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Financial Planning Process

1. Understanding the clients personal & financial circumstances

2. Identifying & Selecting goals

3. Analyzing client's current course of action & potential alternative courses of action

4. Developing the financial planning recommendations

5. Presenting the financial planning recommendations

6. Implementing the financial planning recommendations

7. Monitoring progress & updating

Qualitative Internal Data

Goals, Values, Risk Tolerance, Psychology

Quantitative External Data

Current Income, Expected future income, family members' ages, value of assets & debts

External Data

Gift & Estate taxes, investment returns, inflation rate, interest rates, cost of living, housing market, stage of business cycle

Goals

Must be objective & stated in specific and measurable terms

Fiduciary Duty

Acting in client's best interest at all times & placing the clients' interests above the interests of the planner.

Exceptions to Fiduciary Duty

- when acting as a broker to sell investment or insurance products

- when speaking to an individual who is not their client

- when providing information for the general public

Reasonable Basis Suitability

Broker that ensures they have an adequate understanding of an investment before recommending it

Customer-Specific Suitability

Requires a member has a reasonable basis that a recommendation is suitable for a specific customer

Quantitative Suitability

Basis for believing a series of recurring transactions are not excessive or unsuitable

Developmental School of Counseling

-believes human development occurs in stages over time

-humans develop & progress in a predictable sequence

-disruptions at a particular stage of development will result in predictable problems

EX: wealthy client who grew up poor saves 90% of income

Humanistic School of Counseling

-origins in positive psychology & self-esteem movement

-mental health is congruent & aligned thoughts, feelings & behavior

-acceptance of personal responsibility

EX: do not direct what they do but what they WANT to do and help them

Cognitive-Behavioral School of Counseling

-all behavior is subject to reinforcement

-humans have the same learning principles established in animal research

EX: FP has curriculum for clients to check progress & have HW

Traditional Finance

-Modern Portfolio Theory

-investors are rational

-markets are efficient

-investors want highest return for lowest risk

Behavioral Finance

-supplements traditional finance

-investors are human with irrational biases (influenced by sentiment)

-markets are not efficient

-risk alone does not determine returns

Anchoring

attaching one's thoughts to a reference point, even though there may be a legal relevance or pertinence to the issue

Confirmation Bias

looking for information that supports prior beliefs

Herding

belief that if such a large group of people believe something to be correct then it is

Hindsight

looking back after the fact is known

Overconfidence

investor relies mostly on their own skills & capabilities

Overreaction

common emotion towards the receipt of news or information

Representativeness

Assessing the probability of an event happening based on how similar it is to a previous event

Recency Bias

Giving too much to recent observations versus long term historical trends

Illusion of Control

Overestimate our ability to control outcomes

Sunk Cost Fallacy

resistance to sell a bad investment or continuing to invest in a bad project

Availability Bias

decision makers rely on knowledge that is readily available to them

Outcome Bias

judging a decision based on its outcome

Self-Attribution Bias

Investors attribute successful outcomes based on their own actions and bad outcomes based on external factors

Framing

influence in the manner that a decision is framed

Loss Aversion

Loss is felt worse than the equivalent gain

Mental Accounting Bias

Tendency to treat money differently based on how we obtain it or what we intend to spend it on

The Disposition Effect

Investors are reluctant to realize losses (caused by faulty framing)

Summarization

Brief of summary of what the client has stated

Reflection Statements

used when client is emotional "sounds like your upset"

Active Listening

clarifying statements, "I wanna make sure I heard that correctly"

Paraphrasing Statement

Planner rephrases what the client has said

Three Psychological Needs

autonomy, competence, relatedness

Intrinsic motiv.

from within, associated with satisfaction

Externa motiv.

comes from outside reward, avoidance of punishment

Cognitive Evaluation Theory

Suggests social contextual events can enhance intrinsic motivation

Money Avoidance

Money = Bad

Undeserving of money

Financial self- sabotage, gives away money, ignores money

Money Worship

Money = Happy

Money is limitless

Hoards, overspends, prioritizes money

Money Status

Money = Power, risky financial behaviors, accumulates debt, spends freely

Money Vigilance

Money = Anxiety

Money should be saved

Frugal, lives within means, prioritizes saving

Compulsive Buying Disorder

tendency to engage in compulsive shopping & spending in response to negative life events

