FP 511 Final Quiz | Questions and Answers (Complete Solutions)

FP 511 Final Quiz | Questions and Answers (Complete Solutions) Which of the following activities would be appropriate if you were establishing and defining the client-planner relationship or gathering information nece ...

FP 511 Final Quiz | Questions and Answers (Complete Solutions) Which of the following activities would be appropriate if you were establishing and defining the client-planner relationship or gathering information necessary to fulfill the engagement? I. Collecting personal financial information II. Inquiring about the number of dependents III. Inquiring about the age or dates of birth of dependents IV. Determining which stocks to purchase for the client's investment portfolio Establishing and defining the client-planner relationship does not include determining which stocks or investments to purchase. This occurs in the fourth phase of the financial planning process, developing the recommendations. Which of the following CFP® certificants would likely be considered to be engaged in financial planning or the material elements of financial planning? I. Lance, who reviews a life insurance sales brochure with his client, Arthur, and completes a variable life insurance application II. Nadia, who conducts comprehensive data gathering regarding Jason's investments, life insurance, retirement plans, wills, and trusts and makes recommendations for him The correct answer is II only. Because Nadia's services involve several of the financial planning subject areas and she is involved in the elements of financial planning, she is likely providing financial planning. Lance's service to Arthur is limited, and the engagement would likely not be considered financial planning. According to CFP Board Code of Ethics, Connor, a CFP® professional, is responsible for which of the following? I. Acting in the client's best interests II. Avoiding or disclosing and managing conflicts of interest III. Acting with honesty, integrity, competence, and diligence IV. Maintaining the confidentiality and protect the privacy of client information The correct answer is I, II, III, and IV. A CFP® professional must Act with honesty, integrity, competence, and diligence. Act in the client's best interests. Exercise due care. Avoid or disclose and manage conflicts of interest. Maintain the confidentiality and protect the privacy of client information. Act in a manner that reflects positively on the financial planning profession and CFP® certification. Amanda, a CFP® professional, is enjoying an afternoon at her son's school playground when she is approached by Tracy, a fellow parent and teacher at a local elementary school. Their conversation covers specifics about Tracy's personal and financial situation, with emphasis on a recommended investment strategy for her 403(b) account. Amanda is aware that she is providing Financial Advice to Tracy. Identify the correct application of rules from the Code and Standards based on Amanda and Tracy's interaction. The correct answer is although only Financial Advice has been determined, Amanda must uphold her Fiduciary Duty and must follow the Code of Ethics. As a CFP® professional, Amanda is obligated to uphold the Code of Ethics. In addition, since Financial Advice is occurring, Amanda must act as a Fiduciary, in the best interest of Tracy. The introduction of the Code and Standards specifically states "The Code of Ethics applies at all times, and sets forth principles that guide the behavior of CFP® professionals, with elaboration provided in the Standards." Bill and Sophia have recently retired and want to travel to Europe and then volunteer for local mission work. They would also like to meet with Humphrey, their financial planner, to discuss charitable contributions they would like to make to these local missions. Humphrey should determine Bill and Sophia's life cycle phase to be The correct answer is the distribution phase. The distribution/gifting phase begins subtly when a couple realizes that they can afford to spend on things they never believed possible. The asset accumulation and conservation/protection phases make this phase possible. For many people, there is a period when they are being influenced by all three phases simultaneously, though not necessarily to the same degree. Whitney is designing her new email template which will reflect her recent certification as a CFP® professional. Under her name, she has identified herself as a CFP™. In a tagline at the bottom of the template, she advertises herself as a "CFP® expert." According to CFP Board's guidelines regarding how the CFP®" marks may be used, which of the following is CORRECT? I. Whitney has appropriately identified herself as a CFP™. II. Advertising herself as a CFP® expert is prohibited by CFP Board. The correct answer is II only. Statement I is incorrect. Although, Whitney can identify herself as a CFP®, it must be done behind her name, not under it. If Whitney wants to identify herself under her name, she should do so as a ™. Statement II is correct. "CFP®" must always be used with one of CFP Board's approved nouns ("certificant", "professional", "practitioner", "certification", "mark", or "exam") unless directly following the name of the individual certified by CFP