CFP CFP Psychology of Financial Planning: practice questions with answers

Question 1

Wilfred Pennock, 72, scores as 'aggressive' on a risk tolerance questionnaire and wants 90% of his $650,000 portfolio in stocks. The portfolio must fund nearly all of his living costs beyond Social Security, and he has no other assets or family support. What should his CFP® professional do?

1. A Explain that his low risk capacity limits the losses he can afford, and base the allocation on that capacity.
2. B Recommend 90% in stocks, because a fiduciary must follow the risk tolerance that the client has stated.
3. C Average his tolerance and capacity scores, and recommend the allocation that matches the midpoint.
4. D Recommend 90% in stocks, because his remaining life expectancy at 72 makes him a long-term investor.

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Answer: A. Risk tolerance is a client's willingness to take risk; risk capacity is his financial ability to withstand losses without endangering essential goals. Wilfred is willing but has little capacity: he relies on the portfolio for living costs, has no other resources and is withdrawing now, so a large loss could not be recovered. Good practice is to let the lower of tolerance and capacity set the risk level and to explain the reason to the client, so that the plan is both acceptable to him and sustainable.

Question 2

Curtis Ravenhill bought shares at $85; they now trade at $52. He refuses to sell 'until I get back to even,' although he says he would not buy the stock today. If the stock grows at 8% a year, compounded annually, about how long will it take to reach $85?

1. A 4.3 years
2. B 4.9 years
3. C 6.4 years
4. D 7.9 years

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Answer: C. From $52 the stock must rise $85 / $52 - 1 = 63.5% (not the 38.8% it fell). At 8% compounded:

N = ln(85/52) / ln(1.08) = 0.4914 / 0.0770 = 6.4 years (calculator: PV -52, FV 85, I/YR 8, solve N).

Curtis shows the disposition effect and anchoring on his purchase price, driven by loss aversion: selling would turn a paper loss into a realized one. His purchase price has no bearing on future returns. A useful reframe is to ask whether he would buy the stock today; if not, selling (and possibly harvesting the capital loss) and reinvesting in a better-diversified holding may serve him better.

Question 3

In a first meeting, Aaron Whitcombe wants to save 30% of the couple's income so that he can retire at 55, while his wife Talia wants to spend more on travel while their children are young. The discussion becomes tense, and both look to the CFP® professional to say who is right. What is the best response?

1. A Ask each of them to explain what their goal means to them, and look for shared values and trade-offs they can both accept.
2. B Support Aaron's position, because early retirement is a long-term goal and long-term goals should always come first.
3. C Support Talia's position, because time with young children cannot be recovered and should always come first.
4. D Postpone the planning work until the couple has settled the disagreement privately between themselves.

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Answer: A. When couples disagree about money, the CFP® professional serves both clients and should not take sides. Asking each partner what the goal means to them (security, freedom, family time) usually reveals shared values. The planner can then model trade-offs, such as retiring at 57 while funding some travel now, so that the couple can choose priorities together. This is part of step 2 of the financial planning process, identifying and selecting goals.

Question 4

Natalia Brennan keeps lending money to her brother and says, "If I refuse him again, I'm a terrible sister." Which response from her CFP® professional is most characteristic of a cognitive-behavioral approach?

1. A "What makes saying no the same as being a terrible sister? What would you tell a friend in your position?"
2. B "It sounds like you feel torn between caring for your brother and protecting your own goals."
3. C "Tell me about how money was handled between you and your brother when you were both children."
4. D "Imagine a time when lending to your brother is no longer a worry for you. What is different then?"

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Answer: A. Cognitive-behavioral approaches assume that beliefs drive feelings and behavior. The planner helps the client identify an unhelpful belief (refusing makes her a bad sister), examine the evidence for it and replace it with a more balanced one, which makes changing the behavior easier.

Question 5

Oswin Thistlewood, age 44, has just been laid off and receives three months' severance. He calls his CFP® professional, visibly shaken. What should the planner focus on first?

1. A Withdraw his 401(k) balance now so he has a cash cushion and his emergency fund stays intact
2. B Increase his equity allocation so his portfolio can make up for the lost income
3. C Acknowledge the shock, then review severance, near-term cash needs and health coverage options
4. D Use the severance to pay off his mortgage so that his fixed monthly costs fall

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Answer: C. In a job-loss crisis the planner first acknowledges the emotional impact, then secures short-term needs: severance terms, unemployment benefits, the emergency fund, health insurance continuation (COBRA or a spouse's plan) and spending cuts. Decisions with lasting consequences, such as retirement-plan withdrawals or large debt prepayments, should wait.

Question 6

Gervais and Solange Brassard, 61 and 59, give their 31-year-old son $2,800 a month toward his rent and car payments, although he has a steady job. Their plan shows that this support will push their retirement back about three years. They say they feel guilty whenever they think about stopping. What is the most appropriate approach for their CFP® professional?

1. A Tell them to stop the support at once, because their own retirement must come first
2. B Treat the support as a fixed expense and not raise it again, since family matters are outside planning
3. C Meet with their son and negotiate a repayment schedule with him on his parents' behalf
4. D Show them the trade-off, and help them agree on a support level and end date and how to tell their son

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Answer: D. Supporting adult children is a common source of family money conflict. The planner's role is to quantify the effect on the parents' goals, explore the feelings behind the pattern (guilt, fear of harming the relationship) and help the couple decide on boundaries, such as a tapering amount and an end date, and on how to communicate them, rather than imposing an answer or ignoring the issue.