Free Certified Financial Planner Questions and Answers — Questions and Answers
Question 1: James and Lou Olsen are meeting with Tony, a CFP expert and a representative of an investment adviser, to evaluate their financial strategy, which includes investing and retirement planning. Jimmy questions the tax implications of their strategy as they go over it. A referral agreement between Tony and his CPA colleague states that the CPA will pay Wayne $125 for each client he introduces who hires the CPA for tax preparation or planning services. Wayne suggests his CPA colleague to the Olsens. The referral agreement is not mentioned by him. <br> Which of the following statements most accurately sums up Wayne's behavior during the meeting?
- The referral money is not regarded as a major sum needing disclosure, hence Tony did not transgress the standards of conduct for the CFP Board regarding transparency and conflicts of interest.
- Due to the disclosure of the referral agreement in the firm's ADV part 2, which the customer had already received before the recommendation, Tony complied with the CFP Board's Standards of Conduct.
- When he recommended a different expert to assist the client with the tax element of their financial plan, Tony violated the CFP Board's Standards of Conduct for the duty of care owed to the Olsens.
- Tony violated the CFP Board's Standards of Conduct for failing to disclose that he might get paid a referral fee if they decide to work with his CPA colleague at the time of the recommendation. (Correct answer)
Correct answer: Tony violated the CFP Board's Standards of Conduct for failing to disclose that he might get paid a referral fee if they decide to work with his CPA colleague at the time of the recommendation.
The CFP Board's Standards of Conduct require a CFP professional to disclose any material conflicts of interest to their clients. Tony has a referral agreement where he receives a fee for introducing clients to his CPA colleague. Failing to disclose this potential compensation at the time of the recommendation is a direct violation of his duty to be transparent and act in the client's best interest, as it could influence his recommendation.
Question 2: In order to lower their yearly tax burden, married professionals Mark and Mary, both in their late 50s, are meeting with Ken, a CFP expert, to review alternatives for extra tax-advantaged accounts. Mark is the chief thoracic surgeon at a neighborhood nonprofit hospital, and Helen runs her own private mental health practice. Helen has been contributing fully to a SEP IRA for the past two years, and Mark has been contributing fully to his 403(b) and 457 plans. Mark and May have high-deductible health insurance through Mark's place of employment. Which of the following accounts might offer Mark and Mary more tax-free and deferred benefits?
- Non-deductible IRA
- Roth IRA
- Health Savings Account (Correct answer)
- Flexible Savings Account
Correct answer: Health Savings Account
Mark and Mary have a high-deductible health insurance plan, which makes them eligible for a Health Savings Account (HSA). HSAs offer a triple tax advantage: contributions are tax-deductible, earnings grow tax-free, and qualified withdrawals for medical expenses are tax-free. Given their existing contributions to other retirement accounts, an HSA provides an excellent additional avenue for tax-advantaged savings, particularly for future healthcare costs.
Question 3: When in the business cycle do demand and hiring start to slow down, while inflation is trending up and unemployment is still declining but more slowly?
- Peak phase (Correct answer)
- Contraction phase
- Expansion phase
- Trough phase
Correct answer: Peak phase
The peak phase of the business cycle is characterized by the economy reaching its maximum growth before a downturn. During this period, demand and hiring begin to slow down from their highest levels, while inflation is typically trending upwards due to high demand and resource utilization. Unemployment, though still low, may start to decline at a slower rate as the economy approaches its turning point before a contraction.
Question 4: Mark owns a neighborhood convenience store. He recently began selling a popular candy and noticed that the revenue and the inventory counts on hand were not adding up. Mark decided to move the placement of the candy display from in front of the counter, where he could not see the product, to the top of the counter near the register. What risk management technique did Mark demonstrate?
- Risk Retention
- Risk Transfer
- Risk Reduction (Correct answer)
- Risk Avoidance
Correct answer: Risk Reduction
Risk reduction involves taking steps to lessen the likelihood or impact of a potential loss. Mark observed a problem (missing inventory due to theft) and took action to minimize it by moving the candy display to a visible location. This proactive measure to deter theft and improve oversight is a classic example of implementing controls to reduce risk.
