LO 1.1.5: Differentiate between the three phases of a client’s financial life cycle

Question 1

What factors influence a client’s personal and financial circumstances (Contextual Variables)

Answer 1

• 1. Age
• 2. Marital status and dependents
• 3. Financial Status
• 4. Special needs
• 5. Attitudes, values, beliefs, and behavioral characteristics

Question 2

What are the three financial life cycle phases

Answer 2

• first phase- Asset accumulation
• second phase- Conservation (or protection), and
• third phase- Distribution (or gifting)

Question 3

First phase of the financial life cycle

Answer 3

Asset accumulation phase.

Question 4

How long does the asset accumulation phase usually last

Answer 4

until age 45 or later if client’s children are not yet independent.

Question 5

What is the beginning of the asset accumulation phase characterized by

Answer 5

• limited excess funds for investing
• high degree of debt to net worth
• low net worth
• lack of concern for risks

Question 6

What is the latter part of the asset accumulation phase characterized by

Answer 6

• increased cash available for investments
• reduced use of debt as a percentage of total assets, and
• increased net worth.

Question 7

What is the second phase of the financial life cycle

Answer 7

Conservation (or protection) phase.

Question 8

How long does the conservation phase usually last

Answer 8

from age 45 to 60 or up to planned retirement age. May last throughout working life or sometimes until death.

Question 9

What is the conservation phase characterized by

Answer 9

• increases to cash flow, assets, and net worth;
• decreases in proportionate use of debt;
• concerned about reducing risk.

Question 10

What is the main characteristic when more assets are acquired

Answer 10

People generally become more risk averse as more assets are acquired.

Question 11

Why are people (generally) more risk averse when more assets are acquired

Answer 11

• they are more concerned about losing what they have than acquiring more, and
• they become aware of and are more concerned with risks they ignored at the beginning of asset accumulation phase (e.g. untimely death, unemployment, or disability).

Question 12

What is the third phase of the financial life cycle

Answer 12

Distribution (or gifting) phase.

Question 13

How long does the distribution phase usually last

Answer 13

after a lifetime of building wealth, from age 60 or planned retirement age, until date of death.

Question 14

What is the distribution phase generally characterized by

Answer 14

• 1. Distribution strategies (they have resources to give lifetime gifts to heirs)
• 2. Implementation of estate planning strategies
• 3. High net worth and cash flow
• 4. Low debt