Board. Here, it can be used alone. Maxine, age 57, would like to retire in 10 years. Currently, her debt is decreasing as her cash flow and net worth are steadily increasing. Based on Maxine's current financial life cycle phase, which of the following goals is she likely to have? The correct answer is long-term goals, such as investing for retirement. Maxine is in the conservation/protection phase of the financial life cycle. As such, her goals are likely longer-term goals, such as investing to provide for future retirement income. In the accumulation phase of the financial life cycle, clients have only limited discretionary income and, as a result, they are likely to focus on short-term, cost-of-living goals. Finally, in the distribution/gifting phase, estate planning and capital preservation are usually most important. Blanca, a CFP® professional, has recently entered into a financial planning engagement with Simon. As his financial planner, which of the following are Blanca's roles? I. Analyzing Simon's current financial status II. Assisting Simon in implementing the financial plan III. Helping Simon identify financial goals and objectives The correct answer is I, II, and III. The financial planner is responsible for analyzing clients' financial status, assisting clients in implementing their financial plans, and making recommendations based on the client's goals and objectives. Candice has referred Rochelle, a CFP® professional, to her brother, Nelson. In their initial meeting, Rochelle explains how she can help Nelson develop a comprehensive financial plan. Which of the following would be Rochelle's roles in a client-planner relationship with Nelson? I. Assisting Nelson in identifying his goals II. Analyzing Nelson's current financial status III. Recommending strategies that will meet Nelson's business goals IV. Providing documentation Rochelle needs to complete the financial plan Rochelle is responsible for helping Nelson with identifying his goals and making recommendations based on those goals. She is also responsible for analyzing Nelson's current financial status. Nelson has the duty to provide documentation Rochelle needs to complete the financial plan. In 2012, the average cost of a new home in Oakville was $150,000. In 2014 the average cost rose to $210,000. Due to an economic downturn in 2017, the average cost of a new home fell to $185,000, and the reaction to the decreased cost was positive, even though the new average cost was higher than the 2012 average cost of a new home. This behavior is known as The correct answer is anchoring. When the average cost of a new home rose in 2014 to $210,000, home buyers reset their psychological anchors to that cost. As the price declined in 2017 to $185,000, the reaction was positive because it was considered in light of the higher 2014 price. Recently, Fallon, an avid shopper, has heard from her friends that an investment in Shoes-2-You stock was a wise idea because the shoes sold are very stylish. Even though Fallon's financial planner has advised her that investing in this stock is a poor decision, she invests in it anyway. Her brother, Stanley, congratulates her on her investment because he feels it is a wise investment. Stanley considers himself to be an expert in investments. Unfortunately, he considers his expertise to be much greater than it actually is. In the past, Stanley has taken credit for any investment decisions that have positive returns but blames the economy when an investment does poorly. Considering Fallon's and Stanley's behavior, which of the following statements is CORRECT? The correct answer is that Fallon's behavior is an example of confirmation bias; Stanley's behavior is representative of overconfidence. Confirmation bias is paying attention to information that supports a preconceived opinion and poorly made decision, while disregarding accurate, unsupportive information. Overconfidence tends to make Stanley believe his level of ability is much higher than what it is. Anchoring is making irrational decisions based on information that should have no influence on the decision at hand. Mental accounting is putting money into separate "accounts" based on the function of these accounts. Melissa has $8,000 in a savings account, which she has earmarked for an Australian vacation later this year. The roof of her house was damaged recently and it requires considerable repairs. Melissa does not want to spend the money in her savings account to make the repairs because she believes that money is for her upcoming vacation. Instead, she withdraws $4,000 from her traditional IRA to make the repairs. She has to pay income tax of $1,120 plus a penalty of $400 on the IRA withdrawal. This is an example of which of the following behaviors? The correct answer is mental accounting. Melissa's irrational financial decision resulted from mentally putting her money into separate "accounts" based on the function of those accounts. Self-control bias occurs when an individual lacks self-discipline and favors immediate gratification over long-term goals. Herding occurs when a person follows the actions of a larger group, whether rational or not. Confirmation bias means people tend to pay attention to information that supports their preconceived opinions while disregarding