Certified Financial Planner Practice Exam

Adela must pass the Ethics review in addition to meeting the Educational and Experience requirements as part of the four requirements of a CFP® Practitioner certification. A is incorrect because Adela has not completed the requirements to use The Marks, and is improperly representing them. B is incorrect because the ability to charge fees is independent of CFP® Certificant status. C is incorrect because passing the comprehensive exam does not grant an exemption to Continuing Education Requirements.

The only way for an individual to call themselves a CFP® Practitioner is to pass the exam and go through the other certification requirements. There is no waiver of examination allowed for academics or other professionals, nor is there any mechanism for re-instatement after two plus years. There are no oral exams; the pathway to re-certification under the CFP® is to repeat the process that Joe went through initially.

An individual with an income over $100,000 is allowed to contribute up to 10% of their income to start-ups through crowd funding portals. A is incorrect because the limit that a non-accredited investor is allowed to annually contribute to crowdfunded investments is dependent upon their income, not their net worth. B is incorrect because even if the new net worth of the couple would meet the accredited investor requirement, crowdfunding an investment fund is specifically forbidden in the JOBS Act. D is not correct because The JOBS Act specifically created an avenue for non-accredited individuals to participate in start-ups beyond Friends and Family.

Part b section i of the Integrity clause states "A CFP® professional may not, directly or indirectly, in the conduct of Professional Services: i. Employ any device, scheme, or artifice to defraud..." B is not a violation because "Allowance may be made for innocent error." C is acceptable because Section 8 b. states that "A CFP® professional may not intentionally or recklessly participate or assist in another person's violation of these Standards or the laws, rules, or regulations governing Professional Services." D is allowable under section b. iii. where it is forbidden to "Engage in any act, practice, or course of business which operates or would operate as a fraud or deceit upon any person."

Option B will yield $46,337.63, of which only the growth is taxable. A is not correct because a 529 Plan is an education oriented vehicle. This investment will yield $39,930.11 which is then subject to a penalty and will not achieve her goal. C is not correct because a Roth IRA is a retirement oriented vehicle and this early distribution within five years for funding a business creates a penalty, and this will only yield $30,864.54 before distribution. D is wrong because even though there is no penalty for taking the money from the stock fund, there will only be $33,836.65 before taxes.

It is inappropriate to ask for a client's genealogy. Moreover, it is not needed because although family history does influence longevity and as such retirement calculations as well as potentially impact underwriting decisions for life insurance and disability insurance, three generations is excessive and the relevant information can be garnered in a short conversation with the client. A is needed to review what life insurance and disability insurance is offered through work as well as matching schedules, funds available, and borrowing provisions for the 401(k). B is needed to properly account for expenditures that will still be needed at death or disability, as well as to ensure proper cashflows for retirement planning. C is required to see both balances and allocations, critical for retirement calculations and investment allocation discussions.

An increasing monetary supply is a positive leading indicator, showing the ability of consumers and businesses to spend more on goods and services in the near future. As such, this is a good sign for Chow. B is incorrect because although the monetary supply is a leading indicator, a decrease foreshadows that a tightening of spending is imminent and as such would be a warning for Chow to not expand. C is not correct because although housing starts are a leading indicator, the decline is a negative sign and would be a warning for a company considering an expansion. D is false because the CPI (Consumer Price Index) is a lagging indicator, showing the past instead of the future and as such is not a good predictor of future economic activity.

This is a rational cashflow decision which carries very little risk. Helping the client get a handle on cashflow is critical for a new professional. A is not correct because paying the minimum on the credit card means that debt will compound at almost the historical return of the S&P 500, creating an increasing debt burden. Shifting the cashflows to Cryptocurrencies could potentially yield a higher return but the short time period in question makes this a very speculative move and as such inappropriate. B is not correct because a Single Premium Life Insurance policy is a Modified Endowment Contract (MEC) and as such any monies withdrawn prior to age 59.5 are fully taxable as income plus subject to a 10% penalty. These negative tax implications combined with the short time horizon make this inappropriate. D may be financially viable, but is out of line with the client's goals and belief systems. The draconian nature of the recommendation could be effective in helping the client achieve greater overall wealth over his lifetime, but is out of tune with his stated desires. More discussion with the client will elicit his true goals.

