RATTINER S REVIEW FOR THE CFP CERTIFICATION EXAMINATION

RATTINER S REVIEW FOR THE CFP CERTIFICATION EXAMINATION FAST TRACK STUDY GUIDE Jeffery H. Rattiner John Wiley & Sons, Inc.

RATTINER S REVIEW FOR THE CFP CERTIFICATION EXAMINATION

RATTINER S REVIEW FOR THE CFP CERTIFICATION EXAMINATION FAST TRACK STUDY GUIDE 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 No part of this publication may be reproduced, stored in a retrieval system, or transmitted in any form or by any means, electronic, mechanical, photocopying, recording, scanning, or otherwise, except as permitted under Section 107 or 108 of the 1976 United States Copyright Act, without either the prior written permission of the Publisher, or authorization through payment of the appropriate per-copy fee to the Copyright Clearance Center, Inc., 222 Rosewood Drive, Danvers, MA 01923, 978-750-8400, fax 978-750-4470, or on the Web at www.copyright.com. Requests to the Publisher for permission should be addressed to the Permissions Department, John Wiley & Sons, Inc., 111 River Street, Hoboken, NJ 07030, 201-748-6011, fax 201-748-6008, e-mail: permcoordinator@wiley.com. Limit of Liability/Disclaimer of Warranty: While the publisher and author have used their best efforts in preparing this book, they make no representations or warranties with respect to the accuracy or completeness of the contents of this book and specifically disclaim any implied warranties of merchantability or fitness for a particular purpose. No warranty may be created or extended by sales representatives or written sales materials. The advice and strategies contained herein may not be suitable for your situation. You should consult with a professional where appropriate. Neither the publisher nor author shall be liable for any loss of profit or any other commercial damages, including but not limited to special, incidental, consequential, or other damages. For general information on our other products and services, or technical support, please contact our Customer Care Department within the United States at 800-762-2974, outside the United States at 317-572-3993 or fax 317-572-4002. Wiley also publishes its books in a variety of electronic formats. Some content that appears in print may not be available in electronic books. For more information about Wiley products, visit our Web site at www.wiley.com. Library of Congress Cataloging-in-Publication Data: Rattiner, Jeffrey H., 1960- Rattiner 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 332.024 dc21 2003001695 Printed in the United States of America 10 987654321

CONTENTS Preface.................................................................... ix Chapter 1 General Principles of Financial Planning................................. 1 Chapter 2 Insurance Planning and Risk Management................................ 59 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 v

DEDICATION 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 FINANCIAL PLANNER (CFP ) Certificant. vii

PREFACE 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. HOW THE GUIDE IS ORGANIZED 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 13% Insurance Planning and Risk Management 10% Employee Benefit Planning 8% Investment Planning 19% Income Tax Planning 17% Retirement Planning 18% Estate Planning 15% ix

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. HOW TO USE THIS GUIDE 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 ABOUT THE METROPOLITAN STATE COLLEGE OF DENVER FINANCIAL PLANNING FAST TRACK (FPFT) PROGRAM 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. ACKNOWLEDGMENTS 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. JEFFREY H. RATTINER CPA, CFP,MBA,RFC January 10, 2003

Chapter 1 GENERAL PRINCIPLES OF FINANCIAL PLANNING 1