Fundamentals of Financial Planning

Which activity below is NOT performed in Step 1 - Understanding the Client's Personal and Financial Circumstances? -Identify potential goals -Obtain the qualitative and quantitative information needed -Analyze the information for completeness and accuracy -Terminate the engagement if the client is unable or unwilling to provide the information needed

Answer: Identify potential goals. This happens in Step 2 NOT Step 1

When is a certificant responsible for monitoring and updating in Step 7 of the Financial Planning Process? -Whenever the certificant provides the products being implemented -Whenever more than one recommendation is part of the financial planning services provided -If specifically included in the Scope of Engagement -At all times

Answer: If specifically included in the Scope of Engagement Reason: The certificate is responsible only if the Scope of the Engagement assigns the responsibility to the certificant

Practice Question: You are a CFP® certificant. You were engaged by Mary (age 55) to provide financial planning services. A key part of the financial plan is retirement planning. She defers the maximum possible into her company's 401(k) plan and lacks the resources to save any more. She enjoys her job, is in excellent health and owns her home free and clear of any mortgage debt. She doubts the long-term solvency of Social Security and its ability to pay her full retirement benefit. Mary's goals follow: -Her top priority is retirement from full-time employment no later than age 62. -She hopes to retire with 85% of the purchasing power of her current after-tax compensation. -She would prefer not to count on her full Social Security benefit as a reliable source of income in retirement. Given these goals and assumptions, your initial analysis indicates she is unlikely to achieve her retirement goal on her current course of action. Which of the following is the least appropriate potential alternative to recommend to Mary? -Work part-time in retirement Accept less than an 85% purchasing power replacement -Invest in low credit quality high-yield (junk) bonds -Include a portion of her Social Security retirement benefit in her retirement plan

Answer: invest in low credit quality high-yield (junk bonds) NOT appropriate!

Index of coincident indicators (comprised of economic variables that change along with the business cycle)

- # of employees on non-agricultural payrolls (payroll employment) - index of industrial production or industrial output -level of manufacturing and trade sales which measures total spending in real dollars -personal income measured in real dollars, excluding transfer payments (Social Security)

Index of lagging economic indicators (Summarizes PAST performance)

- AVG Duration of employment - Inventories to sales ratio, manufacturing and trade -Labor cost per unit of output, manufacturing -Average Prime rate -Commercial and industrial loans -Consumer installment credit to personal income ratio -Consumer price index for services

The Fed has 4 tools to implement monetary policy (RODE)

- Reserve Requirement - Open Market Operations -Discount rate/Federal funds rate -Excess Reserve Deposits

The financial planner also needs to collect qualitative information from the client. Qualitative info includes the client's attitude and beliefs regarding:

-Education goals -Retirement goals -Employment goals -Savings goals -Risk tolerance -Charitable goals -General attitude towards spending

Why hire a financial planner?

-Expertise -Objectivity -Efficiency -Consistency -Resources

Examples of Inelastic goods

-Food -Medical Care -Toilet Paper

Items included in CPI

-Food and beverage: cereal, milk, coffee, snacks, etc. -Housing: rent, mortgage, etc. -Apparel: items of clothing -Transportation: new vehicles, airline fares, gasoline, insurance -Medical Care: prescription drugs, physician services, eye care, etc. -Recreation: TVs, toys, pets and pet products, sports equipment, etc. -Education and Communication: college tuition, postage, telephone services, computer software and accessories, etc. -Other goods and services: tobacco and smoking products, haircuts and other personal expenses etc.

There are 3 types of economic indicates that describe the current and future economy and business cycle they are:

-Index of Leading Economic Indicators -Index of Lagging Economic indicators -Index of Coincident Economic Indicators

_____ is important to track because the value of a _____ today will not be the same ten years from now.

-Inflation -Dollar

Federal Reserve has 3 goals

-Maintain PRICE LEVELS -MAINTAIN long-term economic growth -MAINTAIN full employment

5 integration factors

-Relevant Elements -Client's Financial Assets -Length of Time -Exposure to Risk -Barriers to Change

What are the 3 common measures of inflation?

