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John wiley and sons rattiners review for the CFP certification examination ebook lib



Jeffery H. Rattiner

John Wiley & Sons, Inc.

This book is printed on acid-free paper. ᭺

Copyright © 2003 by Jeffrey H. Rattiner. All rights reserved.

Published by John Wiley & Sons, Inc., Hoboken, New Jersey.
Published simultaneously in Canada
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Library of Congress Cataloging-in-Publication Data:
Rattiner, Jeffrey H., 1960Rattiner’s review for the CFP certification examination : fast track
study guide / Jeffrey H. Rattiner.
p. cm.
Includes bibliographical references and index.
ISBN 0-471-27265-5 (pbk.)
1. Certified Financial Planner Examination—United States—Study
guides. 2. Financial planners—United States—Examinations—Study
guides. I. Title: CFP certification examination. II. Title: Review for
the CFP certification examination. III. Title: Fast track study guide.
IV. Title.
HG179.5.R38 2003
Printed in the United States of America
10 9 8 7 6 5 4 3 2 1

Preface . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .


Chapter 1 General Principles of Financial Planning . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .


Chapter 2 Insurance Planning and Risk Management . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .


Chapter 3 Employee Benefits Planning . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 103
Chapter 4 Investment Planning . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 121
Chapter 5 Income Tax Planning . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 177
Chapter 6 Retirement Planning . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 231
Chapter 7 Estate Planning . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 285
Bibliography . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 339
Index . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 341


This book is dedicated to the many aspiring CFP® Certificants who wish to achieve the highest
level of success within our industry—the right to hold the marks and practice as a CERTIFIED


As the originator of the Metropolitan State College of Denver Financial Planning Fast Track
(FPFT) program that satisfies the Certified Financial Planner (CFP) Board’s educational
requirements to sit for the CFP® Certification Examination, and instructing students through all
parts of FPFT for the last 14 years at the Metropolitan State College of Denver, New York
University, and the College for Financial Planning, I have been actively looking for a short-andsweet set of reference materials that can be used as a guide to bridge the gap between the many
financial planning textbooks in the marketplace and the CFP Board’s 101 topic curriculum,
something that would tie into the contents of the exam itself. Many financial planning textbooks
do a fine job of teaching the subject matter, but few do an adequate job of tying specifically to the
CFP Board’s master list for examination inclusion. We saw this unfulfilled need as an opportunity
to satisfy the missing piece of the puzzle and thus entered the journey to formalize the process to
benefit students wishing to sit for the CFP® Certification Examination.
When John Wiley & Sons approached me about making inroads into the CFP® educational
marketplace, in much the same manner as this publisher has been dominating the CPA Examination
Review marketplace for the last 30 years, I mentioned the need to have a guide in place to tie the
many financial planning texts to the CFP Board’s educational curriculum. My aim was to ensure
that students were being exposed to the many facets of the CFP Board’s development of the
financial planning curriculum as defined through its Job Analysis. The Job Analysis is a listing of
the specific duties and responsibilities CFP® Certificants encounter in practice, and as such, the
CFP Board incorporates these tasks and responsibilities into its examination.
This book is a synopsis of my notes from FPFT. These notes are part of my classroom
educational process, in addition to the Keir Educational Resources and American College books
we use to supplement our program.

This guide is organized according to the six categories of financial planning tested as determined
by the CFP Board, in topic order (from Topic 1 to Topic 101). All 101 CFP Board topics are
covered individually. You can expect to see the following percentages of each category represented
on the CFP® Certification Examination.
Financial Planning
Insurance Planning and Risk Management
Employee Benefit Planning
Investment Planning
Income Tax Planning
Retirement Planning
Estate Planning


