The Financial Planning Process

Question 1

The purpose of financial planning is to design a plan of action that will take you from your current financial situation to your future financial goals. What are the actions?

Answer 1

Determining investments to be made.
Reducing income tax liability.
Analyzing cash flow against one’s budget.
Planning life insurance and other types of insurance.
Planning the purchase of real estate.
Saving for children’s education.
Maximizing retirement income.
Creating a will to facilitate legacy planning.

Question 2

What are the relevant elements of a client’s situation?

Answer 2

Relevant elements of personal and financial circumstances vary from Client to Client, and may include the Client’s need for or desire to: develop goals, manage assets and liabilities, manage cash flow, identify and manage risks, identify and manage the financial effect of health considerations, provide for educational needs, achieve financial security, preserve or increase wealth, identify tax considerations, prepare for retirement, pursue philanthropic interests, and address estate and legacy matters.

Question 3

Financial planning specifically helps you to:

Answer 3

Track income and expenses.
Determine net worth.
Minimize tax liability.
Assess risk tolerance.
Save for major expenses, such as:
Children’s education
Real estate, car, boat, etc.
Special occasions like weddings and vacations
Plan estate, and fund estate taxes, if applicable.
Create an emergency fund.
Protect against financial crises in the event of disability or death.
Plan for retirement.

Question 4

Financial planning must be viewed as a ___ process.

Answer 4

lifelong

Question 5

What are the components of life-cyle/financial planning?

Answer 5

Consumption and savings planning
Debt planning
Insurance planning
Investment planning
Retirement planning
Estate planning
Income tax planning

Question 6

________ pose the greatest risk to the preservation of a retiree’s nest egg.

Answer 6

Chronic health problems

Question 7

Consumption and savings planning involves…

Answer 7

Each year, you must decide how much of your income to allocate to current consumption and how much to save for the future.

Question 8

Two important activities related to consumption and savings planning are:

Answer 8

1. Preparing periodic personal financial statements (comprising a cash flow statement and a balance sheet or net worth statement).
2. Preparing an annual budget.

Question 9

____ measures personal wealth by identifying assets, liabilities, and calculating net worth.

Answer 9

Personal Balance Sheet

Question 10

____ is a detailed breakdown of cash income and expenses over a given period

Answer 10

Personal Income Statement

Question 11

____ is used to analyze a client’s financial circumstances, measure financial strength, and monitor progress.

Answer 11

Financial Ratios

Question 12

____ is a plan indicating financial goals and allocation of resources.

Answer 12

Budget

Question 13

Examples of ‘good debt’ include:

Answer 13

Mortgage
Home Equity Loan
Home Equity Line of Credit
Small Business Loans
Student Loans

Question 14

Examples of ‘bad debt’ include:

Answer 14

Credit Cards
Auto Loans
Cash Advance Loans
Pay Day Loans

Question 15

How can Debt Planning help?

Answer 15

It can help you hedge against inflation by permitting the purchase of assets that match or beat the rate of inflation.

Question 16

With _____ you can protect yourself against the loss of the ability to work and earn income.

Answer 16

Disability Insurance

Question 17

______ helps to meet the needs of your dependents in the event of your death.

Answer 17

Life Insurance

Question 18

____ are important as you accumulate assets, such as a house and automobile. Y

Answer 18

Property and personal liability insurance

Question 19

You need _____ to protect against accidents and health issues. The “average” illness can lead to medical bills large enough to wipe out your entire savings, and then some.

Answer 19

medical insurance

Question 20

______ depends on the goals of your clients and their unique risk tolerance.

Answer 20

Investment Planning

Question 21

______ consists primarily of estimating your future consumption and other needs, and then determining how you will meet those needs when you are no longer working.

Answer 21

Retirement planning

Question 22

What are the elements of a Retirement Plan?

Answer 22

Social Security + Employer Plans + Retirement Savings = Retirement Income

Question 23

_____ helps protect the assets you acculumated during your lifetime and determines the best method for distributing those assets to loved ones.

Answer 23

Estate planning

Question 24

With careful ______ there are ways to minimize the tax bite

Answer 24

income tax planning

Question 25

The purpose of financial planning:

Answer 25

To determine where one stands financially and to develop an action plan to attain financial goals and objectives.

Question 26

The benefits of financial planning:

Answer 26

The ability to see how your financial decisions affect your financial goals and how you can track your income and expenses.

Question 27

The components of financial planning:

Answer 27

Support the realization of financial goals in various stages of your life cycle.

Question 28

A Certified Financial Planner™ has a ______ to act in the client’s best interest at all times when providing financial advice.

Answer 28

fiduciary responsibility

Question 29

The financial planner’s main function is to…..

Answer 29

develop, present, implement, and monitor personalized financial plans that help clients achieve their goals.

Question 30

A “financial planning engagement” exists when…..

Answer 30

a financial planning professional performs any type of mutually agreed upon financial planning service for a client. The development of a comprehensive financial plan involves following seven steps in the financial planning process.

Question 31

The Financial Planning process is ___

Answer 31

cyclical

when changes are warranted the process starts again at the first step

Question 32

Fee-Only compensation is….

