BIF CFP Course 1 - Introduction to Financial Planning

Purpose of Financial Planning

to determine where one stands financially and to develop an action plan to attain financial goals and objectives

Benefits of Financial Planning

the ability to see how financial decisions affect financial goals and the importance of tracking income and expenses

Components of Financial Planning

different areas of financial planning will support the realization of financial goals in various stages of the life cycle

Financial Planner

a professional who creates a financial plan to help clients achieve their goals

What Financial Planners Do

a professional who ascertains the financial needs and goals of clients, then develops personalized savings and investment plans

Financial Planner Fees

compensation may be collected through models including fee-only, asset-based, fees and commissions on recommended products, or commission-only

Choosing a Financial Planner

prospective clients should interview several planners before selecting one; making the right choice is important to achieving financial goals

Client Responsibilities

includes organizing and categorizing their tax documents and financial account statements, as well as recording various transactions so their financial status can be accurately determined

Other Advisors’ Responsibilities

lawyers, accountants, and tax preparers may refer clients to financial planners and vice versa

Step 1: Understand the Client’s Personal and Financial Circumstances

the financial planner establishes a rapport with the client, and gathers both qualitative and quantitative data about the client

Step 2: Identify and Select Goals

the financial planner collaborates with the client to translate life goals to financial goals and sets realistic expectations

Step 3: Analyze the Client’s Current COA and Potential Alternative COAs

the financial planner uses the data gathered from the client’s financial records to ascertain their financial status; when necessary, alternative COAs are considered

Step 4: Develop the Financial Planning Recommendation(s)

the financial planner designs a plan that provides flexibility, liquidity, protection, and minimizes taxes

Step 5: Present the Financial Planning Recommendation(s)

the financial planner presents recommendations to the client in a clear and understandable manner

Step 6: Implement the Financial Planning Recommendation(s)

the financial planner works to ensure that the client implements and adheres to the plan; the financial planner’s implementation responsibilities are required unless specifically excluded from the scope of engagement

Step 7: Monitor Progress and Update

the financial planner must constantly review the client’s financial plan and tailor it to the client’s current goals

Key Components of Financial Planning

includes consumption and savings, debt, insurance, investment, retirement, estate, and income tax planning

Fee-Only Compensation

financial planners earn income only through the fees they charge clients; tend to work with bigger, more involved, and specialized situations; requires a fee agreement to be signed by both parties

Asset-Based Compensation

financial planners earn income through the management of client portfolios; derivative of fee-only compensation

Fee-Based Compensation

financial planners earn income through development of a plan and earning commissions on products they recommend through the implementation process; requires a fee agreement to be signed by both parties

Commission-Only Compensation

financial planners earn income through product sales only; no fee agreement is necessary

Step One in the Financial Planning Process

Understand the Client’s Personal and Financial Circumstances

Step Two in the Financial Planning Process

Identify and Select Client Goals

Step Three in the Financial Planning Process

Analyze the Current COA and Potential Alternative COAs

Step Four in the Financial Planning Process

Develop the Financial Planning Recommendation(s)

Step Five in the Financial Planning Process

Present the Financial Planning Recommendation(s)

Step Six in the Financial Planning Process

Implement the Financial Planning Recommendation(s)

Step Seven in the Financial Planning Process

Monitor Progress and Update

Life Events

includes (but not limited to) marriage and children, which can have a profound impact on an individual’s financial planning

Money Issues

couples need to discuss how they will handle money, such as checking accounts and credit cards

Young Adult

part of the financial life cycle; focus is on consumption and savings planning and disability insurance planning

Family Formation

part of the financial life cycle; focus is on home down payment funding, children’s education funding, emergency fund planning, and retirement planning

Family Development

part of the financial life cycle; focus is on retirement planning, insurance planning, and estate planning

Retirement

part of the financial life cycle; focus is on reducing taxes, protecting assets from inflation, ensuring safety and income of and from assets, and estate planning

Portfolio Construction

begins with a plan that considers risk tolerance level and investment objectives

Aggressive Investor

investor type; likely has a high risk tolerance level and generally prefers future return to current return

