FPQP Terms

Financial Planning

A collaborative process that helps maximize a Client’s potential for meeting life goals through Financial Advice that integrates relevant elements of the Client’s personal and financial circumstances.

Areas of financial planning

1. Developing Goals

2. Cash & Debt Management

3. Risk Management & Insurance Planning

4. Education Needs

5. Group Benefits Planning

6. Investment Planning

7. Retirement Savings & Income Planning

8. Tax Planning

9. Estate Planning

Comprehensive financial plan

All aspects of client’s circumstances

Targeted Planning

One or two areas addressed

2 types of financial planning

1. Comprehensive

2. Targeted

Steps to setting a financial goal:

1. Potential goals should be identified by the client. Some find that this part of the process can be the most difficult. It is important for financial planners to learn how to help people identify their needs and wants, now and in the future, and then develop them into clearly stated, realistic, achievable goals. Financial planners must have excellent, active listening skills and should verify their clients’ understanding of their goals by restating, paraphrasing, and summarizing what financial planners believe they heard, either receiving affirmation or requiring further discussion.

2. A time frame must be established. Is this a short-or long-term goal? When is the goal meant to be reached in terms of years or months?

3. Specify the amount needed to accomplish the goal. The amount should be stated (e.g., how much money is needed) so it can be measured, assessed, and monitored as the goal becomes more of a reality.

Acronym to remember the steps for an effective financial goal

PTA

1. Purpose

2. Time frame

3. Amount

A good financial goal example with PTA

“I want to save $20,000 in the next five years for a down payment on a house.”

Is this a well-defined financial goal?

“Establish an emergency fund of $10,000”

No, there is no T in the PTA

Is this a well-defined financial goal?

“Save for a child’s college education which begins in 2035”

No, there is no A in the PTA

Is this a well-defined financial goal?

“Save $25,000 to start a business in 2032”

Yes, it has all PTA

Why do people not plan?

1. Procrastination

   1. Not enough wealth

   2. Only about investments

   3. Only about insurance

   4. Concern about fees

Defining the scope of engagement with a client includes:

1. Identifying the service(s) to be provided, and those that will be excluded

2. Disclosing the planner’s compensation arrangement

3. Disclosing existing or potential conflicts of interest

4. Determining the responsibilities of both the planner and client

5. Establishing the duration of the engagement

6. Providing any additional information necessary to determine, define, or limit the scope of engagement

7 Step Financial Planning Process

1. Understanding the client’s personal and financial circumstances

2. Identifying and selecting goals

3. Analyzing the client’s current course of action and 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 and updating

Remember: Umbrellas In A Downpour Prevent Immense Mess

Financial Planning Process: Step 1 - Understanding the client’s personal and financial circumstances

• QuaNtitative - Names & Numbers

• QuaLitative - Lifestyle, feelings, and ( quality of life

• Fact Finder (like our CF update sheet)

• Other Advisors (attorneys, insurance agents, etc.)

Financial Planning Process: Step 2 - Identifying and selecting goals

• Identify

• Prioritize

• Specific - PTA

  • Purpose

  • Time Frame

  • Amount

Financial Planning Process: Step 3 - Analyzing the client’s current course of action and potential alternate course(s) of action

• Strengths/weaknesses (SWOT)

• Net worth/cash flows

• Emergency Fund (6 months)

• Titling of assets/beneficiaries

• Mismatch: goals and reality

• Tax issues

• Risk analysis

• Insurance coverage

Financial Planning Process: Step 4 - 7

4. Developing the financial planning recommendations and/or alternatives

   1. Planner develops choices

5. Presenting the financial planning recommendations

   1. Client makes the ultimate decisions

6. Implementing the financial planning recommendations

   1. Greatest plan n the world is no good without implementation

7. Monitor progress and updating

Analyzing Information Red Flags for Step 3 of the Financial Planning Process

• Insufficient liquid assets for emergency funds

• Insufficient Insurance Coverage

• Validity of the client’s stated goals in terms of other information

• Mismatches between the client’s time horizon and stated goals

• Mismatches between the client’s time horizon and current investments

• Mismatches between the client’s personality and current investment position or resources, and stated goals

• Investment vehicles that do, or do not, match the client’s needs and goals

• Mismatch of risk

• Disadvantageous titling of assets and naming beneficiaries

3 Ways Financial Planners Receive Compensation

1. Sales Related - Advisors receive commissions through the products they sell, i.e. mutual funds, insurance policies, or annuities

2. Fee only - Clients are charged directly through hourly rates, flat fees, or percent of assets under managment

3. A combination of commissions & fees (fee-based)

Areas of Financial Planning

• Cash Management

• Insurance Planning

• Investment Planning

• Retirement Planning

• Tax Planning

• Estate Planning

What is behavioral finance?

Understanding the behavioral & cognitive psychology behind irrational behavior & poor decisions.

What is a bias?