accurate, unsupportive information. Mark is meeting with a new client, Macy. It is important that Mark understand Macy's psychological ability to deal with uncertain outcomes includes risk tolerance, risk capacity, and risk perception. During what step in the financial planning process should Mark measure Macy's abilities? The answer is understanding Macy's personal and financial circumstance. All of the other answer choices are steps that are too late in the process for this measurement. Wendy, a CFP® professional, is meeting with her client, Chrissy, to discuss her goals. Chrissy advises Wendy that one of her goals is to take an expensive hiking trip in the Alps, something her mother and grandfather had done when they were young. She'd like to keep this tradition in her family. Wendy believes that, because of Chrissy's financial circumstances, this is not the best use of Chrissy's money. What should Wendy do to best serve her client, Chrissy? I. Wendy should understand that expensive trips like hiking in the Alps is an important family tradition to Chrissy. II. Wendy should consider the trip as one of Chrissy's goals and explain how such a goal would impact her overall financial plan. III. Wendy should share her opinion with Chrissy and persuade her to abandon this as one of her goals. IV. Because Wendy, as Chrissy's financial planner, does not feel taking the trip is a wise financial decision, she should not include it in Chrissy's financial plan as a goal. The correct answer is I and II. Wendy should respect Chrissy's wishes and understand that such a trip is part of a family tradition. She should consider the trip as one of Chrissy's goals; however, she should also let her know how such a goal would impact Chrissy's overall financial plan. Wendy should not share her opinion with Chrissy or try to persuade her to abandon it as one of her goals. In his financial planning practice, Frank allows his clients' goals and values to drive his relationships with them. He sees himself as a consultant. Frank's approach to financial counseling is known as The correct answer is the strategic management approach. In this approach, the client's goals and values drive the client-planner relationship and the planner serves as a consultant. In the classical economics approach, planners attempt to achieve better financial outcomes by increasing financial resources or reducing expenditures. The cognitive-behavioral approach believes a client's attitudes, beliefs, and values influence their behavior and tries to replace negative beliefs with positive attitudes that should result in better financial results. Which of the following statements regarding the classical economics approach to financial counseling is CORRECT? I. This approach features the use of a SWOT analysis. II. This approach is based on the use of psychoanalytic theory such as Freudian or Gestalt theory. III. Clients choose among alternatives based on objectively defined cost-benefit and risk-return tradeoffs. IV. This approach believes that increasing financial resources or reducing financial expenditures results in improved financial outcomes. The correct answer is III and IV. Statement I is incorrect; the strategic management approach features the use of a SWOT analysis. Statement II is incorrect; the financial counseling approach that is based on the use of psychoanalytic theory such as Freudian or Gestalt theory is the psychoanalytic approach. Which of the following statements regarding open-ended and closed-ended questions is CORRECT? I. Planners should use as many open-ended questions as possible when developing client goals and expectations. II. Closed-ended questions facilitate effective communication between the client and planner because they require the client to answer in her own words. The correct answer is I only. Planners should use as many open-ended questions as possible when developing client goals and expectations. These types of questions require clients to answer in their own words. Open-ended questions facilitate effective communication between clients and planners. Statement II is incorrect. Closed-ended elicit “yes” or “no” answers, and this can restrict communication. Bernie is meeting with his clients, Mike and Alyssa, to define their goals. Mike tells Bernie that one of his goals is purchasing a hunting camp in two years and Alyssa shakes her head. What is the best action for Bernie to take next? The correct answer is ask Alyssa if the camp if a mutually agreed-upon goal. Alyssa's body language (shaking her head) may express that she does not agree with this goal. Therefore, Bernie should clarify whether or not she is on board with Mike's idea. If Alyssa is agreeable, Bernie should then get more details regarding the purchase of the camp. Bernie should not move on to other goals before Mike and Alyssa are in agreement regarding this particular one. Lastly, this is not the time to make recommendations without comprehensive information. Which of the following statements regarding interpersonal communication between financial planners and their clients are CORRECT? I. Mirroring is accomplished by imitating the client's body language or verbal style. II. Body language can impact how clients receive and interpret messages more than any other type of