x - Rattiner’s Review for the CFP® Certification Examination

ABOUT THE CFP® Certification Examination
The CFP® Certification Examination is offered on the third Friday and Saturday of November,
March, and July at various sites across the country. The Friday afternoon session is four hours, and
on Saturday a morning and afternoon session are three hours each. This 10-hour exam consists of
approximately 285 multiple-choice questions in total, including mainly stand-alone multiplechoice items and three comprehensive case studies given during each session of the examination.
Each case study tests a variety of topics and contains 12 to 20 multiple-choice questions. The
stand-alone multiple-choice questions are worth two points each, and the case study multiplechoice questions are worth three points each, with no partial credit allowed. Each multiple-choice
question is designed to test a single area; however, the questions can integrate more than one topic.
For example, life insurance and taxation or investments in retirement plans can be integrated into a
single question.
With 10 hours (or 600 minutes) and approximately 285 multiple-choice questions, the student
should be ready for an average question response of about two minutes. However, you may want
to pace yourself with 1.5 minutes per question and provide ample time to review open items and
transfer your answers.
Pass rates have ranged from as low as 42 percent to as high as 66 percent. Generally, pass rates
are somewhere in the 50 percent range. You cannot pass the exam in sections—this is an all-ornothing proposition.
The CFP® Certification Examination, although difficult, is a passable exam. Even though a little
more than half of all test-takers pass, it is certainly achievable. The key issue is not to study as if
knowledge of the topics is too difficult, but, rather, to approach the test from a sheer volume
perspective. Six major areas encompassing 101 topics is quite a bit of information for anyone to
master. Therefore, the only proven way to study for this exam is to understand this concept up
front and pace yourself for a long journey. Be prepared to spend whatever time is necessary to
ensure success. There is nothing better than developing a comprehensive study plan and following
that plan through the duration of your studies.

The purpose of this guide is to supplement all the existing financial planning texts that instructors,
students, educators, and practitioners use as part of the local college or university CFP Board
registered educational program. It should be purchased at the very beginning of the program and
used as the singular reference guide during each of the remaining classes.
You should develop your own spreadsheet to accompany this guide as a study reference.
Organize it per line as follows:
• CFP Board Topic No.
• Identify the topic
• Identify the exposure or risk to the client
• Identify solutions to address the exposure
Use this format for all 101 topics. When writing your synopsis, follow each topic number with a
one- or two-sentence description. If you can summarize each of the 101 topics in this clear and
concise format, then you truly do understand the topic and you are well on your way to being
prepared and successful when taking the CFP® Certification Examination. After you have
reviewed each topic with the instructor during class, then proceed to complete this spreadsheet for
all your classes.

Preface - xi

The Metropolitan State Financial Planning Fast Track (FPFT) program is an intensive six-part
educational program that covers the required 101 topics tested by the CFP Board on the CFP®
Certification Examination. FPFT offers five consecutive four-day sessions every six weeks.
Sessions begin Thursday and end on Sunday. Testing is performed daily, and group study
assignments are given in the evenings. The sixth class is a five-day comprehensive review of all
101 topics just prior to the exam. FPFT is designed to take a comprehensive and focused approach
to the subject of financial planning so that you can gain the knowledge you need to pass the exam
and to succeed in practice.
How Do You Satisfy the Educational Requirement Offered through FPFT?
To satisfy this requirement, you must attend FPFT sessions 1 through 5. Classroom attendance is
mandatory for each and every session. If you cannot attend a session, you must satisfy the
classroom requirements by either attending a later training session in Denver or completing the
session through one of the CFP Board’s other Registered Programs at your own cost.
To satisfy the education requirement, you must successfully pass each class with a grade of 70
percent or better. If you fail any one class, you must make up that class, in its entirety, to receive
credit. Once all classes have been successfully completed, you will then receive a certificate of
completion from the Metropolitan State College of Denver.
Are There Other Requirements for Becoming a CFP® Certificant?
Yes. Besides successfully completing an educational program at a CFP Board Registered Program,
you must also satisfy three other requirements:
1. Examination. Successfully complete the two-day exam.
2. Experience. Demonstrate three to five years of work experience.
3. Ethics. Sign ethics documents provided by the CFP Board.
If you want further detail on becoming a CFP® Certificant, contact the CFP Board at (800) 487-1497
or initialcert@CFP-Board.org, or visit the CFP Board Web site at www.CFP-Board.org.
What Has Been Our Pass Rate?
We are pleased that our pass rate has been consistently above the national average. Visit our Web
site (www.financialplanningfasttrack.com) for more information.
Who Should Sit for This Program?
Only serious applicants need apply. This rigorous program is designed to condense two years of
training into approximately seven months (including a review class). Sufficient prep time is
necessary to ensure success. For additional information about FPFT, call (720) 529-1888, e-mail
me at jeff@jrfinancialgroup.com, or visit our Web site at www.financialplanningfasttrack.com.

