General Principles: Chapter 1 Flashcards
What is financial planning?
The process of determining whether and how clients can meet their goals through proper management of financial resources
Who is a client?
A person, persons or entity who engages a practitioner and for whom professional services are rendered
When is a practitioner engaged?
When an individual, based upon the relevant facts and circumstances, reasonably relies upon information or services provided by the practitioner. If dealing with an entity and services are provided, the entity is the client acting through legal representation
The Certified Financial Planner Board of Standards, Inc. owns which certification marks?
CFP® and CERTIFIED FINANCIAL PLANNER™. They are awarded to individuals who successfully complete initial and ongoing certification requirements
What are the series of 7 steps for the financial planning process?
- Understanding the clients personal and financial circumstances
- Identifying and selecting goals
- Analyzing the client’s current course of action and potential alternative courses of
action - Developing the financial planning recommendations
- Presenting the financial planning recommendations
- Implementing the financial planning recommendations
- Monitoring progress and updating
The CFP board requires compliance with these standards for the whole firm under what 3 distinct circumstances?
- When the CFP professional agrees to provide, or provide financial planning, under a
written client engagement agreement - When, to act in the clients best interest, the CFP professional agrees to/actually
provides financial advice based on a clients personal or financial circumstances. Even
if not formal, certain advice might be necessary to honor fiduciary responsibilities - When a client reasonably believes that the CFP professional will provide, or have
provided, financial planning
What are the 8 principle knowledge categories?
- Professional conduct and regulation
- General financial planning principles
- Psychology of financial planning
- Risk management and insurance planning
- Investment planning
- Tax planning
- Retirement savings and income planning
- Estate Planning
What items are included for step 1: understanding the client’s personal and financial situation?
- Identify the client
- Discuss financial planning needs and expectations of client
- Discuss financial planning process
- Explain scope of services offered by the CFP and their firm
- Assess and communicate CFP’s ability to meet clients needs and expectations
- Identify and resolve apparent and potential conflicts of interest in client relationship
- Discuss clients responsibilities and those of the CFP
- Define and document scope of engagement with the client
- Provide client disclosures (regulatory, material conflicts of interest and compensation
arrangements)
What information is necessary to be gathered to fulfill the engagement?
- Identify clients values and attitudes
a. Explore clients personal and financial needs
b. Assess the clients level of knowledge and experience with financial matters
c. Assess clients risk exposure and risk tolerance - Gather data
a. Summary of assets (cost basis, bene’s and titling)
b. Summary of liabilities (balances, terms, interest rates)
c. Summary of income and expenses
d. Estate planning docs
e. Education plans and resources
f. Retirement plan info
g. Employee benefits info
h. Government benefits
i. Special circumstances
j. Tax returns and other docs
k. Investment account statements
l. Insurance policies
m. Closely held business docs
n. Info regarding inheritance, windfalls and other large lump sums - Recognize need for additional data
What should the CFP do for Step 2: Identify and Select Goals?
- Identify goals that are mutually agreeable to clients and CFP
- Prioritize goals
- Quantify goals in terms of time horizon and dollars
- Educate the client relative to unrealistic goals and expectations
What are the steps of analyzing the clients current course of action and potential alternative courses of action?
A. Evaluate and document the strengths and weaknesses of the client’s current financial
situation
1. Balance sheet, Cash Flow Statement, Budget if necessary and capital needs analysis
2. Risk management & insurance
3. Benefits (government, employee and association)
4. Investments (asset allocation, investment types, suitability)
5. Taxes (current, potential liabilities and types of income)
6. Retirement (plans, strategies and distributions)
7. Estate planning
8. Business ownership
9. Education planning
10. Other considerations (charitable gifting, eldercare, inheritance, divorce, disabilities)
B. Identify appropriate tools to conduct analyses
What are the steps for developing the recommendation?
A. Synthesize conclusions from analysis of client’s financial status
B. Consider alternatives to meet the clients goals
1. Conduct scenario analysis and sensitivity analysis
C. Consult as need with other professionals outside planners expertise
D. Develop the recommendation
1. Consider clients goals and priorities
2. Consider client attitudes, values and beliefs
3. Consider behavioral finance issues
4. Consider how certain recommendations may change others
E. Document the recommendations
What are the steps for presenting the recommendation?
A. Present financial plan to the client and educate the client as needed
1. Review clients goals
2. Revisit assumptions
3. Share observations and findings
4. Compare alternatives
5. Explain the reasons for recommenations
B. Obtain feedback from the client and revise the reco’s as appropriate
C. Provide documentation of plan recommendations and any applicable product
disclosures
D. Verify client acceptance of recommendations
What are the steps for implementing the recommendation?
A. Create a prioritized implementation plan with timeline
B. Assign responsibilities
C. Support the client directly or indirectly with implementation mechanics
D. Coordinate and share information as authorized
E. Define monitoring responsibilities with the client
What are the steps for monitoring the recommendation?
- Discuss and evaluate changes to client’s personal circumstances
- Review performance and progress of the plan
- Review and evaluate changes in legal, tax and economic environment
- Make reco’s to accommodate changed circumstances
- Review the scope of work and redefine engagement as appropriate
- Provide client ongoing support