-The Consumer Price Index (CPI) -The Producer Price Index & -GDP

The Federal Trade Commission focuses on many areas in regards to privacy policies. Two key areas are listed below. What are those 2?

-Unfairness and Deception -Financial Privacy

Which of the following statements concerning supply and/or demand is/are true? 1. If demand increases and supply simultaneously decreases, the equilibrium price will rise. 2. There is an inverse relationship between price and quantity demanded. 3.If demand decreases and supply simultaneously increases, the equilibrium price will fall. 4. If demand decreases and supply remains constant, the equilibrium price will rise.

1, 2 & 3

Leading Economic Indicators compromised of 10 data points that are relied on to predict changes in the economy. (6-9 mo. before the change occurs)

1. AVG weekly hours, manufacturing 2. AVG weekly initial claims for unemployment insurance 3. Manufacturers' new orders, consumer goods and materials 4. ISM index if New Orders (supplier deliveries, imports, production, inventories, new orders) 5. Manufacturers new orders, non-defense capital goods 6. Building permits, new private housing units 7. Stock prices, 500 common stocks 8. leading credit index (credit conditions, including yield curve data) 9. Interest rate spread, 10-year Treasury bonds less federal funds 10. AVG consumer expectations for business conditions

Unemployed refers to those individuals ______ years of age and olde who are not working and are making an effort to seek employment

16

Which type of bankruptcy provides for the total liquidation of an individual's or business' assets and liabilities? A) Chapter 7 B) Chapter 11 C) Chapter 13

A) Chapter 7

The Truth in Lending Act requires which of the following? A) Requires a lender to provide a clear disclosure of important terms used in the loan agreement and a list of all costs charged for a loan. B) Requires a lender to protect consumers' personal information held by financial institutions. C) Places restrictions on home loans to curtail predatory lending D) Requires a lessor to provide a clear disclosure of important terms used in the lease agreement and a list of all costs charged for a lease.

A) Requires a lender to provide a clear disclosure of important terms used in the loan agreement and a list of all costs charged for a loan.

Practice Question Which of the following is (are) relevant element(s) of a client's personal and financial circumstances? -Desire to reduce income taxes on nonqualified deferred compensation -Goal to save enough money to open a business -Need to optimize the return on cash and cash equivalents -Concern over unmanaged liability risks -All of the above

All of the above!

Step 3 Financial Planing process

Analyzing the client's current course of action and potential alternative courses of action

What affects supply other than prices?

Availability of some commodities is scarce (gold), others plentiful (sand). In addition to availability, labor costs, availability of skilled labor, technology improvements, government regulation, environmental impacts, cost of capital, amount of competition, etc., can all affect supply. Factors that influence supply are virtually unlimited and can vary by product or service.

A grocery store puts chocolate chip cookies on sale, which increases the demand for milk. What are the two products? A) Substitute. B) Complement. C) Elastic. D) Inelastic.

B) Complement. Rationale Since chocolate chip cookies and milk are consumed jointly, they are complements

Which of the following items would cause the demand curve to shift to the right? A) Increased savings rate. B) Decreased tax rate. C) Price change. D) More suppliers.

B) Decreased tax rate. Rationale Anytime consumers have more money in their pocket, the demand curve is going to shift up and to the right. A decrease in the tax rate puts more spending money in a consumer's pocket.

Roy Al Pain has been a client of yours for several years. During that time, Roy has been rude to both you and your staff on numerous occasions. He has used profanities in front of your staff and other clients, thrown things, and screamed at your staff. You have tired of working with Roy and want to terminate your relationship with him. Which of the following is true? A) You must continue the relationship since only clients can end the client/planner relationship. B) You should consult your engagement letter to determine your rights to terminate the relationship. C) You should start to offer sub-par services to Roy in hopes that he will tire of you and end your relationship. D) You should bad mouth Roy in the community and hope it gets back to him so he will decide not to work with you anymore.

B)You should consult your engagement letter to determine your rights to terminate the relationship. Rationale: You should consult your engagement letter to determine your rights to terminate the relationship. All engagement letters should detail the services to be provided as well as details on how the relationship can be terminated. You should not begin to offer sub-par planning as this can be considered malpractice. You should not bad mouth your clients as this violates confidentiality and is unprofessional.

