EXAM #1 – Definitions (CHAPTERS 1, 2, & 7) Flashcards
Dalton’s Definition of Personal Financial Planning
The process of formulating, implementing, and monitoring financial decisions into an integrated plan that guides an individual or a family to achieve their financial goals.
CFP Board Definition of Financial Planning
“A collaborative process that maximizes a clients potential for meeting life goals through Financial advice that integrates relevant elements of the Client’s personal and financial circumstances.”
Financial Plan
A written document that generally sets out a list of recommendations to achieve a set of goals and objectives based on an understanding of the clients current financial and personal situation.
7 Steps of the Process of Financial Planning
1. Understanding the Client’s Personal and Financial Circumstances
#2. Identifying and Selecting Goals
#3. Analyzing the Clint’s Current Course of Action and Potential Alternative Courses of Action
#4. Developing the Financial Planning Recommendations
#5. Presenting the Financial Planning Recommendations
#6. Implementing the Financial Planning Recommendations
#7. Monitoring Progress and Updating
Items for Internal Data Quantitative Collection of Information
1: The Family
#2: The Insurance Portfolio
#3: Banking and Investment Information
#4: Taxes
#5: Retirement and Employee Benefits
#6: Estate Planning
#7: All Personal Finance Documents
Time Value of Money (TVM)
A mathematical concept that determines the value of money at a point, or over a period of time, at a given interest rate.
Present Value (PV)
the value of the cash flow today in dollars.
Future Value (FV)
the dollar’s value at some point in the future or the amount after earning a rate return over a period of time.
Payments (PMT)
any recurring payments such as an income stream or debt repayment.
Periods (N)
the number of periods of compounding, which may be annual, semi-annual, quarterly, monthly, or daily.
Interest Rate (i)
the rate being earned on an investment or interest paid on a loan.
Present Value of $1 (Future Amount)
the current value today of that one dollar.
Future Value of $1
the value of a present lump sum deposit after earning interest over a period of time.
Ordinary Annuity
a recurring clash flow, of an equal amount that occurs at periodic (but regular) intervals.
(0 or END)
Annuity Due
the timing of the first payment is at the beginning of the period (month, quarter, year).
(1 or BGN)
Amortization Schedule
illustrates the repayment of debt over overtime. Each debt payment consist of both interest, expense, and principle repayment.
Net Present Value (NPV)
used in budgeting by managers and investors to evaluate investment alternatives. Measures the excess or short fall of cash flow based on the discounted present value of the future cash flow, less the initial cost of the investment.
Internal Rate of Return (IRR)
the compound rate return that equates the cash inflows and cash outflows.
Inflation Adjusted Rate of Return
adjust the nominal rate of return into a real after inflation rate of return.
Nominal Interest Rate
the actual rate of return earned on an investment (adjusted for inflation impact).
Serial Payments
different from annuity payments. Adjusted upward periodically throughout the payment period at a constant rate, usually in order to adjust for inflation’s impact. Each serial payment will increase to maintain the real dollar purchasing power of an investment.
Uneven Cash Flow
an investment or project that has periodic cash flow flows. There are not the same dollar amount or that or a combination of inflows and outflows.
Extrinsic Motivation
an outside reward (you expect to get something in return) or avoidance of punishment.
Disposition Effect
the cognitive bias is faulty, framing where normal investors do not mark their stocks to market prices. Investors create mental accounts when they purchase stocks and continue to mark their value to purchase prices even after market prices have changed the normal investor does not consider a stock a loser until the stock is sold.
Developmental Paradigm
believes that human development occurs in stages over time. Relationships are formed early in life and become a template for establishing relationships and adulthood. As to emotions, the developmental paradigm assumes that all humans develop in progress in a predictable sequence.
CHARACTERISTICS:
* Moderately Directive
* Alliance is important
* Resolve emotional needs not met earlier in life
* Healthy development
* Focus on past experiences + family origin to present difficulties
* Understanding and self-awareness
MICROSKILLS:
(1) Active Listening
(2) Client Observation
(3) Paraphrasing
(4) Feeling Reflection
(5) Supportive Challenging
(6) Reflection of Meaning
Confirmation Bias
a commonly used and popular phrase is that you do not get a second chance at a first impression. People tend to filter information and focus on information supporting their opinions.
Composure
a client’s ability to remain calm and focused when under pressure.
Active Listening
requires the solicitor’s undivided attention. Active listening involves concentration on what the speaker saying. The listener must put aside irrelevant thoughts.
Affect Heuristic
deals with judging something whether it is good or bad.
Anchoring
attaching or anchoring one thoughts to a reference point even though there may be no logical relevance or is not pertinent to the issue in question. Also known as conservatism or belief perseverance.
Availability Heuristic
when a decision-maker relies upon knowledge that is readily available in his or her memory the cognitive heuristic known as availability is involved.
Behavioral Finance
contains much of the scientific framework and lessons learned from traditional finance amend some of it with basic assumptions, based on normal more human, like behavior and supplements, other aspects of it with notion from psychology and sociology.
Assumptions:
* Investors are normal
* Markets are not efficient
* The behavioral portfolio theory governs
* Risk alone does not determine returns
Closed Question
seeks a response that is very specific and commonly involves an answer that can be accomplished with a single word or two. Close questions lead with: is, are, do, did, could, would, have, or “is it not true that…?”
Cognitive-Behavioral Paradigm
humans are beings are subject to the same learning principles that were established in animal research. The basic principles of classical and operant conditioning are assumed to count for an individuals behavior and understandings throughout their lives.
