Chapter 1: Utilizing the Financial Planning Process

Which of the following statements best describes the relationship between tax planning and comprehensive financial planning? (A) Tax planning is a fundamental part of any comprehensive financial planning engagement. (B) Tax planning is only a part of the financial plan when the planner is a tax expert. (C) Tax planning is done only by accountants and attorneys and never by financial planners. (D) Tax planning is part of the financial plan when explicitly requested by the client.

(A). (B) is incorrect because, if the planner is not an expert, he or she should recruit the services of one. (C) is incorrect because general tax planning is routinely performed by financial planners. (D) is incorrect because tax planning should be part of all financial planning engagements even if not explicitly requested.

Which step in the financial planning process benefits most from working as a team? (A) analyze and evaluate client data (B) gather client data (C) establish client/planner relationship (D) monitor plan recommendations

(A). Analyzing and evaluating the financial status of a client often requires that planners build a team of experts. The other steps of the process can be facilitated without the need of a team.

A single-purpose approach to financial planning is probably most appropriate for which of the following people? (A) recently-graduated lawyer deciding whether to refinance his or her student loans (B) Young parents trying to balance their retirement and education funding goals (C) A recent widower nearing retirement while settling his spouse's estate (D) A wealthy business owner anticipating going through a divorce within the next year

(A). The decision to refinance student loans is relatively straightforward and does not require a holistic understanding of a person's financial or life situation. In contrast, all of the other people lead relatively complex lives and have financial problems that cannot be solved without a more comprehensive approach.

Which of the following best describes the relationship between conflicts of interest and financial planner compensation? (A) Fee-only advisors do not have conflicts of interest. (B) There is no compensation model that totally avoids conflicts of interest. (C) Salaried compensation only creates conflicts of interest if there are performance bonuses. (D) Only advisors who receive commissions are burdened with conflicts of interest.

(B). All compensation models have inherent conflicts of interest. While the conflicts of interest regarding commissions are perhaps most self-evident, even fee-only advisors have such conflicts. For example, advisors using an AUM model have an interest to accumulate clients' assets rather than hold them away.

As clients age, which of the following generally is true? (A) Their income increases. (B) They should focus on increasingly risky assets. (C) Their need for life insurance to provide for surviving children decreases. (D) Their need for disability insurance coverage increases.

(C). As clients age, their children tend to need less support. Simultaneously, clients' net worth generally increases, allowing them to better provide for their children from their assets. (A) is incorrect because income tends to increase until retirement, when it decreases. (B) is incorrect because clients should generally focus on decreasingly risky assets as they age. (D) is incorrect because disability insurance needs generally decrease with age.

Diane is a new independent financial advisor and is trying to prospect for clients. To that end, she clearly showcases her CFP® and CLU® credentials on her website. She's networked with CPAs in her community for referrals and has joined multiple online planning networks. Moreover, she is as inclusive as possible, offering a range of services for people of all ages and backgrounds. Despite these efforts, she is having trouble converting any leads into clients. What might you recommend? (A) Remove her credentials from her website. (B) Stop asking for referrals from CPAs. (C) Remove her profile from online networks. (D) More clearly and narrowly define her target market and service offering.

(D). Financial advisors should avoid the temptation to be everything to everyone and focus on a narrow target market and service offering. Attaining credentials, networking, and building awareness of one's practice are all important components of a successful prospecting process.

A key principle of the financial planning process is: (A) Collect some form of compensation before performing any work. (B) Single-purpose financial planning is inferior to comprehensive financial planning. (C) If they follow the process thoroughly, planners do not need to recruit outside experts. (D) Understand a client's needs, goals, and situation before making recommendations.

(D). Gathering and analyzing client data should always come before developing or making recommendations. (A) is incorrect because some forms of compensation (such as AUM fees) may not be received until after recommendations are delivered. (B) is incorrect because the financial planning process applies to both single-purpose and comprehensive engagements; moreover, for some clients, single-purpose is preferable. (C) is incorrect because outside experts may be necessary even if the process is followed thoroughly.

Resolving Ethical Principles

1. Ascertain as many facts as possible 2. Examine existing options and/or determine new options 3. Evaluate Options

Guiding Ethical Principles

1. Integrity 2. Objectivity 3. Competence 4. Fairness 5. Confidentially 6. Professionalism 7. Diligence

Financial Life Cycle

1. early career (age 25 or younger to age 35) 2. career development (age 35 to 50) 3. peak accumulation (age 50 to ages 58-62) 4. preretirement (3 to 6 years prior to planned retirement) 5. retirement (ages 62-66 and older)

Sandwich Generation

A generation of people, typically in their thirties or forties, responsible for bringing up their own children and for the care of their aging parents

Comprehensive Financial Planning

Client oriented process that attempts to discover client goals before exploring potential solutions

Flat Fee Model and Hourly Model

Compensation is agreed upon by the advisor and client. This amount is derived from a calculation of the client's net worth, rather than the value of the portfolio and is paid in quarterly installments

Comprehensive Approach

Considers all aspects of a clients financial position, which includes the clients goals and objectives, and utilizes several integrated and coordinated planning strategies for fulfilling those goals and objectives

Critically Analyze Goals & Objectives

Critically Analyze Goals & Objectives

Define the Scope of Engagement

Define the Scope of Engagement

Develop Client Goals & Objectives

Develop Client Goals & Objectives

Develop and Present Recommendations and Alternatives

Develop and Present Recommendations and Alternatives

Data Gathering Sessions

Fact Finder

A formal agreement to proceed with the financial planning process should only be entered into after the first data-gathering interview.

False. A formal agreement to proceed can be entered into as soon as the client and the financial planner have sufficient information about each other to make the required commitment (although it is rare for this to occur before the first data-gathering interview).

Often we portray ethical issues in exclusive either/or terms. Dilemmas that financial advisors face only have two possible outcomes.

False. Often dilemmas may appear as having only two possible outcomes, but upon reflection may yield additional possibilities.

Team Based Financial Planning

Helps to address many of the failures of traditional problem solving methodology

Implementation

Implementation

Multi Purpose Approach

Maintain at least a large part of one of these planning areas, and perhaps some aspects of a second planning area. Majority of advisors

Prospecting

Method to which attain more ideal clients

Monitoring

Monitoring

Ongoing Relationship

Ongoing Relationship

Staging Meetings

Planners tend to break the financial planning process into a series of meetings

Single Purpose Approach

Single purpose planner who is there to address one specific area of financial planning

Precision

Spending sufficient time and study to recognize the existing systems of taxation and to understand that the rules for the imposition of the various types of taxes are often very different

Every advisor follows his or her own ethical compass both personally and in business settings. Even with a strong moral compass, financial services presents grey ethical areas from time to time.

True

Investment planning is intimately tied to the life-cycle process.

True

The financial services profession is characterized by an array of subdivisions, such as insurance agents, broker-dealers, and registered investment advisors. Each group is governed by a specific set of regulations and each practice raises particular ethical concerns.

True