Hoarding

Difficulty in letting go

Workaholism

fear not having money so work at expense of personal relationships

Financial Enabling

Reliance on unearned income from another person to extent it creates anxiety around fear of getting cut off

Gambling Disorder

Mental health disorder of problematic gambling

Financial Dependence

Occurs when one individual provides assistance to keep another individual dependent

Financial Infedelity

The act of engaging in significant financial transactions without the knowledge and support of a spouse or partner

Financial Enmeshment

When parents involve their children in adult financial decisions and conflicts when the child is not yet emotionally and cognitively prepared.

Life Cycle Approach

-broad view of the client financial profile that matches a client's goals with their stage in life

Asset Accumulation Phase

early 20s to mid 50s

-primary focus is accumulating assets

-high debt to NW ratio

Conservation Phase

early 30s to early 70s, planning for family & untimely death, illness, accidents, etc.

Distribution/Gifting Phase

Mid 40s to end of life. concerned about living off of assets & preserving wealth to transfer to future generations

Two Step Approach

Step 1- cover the risks,

Step 2-save and invest

Three Panel Approach

-risk management (LI, DI)

-short term savings/investment/debt management

-long term savings/investments

-catastrophes include, death of a parent, disability, and insufficient liability insurance

Panel 1

Risk management. Cover catastrophic risks, evaluate need for & quality of personal insurance

Panel 2

Meet short term obligations & manage debt.

-evaluate adequacy of: emergency fund, portion of income spent on housing

Panel 3

Meet financial security goal

-evaluate progress toward: retirement goal, education funding goal, large purchase goals, legacy goals

Strategic Approach

-codifies clients big-picture goals while considering external environment

-needs vs wants, SWOT analysis

-develop mission statement

Cash Flow Approach

uses income statement and expenses to make recommendations

-prioritize no Cash flow impact then negative CF impact then positive CF impact

Liquidity Ratios

Ability to meet short-term obligations.

Financial Security Ratio

Determines progress towards long term goals

Debt Ratios

how well debt is managed

Performance Ratio

Adequacy of investment returns relative to risk

Good Debt

interest rate is relatively low in comparison to expected inflation and interest rates

-expected payback period is much less than expected economic life

Reasonable Debt

Payback period is longer or returns on the debt are positive but less certain

Bad Debt

High interest rates or economic life is exceeded by payback period

Vertical Analysis

analyzing items on financial statements in relation to another, as a percentage, usually stated as % of gross income

Horizontal (Trend) Analysis

Compares items to themselves across prior year statements

-compare trends over time

Stafford Loans

The most common form of government student loans, and are awarded to college students who file FAFSA. This type of loan can be subsidized or unsubsidized. Two of the benefits of this type of loan: lower interest rates than private loans and they are not credit-based.

Standard Repayment Plan

10 years with minimum monthly payments of $50

Extended Repayment Plan

up to 25 years, must have $30K + in debt

Graduated Repayment Plan

up to 10 years low payment initially

-payments increase every 2 years up to 3x original amount

Income-Driven Repayment Plan

Payments are based on how much money you make and your family size. After making a certain number of payments, the rest of your loan balances will be forgiven.

Income-Contingent Repayment (ICR) Plan

No more than 20% of borrowers discretionary income

- shortfall to interest added to principal

- after 25 years balance forgiven & taxed as collection of indebtness income

Income-Based Repayment (IBR)

Payment 10% of discretionary income

-20 years and forgiven & taxed

Financial Need

The difference between the cost of attending a particular school and the expected family contribution.

