3 : 1 - Financial Planning Fundamentals

Question 1

What is the definition of Financial planning?

Answer 1

Financial planning is an evolving action plan resulting from a cyclical process

Question 2

What is the definition of Financial advice?

Answer 2

Financial advice is a recommendation regarding a financial transaction at a fixed point in time

Question 3

Why are Financial planning and advice different?

Answer 3

Financial planning will often involve financial advice, although it should be recognised that financial
planning need not necessarily involve product recommendations. In some cases, a rearrangement of the client’s affairs may be enough.

Financial planning recognises the consequence or knock-on effect that one action can have upon other circumstances or objectives. It is comprehensive, in that it deals with a client’s affairs in the round, unlike financial advice, which may be restricted to one or two areas of financial concern treated in isolation.

Question 4

What must advice include, under the Regulated Activities Order (FSMA 2000)?

Answer 4

The merits of the client buying, selling, subscribing for or underwriting a particular investment.

(Financial planning may not include this element.)

Question 5

What is the role of the paraplanner?

Answer 5

To assist and support the financial planner.

This may involve a range of different duties including analysing clients’ situations, research and drafting the financial plan.

Question 6

How does financial planning and paraplanning separate?

Answer 6

The financial planner is ultimately responsible for client relationships and the delivery of each financial plan, even if they have delegated parts of these to their paraplanner.

Question 7

What kind of process is financial planning?

Answer 7

A financial plan may be very simple or very complex. However, the production of a plan will always result from following the financial planning process.

Financial planning is a cyclical process. It is also a dynamic process.

Question 8

Step 1/6 in a financial plan?

Answer 8

1. Establish and define client-planner relationship

Question 9

Step 2/6 in a financial plan?

Answer 9

2. Gathering data, agreeing goals, objectives and priorities

Question 10

Step 3/6 in a financial plan?

Answer 10

3. Analysing and processing information

Question 11

Step 4/6 in a financial plan?

Answer 11

4. Producing a written financial plan with recommendations on how to meet stated goals and objectives

Question 12

Step 5/6 in a financial plan?

Answer 12

5. Implementing the financial plan

Question 13

Step 6/6 in a financial plan?

Answer 13

6. Reviewing progress and modifying the plan, as necessary to take account of changing circumstances

Question 14

Considering financial planning, what might change as time passes?

Answer 14

Assets and liabilities change as time passes, as do income and the cost of living, often by differing rates or amounts.

Question 15

What happens during a regular review?

Answer 15

At review, the client and the financial
planner will revisit the client’s objectives and goals to see if they are being achieved and to check whether they are still relevant.

Assumptions and other factors included in the financial plan are also reviewed, and changed if necessary.

Question 16

As well as the financial plan itself, you might need to provide a client with:

(5)

Answer 16

• client agreement
• suitability reports
• product information
• key features documents
• illustrations.

Question 17

How involved is the paraplanner?

Answer 17

Although the financial planner has the ultimate responsibility for managing this six-step process, the paraplanner is often also heavily involved.

Some financial planners prefer that their paraplanners attend all client meetings, and, in some financial planning practices, the paraplanner may be the first point of contact for clients’ day-to-day queries.

Question 18

What is the financial plan?

Answer 18

The financial plan should be a comprehensive document covering the client’s financial affairs in
sufficient detail to be easily understandable.

Question 19

What should the financial plan cover?

Answer 19

As a rough guide, it should cover where the client is today (for example, current circumstances),

where they want to get to (such as goals, objectives, needs and aspirations)

and how they’re going to get there (for example, your analysis and recommendations).

Question 20

How often should a client’s circumstances be reviewed (and any revisions made to the financial plan)?

Answer 20

At least every 12 months.

HOWEVER, a review should also be held whenever requested by the client (eg, in the event of a change in employment, house sale or purchase, receipt of an inheritance and/or birth of a child).

Question 21

Who’s job is it normally to instigate a review?

Answer 21

It is often the paraplanner’s responsibility to instigate this review process and to collect updated client information.

Question 22

The financial plan will generally cover what areas:

13

Answer 22

1. Cover page
2. Contents page
3. Introduction
4. Objectives and priorities
5. Assumptions
6. Attitudes
7. Net worth (assets and liabilities)
8. Income and expenditure
9. Areas chosen for recommendation
10. Other issues
11. Summary of recommendations
12. Reviews
13. Appendices

Question 23

What is the 1. Cover page for?

Answer 23

States what the document is, who it is for, when it was prepared and completed (and
who by). May also state the tax year or rates used.

Question 24

What is the 2. Contents page for?

Answer 24

Lists the main headings of the document and relevant page numbers of each
section to ease reference. Should include a list of the appendices.

Question 25

What is the 3. Introduction page for?

Answer 25

A note on the structure and purpose of the plan and how the plan has come about

Question 26

What is the 4. Objectives and priorities section for?

Answer 26

A statement of the client’s objectives and priorities, indicating which areas the client has asked you to consider and which other areas will be addressed in your next meeting, where relevant.

Question 27

What is the 5. Assumptions section for?

Answer 27

A statement of the assumptions used in the financial plan, along with justification
for those assumptions (where the justifications are lengthy, these may be placed in the appendices).

Question 28

What is the 6. Attitudes section for?

Answer 28

An explanation of risk and statements regarding the client’s attitudes to mortality,
morbidity and investment risk (some elements may be placed in the appendices). May also include other attitudinal data.

Question 29

What is the 7. Net worth (assets and liabilities) page for?

Answer 29

A summary of the client’s assets and liabilities with comments if appropriate.

Question 30

What is the 8. Income and expenditure page for?

Answer 30

A summary of the client’s net income and expenditure to establish a net spendable income figure with comments if appropriate.

Question 31

What is the 9. Areas chosen for recommendation page for?

Answer 31

Each area for which you make recommendations should have its own section, including:

current position, objectives, assumptions (if not already covered), recommendations, summary,
action points.

Question 32

What is the 10. Other issues section for?

Answer 32

States the other areas which came up, or which you have identified, but for which
you did not include recommendations.

Lists each area and what needs to be addressed and states how, and when, they will be addressed with the client.

Question 33

What is the 11. Summary of recommendations section for?

Answer 33

This should include a summary of all recommendations made (including costs, if relevant) and provide an action plan, summarising all the action points from the
various areas of the plan.

It should include information on what happens next, who is responsible for completing each action and the timescales for completion.

Question 34

What is the 12. Reviews section for?

Answer 34

Includes information on the purpose and importance of reviews. Recommends an
approach to reviews, including timescales and how, and when, the review will be initiated (ie, you will write to them to let them know how far in advance will you do this).

Question 35

What is the 13. Appendices section for?

Answer 35

It is important that a financial plan is easily digestible by the client and you should
consider placing any information that may break the flow or complicate the main body of the
financial plan in the appendices.

It is a useful section of the financial plan to hold detail that the client needn’t necessarily know, but which should form a part of the financial plan, in case they want to know more or need to see how figures included in the main body of the financial plan have been derived.