Essential Keys for CFP Certification Examination Success Revised February 2016 For the July 2016 Exam Published by: KEIR EDUCATIONAL RESOURCES 4785 Emerald Way Middletown, OH 45044 1-800-795-5347 1-800-859-5347 FAX E-mail customerservice@keirsuccess.com www.keirsuccess.com
TABLE OF CONTENTS Title Page Introduction iii Foreword How to Use this Book iv Professional Conduct and Regulation (Topics 1-7) 9 General Financial Planning Principles (Topics 8-16) 24 Education Planning (Topics 17-21) 45 Risk Management and Insurance Planning (Topics 22-32) 55 Investment Planning (Topics 33-41) 99 Tax Planning (Topics 42-51) 147 Retirement Savings and Income Planning (Topics 52-62) 204 Estate Planning (Topics 63-72) 270 Formulas 342 Reading and Understanding the Formulas 344 Tax Tables 358 Index 372
THIS SAMPLE BEGINS AT TOPIC 4 Topic 4: Function, Purpose, and Regulation of Financial Institutions Key Concepts Bank Credit union Brokerage companies Insurance companies Mutual fund companies Trust companies FDIC insurance SIPC insurance Key Information A. Types of Financial Institutions (1) Commercial banks are corporations with a state or federal charter, authorizing the bank to accept deposits, make business and consumer loans, invest in government and private securities, and provide other financial services (including trust department services). (2) A credit union is a nonprofit entity owned by its members, which offers a wide variety of consumer financial services. (3) Brokerage companies, which are large corporate organizations that have grown to enormous sizes by mergers, purchases, or the use of other acquisition techniques, offer a wide variety of financial services. (4) Insurance companies, both life and property-liability companies, obtain most of their funds from policyowners and invest those funds until expenses and claims become payable. (5) Mutual fund companies invest funds in a portfolio of stocks or bonds, depending on the type of mutual fund. (6) Trust companies manage trust assets, which can include cash, stocks, bonds, businesses, and real estate. B. FDIC Insurance (1) The Federal Deposit Insurance Corporation (FDIC) insures accounts in banks and thrift institutions, up to $250,000. (2) Since different categories of accounts are insured separately, the total coverage provided for a depositor can be more than $250,000. For example, separate insurance is provided for individual, joint, retirement, and trust accounts. C. SIPC Insurance
(1) The Securities Investor Protection Corporation (SIPC) is a nonprofit, membership-owned corporation that protects investors against losses due to the failure of their brokerage firm. The insurance does not cover losses due to market fluctuations. (2) Accounts are insured for a maximum of $500,000, including up to $250,000 for deposits in cash. THINK LIKE A PLANNER SM 4 1 Step 3 of the planning process (Job Task Domain 3) requires the planner to evaluate the client s existing portfolio for strengths and weaknesses. A weakness may be identified if holdings at a single FDIC insured financial institution are above the insured amount. A recommendation (Job Task Domain 4) may be to move some of the assets to a different FDIC insured institution.
Topic 5: Financial Services Regulations and Requirements Key Concepts Registered Investment Adviser Brochure rule Agent Principal FINRA registration Regulatory Authorities Authority of Agent Contract Key Information A. Investment Advisers Act of 1940 SEC Registration 5 A Registered Investment Advisers (cannot use initials RIA) Three-Prong Test for Investment Advisers (all three required) (1) In the business (2) Of providing advice about securities (3) For compensation Exceptions: Exemptions: - Bank - Intrastate clients only and gives no - Accountant, lawyer, teacher, engineer advice on national exchange-listed - Broker-dealer securities - Publisher of financial materials - Insurance company clients only - Government securities adviser - Only 15 clients in 12 months - Venture capital fund clients only - Foreign advisor with no U.S. office and manages less than $25 million or has only 15 clients Registration State vs. SEC (1) Less than $100 million under management register with the state. (2) $100 million to $110 million under management may register with the state or the SEC. (3) Over $110 million under management or if no state registration law register with the SEC. Brochure Rule The information found in ADV, Part 2A, written in a plain English narrative form must be delivered before a client signs an investment advisory contract or at the time of signing. B. FINRA (formerly NASD) Registration
(1) The Financial Industry Regulatory Authority (FINRA), which was formerly the NASD, is a self-regulatory organization for the securities industry, supervised by the SEC. (2) Registration with FINRA is required for anyone who sells stocks, bonds, options, mutual funds, tax-sheltered investments, and other securities. (3) An individual registers with FINRA under the sponsorship of a broker-dealer by filing Form U-4, and the individual must pass a qualifying exam. (4) The following FINRA registrations are the most important for financial planners: Series 6 for investment company products, variable life insurance, and variable annuity products Series 7 for all investment products except commodities and certain options Series 22 for direct participation programs (tax shelters, such as real estate, oil and gas, and limited partnerships, but not REITs) Series 62 for all investment products, except options; taken in conjunction with Series 6 and 22 Series 63 for state licensing in many states Series 65 for the registered