I am extremely grateful for the extraordinary staff that works with me at JR Financial Group, Inc.,
in Englewood, Colorado, and Scottsdale, Arizona. In particular, Richard Yasenchak, Director of
Investments, was the guiding force behind this project and set the tone for what needed to be
included and the degree of information that should be covered. He has spent countless hours
ensuring that the materials included in this manuscript are first-rate and that they cover each topic
thoroughly. I thank Jake Koebrich, Director of Financial Planning, who provided his expertise and
guidance to make sure that the materials also had a real-world approach and that they tied into

xii - Rattiner’s Review for the CFP® Certification Examination
academia and the model established by the CFP Board, and Rochele Rattiner, Office Manager,
who oversees the administrative side of the Financial Planning Fast Track program and makes sure
that things are done in a timely manner. Finally, I wish to thank my children, Brandon, Keri, and
Matthew, for putting up with me through yet another authored book.
I am grateful to Louis Garday, CEO of the CFP Board, who has taken time from his demanding
schedule to address the students in many of the Fast Track classes held in Denver, as well as to
Katherine K. Ioannides, Director of Education and Examinations, and Cynthia Coyle, Coordinator
of Registered Programs, who have been integral in the development and monitoring of the
Metropolitan State College of Denver Financial Planning Fast Track program and have shared in
the success. I would also like to acknowledge Dr. Kenneth Huggins, CFP®, chairman of the
finance department of the Metropolitan State College of Denver, and Maria Carillo, Financial
Planning Coordinator, for their undying belief in the Fast Track format as an alternative
educational approach for those students for whom the traditional educational distribution system
does not work.
Finally, I am grateful for the many great instructors we are lucky enough to have nationwide,
including, but not limited to, Gregory Fong, John Phillips, Gary Sidder, and others, who
participate in teaching the FPFT program.
January 10, 2003

Chapter 1



2 - General Principles of Financial Planning

1. Purpose, benefits, and components
A. The purpose of financial planning is to provide sound, coordinated financial advice to
individuals and their families.
B. The benefits of financial planning include a coordinated approach to the multiple facets of
the daily and lifetime financial needs of clients who are too busy to learn what they need to
know. Further, clients benefit from having one person in their corner who can work with
the various experts required to put together a comprehensive financial plan and who can
help them understand the language of those experts.
C. Financial planning consists of five major components: insurance, investments, income tax
planning, retirement planning, and estate planning.
2. Steps
A. Establishing client-planner relationships sets the expectations of the parties and lays the
groundwork for developing the trust required for successful financial planning.
(1) Identifying the service(s) to be provided
(2) Disclosing the financial planning practitioner’s compensation arrangement(s)
(3) Determining the client’s and the financial planning practitioner’s responsibilities
(4) Establishing the duration of the engagement
(5) Providing any additional information necessary to define or limit the scope of the
B. Gathering client data and determining goals and expectations. A financial plan is only as
good as the data collected and assumptions on which the data is based. Quantitative and
qualitative data is used to establish a client’s goals and objectives.
(1) Quantitative versus qualitative
(a) Quantitative data tells you where the client is and what it will take to get the client
to a specific financial goal. Quantitative data is found using a fact-finding
(b) Qualitative data tells you why the client wants to reach the goal, what will make
him or her work toward it, and what the client is not likely to do. Qualitative data is
obtained by conducting a goals and objectives interview.
(2) Goals versus objectives
(a) Goals are broad-based projections of a client’s aspirations. Example: A client’s
goal may be to retire rich.
(b) Objectives are quantifiable ways of achieving goals over a specified time period.
Example: Saving $5 million by age 65 is an objective, whereas retiring rich is the
C. Determining the client’s financial status by analyzing and evaluating general financial
status, special needs, insurance and risk management, investments, taxation, employee
benefits, retirement, and/or estate planning
(1) Identify strengths and weaknesses of client.
(2) Revise goals if necessary.
D. Developing and presenting the financial plan
(1) Design strategies tailored to the client’s objectives and goals.
(2) Seek approval from the client.

Topic 2: CFP Board’s Code of Ethics and Professional Responsibility - 3
E. Implementing the financial plan
(1) Motivate the client.
(2) Draw on outside experts as needed.
F. Monitoring the financial plan
(1) Evaluate the performance.
(2) Review changes in client’s circumstances and tax laws.
(3) Revisit other steps as necessary.
3. Responsibilities
A. Financial planner, client, other advisers
(1) Financial planner. Evaluate client needs, explain financial planning concepts and
clarify client goals, analyze client circumstances and prepare financial plans, and
implement and monitor financial plans.
(2) Client. Express concerns, hopes, and goals; do not procrastinate; be honest with your
answers to questions; live within your current income and do not live up to or beyond
it; be open to formulating a financial plan and identifying strategies to reach goals and
(3) Other advisers. The planner may seek out the help of others when implementing the
financial plan. Their responsibilities fall within the realm of their expertise.