Behavior in favor of or against something, a person, or a group compared with another, usually in a prejudicial manner

2 Types of Bias (Pick the best answer in the exam because people get tripped up)

1. Cognitive errors (biases): Decisions made about well-known correct or incorrect concepts

2. Emotional Biases: Based on feelings; often occur impulsively

Cognitive errors

Faulty reasoning due to

• Lack of understanding for technical analysis

• Information processing mistakes

• Memory errors

Illusion of control - Cognitive error

You think you can control the outcome of an event when you really cannot

Money Illusion - Cognitive error

You think one dollar has the same value without considering inflation

Conservatism bias - Cognitive error

You initially form a rational view but fail to change that view as new information becomes available

Mental Accounting - Cognitive error

Money is put into separate mental “accounts” based on purpose

Self-attribution bias - Cognitive error

You take credit for successes and blame others for your failures

Emotional Biases

Not related to conscious thought

• Feelings

• Impulses

• Intuition

More difficult to overcome; may have to be accommodated

Self control bias - Emotional Bias

You make poor financial decisions because you

• lack self discipline

• Favor immediate gratification over long-term goals

Status quo bias - Emotional Bias

You are comfortable with your existing circumstances

• unwilling to make changes, even if beneficial

Affinity bias - Emotional Bias

You make poor decisions because you feel they are based on your interests and values

Principle of Communication

• Essential during data-gathering step

• Interview-type questions

• Use open-ended questions - answers in your own words

• Avoid close-end questions - no yes or no

• Interpersonal communication - understanding differences across generations, cultures, and genders

Types of Communication

• Body language

• Voice pitch and tone

• Active listening

• Mirroring

• Emotional intelligence

Nondirective Counseling Definition

• Persuade others to reflect and share

• Helps to understand them better

• Provides support

Directive Counseling Definition

• Planner guides the discussion

• Helps client understand the circumstances better

Nondirective Counseling Skills

• Clarification

• Paraphrasing

• Summarizing

Directive Counseling Skills

• Reframing

• Explanation

• Advice

Politeness & Sensitivity

• Politeness

  • Behaving in a socially acceptable way

  • Using appropriate manners

• Sensitivity

  • Responding thoughtfully

  • Not making assumptions

Inclusion & Exclusion

• Inclusion

  • Messaging that others are valued, respected, and supported

  • Presence is acknowledged and considered important

• Exclusion

  • Occurs when others feel “left out”

  • Use thoughtful language

FPQP Code of Ethics

• Fiduciary Duty - act as one, loyalty to place the best interests of the client above your’s or the firm’s, avoid conflicts of interest

• Integrity

• Competence

• Diligence - Respond to client’s reasonably/timely

• Professionalism - Compelling with laws and regulations. Don’t bring dishonor to the profession.

• Confidentiality

The Fiduciary Standard

• Put a client’s interests first

• Act with the utmost good faith

• Provide full and adequate disclosure of all material facts

• Refrain from misleading clients

• Expose all conflicts of interest to clients

Financial Statement (Statement of Financial Position): What it is, its purpose, components

What it is?

• Shows net worth, or “wealth”

• Also known as a personal balance sheet

Its Purpose

• Provides a static “snapshot” of financial status as a specified date

Components

• Assets - Liabilities = Net Worth

• What you OWN - what you OWE = net worth

How to calculate net worth?

Assets - Liabilities = Net Worth

3 Asset Categories

• Cash/cash equivalents (liquid assets): Saving, checking, CDs, Money Market

• Invested Assets: Can include brokerage or retirement accounts, or coin collection held for growth in value when sold

• Used Assets: Things you are use now such as your home, and car

Generally assets are shown as their current Fair Market Value (FMV). What is FMV?

The amount a willing buyer would pay a willing seller for the asset

How much is a good rule of thumb to have going to savings in financial planning?

10%

True or False: Taxes are considered a variable outflow in this course because they can fluctuate from year to year.

True

Cash Flow Statement: What it is, its purpose, components

What it is?

• Shows net inflows/outflows

Its purpose?

• Summarizes cash inflows and outflows over a past time period (month, year)

Components?

• Inflows - outflows = net inflow or outflow

How much do you need in an emergency fund?

3-6 months of expenses

Purpose & Guideline of the Basic Liquidity Ratio?

Purpose: Shows the number of months a household could continue to meet its expenses from existing cash & cash equivalent assets after a total loss of income.

Guideline: 3-6 months of living expenses.

Purpose & Guideline of the Savings Ratio?

Purpose: Figures out how much should be saved/invested

Guideline: 10% or higher (of gross income)

3 Types of Debt-To-Income Ratios

• Housing costs (front-end ratio)

• Total debt (back-end ratio)

• Nonmortgage debt (consumer ratio)

Purpose & Guideline of the Housing Cost?

Purpose: Considers how much home costs will take of income

Guideline: 28% or higher (of gross income)

Purpose & Guideline of the Total Debt Ratio?

Purpose: Ability to cover debt

Guideline: 36% or lower (of gross income)

Purpose & Guideline of the Consumer Debt Ratio?

Purpose: ONLY one that uses net income

Guideline: 20% or lower (of net income)