk tolerance assessment of moderately aggressive for Deidra and over the years, her reactions to market ups and downs had supported this assessment in Sally’s opinion. As a result, well diversified equity investments comprised about 70-75% of Deidra’s portfolio, on average. It had not been a good year in the market. The S&P500 had declined slightly more than 30%, as the economic recovery faltered and concerns about the European debt crisis mounted. Deidra’s portfolio lost 35% of its value over the last 12 months. Deidra became very concerned as she began to recognize the extent of the losses, and was bordering on becoming hysterical. As they talked, Sally discovered that Deidra had become pregnant, was getting married next month and had planned to use some of her investments to help support the family while she stayed home for the first six months of the child’s life. According to the Code of Ethics, Sally must do all of the following to be in compliance EXCEPT:
A. Sally and Deidra must have mutually agreed upon how often they would meet to review the status of her financial plan. B. Sally and Deidra must have mutually agreed upon what information related to her financial plan would be monitored. C. Sally and Deidra must have mutually agreed upon how communications related to her financial plan would be carried out. D. Sally must modify the scope of the engagement to reflect Deidra’s new life situation. E. Sally must do all of the above. |
Correct Answer: D. Assuming Sally had done Items A-C as required by Practice Standard 600, there is no need to modify the scope of the current engagement. Sally should reinitiate several types of analysis and revise her recommendations based on the new information, but all of these actions would fit within the scope of a typical comprehensive financial planning engagement.
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Ralph, a CFP® professional, has been working with Jack over the last few months. He has completed all required disclosures and provided all written documents required for a financial planning engagement. Jack is 32, married, and has 3 children. Ralph discussed Jack’s insurance coverage following a thorough review of Jack’s policies and recommended Jack purchase a disability policy, additional term life insurance through his employer and a personal liability umbrella policy. Ralph also performed a retirement needs analysis and developed an investment plan he believes will help Jack achieve his goals. To comply with the Practice Standards of the Code of Ethics, Ralph must communicate all of the following EXCEPT:
A. The investment plan may not provide the desired retirement results if the insurance recommendations are not implemented. B. The investment returns, life expectancy, inflation assumptions and other economic assumptions relevant to the expected outcomes. C. The advantages and disadvantages of the recommended solutions along with the risks inherent in each alternative. D. Reiterate any conflicts of interest that Ralph has related to products being recommended even though they have been previously disclosed. |
Correct Answer: D. PS 400-3 requires practitioners to communicate all of the items in A-C during the presentation of the plan phase of the engagement. While it would certainly be acceptable to reiterate any conflicts of interest at this time, it is not REQUIRED unless the certificant is recommending products or services for which the conflicts have not been previously disclosed. A is required because of the requirement to communicate the interdependence of recommendations (400-3B, second bullet point). Answers B & C are clearly identified as required communications in PS 400-3 B & C.
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Ralph, a CFP® professional, has been working with his new client Jack over the last few months. He has completed all required disclosures and provided all written documents required for a financial planning engagement. Jack is 32, married, and has 3 children. Ralph discussed Jack’s insurance coverage following a thorough review of Jack’s policies and recommended Jack purchase a disability policy, additional term life insurance through his employer and a personal liability umbrella policy. Ralph also performed a retirement needs analysis and developed an investment plan he believes will help Jack achieve his goals. While presenting the retirement and investment plan, Jack mentioned that he was rejected for the life insurance for medical reasons that he does not wish to discuss with Ralph. To comply with the Practice Standards of the Code of Ethics, Ralph’s best course of action would be to:
A. Gather appropriate information from Jack’s spouse to determine if Jack’s condition may affect the retirement and investment plan. B. Inform Jack that without more information on his medical condition Ralph will not be able to properly address his situation and he would have to restrict the scope of the engagement to the already completed insurance review. C. Inform Jack that without more information on his medical condition Ralph will not be able to properly address his situation and he would have to restrict the scope of the engagement to the already completed insurance review and retirement and investment analyses. D. Inform Jack in writing that his medical condition could affect Ralph’s conclusions and recommendations. |
Correct Answer: B. PS 200-2 requires practitioners unable to obtain sufficient information to form a basis for recommendations to either restrict the scope of the engagement to matters for which sufficient and relevant information is available; or terminate the engagement. Since the insurance review has already been completed, this restriction would amount to terminating the engagement. A is incorrect because Jack is the client, not Jack’s spouse and contacting her without Jack’s permission would violate the client confidentiality standards. C is incorrect because the medical condition could be significant enough to warrant a revision to the life expectancy included in the retirement and investment analyses and therefore the recommendations should not be relied upon due to the lack of appropriate information. Answer D: Although PS 200-2 D states that “The practitioner shall communicate to the client any limitations on the scope of the engagement, as well as the fact that this limitation could affect the conclusions and recommendations” this does not negate the requirement for scope restriction or termination of the engagement. Ralph should definitely communicate the potential impact on his recommendations, but that alone is insufficient to qualify as the best answer.
