Chapter 1: Financial Planning Process Flashcards
A financial advisor can be….
a lawyer, an accountant, an insurance advisor, or none of these things. What matters is that he or she is a specialist in a field in which he is qualified
and most importantly licensed
What is the dilemma of Canadians today?
unprecedented opportunities and extremely difficult challenges
The 21st century will be marked by…
an increasing need for each individual to take responsibility for meeting his or her own financial expectations.
An ethical financial planning…
always serves the client’s interests and his or
her income is generated as a by-product of that services
Who provides the PFP designation
CSI
What are the 4 main concepts of the PFP code of ethics?
- General responsibilities (professional, compliant)
- Responsibilities to the client (respect, honesty, due diligence)
- Responsibilities to the profession (trust, competence, follow rules)
- Responsibilities to the employer
A summary of the code of ethics for FP Canada Certificants (8 points)
- Loyalty
- Integrity
- Objectivity
- Competence
- Fairness
- Confidentiality
- Diligence
- Professionalism
Your responsibility as advisor during the financial planning process is to
get to know the client, including their obligations, monetary position, time horizons, and risk tolerance
The core of financial planning
the client’s goals and objectives
Financial planning constraints
time horizon, liquidity, tax concerns, legal requirements and personal preferences
Four common reasons for liquidity
- Emergency fund
- Short term financial goal
- To pay known, pending expenses (ie. taxes)
- To take advantage of investment opportunities
What is the number one concern for most clients?
Will I have enough?
6 factors of goal achievement
- Years to retirement
- Required annual income at retirement
- Amount of savings currently
- The amount that will be saved each year
- Inflation rate
- Expected return
How many of the 6 factors of goal achievement can the client control?
4 - the only two they cannot control are the pool of assets already in reserve and the inflation rate
The client who requires income to meet day-to-day expenses must consider the following 6 factors:
- current living expenses
- the portion of those expenses that are met through guaranteed income from pensions etc.
- the number of years which the client anticipates the income must last
- the existing pool of retirement savings
- inflation rate of the remainder of clients life
- expected return on investments
myopic loss aversion
Clients usually consider risk to be the actual loss suffered on an investment, not the uncertainty before the loss. Financial institutions, on the other hand, consider volatility of return to be risk. Clients evaluate their portfolios frequently and will act on the short-term gains or losses experienced during the evaluation period, rather than focusing on the longer-term investment horizon.
Two factors that influence a client’s risk tolerance
the client’s demographic and the stability of their income
Demographers predict behaviour by classifying clients by…
age, wealth, marital status, gender, income, and occupation
The four stages of the life cycle approach to financial planning are:
- Accumulation
- Consolidation
- Financial independence
- Gifting
Through the planning process, clients will determine
- Their current financial situation
- Realistic goals for the future
- The steps that must be taken to achieve these goals
The process by which a financial plan is formulated consists of two activities encompassing six steps
Part 1: Analyze client’s situation, problems, and goals
- Establish the client-advisor relationship
- Collect data and info
- Analyze data and info
Part 2: Implement financial plan that has been drawn up using information from analysis
- Recommend strategies to meet goals
- Implement recommendations
- Conduct a periodic review or follow up
A contract with a financial advisor should specify
- the range of services to be performed by the advisor
- the method of compensation
- the client’s responsibility in the planning process
