Financial Planning Exam Practice Questions

To help you get ready for the CFP® Exam, we're going back through our archives to share practice questions that will test your knowledge and help you know what to expect on exam day. 

CFP Board's Code of Ethics and Standards of Conduct

This question is a part of BIF's Special Webinar series which was created to help students affected by the July 2020 CFP^® Exam postponement to September 2020.

Joni, a CFP® Professional, has met with Brandi at a local café three times to discuss the importance of retirement planning. Brandi understands that the meetings are informational in nature, but she has recently acted upon Joni’s specific recommendations to rebalance her retirement portfolio and purchase a deferred variable annuity. Brandi’s retirement assets comprise approximately 10% of her net worth and Joni’s suggestions have not created additional risks or barriers.

Based on the nature of the engagement between Joni and Brandi, select the duties of a CFP® Professional that Joni must uphold.

1. 1. Fiduciary Duty
   2. Disclose and Manage Conflicts of Interest
   3. Practice Standards for the Financial Planning Process
   4. Confidentiality and Privacy

1. I only
2. I and III
3. I, II, and IV
4. II, III, and IV

Correct answer: C. I, II and IV

Instructor insight:

Joni’s specific recommendations to rebalance her retirement portfolio and purchase a deferred variable annuity suggest that Financial Advice has occurred. As a rule of thumb, the more customized the information provided by a CFP^® Professional, the more likely there is Financial Advice.

Because Joni is offering Brandi Financial Advice the following Duties apply:

• The Duties That Apply at All Times (includes Confidentiality and Privacy)
• Fiduciary Duty
• Disclose and Manage Conflicts of Interest
• Provide Information to a Client
• Duties When Recommending, Engaging, and Working with Additional Persons

Brandi understands that Financial Planning has not and will not occur, as noted by her awareness of the informational nature of the meetings. Her retirement assets comprise approximately 10% of her net worth and Joni’s suggestions have not created additional risks or barriers. As a result, Financial Planning is not occurring, and the Practice Standards for the Financial Planning Process do not apply.

CFP® Exam insight:

To fully understand the applicable duties of a CFP^® Professional, begin by mastering the definitions of Financial Advice and Financial Planning outlined in the Code of Ethics and Standards of Conduct. From there, consult the ‘Duties of a CFP® Professional’ chart on page 3 of the Roadmap to the Code & Standards. Commit the duties that apply when providing Financial Advice, then, those that apply while providing Financial Planning. ALL other duties owed to clients, Firm and subordinates, and CFP Board apply at ALL times.

Mortgage Ratios

This question was discussed in detail during the August 2020 episode of the BIF Bites podcast!

The independent rule of thumb for PITI (principal, interest, taxes, and insurance) indicates that it should generally not exceed:

1. 20% of net income.
2. 28% of net income.
3. 28% of gross income.
4. 36% of gross income.

Correct answer: C. 28% of gross income.

Instructor insight:

Use the following table to guide your memorization of the three key mortgage-related ratios:

CFP^® Exam tip:

On your CFP^® exam, be prepared to use information within a question or a cash flow statement/statement of financial position to calculate the key lending ratios, the consumer debt ratio, and ANY of the following:

1. Monthly Mortgage Payment (TVM)
2. Remaining Balance
3. Total Interest Paid*
4. Total Principal Paid*
5. Refinance

The Financial Planning Process

This question was originally discussed in the Practice Question Palooza question episode of the BIF Bites podcast.

Personal financial planning consists of the development and implementation of:

1. Comprehensive personal objectives.
2. Coordinated, comprehensive strategies.
3. Asset allocation techniques.
4. Cash flow analysis.

Correct answer: B. Coordinated, comprehensive strategies.

Instructor insight:

Choose the best answer not just the correct answer. Coordinated, comprehensive strategies is the best choice because the other three choices would essentially be part of creating coordinated, comprehensive strategies. Identification of comprehensive personal objectives and cash flow analysis would occur early in the financial planning process. Asset allocation techniques would become part of a comprehensive recommendation based on stated goals if it is determined if the client’s current plan cannot attain the objectives.

Financial Aid

This question is a part of BIF's Special Webinar series which was created to help students affected by the July 2020 CFP® Exam postponement to September 2020.

Match the EFC variable to the correct inclusion rate:

Correct answer:

Instructor insight:

Cost of Attendance (COA) - EFC = Financial Need

CFP^® Exam insight:

Financial aid availability and the Expected Family Contribution (EFC) have an inverse relationship. With a higher EFC, there is less financial aid awarded. With a lower EFC, there is more financial aid awarded.