Question 5: Deborah, 64, just lost her 67-year-old husband William. She is feeling a little overwhelmed as she tries to understand the money that William managed entirely. Although she has some money in the bank, it won't be there for long. Deborah has spent her whole 42-year marriage to William as a stay-at-home mother and wife. William was the only source of income and a self-employed contractor. She is meeting with Dan, a CFP expert, so he can assist her in determining her prospective sources of income. Six months' worth of bank statements and unopened investment account statements Deborah received in the mail is given to Dan. When Dan opens the statements, he discovers that William had taxable investment accounts worth $175,000, $57,000 in SEP IRAs, and $19,000 in Roth IRAs. <br> Which of the following should Deborah use as her primary source of income, according to Dan's advice?
- Social Security (Correct answer)
- Individual retirement accounts
- Reverse mortgage
- Taxable investment accounts
Correct answer: Social Security
Deborah, as a 64-year-old widow who was married for 42 years, is eligible for significant Social Security survivor benefits based on her deceased husband William's earnings record. These benefits can begin as early as age 60 and can provide a stable and substantial income stream. Given her limited other immediate resources and lack of personal work history, Social Security will likely be her most reliable and primary source of income.
Question 6: Jane comes to you for help with financial planning. Within two years, she wants to purchase a brand-new Mercedes Benz for $40,000. She just went through a divorce. She claims that since she can spend her money on whatever she wants, she wants to reward herself. She presently has $5,000 saved toward the objective and is able to easily set aside $250 each month for the following two years. After taxes and fees, the Mercedes will actually cost $46,000. You discover that the monthly payment will be more than twice as much as the $250 per month she is saving toward her goal after performing a 60-month amortization calculation. The cost is significantly more than $250 even with an amortization of 80 months. <br> Which aspect of the psychology of financial planning ought to you go over with Jane to get a better understanding of her motivation?
- Goal transition – you should discuss with Jane how she can transition from saver to buyer.
- Sources of money conflicts – you should discuss with Jane the lack of financial freedom she felt during her marriage. (Correct answer)
- Money scripts – you should discuss with Jane what money scripts she may be following that are causing her to want something she can’t afford.
- Goal congruence – you should discuss with Jane her lack of goal congruence with what she can afford.
Correct answer: Sources of money conflicts – you should discuss with Jane the lack of financial freedom she felt during her marriage.
Jane's desire for an expensive car immediately after a divorce, despite it being financially challenging, suggests a psychological motivation tied to her past relationship. Her statement about being able to 'spend her money on whatever she wants' indicates a potential reaction to perceived financial control or lack of freedom during her marriage. Addressing these underlying 'money conflicts' from her past can help understand her current spending impulses and guide her towards more realistic financial goals.
Question 7: Married couple Tommy and Marilyn run a quaint antique shop together. They have copies of their K-1 and 1065 tax forms from their CPA and are meeting with their tax preparer today. What kind of business structure does it have?
- S-Corporation
- Sole proprietorship
- Partnership (Correct answer)
- Limited Liability Company
Correct answer: Partnership
The K-1 and 1065 tax forms are characteristic of a partnership business structure. A Form 1065, U.S. Return of Partnership Income, is filed by partnerships to report their income, gains, losses, deductions, and credits. Each partner then receives a Schedule K-1, which reports their share of the partnership's income, deductions, credits, and other items, for use in filing their individual tax returns.
Free Certified Financial Planner Questions and Answers
James and Lou Olsen are meeting with Tony, a CFP expert and a representative of an investment adviser, to evaluate their financial strategy, which includes investing and retirement planning.
Jimmy questions the tax implications of their strategy as they go over it.
A referral agreement between Tony and his CPA colleague states that the CPA will pay Wayne $125 for each client he introduces who hires the CPA for tax preparation or planning services.
Wayne suggests his CPA colleague to the Olsens.
The referral agreement is not mentioned by him.
Which of the following statements most accurately sums up Wayne's behavior during the meeting?