Chapter 4 Flashcards
40+9
40 recommendations to prevent money laundering and 9 for terrorist financing
Financial planning steps
1) interview the client
2) gather data and identify goals and objectives
3) identify financial problems and constraints
4) develop a written financial plan
5) implement the recommendations
6) periodically review and revise the plan
client communication and planning process
Evaluates investment suitability based on financial goals and objectives
Client info provides you with view of client circumstances and future goals
Financial planning pyramid help identify a clients current situation and needs
Money laundering
Accepting illegal cash and making it appear legitimate
Behavioural finance
The application of psychology to understand human behaviour in finance or investing
Behavioural bias
Systematic errors in financial judgement or imperfections in the perception of economic reality
Cognitive bias
Basic statistical, information processing or memory errors that are common to human beings
Emotional bias
Spontaneous decisions based on emotion rather than conscious effort
Emotional
Endowment
People place more value on an asset they hold property rights to than on an asset they do not hold property rights to
Emotional
Loss aversion
People feel a stronger impulse to avoid losses than to acquire gains
Emotional
Regret aversion
People avoid making decisions because they fear that whatever they decide to do will be wrong or bad
Status quo
Emotional
People, when faced with a variety of options, will choose to keep things the same (maintain status quo)
Biases men are susceptible
Overconfidence (cog)
Loss aversion (emo)
Availability (cog)
Cognitive dissonance (c)
Biases for women
Endowment (emo) Status quo (e) Representativeness (c) Regret aversion (e)
Stages in the life cycle
1) early earnings- to age 30
2) family commitments- 25-35
3) mature earnings - 30-50
4) nearing retirement - 45-65
5) retired - 50+
Stage 1- early earnings
Start when an individual starts to work and ends when family commitments begin
80% equity funds
10% bond funds
10% money market funds
Stage 2 family commitment -25-35
Stage 2 is married with kids and wants to buy a home. More commitments and responsibilities
50% equity funds
20% bond funds
30% money market funds
Stage 3- mature earnings- 30-50
Earnings increase. Start to focus on retirement savings and minimizing taxes 40% equity growth funds 30% equity funds 20% bond funds 10% money market funds
Stage 4- nearing retirement- 45-65
Fewer family commitments. More risk averse ( less risky). Want tax minimization 20% equity growth funds 40% equity funds 30% bond funds 10% money market funds
Stage 5- retired- 65+
Rely on retirement savings to maintain lifestyle. Risk averse. May start to focus on estate building and wealth transfer (RRIF)