The following contains wording from both the Code of Ethics and Professional Responsibility and
Disciplinary Rules and Procedures (© 2002 by Certified Financial Planner Board of Standards,
Inc.). It is strongly suggested by this author that all candidates for the CFP® examination read
their own copies of the original Code of Ethics and Professional Responsibility and Disciplinary
Rules and Procedures. These materials can be obtained from the CFP Board’s Web site.
1. Code of ethics and professional responsibility
A. Preamble and applicability
(1) The Code of Ethics and Professional Responsibility (Code of Ethics) has been adopted
by the Certified Financial Planner Board of Standards, Inc. (CFP Board) to provide
principles and rules to all persons whom it has recognized and certified to use the CFP
certification mark and the marks CFP® and CERTIFIED FINANCIAL PLANNER™.
(2) This Code of Ethics also applies to candidates for the CFP® certification who are
registered as such with CFP Board.
B. Composition and scope
(1) The Code of Ethics consists of two parts: Part I, “Principles,” and Part II, “Rules.”
(a) The Principles are statements expressing in general terms the ethical and
professional ideals that CFP Board designees are expected to display in their
professional activities. As such, the Principles are intended to provide a source of
guidance for CFP Board designees.
(b) The Rules describe the standards of ethical and professionally responsible conduct
expected of CFP Board designees in particular situations.
(2) Because of the nature of a CFP Board designee’s particular field of endeavor, certain
Rules may not be applicable to that CFP Board designee’s activities.

4 - General Principles of Financial Planning
C. Compliance—The CFP Board requires adherence to this Code of Ethics by all CFP Board
D. Terminology
(1) Client denotes a person, persons, or entity who engages a practitioner and for whom
professional services are rendered.
(2) CFP Board designee denotes current certificants, candidates for certification, and
individuals who have any entitlement, direct or indirect, to the CFP certification marks.
(3) Commission denotes the compensation received by an agent or broker when the same is
calculated as a percentage on the amount of his or her sales or purchase transactions.
(4) Compensation is any economic benefit a CFP Board designee or related party receives
from performing his or her professional duties.
(5) Conflicts of interest exist when a CFP Board designee’s financial, business, property,
and/or personal interests, relationships, or circumstances reasonably may impair his or
her ability to offer objective advice, recommendations, or services.
(6) Fee-only denotes a method of compensation in which compensation is received solely
from a client with neither the personal financial planning practitioner nor any related
party receiving compensation that is contingent upon the purchase or sale of any
financial product.
(7) Financial planning engagement exists when a client, based on the relevant facts and
circumstances, reasonably relies upon information or services provided by a CFP
Board designee using the financial planning process.
(8) Personal financial planning or financial planning denotes the process of determining
whether and how an individual can meet his or her life goals through the proper
management of financial resources.
(9) Personal financial planning process or financial planning process denotes a process
that typically includes, but is not limited to, these six elements: establishing and
defining the client-planner relationship; gathering client data, including goals;
analyzing and evaluating the client’s financial status; developing and presenting
financial planning recommendations and/or alternatives; implementing the financial
planning recommendations; and monitoring the financial planning recommendations.
(10) Personal financial planning subject areas or financial planning subject areas denotes
the basic subject fields covered in the financial planning process, which typically
include, but are not limited to, financial statement preparation and analysis (including
cash flow analysis/planning and budgeting), investment planning (including portfolio
design, i.e., asset allocation and portfolio management), income tax planning,
education planning, risk management, retirement planning, and estate planning.
(11) Personal financial planning professional or financial planning professional denotes a
person who is capable and qualified to offer objective, integrated, and comprehensive
financial advice to or for the benefit of individuals to help them achieve their financial
E. Principles—Part I. The Code of Ethics Principles apply to all CFP Board designees and
provide guidance to them in the performance of their professional services.
Principle 1 Integrity
Principle 2 Objectivity
Principle 3 Competence
Principle 4 Fairness
Principle 5 Confidentiality
Principle 6 Professionalism
Principle 7 Diligence

