Chapter 1

Question 1

sandwiched generation

Answer 1

Another name for the baby-boom generation.
Many of its members are faced with financing their children’s education and aiding their parents while trying to save for their own retirement.

Question 2

Standard & Poor’s 500 Index

Answer 2

A broad-based measurement of changes in stock-market conditions based on the average performance of 500 widely held common stocks

Question 3

prime interest rate

Answer 3

The short-term interest rate banks charge their most creditworthy commercial customers. It is a key interest rate because loans to less creditworthy customers are often tied to the prime rate.

Question 4

baby-boom generation

Answer 4

The generation of people bom between 1946 and 1964

Question 5

financial planning pyramid

Answer 5

A widely accepted approach for developing a comprehensive financial plan over time. It prioritizes financial goals by categorizing them into three levels. Level 1 goals provide protection against uncertainties, level 2 goals focus on growing investments, and level 3 goals address retirement and estate concerns.

Question 6

life-cycle financial planning

Answer 6

A financial planning process that is ongoing and occurs throughout a client’s financial life. The advisor who monitors this type of planning is practicing life-cycle financial planning.

Question 7

financial life cycle

Answer 7

The five distinct phases in an individual’s financial life or career. The five phases are (1) early career, (2) career development, (3)peak accumulation, (4) preretirement, and (5) retirement. Together the five phases span a person’s entire financial life. Starting at a relatively young age, a career-minded person typically will pass through four phases en route to phase 5 and his or her retirement.

Question 8

consumer price index (CPI)

Answer 8

The index that measures the change in consumer prices as determined by a monthly survey of the U.S. Bureau of Labor Statistics. It measures change in consumer purchasing power due to price inflation (deflation). It is also referred to as the cost-of-living index.

Question 9

comprehensive approach

Answer 9

The approach to financial planning that occurs when an advisor uses the financial planning process to develop a comprehensive financial plan that solves a client’s financial problems. The plan considers all aspects of a client’s financial position, which typically includes financial problems from all the major planning areas. In addition, the plan usually encompasses several integrated and coordinated planning strategies that can be used to help solve the client’s problems and achieve his or her goals.

Question 10

multiple-purpose approach

Answer 10

The approach to financial planning that occurs when an advisor follows the financial planning
process to develop a plan that solves two or more financial problems for a client. The plan may focus on solving several problems from one of the major planning areas, or it may focus on problems from two or three major planning areas.

Question 11

financial plan

Answer 11

A plan designed to carry a client from his or her present financial position to the attainment of financial goals. Since no two clients are alike, the plan must be designed for the individual, with all the advisor’s recommended strategies tailored to each particular client’s needs, abilities, and financial goals.

Question 12

Fact-finder form

Answer 12

A form that needs to be completed by a financial advisor engaged in financial planning for a client. It typically includes both quantitative and qualitative information that the advisor needs in order to develop a financial plan for the client.

Question 13

financial risk tolerance

Answer 13

A client’s psychological attitude toward his or her willingness to expose financial assets to the possibility of loss for the chance to achieve greater financial gain. It is measured along a continuum with individuals who are very risk tolerant at one end and those who are very risk averse at the other.

Question 14

financial planning process

Answer 14

A six-step process that financial advisors must follow when they are engaged in financial planning. The steps are: (1) establish and define the advisor-client relationship, (2) determine goals and gather data, (3) analyze and evaluate the data, (4) develop and present a plan, (5) implement the plan, and (6) monitor the plan.

Question 15

financial planning

Answer 15

A process that focuses on ascertaining a client’s financial goals and then developing a plan to help the client achieve those goals.

Question 16

Single-purpose Approach

Answer 16

Approach of financial planning that occurs when an advisor follows the financial planning process to develop a plan that solves a single financial problem for a client. The plan may be as simple as selling a single financial product or service to the client to resolve the problem.