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Jonathon got divorced in 2007 and subsequently had severe financial problems. In 2009, he filed for bankruptcy. After getting back on his feet, he graduated from college and got a job selling life insurance for a large national insurer in 2011. During his first year on the job, he received a large number of customer complaints, his insurance license was suspended for one month and he was discharged by his employer. During his unemployment, he completed all of the requirements for the CFP® designation. In August of 2012, he made his application to the CFP Board. Which of the following is correct under the Board’s revised policy regarding bankruptcy?
A. Jonathan's behavior falls on the presumed unacceptable list and he will be denied the right to use the marks unless he files a successful consideration request with the CFP Board. B. Jonathan's behavior falls on the always bar list and he will be denied the right to use the marks. C. Jonathan's behavior will prevent him from applying for the CFP® designation for the five year period following his actions D. Jonathan's bankruptcy will be disclosed on the CFP® professional’s public profile displayed on the CFP Board’s website for 10 years. He will need to request a consideration from the Disciplinary and Ethics Commission for the suspension, but the bankruptcy will not be a factor in their decision. |
Correct Answer: A A is correct under the revised Candidate Fitness Standards effective July 2012. Although the bankruptcy alone would not constitute presumed unacceptable behavior, it is a consideration when accompanied by any other behavior on the list, such as the suspension of his insurance license. B is not correct because revocation of a financial professional license is required to move to the always bar list. C is incorrect because there is no five year expiration period on the suspension of the insurance license D is not correct because although the bankruptcy alone would not constitute presumed unacceptable behavior, it is a consideration when accompanied by any other behavior on the list, such as the suspension of the insurance license.
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Sidney, a CFP® professional, has been working with his new client Rachel over the last few months. He has completed all required disclosures and provided all written documents required for a financial planning engagement. After gathering and analyzing Rachel’s financial information, Sidney developed and presented a comprehensive financial plan. Rachel agreed with most of his recommendations, but wants her uncle, a local attorney, to implement the estate planning components of the plan, rather than an attorney that Sidney normally works with and trusts to do a thorough job. Sidney does not know Rachel’s uncle and is unfamiliar with his qualifications. According to the Practice Standards of the Code of Ethics, Sidney could take all of the following actions EXCEPT:
A. Contact Rachel’s uncle and coordinate the delivery of any information needed to implement the estate planning component of the plan. B. Inform Rachel that if she used her uncle for estate planning he would need to restrict the scope of the engagement to exclude responsibility for the estate planning implementation. C. Inform Rachel that if she used her uncle for estate planning, Sidney will require them to be reviewed by his attorney or he may need to terminate the engagement. D. Inform Rachel of the name, contact information and the expertise and credentials of his attorney, and ask her to consider using his services rather than her uncle because Sidney believed his expertise would be valuable to Rachel. |
Correct Answer: C. While Sidney may have valid concerns about using Rachel’s uncle for preparation of the estate planning documents, Practice Standard 500-1 A. leaves the responsibility “for accepting or rejecting recommendations and for retaining and/or delegating implementation responsibilities” to the client. Requiring Rachel to incur the costs of another legal review and/or threatening to terminate the engagement, even if justified in Sidney’s mind, would conflict with this Standard. Answer A would be in accord with 500-1A as explained above. Answer B: would be acceptable, perhaps even advisable, if Sidney has significant questions concerning the uncle’s expertise in estate planning. Note that Sidney is only clarifying his responsibility regarding implementation of the estate planning aspects. Answer D is correct because PS 500-1B includes ‘referring to other professionals” as a listed responsibility of the CFP® professional. 500-1D states “Referrals to other professionals or advisers shall indicate the basis on which the practitioner believes the other professional or adviser may be qualified.”
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John, age 25, is a CFP® professional and is opening his own financial planning practice next week. John is concerned about minimizing his risk of loss of personal assets resulting from liability associated with his practice. What should John do to minimize his risk of loss of personal assets?
