General Principals Flashcards
Define providing financial planning
I agreed to provide or have I provided Financial Planning.
I agreed to provide financial advice that require the integration of relevant elements of the Client’s personal and/or financial circumstances in order to act in their best interest.
The client has a reasonable basis to believe that I will provide or have provided Financial Planning.
Define providing financial advice.
The more individually tailored the communication is to the Client, the more likely the communication will be viewed as Financial Advice.
- A communication that, based on its content, context, and presentation, would reasonably be viewed as a recommendation that the Client take or not take a particular course of action with respect to:
- advice to invest in, purchase, hold, gift, or sell Financial Assets.
- Investment strategies, portfolio management, or other financial matters.
- Retaining other persons to provide financial or Professional Services to the Client.
- Exercise discretionary authority over the Financial Assets of a Client.
The Financial Planning Standard
AKA
The Financial Planning Process
- Understanding the client’s personal and financial scenario.
- Identifying and Selecting Goals
- Analyzing the Client’s Current Course of Action and Potential Alternative Course(s) of Action
- Developing the Financial Planning Recommendations
- Presenting the FinancialPlanning Recommendation(s)
- Implementing the Financial Planning Recommendation(s)
- Monitoring Progress and Updating
Examples of qualitative or subjective information:
Step 1
Health
Life expectancy Family circumstances Values
Attitudes
Expectations
Earnings potential
Risk tolerance
Goals, needs, and priorities Current course of action
Examples of quantitative or objective information:
Step 1
Age Dependents Other professional advisors Income Expenses Cash flow Savings Assets Liabilities Available resources Liquidity Taxes Employee benefits Government benefits Insurance coverage Estate plans Capacity for risk Education and retirement accounts and benefits
Identifying and setting goals
Step 2
Identify potential goals:
• Discuss with the Client your assessment of the Client’s financial and personal circumstances.
• Develop reasonable assumptions and estimates.
• Discuss with the Client and apply reasonable assumptions and estimates. (Life expectancy,tax rates, inflation rates,investment returns, or other material assumptions and estimates.
Identifying and setting goals
Step 2
Select and prioritize goals:
- Note the impact that selecting a particular goal may have on other goals.
- Discuss with the Client any goals the Client has selected that you think are unrealistic.
Analyzing the client’s current course of action and potential alternative course of action.
(Step 3) NTK!!!
Analyze the current course of action:
• Analyze material advantages and disadvantages of the current course of action.
• Analyze whether the current course maximizes the potential for meeting the Client’s goals.
Analyzing the client’s current course of action and potential alternative course of action.
(Step 3) NTK!!!!!
Analyze potential alternative courses of action:
Consider and analyze one or more potential alternative courses of action, including their material advantages and disadvantages, whether they help maximize the potential for meeting the Client’s goals, and how they integrate the relevant elements of the Client’s personal and financial circumstances.
Developing the financial planning recommendation(s)
(Step 4) NTK!!!
Select one or more recommendations designed to maximize the potential for meeting the Client’s goals considering:
o The assumptions and estimates used to develop the recommendation.
o The basis for making the recommendation, including: it’s designed to maximize their goals, the material effects, how it integrates their personal and financial scenario.
o The timing and priority of the recommendation.
o Whether the recommendation is independent or must be implemented with another recommendation.
Presenting the financial planning recommendations
Step 5
Present to the Client the selected recommendation(s) and the information that was required to be considered
in developing the recommendation(s).
(Bullets in Step 4)
Implementing the financial planning recommendations
Step 6
If CFP implements:
> Advise what recommendations are being implements, how, and any third party involvement.
> Discuss with the Client:
- The basis for selecting the action, product, or service,
- The timing and priority of implementing the action, product, or service
-Describe any Conflicts of Interest.
Monitoring progress and updates
Step 7
- Establish monitoring and updating responsibilities.
- Monitor the Client’s progress.
- Obtain current qualitative and quantitative information.
- Update goals, recommendations, or implementation decisions.
Rent or Buy?
Exam Tip:
Think time and taxes
Benefits to rent: * Low rent, save money *No closing or maintenance cost >>> short time frame favor renting Benefits to buy: * Tax deductions for interest and property tax * Capital gains on sale >>> longer time frame and high marginal tax bracket favor buying
Mortgages Program limits:
FHA limits $331,760 - $756,600
VA is similar
TCJA - Tax Cuts and Jobs Act 2018 - 2025
Mortgage/ Home Equity changes
- Deductible qualified residence interest for home taken out to buy, build, or improve the 1st and 2nd home secured by the same property. (Loan limits: MFJ & Single = $750k; MFS = $375k).
**Refinance a grandfathered loan prior to 2018 debt limits are $1m and $500k respectfully.
*** Home equity loans = everything falls under the $750 limit.
Financial Statements/Cashflow Management
Includes: > Statement of financial position (PFS) > Statement of cashflow > Budgeting > Emergency fund > Debt management
Statement of Financial Position Includes:
Assets - Liabilities = Net Worth
Assets:
“Cash” - cash, DDA, TDA, CD < 3, MM Savings, MM Mutual Fund.
“Investments” - Ins cash values, pensions, IRAs, Investment RE, Investment collectibles,Variable/Fixed annuities, Business interest, Mutual Funds, Stocks, Bonds.
“Use assets” - home, personal prop, auto, recreation vehicles, vacation home or condo, pure enjoyment collectibles.
- MINUS-
“Liabilities” - CC balance, personal loans, auto loans, mortgage loans, student loans.
Statement of Cashflow
Inflows - Fixed Outflows - Variable Outflows - Taxes = +/- CASHFLOW
“Inflows” - salary, interest income, investment income, etc.
“Fixed outflows” - mortgage payment, home and auto insurance, property taxes, rent, car note, student loan, personal loans.
“Variable outflows” - Food, transportation, utilities, clothing, entertainment, medical, miscellaneous.
“Taxes”- Federal Income Tax, State Tax, FICA
Budget
Define: Estimating the amount money to be received an spent of a period of time.
Typically a family budget should cover 12 months. Use a shorter period if annual income and expenses cannot be estimated.
Tips: Make it flexible, simple
Estimate variable and/or unknowns
Keep if long enough - typically 1 year
CFP may modify a sample budget to fit the client.
Emergency Fund
Current month plus 3 - 6 months of Fixed expenses, Variable Expenses, Real Estate Taxes.
Recommend 3 months if:
- Single with a 2nd source of income
- Married, both work and have similar wages.
- Married, one wage earner, and have a second source of income.
Otherwise, recommend 6 months.
** Second income sources: alimony, trust fund, financially well off.
Debt Management:
Housing Expenses = 28%
Formula: PITI or Rent / Gross Income
Savings Strategies
Savings is the excess of cash inflows over cash outflows after taxes
Savings Rate as a percentage of inflows
Formula:
Total income - Fixed Expenses - Variable Expenses - Taxes
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Toal Income