Topic 2: CFP Board’s Code of Ethics and Professional Responsibility - 5
F. Rules—Part II. As stated in Part I, the Principles apply to all CFP Board designees.
However, certain rules may not be applicable to a CFP Board designee’s activities. The
universe of activities engaged in by a CFP Board designee is indeed diverse. When
considering the Rules, a CFP Board designee must first recognize the specific services he or
she is rendering and then determine whether a specific Rule is applicable to those services.
The Code of Ethics includes definitions to help a CFP Board designee determine which
services he or she provides and which Rules are applicable to those services.
(1) Rules that relate to the Principle of Integrity
(a) Rule 101. Do not solicit clients through false or misleading communications or
(b) Rule 102. Do not engage in conduct involving dishonesty, fraud, deceit, or
(c) Rule 103. This rule lists the specific responsibilities a Board designee has to his or
her clients.
i. Act in accordance with the authority set forth in the governing legal instrument
(e.g., special power of attorney, trust, letters testamentary, etc.).
ii. Identify and keep complete records of all funds or other property of a client.
iii. Deliver any funds or other property that the client or third party is entitled to
receive, and render a full accounting regarding such funds or other property.
iv. Do not commingle client funds or other property with the CFP Board
designee’s personal funds or property. Two or more clients’ funds or other
property may be commingled, subject to compliance with applicable legal
requirements and maintenance of accurate records.
v. Show the care required of a fiduciary.
(2) Rules that relate to the Principle of Objectivity
(a) Rule 201. Exercise reasonable and prudent professional judgment.
(b) Rule 202. Act in the interest of the client.
(3) Rules that relate to the Principle of Competence
(a) Rule 301. Keep informed of developments in the field of financial planning and
participate in continuing education.
(b) Rule 302. Offer advice only in those areas in which the CFP Board designee has
competence. In areas where the CFP Board designee is not professionally
competent, the CFP Board designee shall seek the counsel of qualified individuals
and/or refer clients to such parties.
(4) Rules that relate to the Principle of Fairness
(a) Rule 401. Disclose to the client:
i. Material information, such as conflict(s) of interest(s), changes in business
affiliation, address, telephone number, credentials, qualifications, licenses,
compensation structure, and any agency relationships
ii. The information required by all laws applicable to the relationship in a manner
complying with such laws
(b) Rule 402. A financial planning practitioner shall make timely written disclosure of
all material information relative to the professional relationship. In all
circumstances such disclosure shall include conflict(s) of interest(s) and sources of
compensation. Written disclosures that include the following information are
considered to be in compliance with this rule:

6 - General Principles of Financial Planning







i. The basic philosophy of the CFP Board designee (or firm) in working with
ii. Resumes of individuals who are expected to provide financial planning services
to the client and a description of those services
iii. Source of compensation and referral fees
iv. A statement indicating whether the CFP Board designee’s compensation
arrangements involve fee only, commission only, or fee and commission. A
CFP Board designee cannot hold out as a fee-only financial planning
practitioner if he or she receives commissions or other forms of economic
benefit from related parties.
v. Any material agency or employment relationships with third parties and the
fees or commissions resulting from such relationships
vi. A statement identifying conflict(s) of interest(s)
Rule 403. Disclose in writing, prior to establishing a client relationship,
relationships that may reasonably compromise the CFP Board designee’s
objectivity or independence.
Rule 404. Should conflict(s) of interest(s) develop after a professional relationship
has been commenced, but before the services contemplated by that relationship
have been completed, a CFP Board designee shall promptly disclose the conflict(s)
of interest(s) to the client or other necessary persons.
Rule 405. Disclosure of compensation must be made annually to ongoing clients.
The annual requirement is satisfied by offering to provide clients a current copy of
Securities and Exchange Commission (SEC) Form ADV, Part II, or the disclosure
called for by Rule 402.
Rule 406. Compensation shall be fair and reasonable.
Rule 407. References may be provided that include recommendations from present
and/or former clients.
Rule 408. Ensure that the scope of authority is clearly defined and properly
Rule 409. All CFP Board designees shall adhere to the same standards of disclosure
and service.
Rule 410. Perform professional services with dedication to the lawful objectives of
the employer and in accordance with this Code of Ethics.
Rule 411. A CFP Board designee shall
i. Advise an employer of outside affiliations that may reasonably compromise
service to an employer
ii. Provide timely notice to the employer and clients, unless precluded by
contractual obligation, in the event of change of employment or CFP Board
certification status
Rule 412. A CFP Board designee must act in good faith with partners.
Rule 413. A CFP Board designee must disclose to partners all relevant and material
information regarding credentials, competence, experience, licensing and/or legal
status, and financial stability.
Rule 414. A CFP Board designee who is a partner or co-owner of a financial
services firm must withdraw in compliance with any applicable agreement and in a
fair and equitable manner.

