11/3 Flash Cards: Introduction to Financial Planning and Behavioral Finance

Vocabulary practice flashcards covering the seven-step financial planning process, life cycles, CFP mark standards, ethical duties, and behavioral finance fundamentals.

UGADPIM

The acronym representing the CFP Board's seven-step financial planning process: Understand, Goals, Analysis, Develop, Present, Implement, and Monitor.

Quantitative Information

Objective, factual data gathered in step one of the financial planning process, including tax returns, trust documents, insurance policies, and numerical values needed to prepare balance sheets or cash flow statements.

Qualitative Information

Subjective information gathered from a client, such as their feelings regarding life expectancy, values, attitudes, expectations, earnings potential, risk tolerance, needs, and priorities.

Step 1: Understanding the Client's Personal and Financial Circumstances

The first step of the financial planning process, involving the gathering of qualitative and quantitative data, assessing the client's current situation, and addressing any incomplete information.

Step 2: Identifying and Selecting Goals

The second step of the financial planning process, where the planner discusses the client assessment, establishes reasonable assumptions, identifies priorities among competing goals, and addresses any unreasonable goals.

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

The third step of the financial planning process, focused on evaluating the advantages and disadvantages of what the client is currently doing versus potential alternatives, prior to making recommendations.

Step 4: Developing the Financial Planning Recommendation(s)

The fourth step of the financial planning process, where the planner formulates recommendations designed to maximize goal achievement, documents their basis, and evaluates their timing, priority, and cross-area impacts.

Step 5: Presenting the Financial Planning Recommendation(s)

The fifth step of the financial planning process, involving a collaborative discussion with the client regarding proposed recommendations, underlying assumptions, alternatives, and timing, presented either orally or in writing.

Step 6: Implementing the Financial Planning Recommendation(s)

The sixth step of the financial planning process, where specific actions, products, and services are recommended and responsibilities are assigned; the planner remains responsible for implementation unless explicitly excluded in writing from the scope of engagement.

Step 7: Monitoring Progress and Updating

The final, cyclical step of the financial planning process, requiring ongoing review of qualitative and quantitative data, updating client goals, and revising recommendations over time.

Contextual Variables

Circumstantial factors—including family status, net worth, income level, career stage, and health issues—that frame a client's unique situation and alter how financial planning scenarios are interpreted.

Asset Accumulation Phase

The financial life cycle phase extending until roughly age 45, typically characterized initially by limited investment capital, high debt, low net worth, and a lack of concern for risk.

Conservation (or Protection) Phase

The financial life cycle phase typically spanning ages 45 to 60, characterized by higher cash flow, increased net worth, lower debt, and an aversion to risk.

Distribution (or Gifting) Phase

The financial life cycle phase lasting from approximately age 60 or retirement until death, characterized by estate planning, wealth distribution, high net worth, high cash flow, and very low debt.

CFP® Mark Display Rules

Mandated formatting rules requiring the mark to appear in all capital letters, with a registered trademark symbol, without periods, and followed by an approved noun (such as certificant, professional, or practitioner) unless placed directly after an individual's name.

Competence

The ethical standard requiring a planner to possess relevant knowledge and skill in an area, or otherwise gain competence, seek professional help, limit the engagement, refer the client out, or terminate the engagement.

Informed Consent

Client agreement obtained when a planner discloses a conflict of interest such that the client fully understands the conflict and consents to proceed; it may be provided orally or in writing.

Behavioral Finance

The study of why people make irrational financial decisions as a result of cognitive errors and emotional biases, accounting for approximately 7% of the CFP exam.

Risk Tolerance

The trade-off between risk and return that a client is willing to accept, describing how they subjectively feel about taking financial risk.

Risk Perception

A client's subjective assessment and understanding of the magnitude of the financial risk being taken.

Risk Capacity

A client's financial ability to absorb and recover from significant monetary losses using existing resources, determined by factors such as age, income stability, and liquid assets.

Risk Literacy

A client's ability to properly interpret and act upon risk-related information, understand statistical probabilities, and make informed choices regarding financial risk.

Kinesthetic Learning Style

A hands-on, tactile approach to processing information where an individual prefers physical activity and expresses themselves through body language.

Auditory Learning Style

A learning style characterized by a preference for listening, speaking, verbal discussions, and conversational exchanges to take in information.

Visual Learning Style

A learning style characterized by a preference for seeing information broken down via graphs, charts, diagrams, pictures, and written text.