Mary Lou has no spouse to make medical decisions on her behalf should she become incapacitated, and only through proper legal documentation (a Health Care Proxy) can she have relative peace of mind that her wishes will be met. A is not appropriate because Mary Lou has sufficient cashflows for retirement (where she feels comfortable enough giving away to charity), and will not outlive the cashflows. B is incorrect because Stretch IRA planning was eliminated with the passage of the SECURE Act. D is incorrect because Mary Lou already has enough money and the risk of loss is not warranted by the facts.

A high deductible generally drives down the insurance premium by pushing the risk for these small incidents to the client. As such, the high deductible does not cover small incidents. Option A makes sense for her to have because collision coverage will cover repair costs in case of an impact/accident caused by the driver, and given the value of the vehicle. B is true because comprehensive coverage would cover repair costs for other objects causing damage to the vehicle such as hail, falling trees, etc. D is true because the client with high net worth and visibility often becomes the target of individuals trying to make a dishonest dollar by falling or faking an accident.

Tawnya can lock in her Occupational Class as an MBA, based upon her current income. As personal coverage is 100% portable, it allows her to be able to take care of herself in case of illness or injury, and at this stage in her career Tawnya's Human Life Value (present value of her income stream) is the most valuable financial asset she possesses. A is incorrect because the three-year cliff vesting means she will not be able to keep any of the corporation's contributions to the 401(k) as she is leaving before the contributions vest or become hers. In addition, the IRS has significantly cracked down on Rollover as Business Startup (ROBS) funding for self-employed individuals so this would not be the best decision. B is not correct because Tawnya has no need of life insurance beyond the free basic coverage in her situation, and the lack of portability will not aid her in her next endeavor. D is incorrect because although there is always a chance of significant injury leading to the need for long term care, the probability of this given Tawnya's lifestyle is fairly low and any event that would trigger the need for assistance with ADLs (Activities of Daily Living) would also trigger disability insurance benefits. Disability insurance benefits would also cover illnesses (much more probable) and be able to cover long term care needs, so it is more flexible, lower cost, and covers more needs.

The term policy will have the lowest short term out of pocket costs and pay if she passes on (thus covering debt and college costs) while having options for her future if her economic situation improves. A is incorrect because as a single individual Delilah needs to have the policy pay at her death to cover the needs for her sons. C is inappropriate because the cost of the policy will not meet her budgetary constraints and the policy will not have enough time to accumulate value sufficient to aid with college costs under reasonable assumptions. D is not appropriate for the same rationale as C.

A Put would lock in a profit of $97.85 per share ($489,250 total) minus the premiums for the Put if the share price drops below $100.00, protecting Chuck on the downside. The stop-loss orders would lock in other stock profits. A is not reasonable given that Chuck is both debt averse and concerned with a downturn in the market. C is not true because while it would protect against a future down turn in the stock prices, it will not give Chuck any upside and given the time horizons, sitting in cash for multiple years is inappropriate. D is not true because buying calls allows Chuck to purchase more Fly High but does not do anything about the market risks.

Option A has a cash component that while low gives certainty to the portfolio over sort periods while being low enough to not lose too much ground in an inflationary environment, with the equity (Stock) offsetting this inflationary risk over the time frame. A portfolio of more bonds than equities falls along the upper part of The Efficient Frontier. B is not true because Cryptocurrency and stocks are correlated assets, so a portfolio of stock correlated and cash assets is riskier than one with bonds (non-correlated as a component). C is false because over the expected lifespan of the client, inflation is a considerable risk and a 100% cash portfolio lacks the hedge needed. D is false -- although it is better than 100% Cash in that it has some inflation hedge, it is still on the lower end of the Efficient Frontier and as such could have a higher return with same risk by adding Stocks and the equivalent.