Topic 2: CFP Board’s Code of Ethics and Professional Responsibility - 7
(o) Rule 415. A CFP Board designee must disclose to an employer any compensation
or other benefit arrangements in connection with his or her services to clients that
are in addition to compensation from the employer.
(p) Rule 416. If a CFP Board designee enters into a business transaction with a client,
the transaction shall be on terms that are fair and reasonable to the client.
(5) Rules that relate to the Principle of Confidentiality
(a) Rule 501. Do not reveal, without the client’s consent, any personally identifiable
information relating to the client relationship, except when use is reasonably
i. To establish an advisory or brokerage account, to effect a transaction for the
client, or as otherwise impliedly authorized in order to carry out the client
ii. To comply with legal requirements or legal process
iii. To defend the CFP Board designee against charges of wrongdoing
iv. In connection with a civil dispute between the CFP Board designee and the
(b) Rule 502. Maintain the same standards of confidentiality to employers as to clients.
(c) Rule 503. Adhere to reasonable expectations of confidentiality while in business
and thereafter.
(6) Rules that relate to the Principle of Professionalism
(a) Rule 601. Use the marks in compliance with the rules and regulations of CFP
Board (see Topic 2, Section 1.A.(1)).
(b) Rule 602. Show respect for other financial planning professionals and related
occupational groups by engaging in fair and honorable competitive practices.
(c) Rule 603. Inform the CFP Board when another CFP Board designee has committed
a violation of the Code of Ethics and there is no substantial doubt.
(d) Rule 604. Inform the appropriate regulatory and/or professional disciplinary body
when there is unprofessional, fraudulent, or illegal conduct by another CFP Board
designee or other financial professional and there is no substantial doubt.
(e) Rule 605. Disclose illegal conduct to the immediate supervisor and/or partners if
illegal conduct is suspected. If appropriate measures are not taken to remedy the
situation, alert the appropriate regulatory authorities, including the CFP Board, in a
timely manner.
(f) Rule 606. In all professional activities, a CFP Board designee shall perform
services in accordance with
i. Applicable laws, rules, and regulations of governmental agencies and other
applicable authorities
ii. Applicable rules, regulations, and other established policies of the CFP Board
(g) Rule 607. Do not engage in any conduct that reflects adversely on the profession.
(h) Rule 608. Disclose to clients the firm’s status as registered investment advisers. It is
proper to use the term registered investment adviser if the CFP Board designee is
registered individually. If the CFP Board designee is registered through his or her
firm, then the firm is the registered investment adviser.
(i) Rule 609. A CFP Board designee must not practice any other profession or offer to
provide such services unless the CFP Board designee is qualified to practice in
those fields and is licensed as required by state law.

8 - General Principles of Financial Planning
(j) Rule 610. Return the client’s original records in a timely manner upon request of
the client.
(k) Rule 611. Do not bring or threaten to bring a disciplinary proceeding under this
Code of Ethics or report or threaten to report information to CFP Board pursuant to
Rules 603 and/or 604 for no substantial purpose other than to harass, embarrass,
and/or unfairly burden another CFP Board designee.
(l) Rule 612. Comply with all applicable renewal requirements established by CFP
(7) Rules that relate to the Principle of Diligence
(a) Rule 701. Provide services diligently.
(b) Rule 702. Enter into an engagement only after securing sufficient information to
satisfy the CFP Board designee that
i. The relationship is warranted by the individual’s needs and objectives.
ii. The CFP Board designee has the ability to either provide requisite competent
services or to involve other professionals who can provide such services.
(c) Rule 703. Implement only recommendations that are suitable for the client.
(d) Rule 704. Make a reasonable investigation regarding the financial products
recommended to clients.
(e) Rule 705. Supervise subordinates with regard to their delivery of financial planning
2. Disciplinary Rules and Procedures
A. Board of Professional Review
(1) Is charged with the duty of investigating, reviewing, and taking appropriate action with
respect to alleged violations of the Code of Ethics and alleged noncompliance with the
Financial Planning Practice Standards
(2) Can divide the Board into two panels consisting of an Inquiry Panel and a Hearing
Panel and designate a chair for each panel. No member of an Inquiry Panel shall act as
a member of a Hearing Panel on the same matter
B. Inquiry Panel
(1) Investigates alleged grounds for discipline, with appropriate assistance from members
of CFP Board staff
(2) Can dismiss allegations as being without merit, dismiss allegations with a letter of
caution recommending remedial action and entering other appropriate orders, or refer
the matter to CFP Board for preparation and processing of a complaint against the CFP
Board designee
(3) All answers to complaints shall be in writing. The answers shall be submitted within 20
calendar days from the date of service of the complaint upon the CFP Board designee.
(4) If the CFP Board designee fails to file an answer within the period provided, such CFP
Board designee shall be deemed to be in default and the allegations set forth in the
complaint shall be deemed admitted.
C. Hearing Panel
(1) Conducts all hearings on complaints seeking disciplinary action against a CFP Board
(2) Reports its findings and recommendations to the Board for final decision