Financial Privacy

By way of the Gramm-Leach-Bliley Act (GLB Act), the FTC works to protect consumers' personal information held by financial institutions

After meeting with your new client, Nala, you used a Monte Carlo simulation within your financial planning software to project the likelihood of meeting her retirement objective based on her current retirement plan contributions and investment portfolio allocation. Which part of the financial planning process were you engaged in? A) Monitoring progress and updating. B) Implementing the financial planning recommendations. C) Analyzing the client's current course of action and potential alternative courses of action. D) Developing the financial planning recommendations.

C) Analyzing the client's current course of action and potential alternative courses of action. Rationale Use of available technology and tools such as Monte Carlo simulations to evaluate the client's likelihood of meeting goals based on the current course of action is part of the analyzing the client's current course of action and potential alternative courses of action step of the financial planning process.

Movement along the demand curve represents a change in quantity demanded. Which of the following is the likely cause of a change in quantity demanded? A) Increased savings rate. B) Decrease tax rate. C) Price change. D) More suppliers.

C) Price change. Rationale Anytime there is a change in price, it is a movement along the demand or supply curve. Movement along the demand curve is a change in quantity demanded. A change in the savings or tax rates will cause the demand curve to shift. As more suppliers enter the market, the supply curve will shift to the left.

The Fair Credit Reporting Act (1971), Consumer Credit Reporting Reform Act (1996) and the Fair and Accurate Credit Transaction Act of 2003 provide protection to consumers in all of the following ways EXCEPT? A) Incorrect credit report information B) From invasion of privacy in the collection and dissemination of information C) Requires a lessor to provide a clear disclosure of important terms used in the lease agreement and a list of all costs charged for a lease. D) Provides consumers with an opportunity to challenge and correct the information that has been collected about them.

C) Requires a lessor to provide a clear disclosure of important terms used in the lease agreement and a list of all costs charged for a lease. (This is a provision of the Consumer Leasing Act)

What affects demand other than prices?

Cultural trends, income levels of consumers, availability of substitute products, perceived risks, climatic events (Hurricane Katrina dramatically increased the demand for generators), environmental legislation, etc., are examples of events or conditions that can affect demand. Factors that influence demand are virtually unlimited and can vary by product or service.

During a period of recession /contraction, which of the following would be true? 1. The supply of goods and services would be decreasing. 2. Interest rates would be decreasing. 3. Unemployment would be increasing. 4. Inflation would be decreasing. A) 1 and 2. B) 1 and 3. C) 1, 2 and 4. D) 1, 2, 3, and 4.

D) 1, 2, 3, and 4. During a recession / contraction, there is a decline in demand. GDP is decreasing, inflation is decreasing, and unemployment is increasing. Since demand is decreasing, the supply of goods and services will also be decreasing. To stimulate economic growth, the money supply will likely increase, causing interest rates to decline

Which of the following is NOT one of the primary responsibilities of the Federal Reserve? A) Maintain price levels supported by the economy. B) Maintain long-term economic growth. C) Maintain full employment. D) Ensure consistent positive returns in the equity markets.

D) Ensure consistent positive returns in the equity markets. Rationale The Federal Reserve's primary responsibilities are: 1: Maintain price levels 2: Maintain long-term economic growth 3: Maintain full employment

Low interest rates and high unemployment would be characteristic of what phase of the business cycle? A) Expansion. B) Peak. C) Contraction. D) Trough.

D) Trough. Rationale Expansion: increasing interest rates, decreasing unemployment Peak: highest interest rates, lowest unemployment Contraction: decreasing interest rates, increasing unemployment Trough: lowest interest rates, highest unemployment

Your client, Jed, engaged you to help him with his financial situation. During the course of your meetings you sold Jed a $1,000,000 life insurance policy. Which part of the financial planning process were you engaged in? A) Analyze the client's current course of action and potential alternative course of action. B) Monitoring progress and updating. C) Developing the financial planning recommendations. D) Implementing the financial planning recommendations.

