Chapter 1

Question 1

What is financial planning?

What is its objective ?

Answer 1

The process of making provision for financial needs that may arise in the future.
To ensure that the right amount of money is available in the right hands at the right time to achieve a client’s financial goals

Question 2

Give examples of financial planning (3)

Answer 2

• creating an emergency fund for unexpected bills or events
• a protection plan to pay out a lump sum or an income in the event of a parent dying …
• putting money into a pension to create an adequate retirement income;
• investing for planned future events such as a child’s education;

Question 3

What are the four important stages of understanding a clients needs?

Answer 3

• distinguishing between perceived and real needs;
• distinguishing between current and future needs;
• quantifying needs; and
• prioritizing needs.

Question 4

What are the two main types of financial planning? (Expand)

Answer 4

1) Predictable events are those that require a sum of money for a specific purpose at a specific time in the
future.
2) An unpredictable event is one that may occur at any time in the future, or it may not occur at all.
Examples include:

Question 5

Give examples of 1) predictable events and 2) unpredictable events.

Answer 5

1) Pay off mortgage, Retirement, Child wedding

2) long term sickness, onset of a critical illness, death of a parent, unemployment

Question 6

What is the hierarchy of financial planning? Top to Bottom

Answer 6

Estate planning, savings & investments, pension, protection, emergency fund

Question 7

What is the life cycle model?

Answer 7

Childhood, young single, young married, young married with children, married with children, married with older children, post-family/ pre-retiremnet, retirement

Question 8

Name two financial planning needs that are essential for families with young children & mortgage

Answer 8

Income protection/ Mortgage Protection/ life assurance.

Question 9

Main protection needs for a 1) young single person 2) Young married 3) married with older children

Answer 9

1) Emergency fund / Income protection
2) Emergency fund/ Income protection
3) Retirement / income protection/ Investment considerations/ Life assurance

Question 10

Retirement categories

Answer 10

Low Pension, little capital
Relatively low pension, some capital
Sufficient pension income, substantial capital

Question 11

Constraints affecting financial advice

Answer 11

Budget, Health, Term, Gender, Eligibility, Taxation, Time, Risk

Question 12

The risk/reward principle

Answer 12

The higher the risk, the higher the
potential reward, but also the higher
the potential for loss.
The lower the risk, the lower the
potential for loss, but also the
lower the potential reward.

Question 13

Modifications to the life cycle model

Answer 13

• individual’s employment status;
• health of the individual and that of their dependants;
• balance between the individual’s income and expenditure; and
• balance between the individual’s assets and liabilities.

Question 14

Employment status can be divided into the following

categories:

Answer 14

• Employees with a company or personal pension.
• Employees without a company or personal pension.
• The self-employed.
• The unemployed.

Question 15

What are assets and what are liabilities

Answer 15

Assets are what a person owns and liabilities are what they owe.

Question 16

Barriers which prevent people from identifying the real need for financial planning

Answer 16

• Unaware of the availability of products to protect their families in the event of death or illness.
• Unaware of the financial impact their death or illness would have on their families.
• ‘It won’t happen to me’ syndrome – the tendency to believe that bad things only happen to other
people.

Question 17

All financial plans should be reviewed regularly to ensure that:

Answer 17

• they are on track to achieve the client’s financial objectives;
• any changes in the client’s situation, for example, having children or getting divorced, are taken into
account; and
• priorities that could not be dealt with at first are reviewed and affordability checked to see if they can
now proceed.

Question 18

The financial adviser needs to know:

Answer 18

• which products are suitable for which need, how they work and their comparative costs;
• the advantages and disadvantages of these products for individual client circumstances;
• the risk/reward profiles of investment products and how they relate to their client’s own profile;
• how to maximise the tax efficiency of the products for clients depending on their tax status, as well as
the advantages and disadvantages of doing so;
• their country’s law of succession (who inherits on the death of an individual who has not made a
will); and
• the different forms of business

Question 19

The financial planning process

Answer 19

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