Topic 3: CFP Board’s Financial Planning Practice Standards - 9





(3) Appeals must be made within 30 calendar days after notice of the order is sent to the
CFP Board designee, or such order shall be final.
Staff counsel—maintains a central office for the filing of requests for the investigation of
CFP Board designee conduct, for the coordination of such investigations, for the
administration of all disciplinary enforcement proceedings carried out pursuant to these
procedures, for the prosecution of charges of wrongdoing against CFP Board designees
pursuant to these procedures, and for the performance of such other duties as are
designated by the Board or the Chief Executive Officer of CFP Board
Grounds for discipline
(1) Any act or omission that violates the provisions of the Code of Ethics
(2) Any act or omission that fails to comply with the Practice Standards
(3) Any act or omission that violates the criminal laws of any state or of the United States
or of any province, territory, or jurisdiction of any other country
(4) Any act that is the proper basis for professional suspension
(5) Failure to respond to a request by the Board, without good cause shown
(6) Any false or misleading statement made to CFP Board
Forms of discipline
(1) No action. In cases where no grounds for discipline have been established, the Board
may dismiss the matter either as being without merit or with a cautionary letter.
(2) Continuing education. The Board has the right to require CFP Board designees to
complete additional continuing education or other remedial work.
(3) Private censure. The Board may order private censure of a CFP Board designee (i.e., an
unpublished written reproach mailed by the Board to a censured CFP Board designee).
(4) Public Letter of Admonition. The Board may order that a Letter of Admonition be
issued against a CFP Board designee (i.e., a publishable written reproach of the CFP
Board designee’s behavior).
(5) Suspension. The Board may order suspension for a specified period of time, not to
exceed five years, for those individuals it deems can be rehabilitated. CFP Board
designees receiving a suspension may qualify for reinstatement to use the marks.
(6) Revocation. The Board may order permanent revocation of a CFP Board designee’s
right to use the marks. Revocation is permanent.
Investigation—The CFP Board designee shall have 20 calendar days from the date of
notice of the investigation to file a written response to the allegations with the Board.
(1) No response. The matter shall be referred to the Hearing Panel.
(2) Response. A report is submitted to the Inquiry Panel.

The following contains wording from the Financial Planning Practice Standards (© 2002 by
Certified Financial Planner Board of Standards, Inc.). It is strongly suggested by this author that
all candidates for the CFP® examination read their own copies of the original Financial Planning
Practice Standards. This material can be obtained from the CFP Board’s Web site.)

10 - General Principles of Financial Planning
1. Purpose and applicability
A. The Financial Planning Practice Standards (Practice Standards) establish the level of
professional practice that is expected of a CFP® Certificant engaged in personal financial
planning. The Practice Standards are intended to (1) ensure that the practice of financial
planning by CERTIFIED FINANCIAL PLANNER™ professionals is based on established norms
of practice, (2) advance professionalism in financial planning, and (3) enhance the value of
the financial planning process.
B. Similarly, standards help practitioners to focus on what to provide as part of the six-step
financial planning process and to base services on what clients need.
C. The Board of Practice Standards drafted 10 standards, with one or more standards for each
of the six steps in the financial planning process.
D. Compliance with Practice Standards is covered in Rule 606(b) in the Code of Ethics and
Professional Responsibility.
E. The Practice Standards do not require practitioners to provide comprehensive planning for
2. Content of each series
A. Establishing and defining the relationship with the client
100-1. Defining the scope of the engagement before any financial planning service is
B. Gathering client data
(1) 200-1. Determining a client’s personal and financial goals, needs, and priorities before
any recommendation is made and/or implemented
(2) 200-2. Obtaining quantitative information and documents before any recommendation
is made and/or implemented. If not obtained, restrict the scope of the engagement or
terminate the engagement.
C. Analyzing and evaluating the client’s financial status
300-1. Analyzing to gain an understanding of the client’s financial situation and evaluating
to what extent the client’s goals, needs, and priorities can be met by the client’s resources
and current course of action
D. Developing and presenting the financial planning recommendation(s)
(1) The 400 Series represents the very heart of the financial planning process. It is at this
point that the financial planning practitioner, using both science and art, formulates the
recommendations designed to achieve the client’s goals, needs, and priorities.
(2) 400-1. Identifying and evaluating financial planning alternative(s) to reasonably meet
the client’s goals, needs, and priorities
(3) 400-2. Developing the financial planning recommendation(s) from among the selected
(4) 400-3. Presenting the financial planning recommendation(s) to the client
E. Implementing the financial planning recommendation(s)
(1) 500-1. Agreeing on implementation responsibilities
(2) 500-2. Selecting products and services for implementation
F. Monitoring
600-1. Mutually defining monitoring responsibilities

Topic 4: Personal Financial Statements - 11
3. Enforcing through disciplinary rules and procedures
A. The practice of financial planning consistent with these Practice Standards is required for
CFP Board designees.
B. Enforcement is based on the disciplinary rules and procedures established by CFP Board
and administered by CFP Board’s Board of Professional Review and Board of Appeals.

