What are the Laws of Agency (insurance)? - ANSWER Express authority, Implied Authority, Apparent authority
What are the Exemptions to Filing as an Investment Adviser? - ANSWER - Advisor whose only clients are insurance companies
- Family office
What are the Exceptions to Filing as an Investm...
what are the exemptions to filing as an investment
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CFP Exam - November 2024
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What are the Laws of Agency (insurance)? - ANSWER Express authority, Implied Authority, Apparent
authority
What are the Exemptions to Filing as an Investment Adviser? - ANSWER - Advisor whose only clients are
insurance companies
- Family office
What are the Exceptions to Filing as an Investment Adviser? - ANSWER - Banks that are not also
investment companies
- Lawyers, accountants, teachers - advice is incidental
- Broker/dealers or registered reps whose performance is incidental and who get no special
compensation for advice.
- Publishers of bona fide newspapers
- Those who give advice solely relating to U.S. government securities.
(BLAT)
How does an Investment Adviser register with the SEC? - ANSWER - Initially, files the ADV Part I and II
with the SEC
- Pays a minimum filing fee of $150
- RIA must submit Part I of ADV and Schedule I annually
What is Gross Domestic Product (GDP)? - ANSWER - Total dollar value of all goods and services produced
within the US ONLY.
- counts economic activity without regard to yearly price fluctuations.
- Does NOT include any income generated outside the U.S. or adjustments for foreign currencies.
, The challenge of reconciling two opposing beliefs.
Example: Remembering the positive part of an experience but forgetting the negative.
(Getting drunk and a hangover) - ANSWER What is Cognitive Dissonance?
Holding onto an investment for emotional reasons rather than considering more practical applications.
Example: My grandfather left me this stock so I can never sell it. - ANSWER What is Attachment Bias?
The tendency to take no action rather than risk making the wrong one.
Example: An investor holds onto a stock that's losing value, because if they sold it and rebounded, they
would feel even worse. - ANSWER What is Fear of Regret?
Investors tend to diversify evenly across whatever options are presented to them.
Example: consider the style-box mania where investors feel compelled to own a piece of each box in
order to feel diversified. 401K participants tend to spread their money across whatever options they
have. - ANSWER What is Diversification Errors?
An individual erroneously believes that the onset of a certain random event is likely to happen following
an event or a series of events.
Example: Some investors believe that they should liquidate a position after it has gone up in a series of
subsequent trading sessions because they do not believe that the position is likely to continue going up.
Conversely, other investors might hold on to a stock that has fallen in multiple sessions because they
view further declines as improbable. The solution is investors should base their decisions on analysis. -
ANSWER What is Gambler's Fallacy?
Couples or partners with shared money or finances being dishonest with each other.
, Example: one partner hiding excessive spending, debt, etc. from the other person. - ANSWER What is
Financial Infidelity?
The 20/20 vision we have when looking at a past event and thinking we understand it, when in reality we
may not. - ANSWER What is Hindsight Bias?
The belief that when something goes right, it is because you were smart and made the right decision. If it
does not work out, it is someone else's fault or simply bad luck. - ANSWER What is Self-Affirmation Bias?
Investors emotionally react towards new market information.
Example: Good news comes out on a stock that should raise the price accordingly. However, participants
overreact to the new information creating a larger-than-appropriate effect on the security. But the truth
is new information should more or less be reflected instantly in the security's price. Although the change
is usually sudden and sizable, the surge erodes over time. - ANSWER What is Overreaction?
Experiences and biases that can facilitate problem-solving and probability judgements.
Examples in daily life are "trial and error" and "rules of thumb"
These strategies are generalizations that can result in inaccurate or irrational conclusions. - ANSWER
What is Heuristics?
What is Behavioral Finance? - ANSWER The study of how psychology affects finance.
The tendency of investors to do nothing when action is actually called for.
Example: None necessary, it is an everyday occurrence. - ANSWER What is Status Quo Bias?
The tendency for individuals to mimic the actions of a larger group. Can also be described as Fear of
Missing Out (FOMO).
, Example: This was exhibited in the late 1900's as venture capitalists and private investors were frantically
investing huge amounts of money into internet-related companies. Avoiding is steering clear of a
bandwagon. Those overvalued investments took a big hit from which many have not recovered. -
ANSWER What is Herd Behavior?
After a prolonged period of solid returns, the stock market declines by 15%. Immediately thereafter, all
kinds of "experts" appear on television and in the mass media, proclaiming that we were long overdue
for a correction, as if the decline were obvious and inevitable. But where were these experts before the
event? If it was so obvious, why weren't they speaking up before the market took a dive? If it was so
obvious, why didn't investors start cashing out just prior to the sell-off? Hindsight biases also regularly
manifest themselves between investment advisors and their clients. Once the reasons why an
investment performed poorly are understood, it becomes difficult to understand why it wasn't avoided. -
ANSWER What is an example of Hindsight Bias?
Investors like patterns, and recent past represents a nice, easy-to-find pattern that can become the basis
for an investment decision. A fund that just had a great year, or a stock that has had a great recent run,
can influence investors to pull the trigger based on the assumption that the recent past will repeat itself
in the future, but they make this decision with little real research. The same holds true for broader
trends. The problem is that while some tend to persist, others tend to revert to the mean, and there is
no way to gauge which is more likely without doing research. - ANSWER What is Over-weighting the
recent past?
An investor reads a study that says short-term mutual fund winners tend to persist. On that basis he
decides to invest in several top funds from the prior year, and to revisit his holdings the following year. A
few funds do well, but one collapses as its highly specific investment and aggressive style falls out of
favor, leading to poor overall results. - ANSWER What is an example of Overweighting the Recent Past?
Example 1: investors tend to believe they are better than others at choosing the best stocks and the best
times to enter or exit a position.NOTE: Even professional fund managers with investment industry
reports often struggle
Example 2: A young fund manager has so much success that he begins to believe that the reason is his
own exceptional talent and that investing just happens to come easy for him. He steadily increases the
amount he is willing to bet on his convictions, while at the same time decreasing the amount of research
that is behind them. Eventually the manager is wrong, and with this heavy over-weighting, disaster
strikes. - ANSWER What are examples of Overconfidence?
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