CHARACTERISTICS:
* Highly directive
* Alliance not as important (only if client cares)
* Identifies reinforcers
* Identifies strengths + weaknesses
* Manipulation of the reinforcers to change the behavior and thought process
* Counselor Challenge: sound evaluation of how reinforcers are maintaining problematic self-talk and behaviors
MICROSKILLS:
(1) Active Listening
(2) Questioning
(5) Supportive Challenging
(6) Reflection of Meaning
Financial Infidelity
the act of engaging in significant financial transactions without the knowledge of support of a spouse or partner.
Financial Enmeshment
occurs when parents involve children in adult financial decision decisions and conflicts at a time when the child is not yet emotionally and cognitively prepared to cope with such decisions and conflicts.
Financial Exploitation
the fraudulent or otherwise illegal, unauthorized or improper act or process of an individual, including caregiver or fiduciary that uses the resources of an older individual for monetary or personal benefit, profit or gain, or that result in depriving an older individual of rightful access to or use of benefits, resources, belongings, or assets.
Framing
a cognitive bias under which the manner in which something is framed impacts how the context is evaluated or interpreted, even though the same fact have been provided.
Gambler’s Fallacy
one of the incorrect assumptions from the world of probabilities in the realm of probabilities misconceptions can lead to faulty, predictions as to occurrences of events.
Herding
this cognitive bias is explained just by looking at the word. People tend to follow the masses or the herd.
Hindsight
another potential buyers for an investor. Hindsight is looking back after the fact to know.
Human Communication
comprise of the fundamental elements. Societal groups use a system of signs in their communication process. Assign could be a word object, gesture, tone, quality, image, substance, or other reference, according to a code of shared meaning among those who use that sign for communication purposes.
Humanistic Paradigm
dominated by theorists, whose models have their origins from a shared philosophical approach. For a client to grow the relationship requires a transparent and genuine counselor. The advisor needs a philosophical dance that humankind is basically good and that people have inherent capability of self direction and growth under the right set of circumstances.
CHARACTERISITCS:
* Varies – non-directive to highly directive
* Alliance extremely important
* Experiencing present moment
* Freedom of choice
* Authenticity, full self-aware
* Accepting personal responsibility
MICRO SKILLS:
(1) Active Listening
(2) Client Observation
(3) Feeling Reflection
(4) Reflection of Meaning
(5) Supportive Challenging
Intrinsic Motivation
intristic motivation comes from within and is often associate with satisfaction and enjoyment
Joining
in the mental health field joining refers to making a connection with the client and establishing a trusting relationship.
Multicultural Psychology
an extension of general psychology that recognizes that multiple aspects of identity, influence, a person’s worldview, including race, ethnicity language, sexual orientation, gender age, disability class, status, education, religious, or spiritual orientation, and other cultural dimensions in that both universal and culture specific phenomena should be taken into consideration when psychologist are helping clients training, students advocating for social change injustice, and conducting research.
Motivational Interviewing
a communication technique that focuses of which is on guiding the client to express the desire and reason a changes needed (their motivation for change), to discover their ability to change, and to commit to making the change.
Nonverbal Behaviors
nonverbal cues or body language can communicate feelings and attitudes from the client to the financial advisor and are mainly provided from the body and the voice. Body position and body movement are important while voice tone and voice pitch are also telling.
Nudge
choice architecture that alters people’s behavior in a predictable way without forbidding any options or significantly changing their economic incentives. To be a nudge, the intervention must be easy and cheap to avoid.
Open Question
result in a person answering with a lengthy response that usually begins with words, such as how what when where who and why?
Overconfidence
usually concerns, an investor that listens mostly to himself or herself, overconfident investors mostly rely on their skills and capabilities to do their own homework or make their own decision decisions.
Passive Listening
described as listening in the normal or usual conversation or conversational setting to which most people are accustomed at seminars, in class, at social gatherings, or sermons.
Prospect Theory
provides that people value gains and losses differently and will base their decisions on perceived gains rather than perceived losses.
Positive Psychology
the scientific study of the strength and enables individuals and community to thrive. The field is founded on the belief that people want to lean meaningful and fulfilling lives to cultivate what is best within themselves into enhance their experiences of love work and play.
Recency Bias
occurs when too much weight is given to recent observations or stimuli versus long-term historical trends. This may cause a client to erroneously believe that recent trend are likely to repeat themselves over the long-term.
Reflective Listening
occurs when the receiver devote reflective attention to both the content being said in the feelings are being expressed.
Socialization
the process by which individuals acquire soft skills, beliefs, values, and behaviors necessary to function effectively in society or in a partucular group.
Social Consciousness
an awareness of intensive responsibility for problems or injustice that exit within society.
Solution-focused Therapy (SFT)
a future focused and goal directed approach to therapy.
Traditional Finance
also described a literature as modern portfolio theory, though some of the concepts of the theory are not necessarily modern and have been subject to much debate and change over recent decades.
Premises/assumptions:
(1) investors are rational. (2) markets are efficient. (3) the mean-variance portfolio theory governs. (4) returned or determined by risk (beta).
Five Stages of Change
1) Pre-contemplation
2) Contemplation
3) Preparation
4) Action
5) Maintenance
Four Key Principles of Motivational Interviewing
(1) Partnership - collaborative process
(2) Evocation - reasons for change
(3) Acceptance - nonjudgemental
(4) Compassion - promotes + prioritizes clients’ welfare
Common Sources of Money Conflict
(1) Financial Infidelity and Lack of Transparency
(2) Saving
(3) Spending
(4) Priorities
(5) Requests for Assistance from Family and Friends
(6) Financial Enmeshment
Three main psychological needs that determine motivation:
(1) Competence – desire to control the outcome
(2) Relatedness – desire to be connected with others
(3) Autonomy – desire to be in control of one’s life
