Book 1 review Flashcards
What is financial planning?
“A collaborative process that helps maximize a Client’s potential for meeting life goals through Financial Advice that integrates relevant elements of the Client’s personal and financial circumstances.”
A financial planning engagement exists when…
A CFP certificate and a client have an “oral or written agreement, arrangement, or understanding” that personal financial planning services will be provided.
A sound, comprehensive financial plan consists of six main components:
a. Savings, budgeting, emergency funding, and education planning
b. Risk management and insurance planning
c. Investment planning
d. Tax planning
e. Retirement savings and income planning
f. Estate planning
* *Tax planning is inherent in all six components of a financial plan
To initiate financial planning services, CFP professional is required to issue specific written documents:
Can be delivered to client before or at time of engagement.
Require the following items:
1. Description of services to be provided
2. How client pays, additional charges that may occur
3. How CFP professional and firm are compensated
4. Location of webpages relevant to CFP professional’s public disciplinary history
5. Disclosure of any other info about CFP or firm that is material to client’s decision to engage
6. Full disclosure of all material conflicts of interest
7. Policies regarding protection, handling, and sharing of nonpublic personal info.
8. Info. required under the Engagement and in response to reasonable client requests
Seven-step financial planning process
- Understanding the Client’s personal and financial circumstances
- Identifying and selecting goals
- Analyzing the Client’s current course of action and potential alternative course(s) of action
- Developing the financial planning recommendation(s)
- Presenting the financial planning recommendation(s)
- Implementing the financial planning recommendation(s)
- Monitoring progress and updating
Step 1 of Seven-step Financial Planning Process
Understanding the client’s personal and financial circumstances
a. Obtain info. from client through interview/questionnaire
b. Client data may be obtained/evaluated as either quantitative or qualitative data
c. Analyze qualitative and quantitative info. to determine client’s personal and financial circumstances
d. Determine client’s life cycle phase
e. Determine client’s risk tolerance and risk exposure
f. Collect client records and documents (e.g. financial statements, tax and investment statements, insurance policies, etc.)
g. Address incomplete info.
Quantitative data
Measurable or expressed as a quantity or number. Examples: a. Current financial status b. Copies of wills and trusts c. A list of current investments
Qualitative data
Related to the quality of a client's life, often represents a client's subjective feelings, opinions, and attitudes. Examples: a. Financial goals and objectives b. Health status c. Risk tolerance level
Determine client’s life cycle phase
Personal and financial circumstances within the life cycle are influenced by the following: a. Age b. Marital status and dependents c. Financial status d. Special needs e. Attitudes, values, beliefs, biases, and behavioral characteristics Three phases: -Asset accumulation phase -Conservation/protection phase -Distribution/gifting phase
Asset accumulation phase
Begins between ages 20 and 25, lasts until approx. age 45 or later if the client’s children are not yet independent. Beginning of phase is characterized by:
- Limited excess funds for investing
- High degree fo debt to net worth
- Low net worth
- Lack of concern for risks
As person moves through asset accumulation phase, there is:
- An increase in cash for investments
- Less use of debt as a percentage fo total assets
- An increase in net worth
Conservation/protection phase
Usually in this phase from approx. 45 to 60 or immediately preceding the client’s planned retirement date.
- May last throughout client’s working life or, in some cases, until death
- Also characterized by increase in cash flow, assets and net worth, typically reduces proportionate use of debt
People generally become more risk averse as more assets are required. Thus, they:
- Are more concerned about losing what they have acquired than acquiring more
-Become aware of/concerned with many risks they ignored previously (untimely death, unemployment, disability, etc.)
Distribution/gifting phase
Begins when a person realizes they can afford to spend on things they may have never deemed possible
- At beginning of phase, person may remain in both asset accumulation and conservation/protection phase
- For many people, there is a period when they are influenced by all 3 phases simultaneously
When client’s purchase new cars for adult children, pay for grandchild’s tuition, treat themselves to expensive vacations, etc., they are likely in distribution/gifting phase
Risk tolerance
Investor’s willingness to accept risk.