investment advisers at the state level C. Regulatory Authorities (1) Certain aspects of financial planning areas are regulated by various government bodies and organizations, and planners should be careful to remain in compliance in all areas. Planning Area Investment advice Sale of securities Sale of insurance Income tax preparation Legal advice Accounting services Real estate law Regulatory Authority SEC/State securities administrator SEC/FINRA/State securities administrator State insurance commission IRS State/ABA State/AICPA State real estate commission D. Business Models (1) Practitioners will need to be aware of the relevant licensing, reporting, and compliance issues associated with the business model under which they choose to operate. The model may be insurance only, brokerage only, investment management only, financial planning only, etc.; or it may be any combination of various areas. E. Agents (1) An agent is a person who acts on behalf of another, called the principal. (2) An agent may have three kinds of authority:
Express authority The principal has directly given the agent the power to act. Implied authority The power was not given expressly, but it is necessary to carry out the assignment given by the principal. Apparent authority The power the public reasonably believes the agent has based on the conduct of the principal. (3) The principal is bound by the acts of an agent under all three types of authority and also by any unauthorized acts of an agent which have been ratified by the principal. (4) The principal is deemed to have all information known by the agent concerning matters within the scope of the agency relationship. (5) An agent has the following duties: loyalty, obedience with regard to the principal s instructions, and reasonable care and skill in following those instructions. F. Contracts (1) The following four elements are required for a valid contract: Offer and acceptance Competent parties Consideration Legal purpose (2) A contract with a minor lacks competent parties and is voidable, not void. It can be accepted or rejected by the minor upon his or her reaching the age of majority. (3) An agreement to fix prices is an illegal contract and is void, i.e., no valid contract came into existence. (4) If fraud or duress occurs, genuine assent is lacking, so there is no contract. THINK LIKE A PLANNER SM 5 1 Job Task Domain 1 (Establishing and Defining the Client-Planner Relationship) and CFP Board Rule 2.2 require that certain disclosures be made to clients and prospective clients. While the CFP Board remains neutral in terms of business model, they do require that if the business model limits the practitioner to only certain products or proprietary products, that it be disclosed. This will allow the CFP practitioner to fulfill his or her fiduciary obligation to act in the best interest of the client, within the limitations that the client has been made aware of in the business model. In addition, the CFP Board requires strict adherence to the use of the terms fee-only and fee plus commission in the planner s brochure and/or Forms ADV. A planner may not describe his or her compensation as fee-only if the planner or firm may receive any other type of compensation (including commissions, 12-b1 fees, and referral fees).
General Financial Planning Principles Index of Examples - Sample 13 Present Value Calculation 13-1 35 13 Future Value Calculation 13-2 36 13 Ordinary Annuity Calculation 13-3 36 13 Annuity Due Calculation 13-4 36 13 IRR Calculation 13-5 37 13 NPV Calculation 13-6 37 16 Mortgage Payment Calculations 16-1 42 16 Mortgage Payment Calculations 16-2 43 Education Planning 17 Calculating the Education Funding Needed 17-1 45 Risk Management and Insurance Planning 27 Exclusion Ratio Calculation 27-1 71 28 Income Calculation in a Viatical Settlement 28-1 78 32 Insurance Calculation with Split Limits of Coverage 32-1 95 Investment Planning 35 Calculating Beta 35-1 110 36 Geometric Mean 36-1 116 36 Dollar-Weighted and Time-Weighted Returns 36-2 117 36 Yield to Maturity 36-3 119 38 Modified Duration 38-1 131 38 Valuation Using the Constant Dividend Growth Model 38-2 132 40 Calculating the Margin Call Price 40-1 142
Professional Conduct and Regulation Table Index - Sample 5 Registered Investment Advisers 5 - A 17 General Financial Planning Principles 8 EGADIM 8 - A 24 Education Planning 18 Education Phaseouts 18 - A 48 19 Education Tax Credit Phaseouts 19 - A 50 19 Education Funding Techniques 19 - B 50 Risk Management and Insurance Planning 22 Primary Risk Management Techniques Based on 22 - A 55 Loss Severity and Loss Frequency 24 Who Pays Medical Costs with 24 - A 59 Major Medical Expense Coverage 24 COBRA Coverage 24 - B 61 25 Tax Consequences for Disability Income Insurance 25 - A 64 26 Long-Term Care 26 - A 66 27 Comparison of Fixed and Variable Annuities 27 - A 69 27 Calculating the Exclusion Amount for a Non-Qualified 27 - B 70 Annuity 28 Comparing Life Insurance Products 28 - A 74 28 Life Insurance Policy Options 28 - B 75 28 Comparison of Viatical Settlements and 28 - C 76 Accelerated Benefits 28 Taxation of Life Insurance 28 - D 77 29 Transfer-for-Value Rule 29 - A 81 29 Types of Non-Qualified Deferred-Compensation Plans 29 - B 83 29 Summary of Deferred-Compensation Funding 29 - C 85 30 How Much Insurance? 30 - A 86 30 Typical Family Life Insurance Needs 30 - B 86 31 Selection of Life Insurance Coverage 31 - A 88 31 Methods for Determining the Cost of Life Insurance 31 - B 88 31 Insurance Company Rating Services 31 - C 89 32 Homeowners Forms Section I Coverages 32 - A 93 32 Insurance Planning Recommendations for Case Problems 32 - B 96