FP511 - General Financial Planning Principles: -
Questions With Appropriate Solutions
Financial Planning Correct Answer - a collaborative process
that helps maximize a Client's potential for meeting life goals
through Financial Advice that integrates relevant elements of the
Client's personal and financial circumstances
Financial Advice Correct Answer - a communication that,
based on its content, context, and presentation, would reasonably be
viewed as a recommendation that the client take or refrain from
taking a particular course of action with respect to:
— the development or implementation of a Financial Plan;
— the value of or the advisability of investing in, purchasing,
holding, gifting, or selling Financial Assets
— investment policies or strategies, portfolio composition, the
management of Financial Assets, or other financial matters
— the selection and retention of other persons to provide financial
or professional services to the client
— the exercise of discretionary authority over the financial assets of
a client
NOT Financial Advice Correct Answer - 1. A communication
that, based on its content, context, and presentation, would not
reasonably be viewed as a recommendation
2. Responses to directed orders
3. The following, if a reasonable CFP® professional would not view
it as Financial Advice:
— Marketing materials
— General financial education
— General financial communications
,The more customized a planner's communications are to a client's
individual situation, the greater the likelihood that Financial Advice
is being provided.
Questions for financial advice requiring planning: Correct Answer
- 1. Has the planner agreed to provide or provided Financial
Planning?
2. Does the client have a reasonable basis to believe that the planner
will provide or has provided Financial Planning?
3. Does the Financial Advice provided require integration of relevant
elements of the client's personal and financial circumstances to act
in the client's best interests, taking into account the integration
factors?
Relevant Elements Correct Answer - developing client goals,
managing assets and liabilities, managing cash flow, identifying and
managing risks, identifying and managing the financial effect of
health considerations, providing for educational needs, achieving
financial security, preserving or increasing wealth, identifying tax
considerations, preparing for retirement, pursuing philanthropic
interests, addressing estate and legacy matters
Integration Factors Correct Answer - number of relevant
elements
length of time
barriers to modifying the actions taken
% & $ of clients assets affected
effect of clients overall exposure to risk
Financial Planning Process Steps / CFP Board's "Practice Standards"
Correct Answer - "Umbrellas in a downpour, prevent immense
mess"
1. Understanding the clients personal & financial circumstances
(qual & quant info, incomplete info)
,2. Identifying & selecting goals (potential goals, prioritizing goals;
purpose, time horizon, & amount)
3. Analyzing the client's current course of action and potential
alterative courses of action
4. Developing the financial planning recommendations
5. Presenting the recommendations
6. Implementing the recommendations
7. Monitoring progress and updating (how & when they will update
the financial planning recs & how & when they will monitor the
action, products, & services; what actions products & services are
not subject to monitorization)
Asset Accumulation phase Correct Answer - Age: (0-45)
Shortage of cashflow, high debt, low net worth
lack of concern for risk
Conservation/Protection Phase Correct Answer - (45-60)
Mid cashflow, assets, net worth. Decreases in debt
more risk averse
Distribution/Gifting Phase Correct Answer - (60+)
High net worth & cash flow, low debt
Statement of financial position Correct Answer - balance sheet
or net worth statement
FMV
"snapshot"
Cash and cash equivalents—maturities of less than one year
Investments (invested assets)
Personal use assets (e.g., residence, furniture, etc)
Assets should be listed in order of liquidity (ability to convert to
cash quickly), from most liquid to least liquid
, Statement of cash flows Correct Answer - Indicates a period
covered
current ratio Correct Answer - current assets/current
liabilities
Indicates the client's ability to meet short-term obligation
A higher current ratio is preferable; a ratio of greater than 1.0
indicates that the client can pay off existing, short-term liabilities
with readily available, liquid assets
Consumer debt ratio Correct Answer - non-housing monthly
debt payments/ monthly net income
-Should not exceed 20%
-Monthly net income: monthly gross income less monthly taxes
Housing cost ratio Correct Answer - all monthly
nondiscretionary housing costs (PITI) ÷ monthly gross income ≤
28%
All monthly nondiscretionary housing costs include principal,
interest, taxes, insurance, and any condominium or neighborhood
association fees
Gross income is salary, dividend, & interest (not Sch C income)
(if a renter, then the ratio is rent + insurance ÷ monthly gross
income ≤ 28%)
Debt-to-income ratio (total debt ratio) type of Housing Ratio
Correct Answer - all monthly debt payments and housing costs
(PITI) ÷ gross monthly income ≤ 36%
Monthly debt payments include, but are not limited to, payments for
automobile loans, credit card debt, and student loans
All monthly nondiscretionary housing costs include principal,
interest, taxes, insurance, and any condominium or neighborhood
association fees
Questions With Appropriate Solutions
Financial Planning Correct Answer - a collaborative process
that helps maximize a Client's potential for meeting life goals
through Financial Advice that integrates relevant elements of the
Client's personal and financial circumstances
Financial Advice Correct Answer - a communication that,
based on its content, context, and presentation, would reasonably be
viewed as a recommendation that the client take or refrain from
taking a particular course of action with respect to:
— the development or implementation of a Financial Plan;
— the value of or the advisability of investing in, purchasing,
holding, gifting, or selling Financial Assets
— investment policies or strategies, portfolio composition, the
management of Financial Assets, or other financial matters
— the selection and retention of other persons to provide financial
or professional services to the client
— the exercise of discretionary authority over the financial assets of
a client
NOT Financial Advice Correct Answer - 1. A communication
that, based on its content, context, and presentation, would not
reasonably be viewed as a recommendation
2. Responses to directed orders
3. The following, if a reasonable CFP® professional would not view
it as Financial Advice:
— Marketing materials
— General financial education
— General financial communications
,The more customized a planner's communications are to a client's
individual situation, the greater the likelihood that Financial Advice
is being provided.