During the risk assessment, risk tolerance may be considered as the tradeoff client’s are willing to make between potential risks and rewards.
Step 2 of Seven-step Financial Planning Process
Identifying and selecting goals
a. Collaboration between planner and client
b. Planner should encourage client to prioritize multiple goals (financial resources may be insufficient to fund them all)
c. Any goals that CFP professional believes to be unrealistic must be discussed
d. Planner should ask open-ended questions
Step 3 of Seven-step Financial Planning Process
Analyzing client’s current course of action and potential alternative course(s) of action
This requires the CFP to have detailed knowledge of:
1. Insurance and employee benefits
2. Investments
3. Taxation
4. Retirement planning and retirement plans
5. Estate planning
Then, planner can identify client’s strengths and weaknesses (may involve subjective judgement)
Common financial strengths
- Adequate savings (particularly for retirement)
- Appropriate emergency fund
- Appropriate net worth, given client goals
- Well-defined financial goals
- Excellent cash flow management skills (including proper debt management)
- Appropriate investments given client risk tolerance, time horizon, and goals
- Appropriate insurance coverage
- Valid and current estate planning doucuments
- Employment status stable or promising
Common financial weaknesses
- Insufficient savings (particularly for retirement)
- Inadequate emergency fund
- Low net worth, given client goals
- Financial goals that are not defined or unrealistic
- Poor or improper cash flow management skills
- Investments that are not aligned with risk tolerance, time horizon, and goals
- Insufficient amount of or no insurance coverage
- Lack of estate planning documents
- Unfavorable employment status
Step 4 of Seven-step Financial Planning Process
Developing the financial planning recommendation(s)
a. Once f.p. determines client’s financial status, comprehensive financial plan may be developed
b. Create client-specific recommendations tailored to meet their goals and objectives
c. Often involves input from a team (e.g. banker, CPA, insurance agents, etc.)
d. Advantages/disadvantages of each approach should be clearly stated and conveyed to client
Step 5 of Seven-step Financial Planning Process
Presenting the financial planning recommendation(s)
a. Present a financial plan to client reviewing the following:
1. Client goals
2. Assumptions
3. Observations and findings
4. Alternatives
5. Recommendations
b. When communicating recommendations, be aware of emotional intelligence, active listening, leading responses, body language, context
c. Once feedback is obtained, revise recommendations as appropriate
d. Provide documentation of recommendations and any applicable disclosures
e. Confirm client’s acceptance of recommendations
Step 6 of Seven-step Financial Planning Process
Implementing the financial planning recommendation(s)
a. Often involves action in some or all of the financial planning areas considered while establishing goals, expectations, and financial status (e.g. review life insurance, bene designations, etc.)
b. CFP prof. must specify who will be responsible for implementation (e.g. estate attorney may draft will or trust)
c. Planner must identify, analyze, and select actions, products, and services
Step 7 of Seven-step Financial Planning Process
Monitoring progress and updating
a. CFP prof. must analyze, at appropriate intervals, the progress towards achieving the client’s goals
b. CFP prof. must review with the client the results of the recurring analysis
c. Updating the financial plan’s recommendations on a recurring basis is essential because the client’s circumstances are likely to change over time
d. Additional external conditions (e.g. the economy) may also warrant a modification of the plan
e. Monitoring client’s progress toward goal achievement is critical to financial planning process
f. Planner should communicate with the client whenever necessary adjustments should be made to the plan
Statement of financial position
Also known as a balance sheet or net worth statement, provides a “snapshot” of net worth on a given date (e.g. “As of December 31, 20XX”0. Assets and liabilities should be presented at fair market value (FMV). Pay attention to footnotes!
assets –liabilities =
net worth
Property should be identified by ownership on statement of financial position (balance sheet/net worth statement)
- S1–individual ownership of named spouse
- S2–individual ownership of named spouse
- JT–joint tenants with rights of survivorship
- CP–community property
- TC–tenants in common
- TE–tenants by entirety
