Chapter 1: Financial Planning Process

Question 1

A financial advisor can be….

Answer 1

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

Question 2

What is the dilemma of Canadians today?

Answer 2

unprecedented opportunities and extremely difficult challenges

Question 3

The 21st century will be marked by…

Answer 3

an increasing need for each individual to take responsibility for meeting his or her own financial expectations.

Question 4

An ethical financial planning…

Answer 4

always serves the client’s interests and his or

her income is generated as a by-product of that services

Question 5

Who provides the PFP designation

Answer 5

CSI

Question 6

What are the 4 main concepts of the PFP code of ethics?

Answer 6

1. General responsibilities (professional, compliant)
2. Responsibilities to the client (respect, honesty, due diligence)
3. Responsibilities to the profession (trust, competence, follow rules)
4. Responsibilities to the employer

Question 7

A summary of the code of ethics for FP Canada Certificants (8 points)

Answer 7

1. Loyalty
2. Integrity
3. Objectivity
4. Competence
5. Fairness
6. Confidentiality
7. Diligence
8. Professionalism

Question 8

Your responsibility as advisor during the financial planning process is to

Answer 8

get to know the client, including their obligations, monetary position, time horizons, and risk tolerance

Question 9

The core of financial planning

Answer 9

the client’s goals and objectives

Question 10

Financial planning constraints

Answer 10

time horizon, liquidity, tax concerns, legal requirements and personal preferences

Question 11

Four common reasons for liquidity

Answer 11

1. Emergency fund
2. Short term financial goal
3. To pay known, pending expenses (ie. taxes)
4. To take advantage of investment opportunities

Question 12

What is the number one concern for most clients?

Answer 12

Will I have enough?

Question 13

6 factors of goal achievement

Answer 13

1. Years to retirement
2. Required annual income at retirement
3. Amount of savings currently
4. The amount that will be saved each year
5. Inflation rate
6. Expected return

Question 14

How many of the 6 factors of goal achievement can the client control?

Answer 14

4 - the only two they cannot control are the pool of assets already in reserve and the inflation rate

Question 15

The client who requires income to meet day-to-day expenses must consider the following 6 factors:

Answer 15

1. current living expenses
2. the portion of those expenses that are met through guaranteed income from pensions etc.
3. the number of years which the client anticipates the income must last
4. the existing pool of retirement savings
5. inflation rate of the remainder of clients life
6. expected return on investments

Question 16

myopic loss aversion

Answer 16

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.

Question 17

Two factors that influence a client’s risk tolerance

Answer 17

the client’s demographic and the stability of their income

Question 18

Demographers predict behaviour by classifying clients by…

Answer 18

age, wealth, marital status, gender, income, and occupation

Question 19

The four stages of the life cycle approach to financial planning are:

Answer 19

1. Accumulation
2. Consolidation
3. Financial independence
4. Gifting

Question 20

Through the planning process, clients will determine

Answer 20

1. Their current financial situation
2. Realistic goals for the future
3. The steps that must be taken to achieve these goals

Question 21

The process by which a financial plan is formulated consists of two activities encompassing six steps

Answer 21

Part 1: Analyze client’s situation, problems, and goals

1. Establish the client-advisor relationship
2. Collect data and info
3. Analyze data and info

Part 2: Implement financial plan that has been drawn up using information from analysis

4. Recommend strategies to meet goals
5. Implement recommendations
6. Conduct a periodic review or follow up

Question 22

A contract with a financial advisor should specify

Answer 22

• the range of services to be performed by the advisor
• the method of compensation
• the client’s responsibility in the planning process