A. John should provide services using a fiduciary standard of care. B. John should form a multi party LLC to insulate liability. C. John should purchase a general liability insurance policy and an errors and omissions policy. D. John should use a suitability standard when evaluating and recommending investment alternatives, and other financial planning advice, for clients |
Answer: A According to the CFP Board’s Standard of Professional Conduct FAQs, the CFP Board believes that compliance with the Standards, including the requirement that financial planning services be provided with the duty of a fiduciary, is a way to reduce liability. Answer B is incorrect because a team of practitioners will not limit his liability. He will likely be responsible for the acts of his partner practitioners when practicing with others. Answer C is incorrect because purchasing an insurance policy is used to transfer risk. Minimizing risk of liability is different from minimizing risk of loss. Although it’s a possible answer, it’s not the best answer. Answer D is incorrect because CFP® practitioners must use a fiduciary standard of care, not a suitability standard.
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Bill is 63, very wealthy and has one child from his current marriage with Hillary. He also has a child from a previous relationship that Hillary is unaware of. Bill’s investment portfolio and pension assets are held in a variety of accounts for which no overall plan has been developed. Bill, being kind and generous, has asked Monica, a CFP® professional, to assist him in maximizing his children’s inheritance while ensuring that Hillary is financially comfortable for the remainder of her life. All of the following items are relevant to determining if this engagement constitutes financial planning or material elements of the financial planning process EXCEPT:
A. The client’s understanding and intent in engaging the certificant. B. The comprehensiveness of expected data gathering. C. The planner’s understanding of the engagement. D. The breadth and depth of expected recommendations. |
Correct Answer: C Item C is not relevant because the certificant should use the criteria provided by the Board to determine if the engagement rises to the level of financial planning, not his/her ‘understanding’ [FAQ 1-3].
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Thomas, a CFP® professional, has been Shelley’s financial advisor for over 20 years and is very familiar with her family situation, goals, objectives and needs. Thomas has just completed a meeting with Shelley and Gertrude, Shelley’s mother, who is 79. During the meeting, Thomas entered into an oral agreement with Shelley to manage Gertrude’s financial affairs. Gertrude offered no objections to this arrangement. Thomas did not complete a client profile for Gertrude since he was already fully aware of the family’s and Gertrude’s situation. Gertrude collects a small amount from social security but must supplement that with the interest from her investment portfolio of $100,000. She indicated she would like to provide for her remaining life and establish education funds to send her six grandchildren to college. The grandchildren range in age from 2 - 15. According to the provisions of the Practice Standards, Thomas should take all of the following actions before initiating any action on behalf of Gertrude, EXCEPT:
A. Thomas should discuss the nature of activities he will be performing with Gertrude to ensure Gertrude understands and agrees. B. Thomas should complete his firm’s client profile for Gertrude, and gather sufficient information with which to analyze Gertrude’s needs and objectives. C. Thomas should discuss with Gertrude the best available alternatives for funding the education accounts and disclose the costs and expenses in writing. D. Thomas should provide a written document covering his compensation, and the timing and termination conditions for the engagement. |
Correct Answer: C. C is correct because it is extremely unlikely that Thomas can help Gertrude achieve her stated goal of funding college education for six grandchildren, while continuing to be self-supporting, given her available resources. Instead, as required by Practice Standard 200-1 A 2, he should assist her in recognizing the implications of unrealistic goals and objectives. All of the remaining actions are required to be completed prior to initiating a financial planning engagement. Although Thomas is already quite familiar with the family’s situation, his agreement with Shelley would not be sufficient. He needs to properly establish the engagement with Gertrude.
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Which of the following are necessary inputs to determine a client’s goals?
I. Client’s attitude II. Clients values III. Client’s current income IV. Client’s expectations A. I and II only. B. II, III, and IV only. C. I, II and IV only. D. I, II and III only. |
Answer: CA client’s attitudes, values, expectations, and time horizon are all necessary to determine financial goals, needs, and priorities.Choice A is incorrect because it is lacking the client’s expectations.Choice B is incorrect because using a client’s current income is not a variable for determining goals and it is missing the client’s attitude.Choice D is incorrect because using the client’s current income is not a variable for determining goals and it is missing the client’s expectations.
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Tom, a CFP® professional, has developed a financial plan for his client. Based on the CFP Board Practice Standards which of the following should Tom do next?
