CFP (Certified Financial Planner) Practice Questions — All Questions

A CFP professional providing financial advice must act as a:

• a.Salesperson maximizing commissions
• b.Fiduciary acting in the client's best interest✓
• c.Neutral party with no duty
• d.Regulator

CFP professionals owe a fiduciary duty to act in the client's best interest.

An early step in the financial planning process is to:

• a.Understand the client's personal and financial circumstances✓
• b.Sell a product
• c.Skip goal setting
• d.File the client's taxes

Planning starts with understanding the client's situation and goals.

An emergency fund is generally recommended to cover:

• a.One day of expenses
• b.Only luxury purchases
• c.Several months of living expenses✓
• d.Retirement entirely

An emergency fund typically holds several months of expenses in liquid savings.

Conflicts of interest should be:

• a.Hidden from the client
• b.Ignored
• c.Encouraged
• d.Disclosed and managed✓

Fiduciaries must disclose and manage conflicts of interest.

The primary purpose of life insurance is to:

• a.Build the largest possible investment
• b.Replace income or provide for dependents on death✓
• c.Avoid all taxes
• d.Guarantee stock gains

Life insurance provides financial protection for dependents upon the insured's death.

Disability income insurance protects against:

• a.Loss of income due to inability to work from illness or injury✓
• b.Property damage
• c.A car accident's liability
• d.Estate taxes

Disability insurance replaces income when one cannot work due to disability.

Insurance fundamentally works by:

• a.Guaranteeing profit
• b.Eliminating all risk
• c.Pooling and transferring risk among many policyholders✓
• d.Investing in stocks only

Insurance pools risk across many, transferring individual risk to the insurer.

A deductible in a policy is:

• a.The insurer's profit
• b.A type of dividend
• c.The premium
• d.The amount the insured pays before coverage applies✓

The deductible is the insured's out-of-pocket amount before the insurer pays.

Asset allocation refers to:

• a.Picking a single stock
• b.Dividing a portfolio among asset classes like stocks, bonds, and cash✓
• c.Timing the market daily
• d.Avoiding all risk

Asset allocation spreads investments across asset classes to balance risk and return.

A longer time horizon generally allows an investor to:

• a.Take on more risk for potentially higher returns✓
• b.Never hold stocks
• c.Avoid diversification
• d.Ignore goals

Longer horizons can tolerate more volatility for higher expected returns.

Dollar-cost averaging means:

• a.Buying only at market lows
• b.Investing a lump sum once
• c.Investing a fixed amount at regular intervals✓
• d.Selling everything yearly

Dollar-cost averaging invests fixed amounts periodically, smoothing purchase prices.

Diversification helps primarily by:

• a.Guaranteeing gains
• b.Eliminating market risk
• c.Increasing fees
• d.Reducing the impact of any single investment's poor performance✓

Diversification reduces unsystematic risk from individual holdings.

The power of compounding rewards investors who:

• a.Wait until retirement to start
• b.Start saving and investing early✓
• c.Withdraw frequently
• d.Avoid all growth assets

Starting early gives returns more time to compound.

Tax-advantaged retirement accounts generally:

• a.Offer tax benefits to encourage retirement saving✓
• b.Are taxed more heavily
• c.Cannot be invested
• d.Guarantee returns

Retirement accounts provide tax advantages to encourage long-term saving.

A key retirement-planning risk is longevity risk, which is the risk of:

• a.Dying too early
• b.Markets rising
• c.Outliving one's savings✓
• d.Paying off a mortgage

Longevity risk is outliving one's assets in retirement.

Employer matching contributions to a retirement plan should generally be:

• a.Declined
• b.Ignored
• c.Delayed for years
• d.Captured, since they are effectively free money✓

Employer matches boost savings and should generally be maximized.

A will primarily:

• a.Avoids all taxes automatically
• b.Directs how a person's assets are distributed after death✓
• c.Manages assets while alive only
• d.Replaces insurance

A will specifies distribution of assets and can name guardians and an executor.

Beneficiary designations on accounts like retirement plans generally:

• a.Pass assets directly, often outside the will and probate✓
• b.Are overridden by the will always
• c.Are illegal
• d.Have no effect

Named beneficiaries typically receive assets directly, bypassing probate.

Probate is:

• a.A type of trust
• b.An insurance policy
• c.The legal process of validating a will and settling an estate✓
• d.A tax rate

Probate is the court process of administering a deceased person's estate.

A revocable living trust can help by:

• a.Guaranteeing investment returns
• b.Eliminating all taxes
• c.Avoiding the need for any planning
• d.Allowing assets to pass to beneficiaries while often avoiding probate✓

A funded revocable living trust can help avoid probate for the assets it holds.