Learning Outcome 01- The Financial Planning Process Flashcards
The Benefits of Financial Planning
Peace of mind Security Clarity Organisation Professional relationship/expertise Efficiency Improved knowledge Help with decision making Ongoing reviews Enhanced understanding
Factors which affect the size of an emergency fund:
Security of income and ease of replacement
Expenditure levels
Protection provisions
Access to capital or income from other assets or investments
Age of client
Client attitude to risk
Level of income
The steps in the financial planning process are as follows:
- Establish and define the relationship with the client
- Collect Information and understand Goals
- Analyse and assess the client’s situation
- Develop and present the financial planning recommendations and/or alternatives
- Implement the financial planning recommendations
- Review the financial planning recommendations.
“ECADIR”
Processing personal data is lawful if al least one of the following is true:
- the data subject has given consent
- processing is necessary for the performance of a contract
- processing is necessary for compliance with a legal obligation
- processing is necessary for the vital interests of the data subject
- processing is necessary for the performance of a task carried out in the public interest
- processing is necessary for the interests pursued by the data controller
Outline the different types of conflict of interest:
Make a financial gain or avoid a financial loss
Has an interest in the outcome of a service provided to a client
Has a financial or other incentive to favour the interest of one client over another
Acting for family members and unable to disclose information to the other party (e.g. parents planning to disinherit children but planner unable to let the children know)
Acting for couples going through divorce
Soft commission/gifts/inducements
In the Data Gathering process, the minimum an adviser should have obtained is the following
- Personal information – name, address, date of birth, marital status, dependants and health.
- Employment – occupation, employer’s details and benefits or details of self-employment.
- Income – from all sources.
- Expenditure – all outgoings including debt or credit card repayments.
- Assets – property, valuables, savings, investments.
- Liabilities – mortgage, loans, credit cards.
- Goals, objectives and aspirations – what the client is hoping to achieve.
- Risk profile – how much risk they are willing and comfortable with, and financially able to tolerate.
What are the ethical considerations when advising clients?
Conflicts of interest Limits of authorisation Limits of competence Client's mental capacity Client's vulnerability
Formula for Future Value
FV= PV x (1+r)n
eg. Scientific Calculator
£20,000 at 4% invested for 6 years
£20000 (1.04)6 = £25,306.38
or HP10BII Calculator PV = -20000 N= 6 (Remember to change p/yr =1) begin I/yr=4.00 PMT=(leave blank) FV= £25,306.38
Formula for Present Value
PV = FV/ (1+r) n
We need £20,000 in 3 years time invested at 7%, how much do we need to invest today
eg. Scientific Calculator
£20000 / (1.07)3
£16,325.96
10BII FV=20000 I/yr=7 PMT=(leave blank) N=3 Press PV = -16325.96
Is it a Need, Goal or Objective
Need implies necessity, ie, something that must happen, or an essential outcome without which the plan will not succeed
A goal is often thought of as synonymous with an objective but there is a subtle difference which can have a profound effect on the level of engagement that the client has with both their plan and the planner responsible for its creation and implementation. The difference lies in the emotional, personal attachment that applies to a goal which is often absent when discussing an objective. Indeed, a goal is, by its nature, subjective and likely to be more personally, or even emotionally, important to the client than an objective
An objective typically applies to an outcome occurring at some time in the future whereas a need may be a future or present one
Formula for Annual Effective Rate (AER)
(1 + r / n )n - 1 x 100
A deposit account pays interest of 5% Per annum compounded on a quarterly basis. What will the AER be?
Scientific Calculator
(1+0.05/4)4
=1.050945337
10Bii
4 (Orange Shift) P/YR (PMT BUTTON) = Change to QTRLY
For what reasons is a net worth statement usually prepared?:
Alive today At retirement Catastrophe scenario: incapacity Catastrophe scenario: death of a client Education funding Estate planning issues
What are the key points regarding preparation of a net worth statement?:
It must state a date of preparation
It must contain the name(s) of the client(s)
Assets are grouped so that it is easy to identify sources of wealth
Liabilities are also detailed
Explanatory notes indicate what is included and excluded in the net worth statement and how the value has been calculated
What does SMART mean?
Specific Measurable Actionable Realistic Timebased
Roadblocks that Hinder Financial Planning and the Achievement of Objectives
a. Impediments perceived as obstacles by the client.
b. Real impediments, conditions or constraints.
