CFPN cheat sheet

Fiduciary duty requires placing the client's interests above the planner's own; suitability only requires that a recommendation be appropriate for the client.

The six-step financial planning process: establish the engagement, gather data and goals, analyze the situation, develop recommendations, implement, and monitor.

Material conflicts of interest must be disclosed in writing; disclosure alone does not cure a conflict that biases advice.

The planner should document scope of engagement, compensation method (fee-only, commission, fee-based), and any limitations of the engagement in the engagement letter.

Client confidentiality applies to all non-public personal information; exceptions include legal compulsion and client-authorized release.

Competence rule: a planner must refer or decline work outside their expertise rather than attempt it without qualification.

Compensation models: fee-only reduces product bias, commission-based may create churning risk, fee-based combines both and requires clear disclosure.

Continuing education and adherence to a recognized code of ethics (e.g., CFP Board Standards) support professional accountability, but no exam-prep claim of official affiliation should be made.

Net worth = total assets − total liabilities; a negative net worth signals insolvency risk even if cash flow is positive.

Cash flow surplus = income − expenses − debt service; a sustained deficit must be funded by asset drawdown or new borrowing.

Emergency fund target is typically 3–6 months of essential expenses; self-employed or single-income households often need 6–12 months.

Current ratio = current assets ÷ current liabilities; a ratio below 1.0 indicates short-term liquidity strain.

Savings rate = (income − consumption) ÷ income; a common planning benchmark is 10–15% of gross income, higher for late starters.

Housing cost ratio: total housing costs (PITI) should generally not exceed 28–36% of gross monthly income.

Debt service ratio: total monthly debt payments ÷ gross monthly income; above 36–43% often triggers lending constraints.

Budget variance analysis compares actual versus planned spending; persistent variances signal need to revise the plan or behavior.

Expected portfolio return = Σ (weight_i × expected return_i); portfolio risk is not the simple weighted average of asset risks when correlations are below 1.

Diversification reduces unsystematic risk; systematic (market) risk remains and is compensated by the equity risk premium.

Risk tolerance has both willingness (psychological) and ability (financial capacity) components; the lower of the two governs the plan.

Asset allocation is the primary driver of long-term return variability; security selection and market timing are secondary.

Real return ≈ nominal return − inflation; use real returns for long-horizon goal funding.

Sharpe ratio = (portfolio return − risk-free rate) ÷ standard deviation; higher is better for risk-adjusted performance.

Rebalancing to target weights controls drift; threshold (e.g., ±5%) and calendar (e.g., annual) methods are common.

Time horizon shortens the appropriate equity allocation; funds needed within 2–3 years generally belong in cash or short-duration bonds.

Risk handling methods: avoidance, reduction, retention, and transfer; insurance is a transfer mechanism.

Insurable risk requires large numbers, accidental loss, measurable loss, and no catastrophic concentration for the insurer.

Life insurance need methods: human life value (present value of future earnings) and needs analysis (income replacement + debts + education − existing resources).

Term insurance provides pure death benefit with no cash value; permanent insurance combines death benefit with cash value accumulation.

Disability insurance: own-occupation definition pays if unable to perform one's own occupation; any-occupation is more restrictive.

Long-term care insurance covers custodial care; benefit triggers typically require inability to perform 2 of 6 ADLs or cognitive impairment.

Deductibles and coinsurance are cost-sharing mechanisms that reduce premium but increase retained risk.

Umbrella liability coverage sits above auto and homeowners limits; required underlying limits must be maintained.

Marginal tax rate applies to the next dollar of income; average tax rate = total tax ÷ taxable income.

Taxable income = gross income − adjustments − standard or itemized deductions − qualified business income deduction.

Capital gains: short-term (held ≤1 year) taxed at ordinary rates; long-term (held >1 year) taxed at preferential 0/15/20% rates.

Tax-deferred accounts (traditional IRA/401k) reduce current taxable income; withdrawals are taxed as ordinary income.

Tax-free accounts (Roth) are funded with after-tax dollars; qualified withdrawals are tax-free.

Wash sale rule disallows a loss if substantially identical securities are purchased within 30 days before or after the sale.

Gift tax annual exclusion and lifetime exemption allow tax-free transfers; estate tax applies to transfers at death above the exemption.

Tax loss harvesting offsets realized gains and up to $3,000 of ordinary income per year; excess carries forward.

Retirement funding need = projected annual expenses × years in retirement, adjusted for inflation and expected returns.

Replacement ratio: retirees often need 70–80% of pre-retirement income; lower-income households may need a higher ratio.

4% safe withdrawal rule: a 4% initial withdrawal from a diversified portfolio has historically sustained 30-year retirements; it is a heuristic, not a guarantee.

Social Security benefit depends on 35 highest-earning years; claiming before full retirement age reduces benefits permanently.

Required Minimum Distributions (RMDs) from traditional accounts begin at age 73 for those born 1951–1959 (age 75 for 1960+); Roth IRAs have no lifetime RMDs.

Sequence-of-returns risk: poor returns early in retirement deplete assets faster than the same average return later.

Annuities can provide longevity protection; immediate annuities convert a lump sum into lifetime income.

Retirement plan contribution limits are indexed annually; catch-up contributions apply to those age 50 and older.

Gross estate includes all assets owned at death, life insurance proceeds if the insured owned the policy, and certain transfers within three years of death.

Probate is the court-supervised process of validating a will and distributing assets; it is public and can be slow.

Assets passing by beneficiary designation (life insurance, retirement accounts, TOD/POD) generally avoid probate.

Intestacy: dying without a valid will means state law determines distribution, often not matching client wishes.

Trusts: revocable trusts allow control and probate avoidance; irrevocable trusts remove assets from the estate but surrender control.

Annual exclusion gifts and lifetime exemption reduce taxable estate; gift tax returns may be required for gifts above the annual exclusion.

Marital deduction allows unlimited transfer to a surviving spouse; portability allows the surviving spouse to use the deceased spouse's unused exemption.

Powers of attorney and health care directives address incapacity; they do not transfer assets at death.

Integrate all domains: cash flow, tax, investment, insurance, retirement, and estate decisions interact; a change in one affects the others.

Prioritize goals by time horizon and importance; fund short-term and high-priority goals before discretionary ones.

Use a client data sheet to capture assets, liabilities, income, expenses, insurance, and estate documents before analysis.

Scenario analysis (e.g., premature death, disability, market downturn) tests plan robustness and reveals gaps.

Monitor and update the plan at least annually or after major life events (marriage, birth, job change, inheritance).

Document assumptions (inflation, return, tax rates) explicitly; sensitivity analysis shows which assumptions drive outcomes.

Ethical case analysis: identify conflicts, disclose them, and recommend in the client's best interest even if it reduces planner compensation.

A comprehensive plan should include a written summary of recommendations, implementation responsibilities, and a review schedule.