CFP (Certified Financial Planner) Practice Questions — All Questions
20 questions
A CFP professional providing financial advice must act as a:
- a.Salesperson maximizing commissions
- b.Regulator
- c.Fiduciary acting in the client's best interest✓
- d.Neutral party with no duty
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.Skip goal setting
- b.Sell a product
- c.File the client's taxes
- d.Understand the client's personal and financial circumstances✓
Planning starts with understanding the client's situation and goals.
An emergency fund is generally recommended to cover:
- a.Retirement entirely
- b.Several months of living expenses✓
- c.Only luxury purchases
- d.One day of expenses
An emergency fund typically holds several months of expenses in liquid savings.
Conflicts of interest should be:
- a.Disclosed and managed✓
- b.Ignored
- c.Encouraged
- d.Hidden from the client
Fiduciaries must disclose and manage conflicts of interest.
The primary purpose of life insurance is to:
- a.Avoid all taxes
- b.Guarantee stock gains
- c.Replace income or provide for dependents on death✓
- d.Build the largest possible investment
Life insurance provides financial protection for dependents upon the insured's death.
Disability income insurance protects against:
- a.Estate taxes
- b.Property damage
- c.Loss of income due to inability to work from illness or injury✓
- d.A car accident's liability
Disability insurance replaces income when one cannot work due to disability.
Insurance fundamentally works by:
- a.Eliminating all risk
- b.Pooling and transferring risk among many policyholders✓
- c.Guaranteeing profit
- 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.The amount the insured pays before coverage applies✓
- c.The premium
- d.A type of dividend
The deductible is the insured's out-of-pocket amount before the insurer pays.
Asset allocation refers to:
- a.Avoiding all risk
- b.Dividing a portfolio among asset classes like stocks, bonds, and cash✓
- c.Picking a single stock
- d.Timing the market daily
Asset allocation spreads investments across asset classes to balance risk and return.
A longer time horizon generally allows an investor to:
- a.Never hold stocks
- b.Ignore goals
- c.Take on more risk for potentially higher returns✓
- d.Avoid diversification
Longer horizons can tolerate more volatility for higher expected returns.
Dollar-cost averaging means:
- a.Investing a lump sum once
- b.Investing a fixed amount at regular intervals✓
- c.Buying only at market lows
- d.Selling everything yearly
Dollar-cost averaging invests fixed amounts periodically, smoothing purchase prices.
Diversification helps primarily by:
- a.Guaranteeing gains
- b.Increasing fees
- c.Eliminating market risk
- 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.Start saving and investing early✓
- b.Withdraw frequently
- c.Avoid all growth assets
- d.Wait until retirement to start
Starting early gives returns more time to compound.
Tax-advantaged retirement accounts generally:
- a.Are taxed more heavily
- b.Offer tax benefits to encourage retirement saving✓
- 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.Paying off a mortgage
- c.Outliving one's savings✓
- d.Markets rising
Longevity risk is outliving one's assets in retirement.
Employer matching contributions to a retirement plan should generally be:
- a.Delayed for years
- b.Captured, since they are effectively free money✓
- c.Ignored
- d.Declined
Employer matches boost savings and should generally be maximized.
A will primarily:
- a.Manages assets while alive only
- b.Avoids all taxes automatically
- c.Replaces insurance
- d.Directs how a person's assets are distributed after death✓
A will specifies distribution of assets and can name guardians and an executor.
Beneficiary designations on accounts like retirement plans generally:
- a.Are illegal
- b.Have no effect
- c.Pass assets directly, often outside the will and probate✓
- d.Are overridden by the will always
Named beneficiaries typically receive assets directly, bypassing probate.
Probate is:
- a.An insurance policy
- b.A tax rate
- c.A type of trust
- d.The legal process of validating a will and settling an estate✓
Probate is the court process of administering a deceased person's estate.
A revocable living trust can help by:
- a.Allowing assets to pass to beneficiaries while often avoiding probate✓
- b.Avoiding the need for any planning
- c.Eliminating all taxes
- d.Guaranteeing investment returns
A funded revocable living trust can help avoid probate for the assets it holds.