Low Income Long Time Horizon

-savings bonds

-529 plans

Low Income Short Time Horizon

-subsidized fed student loans

-financial aid

-IRAs

High Income Long Time Horizon

-529 plans

-UGMA/UTMA

-Life insurance

High Income Short Time Horizon

-401k loans

-IRAs

-Parent PLUS loans

-Private student loans

-HELOCs

American Opportunity Tax Credit

-up to 2500 per student per year for first 4 years of qualified higher ed expenses

-100% x first 2k + 25% x second 2k

Lifetime Learning Tax Credit

-up to 2000 per family for unlimited years if pursuing post grad

-20% x up to 10K (over 10K = 2000)

Code of Ethics

1. Act with honesty, integrity, competence & diligence

2. Act in client’s best interest

3. Exercise due care

4. Avoid or disclose and manage conflicts of interest

5. Maintain the confidentiality and protect the privacy of client information

6. Act in a manner that reflects positively on the financial planning profession & CFP certification

Standards of Professional Conduct

Code of Ethics & Standard of Conduct

Procedural Rules

Fitness Standards

Duties to Clients

Integrity, Competence, Diligence, Objectivity, Confidentiality

FP in Writing

Privacy policy, services & products, how client pays, compensation, public discipline & bankruptcy, referral compensation, other material information, terms of engagement, implementation responsibilities, monitoring and updating responsibilities

FP Orally (Documented) or in Writing

Conflicts of Interest

FA in Writing

Privacy Policy

FA Orally or in Writing

Conflicts of Interest, Services and Products, how client pays, compensation, other material information, public discipline and bankruptcy, referral compensation, other material information

Categories of Sanctions

Private censure, public censure, suspension, administrative suspension, revocation, administrative revocation, interim suspension

Categories of Adverse Conduct

1. Conduct that presents an absolute bar

2. Conduct that renders an applicant currently ineligible

3. Conduct that requires a petition for fitness

Conduct that Presents an Absolute Bar

1. Professional discipline for intentional or reckless fraud, theft of client funds, misrepresentation to clients or other dishonest acts involving clients

2. Felony Conviction for

   1. fraud, theft, embezzlement, racketeering, antitrust, blackmail, bank or tax related crime

   2. false statement, declaration or perjury

   3. obstruction of justice

   4. identity theft

   5. treason, sedition

   6. drug trafficking or gambling

   7. human trafficking, cp or child abuse

   8. arson

   9. sex related offenses

   10. homicide

   11. any other violent crime

Conduct that Renders an Applicant Currently Ineligible

1. Profession discipline that

   1. Currently bars the applicant from obtaining a license or registration to provide professional services

   2. Resulted in suspension or revocation of professional/securities licenses

   3. Currently limits or prohibits applicant from being able to appear before a regulatory authority

2. Statutory disqualification under the Securities Exchange Act of 1934 that currently prevents them from obtaining a professional services license

3. A surrender of professional licenses as result of a regulatory action or investigation

4. CFP Board detects information that requires further investigation to determine ethical fitness

Conduct that Requires a Petition for Fitness

1. A professional discipline that

   1. was based on applicants fraud, theft or misrepresentation

   2. previously barred the applicant from obtaining a Professional services license

   3. previously suspended or revoked applicants professional license

   4. previously limited applicant from appearing before a regulatory authority

   5. was based on applicants conduct and resulted in a fine of more than $5k

   6. was based on applicants conduct and resulted in disgorgement or restitution of any amount

2. Statutory disqualification that previously prevented the applicant of obtaining a professional license

3. Surrender of a license in response to a regulatory action or investigation

4. A felony conviction that does not result in an absolute bar

5. Conviction for an offense that is not a felony but would result in absolute bar if it were

6. Relevant misdemeanor conviction

7. One or more filings or adjudications for personal or business bankruptcy

8. An unsatisfied tax lien or judgement lien

9. The Applicant us subject of a civil finding that the applicant:

   1. violated a law rule or regulation concerning professional services

   2. engaged in fraud, theft, misrepresentation or violence

10. The applicant is the subject of

    1. three or more client disputes in which clients have made allegations of misconduct

    2. a lesser number if CFP Board would recommend a public sanction under their guidelines

11. Applicant is subject of

    1. two or more firm terminations

    2. one firm termination if CFP board recs public sanction

12. CFP Board finds probable clause for actions resulting in sanction under their guidelines

Chapter 7 Bankruptcy

For wage earners to discharge debts by liquidation

Chapter 11 Bankruptcy

For companies to reorganize and adjust debts