Purchasing an ETF with proceeds from the sales of an individual stock is not a tax-wash sale, and the sale locks in the gain while allowing participation in the space but reducing the company specific risk. A is not correct because a margin purchase does not lock in the gain and increases the risk assumed on that particular security if it drops in price. B is incorrect because repurchasing the same security within two weeks is a disallowed "tax-wash sale." D is not correct because an option spread like this does not allow for participation of other companies in the industry even if it does reduce the overall risk associated with the company specific position.

The $50,000 in capital appreciation post death to sale date is taxed at a 15% rate due to Ken's marital status and income. A is incorrect because Ken's basis in the stock is stepped up to the valuation on date of death. Post valuation increases in value are included for tax calculations. C is incorrect because the total appreciation of the stock from the date his mother purchased it is not used for the calculation of taxes, but the stepped up basis is. D is incorrect; there are no Estate Taxes as the value of the security portfolio falls well below the excluded amount.

The full $1,036,226.07 will be income tax free when withdrawn from a Roth IRA. A is not correct because the extra $1,036,226.07 accumulated is fully taxable as income when withdrawn from a 401(k). B is not the correct answer as the $1,036,226.07 will be partially taxable when withdrawn from a Traditional IRA. D is incorrect because the non-qualified account (in addition to having tax implications every year before retirement) will have a combination of short and long term capital gains due on every sale/distribution, which will reduce the after tax income.

Option D is correct as  7.5% of $100,000 of AGI (adjusted gross income) is $7,500 and the deductible amount above and beyond this threshold is $$10,300. The hot tub is not a deductible expense because there is no medical reason for it per the IRS. The gym membership is non-deductible also. All other expenses are acceptable to the IRS. A is not correct because this total includes the non-deductible gym membership. B is not correct because it includes the non-deductible gym membership and the hot tub. C is not correct because although the total amount of deductible expenses is $17,800, only the amount exceeding 7.5% of adjusted gross income may be deducted.

Zan was born in the first year, Janna in the second and the parents maintain the deduction until the children are 18 or emancipated. A is incorrect because the year a baby is born is the first year the parents are eligible for a deduction, regardless of when in the year the baby is born. B is incorrect because of the rationale presented in A. Zan is born in the first year, Janna is not. D is incorrect because Zan was born in the first year and as such Jimmy and Margarita Ville get a deduction for him in the first year.

Gifts to a child are not tax deductible. Devesh can do option A because donating appreciated securities to a Charity, whether directly or through a split interest gift like a CRAT, generates a current income tax deduction which may be carried forward. This reduces taxable income, and the income stream generated from the retained interest will be at Capital Gains rates until the basis of the gift is exhausted. Devesh can do option B because an immediate annuity will produce income, and the return of basis is tax free. Devesh can also do option D because the sale of the house does not trigger income taxes while the bond portfolio will generate income.

The limits of deductibility for a SEP IRA are 25% of income, up to $68,000 contribution. A is incorrect because as a 1099 Employee, Rocio is ineligible to participate in the 401(k). If she were a W2 Employee, she might be eligible to participate. B is incorrect because a Roth IRA is an after-tax retirement vehicle. D is incorrect because the maximum deductible amount for an Individual IRA is $6,000 a year, and Rocio is above the max earnings to deduct any of her contributions.

Juan receives his full benefit because his benefits are not diminished. A is false because a remarried spouse does not qualify for benefits based upon their ex. Furthermore, Juan's benefits are not diminished. B is false because Juan's benefits are not diminished because of an ex-spouse receiving benefits. C is false because Lori does not qualify for benefits due to her age and her shorter marriage time. Furthermore, Juanita does not qualify for benefits based upon her marriage to Juan due to her being remarried.

