1-1. Introduction to the Financial Planning Process

Question 1

1. Introduction to the Financial Planning Process

1. The initial step in the financial planning process is gathering comprehensive data on each new client.

Answer 1

False

Rationale: The initial step in the financial planning process is establishing and defining the client-planner relationship.

Question 2

1. Introduction to the Financial Planning Process
2. The financial planning process must follow the prescribed order, with no steps taking place at the same time as any other step in the process.

Answer 2

False

Rationale: The steps in the process guide a planner regarding what must be done in a financial planning relationship. However, it is possible, and probable, that more than one step may happen in a single meeting with a client.

Question 3

1. Introduction to the Financial Planning Process
2. A cash flow statement shows all inflows (referred to as income) and all outflows (referred to as expenses) over a specified period of time.

Answer 3

True

3. A cash flow statement shows income and expenses over a specified period of time. The definitions of income and expenses are broad here and not the same as used for defining income for income tax purposes. For example, a sale of an asset would be considered income even if part of it was return of principle. If the money were reinvested, it would all show as an expense in the form of savings outflow.

Question 4

1. Introduction to the Financial Planning Process

5. Family budgets are created to make sure that only planned expenses are incurred.

Answer 4

False

.

Rationale: Family budgets are created to provide a guideline for effective money management. They are to be kept flexible.

Question 5

1. Introduction to the Financial Planning Process
2. Special goals, such as “early retirement” or “travel,” must, by necessity, remain nebulous in the financial planning process.

Answer 5

False

Rationale: It is impossible to plan for nebulous goals. For example, a client who wants to retire early or to travel must establish dollar amounts and time frames so that the financial plan can be set up to meet these goals. It doesn’t mean that the target amounts and time frames won’t change over time.

Question 6

1. Introduction to the Financial Planning Process

7. Buying a home rather than renting is always a better choice, because homes always increase in value.

Answer 6

False

Rationale: Homes do not always increase in value. Because of changing demographics, homes may decrease in value, and changes in the economy may cause housing prices to stagnate or drop. If one does not expect to stay in the same locale for more than a few years, renting may make more sense.

Question 7

1. Introduction to the Financial Planning Process
2. One of the most important areas a financial planner must deal with in divorce-related planning is that of child custody.

Answer 7

False

Rationale: Of all the areas in which a planner may be involved in divorce planning, child custody is clearly outside the scope of his or her expertise. However, the planner should be involved in adapting the client’s financial plan to provide for child support.

Question 8

1. Introduction to the Financial Planning Process
2. Opportunity funds and emergency funds use all of the same investment vehicles.

T or F

Answer 8

False

Rationale: Opportunity funds are typically invested in anything that is appropriate for emergency funds, but they are also invested in semi-liquid investments.

Question 9

1. Introduction to the Financial Planning Process

10. In the data gathering step of the financial planning process, a client survey form is completed.

Answer 9

True

Question 10

1. Introduction to the Financial Planning Process
2. Two tasks of the data gathering stage are reviewing client information and conducting an initial implementation meeting.

Answer 10

False

Rationale: Client information is reviewed in step three; implementing the planning recommendations is step five.

Question 11

1. Introduction to the Financial Planning Process
2. Two tasks of the “gathering client data, including goals” step are quantifying goals in terms of measurable objectives and ranking objectives in order of priority.

Answer 11

True

Question 12

1. Introduction to the Financial Planning Process
2. In step three—analyzing and evaluating the client’s financial status—appropriate techniques for achieving client objectives are selected.

Answer 12

False

Rationale: Selection of appropriate techniques is a task of step four.

Question 13

1. Introduction to the Financial Planning Process
2. Two tasks of the “analyzing and evaluating the client’s financial status” step are reviewing relevant legal papers and contracts and presenting financial planning strategies to the client.

Answer 13

False

Rationale: Presenting strategies to the client is a task of step four.

Question 14

1. Introduction to the Financial Planning Process
2. In step four—developing and presenting financial planning recommendations and/or alternatives—the financial planner evaluates the general economic environment, selects alternative products, and follows the performance of each.

Answer 14

False

Rationale: Evaluating the economic environment is a task of step three; following performance of products is a task of step six.

Question 15

1. Introduction to the Financial Planning Process
2. In step five—implementing the financial planning recommendations—the financial planner assists the client in acting on the recommendations and identifies existing or potential problems in the client’s situation.

Answer 15

False

Rationale: Identifying problems in the client’s situation is a task of step three.

Question 16

1. Introduction to the Financial Planning Process
2. Two tasks of the “implementing the financial planning recommendations” step are using the assistance of other
   professionals, as needed, and providing the client with ideas for implementing the recommendations.

Answer 16

True

Question 17

1. Introduction to the Financial Planning Process
2. In step six—monitoring the financial planning recommendations—the financial planner establishes a system for plan review and revision to update it for changes in the client’s situation.

