Chapter 1: Intro to Financial Planning

A CFP professional is the principal advisor for a registered investment adviser (RIA) firm that manages $50,000,000 in client assets and sells life insurance products. He is likely to be regulated by all the following regulatory bodies

a state insurance commission. a state securities administrator. the CFP Board. NOT: SEC

All the following are usually included in an engagement letter EXCEPT

a summary of the recommendations. What is included: the defined parties to the agreement. a description of the fees and costs. the time horizon for the work to be completed.

Identify financial planning concepts that are applied to a client's financial plan considering the client's profile, financial goals, and values.

• an evaluation of the client's risk management portfolio (includes risks retained and risks transferred through the use of insurance contracts) • financial statement preparation and analysis including cash flow analysis and budgeting • emergency fund and debt management (short-term goals) • long-term goal planning including: >>>achieving financial security (retirement planning) >>>education planning for children's or grandchildren's college or private secondary education >>>planning for lump-sum purchases (major expenditures) >>>legacy planning (estate planning) • income tax planning is integrated throughout all aspects of a financial plan • the investment planning portfolio is used to fund many of the client's short-and long-term goals

the duty of fair dealing requires that brokers

-provide suitable recommendations to customers -receive fair and reasonable compensation

Types of fiduciary relationships in financial planning include the following:

1. An executor or personal representative of an estate has a duty to act in the best interests of the beneficiaries of the estate. 2. A trustee must act in the best interests of the trust beneficiaries. 3. Guardians are appointed to act in the best interests of the person who is their ward. 4. An agent under a Power of Attorney document is a fiduciary who must act in the best interests of the principal. 5. Advisers to retirement plans have the duty to act in the best interests of the plan participants and beneficiaries. 6. Registered investment advisers are required to provide advice that is in the best interests of the clients.

trustee

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

Explain the difference between internal and external data collected as part of the financial planning process.

Internal data: Quantitative: Family info Insurance portfolio Banking and investments Taxes Retirement and employment Estate planning Personal financial info Qualitative: GOALS: · Education · Retirement · Employment · Savings · Charitable Risk Tolerance General attitudes towards spending External data: • Interest rates • Housing market • Job market • Investment market • Business cycle • Local insurance costs • Local cost of living • Expected inflation rate, both short and long term • Expected rate of increase in the prices of education and medical care • Legislation that may impact certain industry sectors (e.g., healthcare) • Current and expected income, gift, and estate tax rates

Know what the financial planner should attempt to accomplish during the client introductory meeting.

Introductory letter- · provide the client with a list of documents and information that the client needs to bring to the first meeting (e.g., get to know each other, collect some data, answer questions, clarify goals, reduce fears). · the client with establishing defined goals and discuss how the client's values fit into those goals. · general discussion of the client's personal data and family data. · The financial planner and client should mutually agree as to how they will communicate (e.g., email, office telephone, cell phone) and how often they will meet (e.g., 2 hours per week for 10 weeks). The client should be given a time frame over which the plan will be completed (e.g., 3 months). · planning process and fees, provide relevant and required disclosures, and answer questions that the client is likely to have · effectively manage the client's expectations and have a remedy for instances when the client is dissatisfied.

Maxine Li has been a client of yours for almost a decade. In your quarterly meeting with Maxine, you evaluate her retirement portfolio performance and ensure that the expected amount of progress is being made. In which part of the financial planning process are you engaged?

Monitoring Progress and Updating

regulatory authority for banking

Office of the comptroller of Currency (OCC0 Federal Reserve Board (FED) Office of Thrift Supervision

During a meeting with your client Cameron, you recommended that he purchase a personal liability umbrella policy (PLUP). In which part of the financial planning process were you engaged?

Presenting the Financial Planning Recommendation(s)

One of your clients, Armand, has expressed interest in enrolling in a local college. He has asked you about ways in which he might fund his education. During a meeting, you provide him with three education saving plans from which to choose. In which part of the financial planning process are you engaged?

Presenting the Financial Planning Recommendation(s)

Define the steps in the financial planning process.