Any amounts that should be distributed for RMD that are not distributed are penalized at a 50% rate. A is incorrect because if Shuri does not take her RMD, only the amount that should have been distributed is subject to penalty, not the entire account balance. C is incorrect because the penalty rate for failure to take the RMD is 50%, not income tax rates. D is false because per the SECURE Act, RMDs are required beginning at age 72.

Monies placed in a 529 Plan are excluded and not subject to five-year lookback provisions. Furthermore it is reasonable to assume that securities would appreciate over time, so this appreciation is outside the estate. A is false because Roth IRAs are included in the estate just as IRAs are. B is incorrect because the $10,000,000 policy will be included in the estate and actually compound the problem unless held in a trust, which is not specified. C is not a viable option because artwork owned by the creator is limited to the basis of the work if held by the creator. Yes, the supplies would be deductible at cost but this is de minimis and as such is not correct.

A Charitable Lead Annuity Trust will pay income to the charitable beneficiary based on the initial value of the gift for a set period of years, and at the end of the term the assets will pass to the non-charity beneficiaries, usually the heirs of the donor. A is false because a Net Income Charitable Remainder Unitrust (NIMCRUT) is a split interest gift where the securities are placed in trust and annually an income based upon current market value of the trust is passed back to the donor or designated income beneficiary. In years where there is no income (often early on due to income planning reasons) by the definition of the trust document, the shortfall is accounted for and may be distributed later when income and assets are greater. Upon death of the donor or a set number of years, the assets pass to charity and the income stream to the income beneficiary stops. C is not correct as a CRUT is the Charitable Remainder Unitrust that the NIMCRUT is a derivative of. A CRUT is required to annually pay the income beneficiary regardless of it having income or not. D is not true as a Charitable Remainder Annuity Trust, while having a defined lifespan, pays its income to a non-charitable beneficiary with the corpus passing to the charity at the end of the term.

There are nine heirs (the four children, the two living spouses, and the three grandchildren). 9 x $16,000 is $144,000 total. The annual gifting limit is $16,000 per donor per donee per year. A is incorrect because this is a per done per donor limit, not a total limit. B is incorrect because all heirs are included in the calculation of number of exclusions used, not just children and living, currently married spouses. D is incorrect because as a widow Bau has no one to split gifts with, and the total number of exclusions is 9 not 6.

The Extension Neglect Bias refers to small sample sizes that are interpolated beyond that which is reasonable. Clients with limited experience often display this bias. A is not correct because the Dunning-Krueger Effect is the overconfidence of an individual in their skills or intelligence. This is why the average person believes themselves to be an above average driver. C is "throwing good money after bad," where a client no longer rationally assesses the situation and stays committed to an action because of previous financial or emotional investment. Often seen in start-up company investments and bad relationships. D is not true because The Endowment Effect refers to the mental premium an individual needs to part with an item that they already possess, versus what they would pay to acquire it and is often reflected in auctions and transactions of privately held businesses.

This is a leveraging technique based upon a belief in the upside potential of the market. A is false because not investing in the market during a short term event for a long term goal is a pessimistic attitude. B is incorrect because Olivia is exhibiting the Frequency Bias from hearing news about the increase in deaths, and the purchase of life insurance is generally an indication of doubt as opposed to optimism. C is false because the sale of stock and awaiting a negative outcome shows is opposite of optimism.

Bounded Rationality involves making the best decision given imperfect knowledge as opposed to an optimal decision. Given the plan of the client for the next few years, this allocation choice fits the "good enough" adage of Bounded Rationality. B is not correct because Homo Economicus is the perfectly rational human created by economists, that has full knowledge and focuses on optimal decisions. C is not true because a gender bias is the belief that one gender has skills or difficulties vis a vis the other. As gender was never mentioned as a factor in the scenario. D is not correct because the Gambler's Fallacy is the belief that future events are influenced by previous events, such as the person at the roulette wheel "knowing" black is about to be hit because the ball landed on red four times in a row.