Education Needs Analysis

This question is a part of BIF's Special Webinar series which was created to help students affected by the July 2020 CFP® Exam postponement to September 2020.

The Clark’s want to start saving for their daughter, Cari’s, college education. Cari turned age 3 today. The cost is currently $25,000. The CPI is currently 3% and college expenses are assumed to increase by 5% per year. Cari will begin college at age 18 and graduate in 4 years. The Clark's will fund their education savings at the end of each year and assume they can earn 8% per year.

Question 1: What will the cost for Cari’s first year in college be?

Question 2: What amount must the Clark's have accumulated by day one of Cari’s college attendance?

Question 3: How much must the Clark's invest each year to accumulate the needed amount by day one of Cari’s college attendance?

Question 1: What will the cost for Cari’s first year in college be?

Keystrokes:

Question 2: What amount must the Clark's have accumulated by day one of Cari’s college attendance?

Keystrokes:

Question 3: How much must the Clark's invest each year to accumulate the needed amount by day one of Cari’s college attendance?

Keystrokes:

CFP^® Exam insight:

When using the three-step, build a foundation of knowledge by committing the interest rate, calculator mode (BEG/END), and variable to solve for in each step. By understanding these core components, the remaining data to input is plug and play!

Financial Planning Process #2

This question is a part of BIF's Special Webinar series which was created to help students affected by the July 2020 CFP® Exam postponement to September 2020.

When establishing monitoring and updating responsibilities in Step 7 of the financial planning process (Monitoring Progress and Updating), each of the following must be communicated to the client, EXCEPT:

1. Which actions, products, and services are and are not subject to your monitoring responsibility.
2. Your responsibility to update the financial planning recommendations.
3. Your responsibility to identify any material changes to the client’s qualitative and quantitative information.
4. How and when you will monitor actions, products, or services.

Correct answer: C. Your responsibility to identify any material changes to the client’s qualitative and quantitative information.

Instructor insight:

According to the Code and Standards, the client is responsible for informing you of any material changes to the their qualitative and quantitative information. You are responsible for communicating this responsibility to the client in Step 7 of the financial planning process.

CFP^® Exam insight:

Code and Standards Section A.10.b.ii states that a financial planner is responsible for:

1. Implementing the client’s financial planning recommendation(s)
2. Monitoring and updating the client’s financial planning recommendation(s)

Unless specifically excluded from the Scope of Engagement. Therefore, it is assumed that the financial planner would have responsibility for implementation and monitoring unless he or she is excluded from these items at the onset of the planning engagement.

Economic Policy

This question was originally discussed during the August 2020 episode of the BIF Bites podcast!

Assume that an 8% money purchase plan is to be integrated with Social Security. What is the plan’s maximum permitted disparity?

1. 4.3%
2. 7.65%
3. 5.7%
4. 13.7%

Correct answer: C. 5.7%

Instructor insight:

The question is about permitted disparity (5.7%) not base contribution or excess contribution percentage (13.7%). Because the information does not specify that the integration level is below the taxable wage base, so 5.7% must be used.

Economic Concepts

This question is a part of BIF's Special Webinar series which was created to help students affected by the July 2020 CFP® Exam postponement to September 2020.

Which of the following monetary policy actions by the Federal Reserve would promote economic expansion?

1. Fed raises the discount rate.
2. Fed lowers the reserve requirements.
3. Fed sells securities.
4. Fed lowers the discount rate.
5. Fed buys securities.

1. I, II, and III
2. I and III
3. II, III, and IV
4. II and III
5. II, IV, and V

Correct answer: E. II, IV, and V

Instructor insight:

To promote economic expansion, the Federal Reserve will implement strategies to ease lending and infuse capital into the economy. Of the options available, lowering the reserve requirements and lowering the discount rate will bring lending rates down and encourage borrowing.

By buying securities, the Fed is purchasing Treasuries in exchange for money. This results in a capital infusion into the economy which promotes spending and growth.

CFP^® Exam insight:

Follow the direction of cash flow to determine the effects on the economy. When the Fed is buying securities, cash is disbursed into the economy in exchange for securities. This is an expansionary action, intended to promote economic growth.

When the Fed is selling securities, cash is removed from the economy in exchange for securities. This is a restrictive action, intended to “cool-down” or contract the economy.

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