1. Balance sheet (statement of financial position)
A. It is a financial snapshot of the individual’s wealth at a moment in time.
B. It contains three categories: (1) assets, (2) liabilities, and (3) net worth.
C. Net worth measures the client’s wealth or equity at a specified period of time (i.e., net
worth equals total assets minus total liabilities).
(1) Net worth increases from the following:
(a) Appreciation in the value of assets
(b) Increase in assets from retaining income
(c) Increase in assets from gifts or inheritances
(d) Decrease in liabilities through forgiveness
(2) Net worth is unchanged by the following:
(a) Paying off debt
(b) Buying an asset with cash
D. Assets and liabilities are indicated at fair market value (FMV), footnotes are used to
describe details of assets and liabilities, and property is identified by type of ownership.
E. Assets are categorized as (1) cash and cash equivalents (checking and savings account,
money markets), (2) invested assets (stocks, bonds, mutual funds), and (3) use assets
(home, furnishings, cars).
F. Liabilities are categorized as (1) current liabilities (credit card balances) and (2) long-term
liabilities (auto loans, real estate mortgages, life insurance loans).
2. Cash flow statement
A. Must indicate the period of coverage, usually a calendar year
B. Step 1. Estimate the family’s annual income.
C. Step 2. Develop estimates for both fixed and discretionary expenses.
D. Step 3. Determine the excess of shortfall of income within the budget period. Net cash flow
equals total income minus total expenses. If net income is positive, the client can increase
discretionary expenses.
E. Step 4. Consider available methods of increasing income or decreasing expenses.
F. Step 5. Calculate income and expenses as a percentage of the total to determine a better
allocation of resources.
3. Pro forma statements
A. Forecasting future balance sheets and cash flow statements
B. It may make sense to include three different cash flow statements: (1) worst-case budget,
based on lowest income and highest expenditures expected, (2) average-case budget, based
on reasonable expectations of income and expenses, and (3) best-case budget, based on
highest income and lowest expenditures.

12 - General Principles of Financial Planning

1. Discretionary versus nondiscretionary
A. Discretionary expenses are flexible and can be prevented or timed.
B. Nondiscretionary or fixed expenses can be changed, but must be paid.
C. Various strategies are used to maximize income and minimize expenses:
(1) Debt restructuring. The process of paying off all outstanding credit cards by
consolidating debt into one low personal line of credit
(2) Asset reallocation. This process involves the change in assets from underperforming
assets to more productive investment assets to improve return and income.
(3) Expenditure control. The process of reducing consumption expenditures by
emphasizing the savings element
(4) Income tax planning. Process of benefiting from proper tax planning
(5) Incorporating children’s assets. The process of saving for a child in a custodial account
or trust to benefit from the lower tax rate of the child
(6) Qualified plan vehicles. The process of utilizing a qualified plan to benefit from saving
programs and deductibility
2. Financing strategies
A. Consolidating credit card debt and student loan debt
B. Taking a cash-out refinance. A cash-out refinance will give a new first mortgage by paying
off the current first mortgage and provide additional cash. If current mortgage rates are
lower than that of the existing first mortgage, a new first mortgage will allow the borrower
to save on the current debt. The combined loan to value of 80 percent is recommended to
avoid mortgage insurance. Interest is tax deductible, as with all home mortgages.
C. Taking out a home equity loan or a home equity line of credit
D. Using the cash value of a life insurance policy for a loan. Interest rate charges are generally
less than for personal or credit card loans.
E. Tapping into a company savings plan
F. Using after-tax money from a Roth IRA. Tap into money that can be taken out without
penalty or tax consequences.
3. Savings strategies
A. Goal setting. Goals should be realistic and agreed upon by the family.
B. Self-rewarding plan. If a family exceeds the savings goal, they should spend the extra
savings on themselves.
C. Savings-first approach. Save first and pay cash to avoid high interest charges on loans and
to earn interest by investing the savings.
D. Automatic savings plan. Deduct directly from a paycheck and invest the funds in savings.
This includes dollar cost averaging into mutual funds and contributions to company
retirement plans.

1. Adequacy of reserves—Three to six months of monthly expenses is typically a reasonable
range. For one-income families, a six-month level may be more appropriate. For two-income
families, a three-month level may be adequate.
2. Liquidity versus marketability
A. Marketability. The ease with which an asset may be bought or sold
B. Liquidity. The ease with which assets can be converted into cash with little risk of loss of

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