Step 1: Understanding the Client's Personal and Financial Circumstances. In this step, the adviser needs to obtain qualitative and quantitative information for the client. The client infor-mation must be analyzed to obtain an understanding of the client's personal and financial cir-cumstances. This information will help the adviser and the client with step 2. • Step 2: Identifying and Selecting Goals. In this step, the adviser will work with the client to help identify potential goals, especially as it relates to goals that are mutually exclusive. For example, a client may be able to accumulate enough savings for a beach house or a house in the mountains, but not both without delaying retirement for several years. Once the potential goals are discussed and contemplated, the client must select and prioritize the goals with the help of the adviser. • Step 3: Analyzing the Client's Current Course of Action and Potential Alternative Course(s) of Action. In this step, the adviser considers the advantages and disadvantages of the client's current financial situation in light of the goals of the client. In addition, alternative courses of action are considered. • Step 4: Developing the Financial Planning Recommendation(s). This step is for determin-ing the recommended course(s) of action that will maximize the potential to achieve the goals of the client. • Step 5: Presenting the Financial Planning Recommendation(s). In this step, the adviser presents his or her recommendations to the client. • Step 6: Implementing the Financial Planning Recommendation(s). The person who is responsible for implementing the plan must be determined. The client or the adviser might have this responsibility depending on the engagement. If the adviser is responsible, then the adviser must identify and analyze actions, products, and services designed to implement the recommendations. The adviser and the client must discuss the basis for actions, products, or service, as well as the timing for implementation. Finally, the adviser must help the client select and implement the actions, products, or services. • Step 7: Monitoring Progress and Updating. Financial plans will need to change over time, especially as assumptions underlying the plan change. The responsibility for monitoring the financial plan must be established with the client. If the adviser has responsibility, then he or she must analyze, at appropriate intervals, the progress toward achieving the client's goals. Working with the client, the adviser would then make recommendations to modify the plan as needed and assist with implementing those recommendations.

In this step, the adviser will work with the client to help identify potential goals, especially as it relates to goals that are mutually exclusive. For example, a client may be able to accumulate enough savings for a beach house or a house in the mountains, but not both without delaying retirement for several years. Once the potential goals are discussed and contemplated, the client must select and prioritize the goals with the help of the adviser.

Step 2: Identifying and Selecting Goals.

At the end of the introductory meeting the planner should prepare an engagement letter and send it to the client for approval.

Step 3: Analyzing the Client's Current Course of Action and Potential Alternative Course(s) of Action

exectuor

The executor or personal representative is appointed by a court to gather the decedent'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.

You meet with Geoffrey, a new client , who provides you with his tax returns from the previous year. In which part of the financial planning process are you engaged?

Understanding the Client's Personal and Financial Circumstances

Garbage In Garbage Out A new financial planner recommends her client max out his retirement plan, health savings account, and IRA. Her analysis shows that the client will maintain a $3,000 cash-flow surplus each year.

Unfortunately, the planner never learned that this client is an independent contractor and not an employee. Independent contractors pay additional taxes and have fewer employee benefits. Had the planner collected this data, she would have found that the client not only doesn't have a $3,000 surplus, but that he will have a $4,000 deficit!

one of the most critical steps in the financial planning process

development and presentation of dinancial plan recommendations

· defining goals, needs, and objectives gathering data · projecting the result of no action formulating alternative possibilities selecting from those alternatives · establishing who is expected to implement which elements of the plan (this can be subject to revision at the implementation phase of the process) · defining who has monitoring responsibilities delineating services that are not provided, such as legal documents or income, gift, or estate tax return preparation

engagement letter

At the end of the introductory meeting the planner should prepare an

engagement letter and send it to the client for approval.

During this step, the advisor will consider both internal and external information, which can be thought of similarly as microeconomic and macroeconomic factors at the individual level.

gathering client data

After signing the engagement letter, the advisor can proceed to the first step in the financial planning process

gathering client data (understanding the client's personal and financial circumstances)

financial planning

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

The duty of fair dealing requires that brokers

provide suitable recommendations to customers receive fair and reasonable compensation.

A workable goal for financial planning purposes should be

specific, prioritized, and measurable, achievable, and realistic.

client benefits of the planning process

· helps to identify risks and to establish and prioritize goals. · helps to anticipate where financial needs exist (such as, education and retirement needs) and where new risks may arise (for example, long-term care insurance and property and liability insurance on newly acquired major assets) · provides the client with choices and alternatives to consider, enhancing the awareness of the opportunity costs of foregone options (see Chapter 15 on Economics for more information on opportunity costs) leading to better decisions

client benefits of the plan itself

· establishes benchmarks (metrics) within a finite time frame where a comparison with actual results creates an early warning system for deviations · keep the client focused on achieving the objectives of the plan and provides for more efficient and effective resource utilization

elements of an engagement letter (5)

• define the parties to the agreement • a description of the mutually agreed upon services (the scope of work) • the time horizon for the work to be completed • a description of the fees and costs • the obligation and responsibilities of each party (planner/client)

The engagement letter does not include parts of the plan itself, such as

•assumptions. •recommendations. •analyses.