Answer 32

Earn income only through the fees they charge clients. These financial planners tend to work with bigger, more involved, and specialized situations. The engagement of a fee-only plan requires a fee agreement be signed by both parties.

Question 33

Asset-Based Compensation is….

Answer 33

Compensation is a derivative of fee-only planner compensation. Where the fee-only planners are compensated for analyzing a client’s portfolio, asset-based planners are compensated for actually managing it. (Some planners will refer to their compensation as fee-only when they are actually talking about asset-based. It is wise to clarify which type of compensation they are referring to.

Question 34

Fee-Based Compensation is….

Answer 34

Charge a fee for the development of the plan and also collect commissions on products they recommend through the implementation process. This relationship also requires a fee agreement.

Question 35

Commission-Only Compensation is….

Answer 35

Commission-only planners earn their income through product sales. No fee agreement is necessary.

Question 36

An advisor should _____ rely on verbal quantitative information from a client, such as the death benefit amount on a life insurance policy or the mutual fund selections in their 401(k) plan.

Answer 36

never

incorrect information will lead to incorrect recommendations and conclusions. The only way for an advisor to understand a client’s current financial status is to review current documents and statements that are real and accurate.

Question 37

What are the 7 steps of the financial planning process?

Answer 37

Understanding, Identifying, Analyzing, Developing, Presenting, Implementing, and Monitoring

Question 38

Step 1 of the Process: Understanding the Client’s Personal and Financial Circumstances includes…..

Answer 38

a. Obtaining Qualitative and Quantitative Information.
b. Analyzing Information
c. Addressing Incomplete Information.

Question 39

Step 3 of the Financial Planning Process involves….

Answer 39

Analyzing Current Course of Action and Analyzing Potential Alternative Courses of Action.

Question 40

Step 2 of the Financial Planning Process involves….

Answer 40

a. Identifying Potential Goals.
b. Selecting and Prioritizing Goals.

Question 41

What are the elements that needed to be included in Step 4 of Developing the Financial Planning Recommendation(s)?

Answer 41

Flexibilty
Liquidity
Protection
Asset Allocations
Minimization of taxes
Pre-Retirement
Post- Retirement

Question 42

Step 5 of the Financial Planning Process involves….

Answer 42

A CFP® professional must present to the client the selected plan recommendations and the information that was required to be considered when developing the recommendation(s).

Question 43

Code and Standards Section A.10.b.ii states that a financial planner is responsible for:

Answer 43

Implementing the client’s financial planning recommendation(s)
Monitoring and updating the client’s financial planning recommendation(s)

Question 44

Step 6 of the Financial Planning Process involves….

Answer 44

a. Addressing Implementation Responsibilities.
b. Identifying, Analyzing, and Selecting Actions, Products, and Services
c. Recommending Actions, Products, and Services for Implementation.
d. Selecting and Implementing Actions, Products, or Services.

Question 45

Step 7 of the Financial Planning Process involves….

Answer 45

a. Monitoring and Updating Responsibilities.
b. Monitoring the Client’s Progress
c. Obtaining Current Qualitative and Quantitative Information.
d. Updating Goals, Recommendations, or Implementation Decisions.

Question 46

What is the phrase/ acronym to remember the 7 steps of the Financial Planning Process?

Answer 46

Ukuleles In A Dive-bar Playing Iron Maiden.”The steps are Understanding, Identifying, Analyzing, Developing, Presenting, Implementing, and Monitoring the plan on an ongoing basis

Question 47

What are examples of Qualitative Objective Information used to asses a client?

Answer 47

the Client’s health, life expectancy, family circumstances, values, attitudes, expectations, earnings potential, risk tolerance, goals, needs, priorities, and current course of action.

Question 48

What are examples of Quantitative Objective Information used to asses a client?

Answer 48

The Client’s age, dependents, other professional advisors, income, expenses, cash flow, savings, assets, liabilities, available resources, liquidity, taxes, employee benefits, government benefits, insurance coverage, estate plans,
education and retirement accounts and benefits, and capacity for risk.

Question 49

Step 4 of the Financial Planning Process involves….

Answer 49

Developing the Financial Planning Recommendation(s)

Question 50

Define the Financial Planning Process Summary Financial Planners:

Answer 50

Recognize problems, and suggest specialized help, where needed.

Question 51

What Planners Do?

Answer 51

Ascertain the financial needs and goals of clients, and then develop personalized savings and investment plans.

Question 52

What are the methods of compensation?

Answer 52

Compensation may be collected through models including fee-only, asset-based, fees and commissions on recommended products, or commission-only.

Question 53

How should someone Choose a Planner?

Answer 53

Prospective clients should interview several planners before selecting one. Choosing the right planner is vital to achieving financial goals.

Question 54

What are the Client’s Responsibilities?

Answer 54

Include organizing and categorizing their tax documents and financial account statements, as well as recording various transactions so that their financial status can be accurately determined.

Question 55

Other Advisors’ Responsibilities:

Answer 55

Lawyers, accountants, and tax preparers may refer clients to financial planners.