Client Specific Terms, Factors in FP process

Question 1

Financial Planning defined:

Answer 1

A means to attain hopes and dreams (goals) while confronting/managing concerns and fears.

Question 2

What are the 5 elements of an Engagement Letter?

Answer 2

1. Define the parties to the agreement.
2. A description of the mutually agreed upon services; (scope of work).
3. The time horizon of the work to be completed.
4. A description of fees and costs.
5. Obligation and responsibilities of each party.

Question 3

At the introductory meeting, the financial planner will… (4 things)

Answer 3

1. Collect data
2. Come to understand the client’s values and goals
3. Establish the scope of the engagement
4. Discuss Fees

Question 4

What are the 7 stages of the process of Financial Planning?

Answer 4

1. Understanding the client’s personal/financial circumstances (qualitative & quantitative).
2. Identifying and selecting goals.
3. Analyzing the client’s current course of action and potential alternative course of action.
4. Developing the financial planning recommendation.
5. Presenting the financial planning recommendation.
6. Implementing the financial planning recommendation.
7. Monitoring progress and updating as necessary.

Question 5

Examples of internal data surrounding client

Answer 5

The client’s financial goals and values.

Question 6

Examples of external data surrounding client

Answer 6

external environment: inflation, interest rates, gift and estate taxes, current and future income, etc.

Question 7

What is an Integration Factor?

Answer 7

Anything that has a significant influence over the financial advice or financial planning a CFP provides a client.

Question 8

List 5 Integration Factors

Answer 8

1. Relevant Elements
2. Client’s financial elements
3. Length of time
4. Exposure to risk
5. Barriers to change

Question 9

Give examples of Relevant Elements of Personal and Financial Circumstances

Answer 9

1. Develop goals
2. Manage cashflow
3. Prepare for retirement
4. Manage assets and liabilities
5. Identify and manage risks
6. Preserve/increase wealth

Question 10

What is a “Sensitivity Analysis?”

Answer 10

The process of changing key variables in planning assumptions to determine the overall impact of those changes on the plan.

Question 11

What is a Financial Plan?

Answer 11

A written document that generally sets out a list of recommendations to achieve a set of goals and objectives based on an understanding of a client’s current financial and personal situation.

Question 12

What is the “Statement of Cash Flows?”

Answer 12

The statement of ALL income and expenses (receipts and disbursements) per year.

Question 13

3 Main Types of Assets

Answer 13

1. Cash and cash equivalents
2. Investments
3. Personal use assets

Question 14

What is a Statement of Financial Position? (aka Balance Sheet)

Answer 14

A snapshot of a person’s financial position at a specific point in time.

Question 15

3 main things a Statement of Financial Position (balance sheet) shows

Answer 15

Assets
Liabilities
Net Worth

(Assets-Liabilities=Net Worth)

Question 16

What is a Monte Carlo Analysis?

Answer 16

A mathematical simulation that determines the probability of achieving a given outcome.

Question 17

True or False

The CFP and client have similar privileges to attorney/client privileges.

Answer 17

False; Communications between CFP and client are not legally privileged AND are subject to discovery in legal proceedings.

Question 18

What are some limitations of Financial Statement Analysis? (3 things)

Answer 18

1. Inflation
2. Uncertain returns
3. Hard to value assets

Question 19

Emergency fund should cover 3 months if…(3 possibilities)

Answer 19

Single with additional reliable source of income other than normal compensation

Both spouses have big paychecks

Clients are married with one income and an additional reliable source of income

Question 20

Emergency fund should cover 6 months if…(2 possibilities)

Answer 20

Single client with single income

Married clients with single income

Question 21

Clients who are qualified to be charged performance based fees (2 things)

Answer 21

1. Client with a minimum net worth of 2.2 million
2. Client with AUM of 1.1 million

Question 22

5 Elements of a Valid Contract

Answer 22

1. An offer
2. Acceptance
3. Consideration (may be a type of downpayment or promise to pay in full)
4. Competent Parties (of age and sound mind)
5. Legal Object (don’t break the law)