A. Review the plan with the client’s CPA and Attorney. B. Implement the financial plan. C. Present the financial plan to his client. D. Develop financial planning recommendations. |
Answer: CBased on the 400 series of the CFP® practice standards, the next step for a CFP® certificant after developing the financial plan is presenting the plan.Choice A is incorrect because reviewing the plan with the client’s CPA and Attorney is not required in the Practice Standards.Choice B is incorrect because Tom must first present the plan to the client before implementing the plan.Choice D is incorrect because Tom would have already developed financial planning recommendations at this point of the financial planning process.
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Morgan, a prospective client, recently approached Mike, a CFP® professional with significant estate planning needs. Mike does not feel like he can adequately fulfill all of Morgan’s needs so he refers Morgan to a colleague who specializes in estate planning. What principle did Mike most clearly demonstrate?
A. Objectivity B. Fairness C. Professionalism D. Competence |
Answer: DA competent financial planner focuses on maintaining and applying adequate skills and knowledge when providing services to clients. Competence also includes the planner’s ability to recognize his or her limitations.Answer A is incorrect because objectivity is about providing professional services objectively and Mike did not perform any services.Answer B is incorrect because although Mike is being fair to Morgan, he is better demonstrating competence, and the question asks what principle did Mike MOST clearly demonstrate.Answer C is incorrect because much like answer B, competence is most clearly demonstrated over professionalism.
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Kevin, a 55-year-old corporate executive, wants advice as to when he can retire. His current salary is $240,000 and he receives an annual bonus of $300,000; he also has annual stock options and restricted stock awards valued at $100,000. His employer contributes to a cash balance pension plan and matches his contributions to a 401(k). Kevin owns a whole life insurance policy with a $500,000 death benefit and is considering the purchase of a term policy with a $2,000,000 death benefit. He and his wife, Anne, also age 55, believe they can live on an after-tax income of $180,000. Assume a federal income tax rate of 35%. Kevin is in the 42% marginal tax bracket (combined federal and state). Kevin wants to contribute $100,000 towards his child's education in the next 3 years. Which of the following approaches minimizes his taxable gift (CFP® Certification Examination, released 8/2012)?
A. Paying the college directly. B. Contributing the funds to a Section 529 Qualified Tuition Plan. C. Contributing to a Uniform Transfers to Minors Act (UTMA) account for the child. D. Contributing to a Coverdell Education Savings Account plan. |
Answer: A Paying the school directly does not utilize any annual exclusion or credit equivalent because this is a qualified payment. B is incorrect because the contributions over 3 years will exceed the annual exclusion amount. C is incorrect because it uses both the annual exclusion and credit equivalent, even with gift splitting. D is incorrect because he is not eligible to contribute due to his income level.
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What conflict of interest do you need to disclose in writing?
A. That the CFP® professional recommended his personal accountant who gives the CFP® professional free accounting services. B. The CFP® professional received an undisclosed fee for a referral to a municipal bond broker. C. A client who is an attorney brought him to a sporting event as a thank you for a referral. D. The CFP® professional gave the name of his lawyer to one of his clients who was wishing to divorce his wife, whom was also a client of the CFP® professional. |
Answer: DWritten disclosures of conflict of interest are required for any engagements where material elements of financial planning are being provided. Answers A, B and C do not lead us to believe that material elements of financial planning are being provided. Answer choice D is the only choice that indicates we are referring a “client”, thereby the professional is likely providing material elements of financial planning.
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A client, Sam, seems to be suffering from dementia and wants to remove his children from his will and give all of his wealth to Susan, the head of a non-profit organization who is very nice to Sam. What should the CFP® professional do?
A. He should contact Sam’s children to let them know. B. He should do what Sam asks. C. He should contact the doctor to confirm if he is suffering from dementia or not. D. He should contact Sam’s lawyer. |
Answer: DThe CFP® professional owes a duty of confidentiality to his client. However, speaking to Sam’s lawyer, who also owes a duty of confidentiality, to seek legal advice is the best answer choice. A is incorrect because the CFP® professional owes the duty of confidentiality to his client. B is incorrect because CFP® professional owes a fiduciary duty to the client to act in their best interest. Prior to suffering from dementia, the client intended to transfer assets to his children. Therefore, the planner should seek legal advice before proceeding. C is incorrect the CFP® professional owes the duty of confidentiality, as does the doctor, who will not be able to disclose medical conditions to the planner.