D. Implementing the financial planning recommendations. Rationale By actually selling the insurance product you are now implementing plan recommendations.

Tightening monetary policy =

Decrease the supply of $ and ultimately increase short term interest rates, in an effort to slow down consumer spending.

_______ is a decrease in overall price levels of goods and services

Deflation

______a slowdown in the rate of inflation or a slowdown in the rate of price increase of goods and services. Inflation is continuing, but at a declining rate

Disinflation

An _____ is a legal agreement (a contract) between a professional organization (the planner) and a client that defines their business relationship.

Engagement letter

The ____ or personal representative is appointed by a court to gather the dependent's assets, resolve claims and disputes against the estate, invest assets during the period of administration, prepare an accounting of the estate assets, and make distributions to the beneficiaries according to the will or intestacy laws.

Executor

T or F: Inflation results in transfer of wealth from borrowers to holders

FALSE

T or F: Microeconomics is the study of economic factors that impact the economy as a whole including GDP, unemployment, and inflation.

FALSE

T or F: Long-term goal planning includes emergency funding, financial security planning, education planning, lump-sum purchase planning, and legacy planning.

FALSE! Reason:

A __ is a person in a position of ___ and ____ who is required to act for the benefit and best interest of another person

Fiduciary, trust, confidence

A Russian national hockey player that plays professional hockey in the U.S. would be included in the U.S. _____, but NOT in the U.S. ____.

GDP; GNP

A U.S. businessman who owns a manufacturing company in China would be included in U.S. ____ but NOT U.S. ____

GNP, GDP

_____ is a process that begins with establishing ______

Goal Setting, Priorities

Financial Planning is a means to attain ____ while ____concerns and fears

Goals, Managing

Elastic goods

However, an expensive ice cream or liqueur is more easily eliminated or substituted with a less expensive product and is, therefore, elastic

Step 2 Financial Planning process

Identifying and selecting goals

The Identity Theft and Assumption Deterrence Act (1998 ) for the first time made _________ a ______ and gives consumers specific rights when they become (or believe they have become) the victim of identity theft.

Identity theft; federal crime

Supply

If the price for a good or service increases, assuming all other non-price factors are the same, we would expect the supply of that good or service (quantity) to increase as manufacturers or service providers are attracted by the higher prices. The reverse is also expected; if the price for goods or services declines, we expect the supply to decrease. This is illustrated in the supply curve below.

Demand

If the price for a good or service increases, we expect the demand by consumers (quantity) will decline, assuming all other non-price factors remain the same. This, of course, also works in reverse; if the price of a product or service decreases, assuming all other non-price factors remain the same, the demand will increase. This is shown in the demand curve seen below

The CFP® certificant is responsible for _________ unless specifically relieved of that responsibility by the client. This is true even if the certificant is not selling or providing the product, action or service.

Implementation

The "erosion of purchasing power"

Inflation

_____ represents an increase in the general level of prices of goods and services representing the economy as a whole over a period of time and without a corresponding increase in productivity.

Inflation

Disinflation

Inflation continuing but at a declining rate. slowdown in the rate of inflation or a slowdown in the rate of price increase of goods and services.

Government Fiscal Policy

Influence on the economy through taxation and spending.

Monetary Policy

Intended influence on -money supply + -interest rates

The Business Cycle

It is important to understand that the economy grows and shrinks in a four-phase cycle

Centered on the entire or broader economy and uses measurements such as the GDP, inflation, unemployment, and investment in order to determine the performance of the overall economy

Macroeconomics

Gross National Product (GNP)

Measures the total final output by the citizens of a country, whether produced domestically or in a foreign. country. GNP does NOT include the output of foreigners in a country.