communication. III. Emotional intelligence includes the ability to recognize emotional expressions and select socially appropriate responses. The correct answer is I, II, and III. Also, effective interpersonal communication involves the application of both oral and non-verbal skills, such as the effective use of body language. Oscar and Kathryn have a net worth of $250,000 before each of the following transactions: - Purchased $3,000 of appliances on credit - Transferred $2,000 from their checking account to a personal savings account - Paid off a credit card with a balance of $6,000 using a personal savings account What is the net worth of Oscar and Kathryn after these transactions? The correct answer is $250,000. None of these transactions will change Oscar and Kathryn's net worth. The checking and savings account transactions offset each other and, although the addition of the appliances will increase the clients' assets by $3,000, the use of credit will increase their liabilities by the same amount. Which of the following financial statements provides a snapshot of the client's net worth at any given point in time, usually at the end of a calendar year? I. Personal tax return II. Cash flow statement III. Net worth statement IV. Statement of financial position The correct answer is III and IV. A statement of financial position, also known as a personal balance sheet or net worth statement, provides a snapshot of the client's net worth at any given point in time, most often at the end of a calendar year. Which of the following statements regarding a financial planner's analysis of a client's cash flow statement is CORRECT? I. The analysis of the client's cash flow statement can help the planner determine whether the client is living within his financial means. II. The analysis of the client's cash flow statement helps determine the client's net worth, or total cash surplus, by tracking cash inflows and outflows over a period of time. III. Typically, the financial planner will encourage the client to reduce the variable expenses reported on the cash flow statement. The correct answer is I and III. Statement II is incorrect. The analysis of the client's cash flow statement helps determine the client's savings level, or total cash surplus, by tracking cash inflows and outflows over a period of time. Net worth is determined in a statement of financial position. You have gathered the following information from Edgar's financial statements: Net income $75,000 Gross income $110,000 Total assets $190,000 Total debt $45,000 Consumer debt $20,000 Based on this information, which of the following statements is CORRECT? I. Edgar's total debt ratio exceeds the generally recommended maximum. II. Edgar's consumer debt ratio exceeds the generally recommended maximum. The correct answer is Both I and II. It is generally recommended that total debts do not exceed 36% of gross income. Edgar's total debt ratio is 40.9%, greater than the 36% maximum ($45,000 / $110,000 = 40.9 %). The consumer debt ratio is the ratio of consumer debt payments to net income. Edgar's consumer debt ratio is 26.67%, which exceeds the generally recommended maximum of 20% ($20,000 / $75,000 = 26.67%) Blake and Sarah have a monthly mortgage payments of $850 (principal, interest, taxes, and insurance [PITI]) on a mortgage balance of $95,000 on their home. They have an auto loan balance of $5,000, with monthly payments of $250. Additionally, they have a credit card balance of $2,000, on which they pay $225 each month. Blake and Sarah's net income for the past year was $35,000. Their gross income was $48,000. Are Blake and Sarah using excessive amounts of debt? The correct answer is no, because monthly house payments (PITI) are less than 28% of gross income and total monthly debt payments are only 33% of gross income. Blake and Sarah are not using excessive amounts of debt. Both ratios should be calculated using gross income. Which of the following are considered fixed cash outflows? I. Clothing expenses II. Mortgage payments III. Insurance premiums IV. Auto loan payments The correct answer is II, III, and IV. Clothing expenses are a variable outflow because they typically do not occur on a regular basis and the amount tends to vary. The other choices represent fixed outflows because they tend to occur regularly and the amount is more predictable. Peter, age 35, has requested your expertise in developing a college funding plan for his five-year-old daughter, Brooke. He has presented you with the following information. Current annual salary—$115,000Monthly mortgage payment—$1,700Credit card debt—$3,000 (16.5% fixed)Checking account balance—$1,345Long-term group disability insurance—60% of salary to age 65, 60-day elimination periodLife insurance—1x salary (group), $400,000 20-year term (individual) After completing a budget with Peter, you have determined that he has $350 per month in surplus cash flow. He tells you he would like to use this amount to fund a college plan for Brooke. Based on the information provided, what should Peter do first? The correct answer is establish an emergency fund. At this point, Peter should use his surplus cash flow to establish an emergency fund. He does not have access to immediate cash, and, in the event of disability, he does not have enough set aside