Joe Templin has two and a half decades in financial planning under his belt and was an Advisor Today 4 Under 40 Winner. He passed the CFP exam almost 20 years ago and has since written thousands of review questions for exams. Here are his thoughts on the CFP exam:
First off, the CFP exam is not a “memorize and regurgitate facts” test, it is a comprehensive and cross-disciplinary evaluation of your ability to understand the breadth of client situations and solve their issues, much more like the real world than other designation or licensing exams you might have taken.
Many participants have found the case study questions the most difficult. In these, a few paragraphs summarizing the client’s situation is presented, and several questions pertaining to different (often interrelated) aspects of their needs and goals are then posed.
This simulates the real world in which we need to uncover the motivations, analyze tax returns, investment statements, trust documents, insurance policies et al. to help the clients achieve their particular goals. Invest time to be comfortable with these case studies as they are the downfall of many test takers.
Know What to Expect
The exam is also likely to be longer than others you have taken, lasting three sessions over two days totaling ten hours. Make sure you have worked on your mental endurance to sustain intense thought during this extended time period. Most people don’t roll off the couch and run a marathon, and the CFP exam is a similar situation.
Build up your capacity with longer study sessions, doing the types of problems that will be on the test to make sure that you have the strength and stamina to get through all three sessions. Proper nutrition (especially extra protein in the week before the exam) and rest are often overlooked keys to success.
The exam features 170 questions in a variety of forms. In addition to the long-form paragraphs with 3-5 questions on different aspects of the client situations referenced previously, there are the standard types you saw on your licensing exams, SIE, and Series exams such as 6, 7, or 65, or for your designations. There are lots of calculations, so get used to writing out the core ideas and information from problems during your review.
As you probably haven’t been in full school mode for several years, ramp up your studying for several months before the exam. Aim for at least three months of prep, but six is better.
Consistent repetition will help you: do some studying every single day, make your sessions longer and longer until you are doing multiple hours a day in the weeks leading up to the exam.
I also recommend doing 100x the number of practice questions as are on the exam (17,000 or more). You can’t cram for this test.
The exam covers eight areas, and no one topic section should make or break you.
1. Professional Conduct and Standards:
The first component is Professional Conduct and Standards, about 12-15 questions. You will definitely have a question about your responsibility as a fiduciary, a few on the various consumer protection laws, and a couple specifically about the CFP Board Code of Ethics, Planning Standards, and Rules/Procedures.
This section is the closest to a memorization exercise of all components, and writing out verbatim parts of the CFP as well as the various laws on flashcards has worked for many people in the past. Keep these cards with you during the course of your day, and you can squeeze in micro review sessions between appointments.
2. General Principles of Financial Planning:
The second grouping of concepts should be the easiest for most practitioners, based upon experience. Financial Planning is about a sixth of the overall exam (25-30 questions usually).
You will need to understand economic theory, cash flow and debt management strategies, how to read statements, and how to understand clients. Be ready to do at least one present value calculation. A couple of YouTube searches of the various concepts during downtime on your commute or other wasted moments are good ways to fill in your gaps.
You probably won’t need to dedicate too much time to this area if you have been actually doing financial planning with your clients. Don’t ignore these ideas, but don’t stress over them either.
3. Education Planning:
Education planning is the smallest section on the exam, around only 10 questionsIn addition to knowing the various vehicles used in educational planning, make sure you read up on financial aid and the various gift/income tax strategies as well as other financing concepts.
4. Risk Management and Insurance Planning:
This area covers anything with the word “insurance” in it, plus annuities. In addition to Human Life based insurances (life, disability, health, and long-term care insurances), you need a knowledge of the basics of property and casualty insurance as well as risk in general (moral hazards, warranties, etc).
If you come from an insurance background and have designations such as CLU, ChFC, or CPCU, this area will be easy so do not over-allocate time here. If insurance is not at the core of your practice, invest extra time on Risk Management or risk failing the exam.
5. Investment Planning:
This is usually the single largest section on the exam, around 28-32 questions. If you have your old books/resources from taking your Series 65 and Series 7, I suggest dusting them off, especially if you can go back and do old questions (especially options).
Most of the investment questions are linked with other knowledge (such as Retirement or Educational oriented questions), so having your fundamentals here is critical. In addition to the calculations (returns, valuations), make sure you are feeling good about portfolio development and investment strategies
6. Tax Planning:
CPAs rock this on the exam, but it is the same proportion as Risk/Insurance or Retirement planning at around 25 questions. AMT questions are always on the exam as are taxation of trusts/estates (often in cross-disciplinary questions). You will have several questions on income taxation for individuals and businesses, and familiarity with tax reduction strategies is an absolute must. Count on up to a handful of questions about property transactions and passive income.
7. Retirement Savings and Income Planning:
Retirement Planning should be about 24 questions. The questions center around choosing and modeling how monies go into and come out of qualified plans (and the taxation thereof) at the core of the retirement calculations. Cash flow planning and government-sponsored programs (Social Security, Medicare, Medicaid) will also make an appearance. This area will involve many calculations, most of a tax nature. Distribution rules and exemptions are always asked so do not overlook these.
8. Estate Planning:
Estate Planning is about the same size as the Risk section (about 25 questions), and will require calculations of inclusion of insurance policies and retirement plans in the estate. Gift and estate tax planning and mitigation are covered, as are transfer techniques to spouses, other family members, and non-related parties. Non-traditional and non-U.S. partner questions have become more prevalent in recent years, and a long-form question including transferring a family business is common.
So that’s an overview of the CFP exam. The current pass rate is just over 60% per the CFP Board, with first-time test takers having a slightly higher pass rate.
There are really no surprises on the exam (even though sometimes they are testing some questions that don’t count in your score) and no super-secret strategy to ace it other than to do the studying and practice questions so that you are confident in your knowledge to serve your clients. Best of luck!
Joe Templin CEC, CAP, CLU, ChFC passed the CFP exam, coaches Tae Kwon Do, runs 200-mile team endurance races, speaks all across the U.S. and Canada to financial planning professionals, and has written multiple top-selling books. He is the President of The Intro Machine (www.theintromachine.com) and has taught thousands of financial advisers how to be more ethical and productive.