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A CFP® professional is a Registered Investment Advisor, managing $120,000,000 in assets. One of the CFP® professional's clients sends a complaint letter to the CFP® professional, complaining that certain trades were not properly executed. During the investigation, it is discovered that the client never received the firm's Form ADV. Which governing body has ultimate authority over lack of regulatory disclosure for this matter (CFP® Certification Examination, released 8/2012)?
A. FINRA B. CFP Board C. The firms' compliance department D. SEC |
Answer: D. The SEC regulates form ADV. A is incorrect because FINRA does not regulate form ADV, the SEC does. B is incorrect because the CFP Board does not regulate form ADV, the SEC does. C is incorrect because the firm’s compliance department does not regulate form ADV, the SEC does.
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Which of the following are included in the 100 series (Defining the Scope of the Engagement)?
I. The scope of the engagement must be in writing for financial planning engagements. II. Identifying the services to be provided. III. Determining the client’s responsibilities. IV. Disclosing the practitioner’s compensation arrangements. A. II, III and IV only. B. I, II and IV only. C. II and IV only. D. I, II, III and IV. |
Answer: AChoice B is incorrect because the Practice Standard does not require the scope of the engagement to be in writing and it is missing choice III.Choice C is incorrect because it excludes choice III, determining the client’s responsibilities, which is important in defining the scope of the engagement.Choice D is incorrect because the Practice Standard does not require the scope of the engagement to be in writing.
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A client is involved in a potentially litigious matter and asks to confide legally sensitive information to a CFP® professional under the protection of advisor-client privilege. This information may affect another one of the CFP® professional's clients, who happens to be a business partner of the first client. How should the CFP® professional respond to this situation (CFP® Certification Examination, released 8/2012)?
A. Ensure that the client signs the required Privacy Policy before having any discussions. B. Caution the client that there is no such thing as advisor-client privilege. C. Document the information and, as required by CFP Board's fiduciary standard, debrief the second client on the details that pertain to her. D. Document the information and, as required by CFP Board's Rule on Reciprocal Disclosure. |
Answer: B Rules of Conduct 3.1 states “a certificant shall treat information as confidential except as required in response to proper legal process; as necessitated by obligations to a certificant’s employer or partners; as required to defend against charges of wrongdoing; in connection with a civil dispute; or as needed to perform the services.” A is incorrect because a CFP® professional will be required to disclose information that may impact another client or disengage the client. C is incorrect because debriefing the second client would not be in the best interest of the first client D is incorrect because there is no such rule as Reciprocal Disclosure
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What is the first step in the financial planning process?
A. Gather data B. Explain the scope of the services provided C. Identify the clients values and attitudes D. Sign the engagement letter |
Answer: BThe first step in the financial planning process is to establish and define the relationship. During this step, mutually defining the scope of the services is necessary. A is incorrect because gathering data is the second step in the financial planning process. C is incorrect because identifying the client’s values and attitudes is part of the data gathering phase, which is the second step in the financial planning process. D is incorrect because an engagement letter cannot be drafted (and signed) until the scope of the engagement has been mutually agreed upon (answer choice B). Signing the engagement letter would take place after agreeing on the scope of the services to be provided.
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A client complained about a CFP® professional because he took too long to do something and the client lost 10% of his investment in a stock. Who does the CFP® professional have to report this complaint to?
A. CFP Board B. FINRA C. His manager D. The Securities and Exchange Commission |
nswer: CThe manager should be notified and the firm will take appropriate steps to resolve the issue with the client, typically either through arbitration or negotiations.A is incorrect because the CFP Board must be notified of a conviction of a crime or the suspension of a professional license.B is incorrect because FINRA must be notified if there is a violation of securities law. D is incorrect because the SEC must be notified if there is a violation of securities law.
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John, a CFP® professional, raises his compensation charged for assets under management by 50 basis points, does John have to inform his clients?
A. Yes, he must disclose the change in compensation with 10 days. B. Yes, he must timely disclose the change in compensation. C. Yes, he must immediately disclose the change in compensation. D. Yes, he must disclose the change in compensation within 45 days. |
Answer: BAccording to the CFP Code of Ethics, the certificant shall timely disclose to the client any material changes to compensation.A is incorrect because there is not a 10 day requirement.C is incorrect because “immediately” is not required, not defined in the code of ethics. D is incorrect because there is not a 45 day requirement.
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