to cover his elimination period. Paying off his credit card debt, purchasing additional life insurance, and establishing a college plan for Brooke should be considered after establishing the emergency fund. Mickey has decided he needs to increase the balance of his emergency fund. Which of the following are ways Mickey can save for this purpose? I. Cancel his audiobook subscription. II. Choose a more economical cell phone plan. III. Use an overdraft feature on his debit cards. IV. Decrease the deductible on his automobile insurance policy. The correct answer is I and II. Using an overdraft feature on debit cards may entice Mickey to spend money he does not have available in his account. Decreasing insurance deductibles increases premiums, which is not a savings strategy. Aaron, a financial planner, has advised Macy that she needs to increase her savings. What might you recommend as a good savings strategy? I. Limit the number of lattes she purchases. II. Use an overdraft feature on debit cards. III. Increase her deductible on her car insurance policy. IV. Limit her credit card purchases to those she can pay off in full in one year. The correct answer is I and III. Macy can use the money she saves by limiting the number of lattes she purchases to increase her savings. Using an overdraft feature on debit cards may tempt her to spend money she does not have available in her account. Increasing insurance deductibles decreases premiums, which is a good savings strategy. If credit cards are used, they should be paid off in full at the end of each month. Over the years, Quinn has made timely payments on four of his credit card accounts, all which have balances near the available credit limits. He did pay off a fifth credit card account, which he had for 20 years, and immediately closed it. Which of the following statements regarding Quinn's credit score is CORRECT? I. By immediately closing his long-standing account when it was paid off, Quinn likely decreased his credit score. II. Having four credit card account balances near their available credit limits will in all likelihood adversely affect Quinn's credit score. The correct answer is both I and II. Immediately closing long-standing accounts will likely decrease Quinn's credit score. Keeping account balances near the available credit limit has a negative effect. Craig is refinancing his current 7.5% 30-year fixed-rate mortgage for $150,000 into a new 5.75% 30-year mortgage for $150,000. How much is his new monthly payment and how much per month will he save on this payment? The correct answer is new payment = $875.36, savings = $173.46. END Mode Old payment: PV = 150,000 n = 360 (30 × 12) i = .625 (7.5 ÷ 12) PMT = −1,048.82 New payment: PV = 150,000 n = 360 (30 × 12) i = .4792 (5.75 ÷ 12) PMT = −875.36 Savings = $1,048.82 − $875.36 = $173.46 Which of the following actions would most likely help an individual improve their credit score? The correct answer is to make the minimum payment on time each month. Although making a minimum payment on a credit card will mean an individual will pay significant interest over the years, it shows creditworthiness and, over time, would increase a credit score. Which of the following statements regarding the decision to buy or lease a home are CORRECT? I. The itemized tax deduction for mortgage interest is a benefit of home ownership. II. A client who will be residing in the home for a short period of time should lease the home. III. The lower the marginal income tax bracket, the greater the advantage of owning a home. IV. Generally, more costs are associated with buying a home, especially if this arrangement is short term. Correct answer is I, II, and IV. Individuals in higher marginal income tax brackets benefit more from owning a home than those in lower tax brackets. More costs are associated with purchasing a home, regardless of the length of the lease. Paul and Carmen recently moved to the Gulf Coast. Paul is in the Secret Service and would like to live on the beach until he gets his next work assignment in three years. Paul and Carmen want to purchase a home; however, they expect to move for Paul's next assignment. Which of the following mortgages is best for Paul and Carmen if they want to keep their monthly mortgage payments to a minimum? The correct answer is an adjustable rate mortgage with an interest rate cap. Given Paul and Carmen's relatively short time in their new home, an adjustable rate mortgage (ARM) is their best option. A reverse mortgage is a special type of home loan where the payment stream is reversed (that is, the lender pays the homeowner a stream of income secured by the considerable amount of equity in the home). At the beginning of each year for the past 15 years, Betty, who is Angela and Avery's aunt, has put $5,000 into an account earning 5.5% annually for their benefit. How much is the account worth today and which process must take place to calculate the value? The correct answer is $118,205.70; annuitizing. This is a future value of an annuity due calculation. The keystrokes on the HP 10bII/HP 10bII+ are as follows: BEG mode; 5,000 +/− PMT; 5.5 I/YR; 15 N; solve for FV = 118,205.6999, or $118,205.70. This is done using annuitizing. Compounding is the process of interest being earned on increasing sums over time.