Focuses on the decisions off individuals and firms, such as those that affect supply and demand and the resulting pricing of products and services

Microeconomics

You are helping your client identify, select and prioritize goals. You are in which step of the Financial Planning Process? -Step 1 - Understanding the Client's Personal and Financial Circumstances -Step 3 - Analyzing the Client's Current Course of Action and Potential Alternative Courses of Action -Step 4 - Developing the Financial Planning Recommendations -None of the above

NONE of the above! Reason: This happens in Step 2 - Identifying and Selecting goals

_____ measures the value of goods and services in CURRENT prices

Nominal GDP

You just analyzed the qualitative and quantitative information provided to you by your client. You are in what step in the Financial Planning Process? Step 3 - Analyzing the Client's Current Course of Action and Potential Alternative Courses of ActionStep 4 - Developing the Financial Planning Recommendations Step 5 - Presenting the Financial Planning Recommendations None of the above

None of the above: Correct. The action you took describes Step 1 - Understanding the Client's Personal and Financial Circumstances

Frictional unemployment occurs when...

People are VOLUNTARILY unemployed because they are seeking other job opportunities and they haven't found the desired employment yet.

A_____ is a legal document allowing the principal to name an agent to handle the principal's financial affairs under certain circumstances

Power of attorney

An interest rate is the ____ that a borrower pays to borrow money

Price

_____ measures the value of goods and services at a base year price

Real GDP.

Monetary Policy (The Federal Reserve)

Regulates interest rates and the money supply.

Gross Domestiv Product (GDP)

Represents the total final output of a country, by its citizens and foreigners in the country, over a period of time.

Truth in Lending Act

Requires lenders to provide written disclosures to borrowers about the terms and cost of consumer loans in a standardized manner. The disclosure includes the costs associated with borrowing, how they are calculated, and the Annual Percentage Rate (APR) they are paying for the loan.

reserve requirement

Requires that banks maintain a certain % or their deposits on hand, in the form of cash known as their reserve requirement. Assets= Loans + Cash Liabilities = Deposits

Do not assume the certificant is responsible for monitoring and updating unless the ________ explicitly states so.

Scope of the Engagement

Process of Financial Planning (7 Steps) U.I.A.D.P.I.M.

Step 1: Understanding the Client's Personal and Financial Circumstances Step 2: Identifying and Selecting Goals Step 3: Analyzing the Client's Current Course of Action and Potential Alternative Course(s) of action Step 4: Developing the Financial Planning Recommendations Step 5: Presenting the Financial Planning Recommendations Step 6: Implementing the Financial Planning Recommendation(s) Step 7: Monitoring Progress and Updating

You are selecting a recommendation from among the potential alternatives to the client's current course of action. Once you have selected the recommendation, what is the next step in the Financial Planning Process? Step 3 - Analyzing the Client's Current Course of Action and Potential Alternative Courses of Action Step 4 - Developing the Financial Planning Recommendations Step 5 - Presenting the Financial Planning Recommendations Step 6 - Implementing the Financial Planning Recommendations

Step 5 - Presenting the Financial Planning Recommendations Correct.

If GDP is slowing and unemployment is increasing, the Federal Reserve may want to ______ or expand the economy. In an effort to expand the economy, it may _______monetary policy. The Fed will take steps to _____ the money supply, which will put downward pressure on ________ rates.

Stimulate Ease Increase Interest

T or F: At the introductory meeting, the financial planner will collect data, come to understand the client's values and goals, establish the scope of engagement and discuss fees.

TRUE

T or F: CPI measures the overall price levels for a basket of goods and services that consumers purchase.

TRUE

T or F: Personal financial planning is the comprehensive process of formulating, implementing and monitoring financial decisions that guide the client to achieve financial goals

TRUE!

What does the unemployment rate measure?

The % of workers that are UNABLE to find work

leading economic indicators

The Conference Board Inc. (CBI) calculates and regularly publishes the "Leading Economic Index" (LEI) composed of 10 leading economic indicators. Economists, governments and businesses around the world watch the LEI closely as a key indicator of the United States economic status. The Conference Board is a non-profit, international organization supported by businesses around the world.

Consumer Leasing Act

The Consumer Leasing Act requires a lessor to provide a clear disclosure of important terms used in a lease agreement and a list of all costs charged for a lease.

Equal Credit Opportunity Act

The Equal Credit Opportunity Act makes it unlawful for any creditor to discriminate against any applicant, with respect to any aspect of a credit transaction, on the basis of race, color, religion, national origin, sex, marital status, or age.