Questions for financial advice requiring planning: Correct Answer
- 1. Has the planner agreed to provide or provided Financial
Planning?
2. Does the client have a reasonable basis to believe that the planner
will provide or has provided Financial Planning?
3. Does the Financial Advice provided require integration of relevant
elements of the client's personal and financial circumstances to act
in the client's best interests, taking into account the integration
factors?
Relevant Elements Correct Answer - developing client goals,
managing assets and liabilities, managing cash flow, identifying and
managing risks, identifying and managing the financial effect of
health considerations, providing for educational needs, achieving
financial security, preserving or increasing wealth, identifying tax
considerations, preparing for retirement, pursuing philanthropic
interests, addressing estate and legacy matters
Integration Factors Correct Answer - number of relevant
elements
length of time
barriers to modifying the actions taken
% & $ of clients assets affected
effect of clients overall exposure to risk
Financial Planning Process Steps / CFP Board's "Practice Standards"
Correct Answer - "Umbrellas in a downpour, prevent immense
mess"
1. Understanding the clients personal & financial circumstances
(qual & quant info, incomplete info)
,2. Identifying & selecting goals (potential goals, prioritizing goals;
purpose, time horizon, & amount)
3. Analyzing the client's current course of action and potential
alterative courses of action
4. Developing the financial planning recommendations
5. Presenting the recommendations
6. Implementing the recommendations
7. Monitoring progress and updating (how & when they will update
the financial planning recs & how & when they will monitor the
action, products, & services; what actions products & services are
not subject to monitorization)
Asset Accumulation phase Correct Answer - Age: (0-45)
Shortage of cashflow, high debt, low net worth
lack of concern for risk
Conservation/Protection Phase Correct Answer - (45-60)
Mid cashflow, assets, net worth. Decreases in debt
more risk averse
Distribution/Gifting Phase Correct Answer - (60+)
High net worth & cash flow, low debt
Statement of financial position Correct Answer - balance sheet
or net worth statement
FMV
"snapshot"
Cash and cash equivalents—maturities of less than one year
Investments (invested assets)
Personal use assets (e.g., residence, furniture, etc)
Assets should be listed in order of liquidity (ability to convert to
cash quickly), from most liquid to least liquid
, Statement of cash flows Correct Answer - Indicates a period
covered
current ratio Correct Answer - current assets/current
liabilities
Indicates the client's ability to meet short-term obligation
A higher current ratio is preferable; a ratio of greater than 1.0
indicates that the client can pay off existing, short-term liabilities
with readily available, liquid assets
Consumer debt ratio Correct Answer - non-housing monthly
debt payments/ monthly net income
-Should not exceed 20%
-Monthly net income: monthly gross income less monthly taxes
Housing cost ratio Correct Answer - all monthly
nondiscretionary housing costs (PITI) ÷ monthly gross income ≤
28%
All monthly nondiscretionary housing costs include principal,
interest, taxes, insurance, and any condominium or neighborhood
association fees
Gross income is salary, dividend, & interest (not Sch C income)
(if a renter, then the ratio is rent + insurance ÷ monthly gross
income ≤ 28%)
Debt-to-income ratio (total debt ratio) type of Housing Ratio
Correct Answer - all monthly debt payments and housing costs
(PITI) ÷ gross monthly income ≤ 36%
Monthly debt payments include, but are not limited to, payments for
automobile loans, credit card debt, and student loans
All monthly nondiscretionary housing costs include principal,
interest, taxes, insurance, and any condominium or neighborhood
association fees