Answer 17

True

Question 18

1. Introduction to the Financial Planning Process
2. Two tasks of the “monitoring the financial planning recommendations” step are periodically reviewing the implemented recommendations with the client and reassessing the client’s objectives.

Answer 18

True

Question 19

1. Introduction to the Financial Planning Process
2. A financial planner gathers information on titling of assets in part because this may reveal estate distribution of property.

Answer 19

True

Question 20

1. Introduction to the Financial Planning Process
2. A financial planner gathers information on the client’s other financial advisors to determine where advice has been obtained in the past.

Answer 20

True

Question 21

1. Introduction to the Financial Planning Process

22. The cash/cash equivalents section of a statement of financial position would include vested pension benefits.

Answer 21

False

Rationale: Vested pension benefits would be included as invested assets because they generally would require time to liquidate even if they are in money markets (which is unlikely).

Question 22

1. Introduction to the Financial Planning Process

23. The invested assets section of a statement of financial position would include the purchase price of bonds.

Answer 22

False

Rationale: It would include the current market value of the bonds.

Question 23

1. Introduction to the Financial Planning Process
2. The general rule for the inclusion of assets on the statement of financial position is to show them at their original cost.

Answer 23

False

Rationale: Assets should be shown at their fair market value unless there is a good reason to do otherwise.

Question 24

1. Introduction to the Financial Planning Process

25. The inflows section of a cash flow statement could include a category for investment inflows.

Answer 24

True

Question 25

1. Introduction to the Financial Planning Process

26. A mortgage note payment would normally be classified as a fixed expense in a cash flow statement.

Answer 25

True

Question 26

1. Introduction to the Financial Planning Process

27. Savings and investment outflows would normally be classified as a variable expense on a cash flow statement.

Answer 26

False

Rationale: Savings and investments should be a separate category to reinforce the need to pay one’s self first.

Question 27

1. Introduction to the Financial Planning Process

28. An emergency fund should contain two months’ expenses in liquid form.

Answer 27

False

Rationale: An emergency fund generally should contain three to six months’ expenses.

Question 28

1. Introduction to the Financial Planning Process

29. Money market accounts and funds and savings accounts are appropriate to use in establishing an emergency fund.

Answer 28

True

Question 29

1. Introduction to the Financial Planning Process
2. A person with many sources of stable income usually is in a better position financially than a person with only one, or a few, sources of income.

Answer 29

True

Question 30

1. Introduction to the Financial Planning Process

31. Individuals generally should save 5% to 10% of their income on an ongoing basis.

Answer 30

False

Rationale: Individuals generally should save at least 10% to 20% of their income. Depending on financial goals, greater savings may be required. Remember that employer matches count toward this goal.

Question 31

1. Introduction to the Financial Planning Process

32. A long credit card grace period is preferable to a short one.

Answer 31

True

Question 32

1. Introduction to the Financial Planning Process
2. A graduated payment mortgage entails making higher payments for a period of time, then lower payments for the duration of the mortgage term.

Answer 32

False

Rationale: A graduated payment mortgage entails making lower payments for a period of time, but these payments increase later.

Question 33

1. Introduction to the Financial Planning Process

34. A reverse mortgage is one means of accessing home equity.

Answer 33

True

Question 34

1. Introduction to the Financial Planning Process

35. A budget is unnecessary if the client’s economic situation is complex.

Answer 34

False

Rationale: Budgeting is helpful for clients with complex economic situations.

Question 35

1. Introduction to the Financial Planning Process

36. A disadvantage of budgeting is that it may discourage flexibility.

Answer 35

True

Question 36

1. Introduction to the Financial Planning Process
2. A critical component of budgeting is planning for expenses, such as car or home repairs, even when you don’t know that they will occur in the near future.

Answer 36

True

Question 37

1. Introduction to the Financial Planning Process

38. Interest earnings on assets held in a minor’s trust generally are exempt from the kiddie tax.

Answer 37

False

Rationale: Any unearned income in a 2503(c) minor’s trust is subject to the “kiddie tax” rules.

Question 38

1. Introduction to the Financial Planning Process

39. Custodial accounts generally involve high administrative costs.

Answer 38

False

Rationale: Generally, administrative costs for custodial accounts are nonexistent.

Question 39

1. Introduction to the Financial Planning Process

40. Pell grants are available to graduate and undergraduate students.

Answer 39

False

Rationale: Pell grants are available only to undergraduate students.

Question 40

1. Introduction to the Financial Planning Process

41. Perkins loans are made available on the basis of financial need.

Answer 40

True

Question 41

1. Introduction to the Financial Planning Process

42. Monthly cash flow is the primary determinant in the lease or buy decision.

Answer 41

False

Rationale: Cash flow is only one factor in the decision; overall cost (based on many factors), tax bracket, and length of possession all contribute to the decision.