International Transactions

The cost of goods traded between countries can fluctuate due to changes in currency values relative to each other.

equilibrium price

The equilibrium price of a product or service is the theoretical price where supply and demand "meet." That is the price where the supply of a particular product or service would be completely consumed and demand would no longer exist. If current prices are above the equilibrium price, supply will exceed demand. If current prices are below the equilibrium price, demand will exceed supply. The equilibrium price in the supply and demand curve graphic is where the two curves meet.

The law of supply and demand

The price of any product or service in a free economy will fluctuate based on the supply and demand for that product or service.

Supply & Demand

The price of any product or service in a free economy will fluctuate based on the supply and demand of that product or service

Personal Financial Planning (financial planning)

The process of formulating, implementing, and monitoring financial decisions into an integrated plan, which guides an individual or a family to achieve their financial goals.

What does GDP measure?

The total economic output of a country

Inelastic goods

There are those goods and services that are considered essential, that we will typically purchase at any price.

Fair Credit Reporting Act (1971), Consumer Credit Reporting Reform Act (1996) and the Fair and Accurate Credit Transaction Act of 2003

These Acts provide consumers protection from harm due to incorrect credit report information and from invasion of privacy in the collection and dissemination of information, provide consumers with the right to know who is gathering information about them and the nature of the information gathered, and provide consumers with an opportunity to challenge and correct the information that has been collected about them.

Home Ownership and Equity Protection Act (HOEPA)

This act places restrictions on home loans to curtail predatory lending.

A ____ is named in a trust document to manage trust assets during the continues existence of the trust. The ___ invests the property, collects income, and makes distributions to the beneficiaries according to the directions of the trust provisions.

Trustee

Unfairness and Deception

Under section 5 of the FTC Act, which prohibits unfair or deceptive practices, the FTC enforces the promises made to consumers by companies regarding consumer privacy and the precautions they take to secure personal information of their customers.

Step 1 Financial Planning process (3 tasks)

Understanding the Client's Personal and Financial Circumstances: -Obtain qualitative & quantitative info -Analyze the info for accuracy & completeness -Address any incomplete information

Practice Question: An individual, not currently your client, has asked for your help with an IRA contribution question. She wants to know if she should contribute to a Roth IRA or Traditional Deductible IRA for the current year. You are a CFP® professional and have clearly communicated the difference between Financial Advice and Financial Planning to her. You have agreed to make a recommendation on whether or not your client should contribute to a Traditional deductible IRA or Roth IRA. Additional information follows: -Your advice is limited to this one issue and you will provide no other financial advice. -You have a signed a scope of engagement with the individual, now your client, that clearly limits your responsibility to make a recommendation on this one issue. -The client has not asked you to make recommendations on any other financial planning area such as an overall retirement strategy, risk management, investment, tax or estate planning. -The client has not asked any questions of you except those relating directly to the issue at hand; the information provided by the client relates only to this one issue. -The client believes, but has not communicated that belief to you, that you are providing financial planning services. According to CFP Board's Practice Standard B-3, is it likely or unlikely that you are providing financial planning to this client?

Unlikely:

Deflation

a decrease overall price levels of goods and services. As a result, there is a transfer of wealth from borrowers (like homeowners) to holders of cash.

Step 3 Financial Planning Process. The certificate must ____ whether own to the client will achieve his or her goals on the current course of action. If the goal will not be achieved, the certificate must develop ____ to the ___ course of action

analyze, alternatives, current

Producer Price Index (PPI)

measures the inflation rate for raw materials used in the manufacturing process

Federal Reserve controls

money supply + interest rates

The CPI measures:

the overall price levels for a basket of goods and services

cyclical unemployment occurs when...

there is an overall downturn in business activity and fewer goods are being produced causing a decrease in the demand for labor (related to changed in the business cycle)

Structural unemployment occurs when...

there is inequality between the supply of adequately skilled workers and the demand for workers

A financial plan is a

written documents that generally sets out a list of recommendations to achieve a set of goals and objectives based on an understanding of a client's current financial and personal situation.