Income Investor

investor type; must select investment vehicles that provide high current returns

Cautious Investor

investor type; generally has a low risk tolerance level but, more importantly, also prioritizes accumulating money to achieve future goals

Rebalancing

two types: constant ratio, which maintains a constant target allocation, and variable ratio, which adjusts the target allocation to prefer/overweight asset(s) with recent underperformance

Asset Allocation

the process of dividing money among stocks, bonds, and cash equivalents to increase return while decreasing risk

Diversification

an important strategy used by investors to help reduce risk; implemented by investing across various assets/asset classes with negative correlation

Time

the easiest way to reduce the risk of investing in equities and improve gains is to increase this

Importance of Liquidity

if liquid funds are not available, an unexpected need may force liquidations of longer-term investment(s)

Managing Adequate Liquidity

requires having sufficient liquid assets to pay bills on time

Liquid Assets to Take-Home Pay Ratio

measures liquid assets against take-home pay

Liquid Assets to Current Liabilities Ratio (a.k.a. Current Ratio)

measures liquid assets against current liabilities

Automating Savings

liquidity management strategy which puts saving on autopilot; makes saving less of a chore, and what isn’t seen isn’t spent

Money Market Mutual Funds

liquid investment; not insured; mutual fund invested in very short-term T-bills

Stock Mutual Funds

mutual fund which invests primarily in stocks but also has limited holdings in cash, bonds, and short-term investments

Stocks

potential returns are high, and so are the risks; generate returns, in part, due to their marketability

Bonds

reduce risk through diversification and produce steady current income; can be a safe investment for emergency funds

CFP Professional’s Firm(s)

any entity on behalf of which a CFP provides professional services to a Client, and that has the authority to exercise control over the CFP’s activities, including the CFP’s employer, broker-dealer, RIA, insurance company, and insurance agency

Client

any person, including a natural person, business org, or legal entity, to whom the CFP provides or agrees to provide professional services pursuant to an Engagement

Conflict of Interest

when a CFP’s interests, or their firm’s interests, are adverse to the CFP’s duties to a Client, OR when a CFP has duties to one Client that are adverse to another Client

Control

the power, directly or indirectly, to direct the management or policies of the entity at the relevant time, through ownership, by contract, or otherwise

Control Person

a person who has control, i.e. the power, directly or indirectly, to direct the management or policies of the entity at the relevant time, through ownership, by contract, or otherwise

Engagement

an oral or written agreement, arrangement, or understanding

Family

includes a grandparent, parent, stepparent, father-in-law/mother-in-law, uncle/aunt, spouse, former spouse, spousal equivalent, domestic partner, brother/sister, stepsibling, brother-in-law/sister-in-law, cousin/ son/daughter, stepchild, son-in-law/daughter-in-law, nephew/niece, grandchild, and any other person the CFP directly or indirectly supports financially to a material extent

Financial Advice

1) a communication that would reasonably be viewed as a recommendation that the Client take or refrain from taking a particular course of action with respect to: A) the development or implementation of a financial plan; B) the value of or the advisability of investing in, purchasing, holding, gifting, or selling financial assets; C) investment policies or strategies, portfolio composition, the management of financial assets, or other financial matters; OR D) the selection and retention of other persons to provide financial or professional services to the client, OR
2) the exercise of discretionary authority over the financial assets of a client

Financial Assets

securities, insurance products, real estate, bank instruments, commodities contracts, derivative contracts, collectibles, or other financial products

Financial Planning

a collaborative process that seeks to maximize a Client’s potential for meeting life goals through financial advice that integrates relevant elements of a Client’s personal and financial circumstances

Material

information which a reasonable Client or prospective Client would consider important in making a decision

Professional Services

includes financial advice and related activities and services that are offered or provided, including but not limited to, financial planning, legal, accounting, or business planning services

Related Party

a person or business entity whose receipt of sales-related compensation a reasonable CFP would view as benefiting the CFP or CFP’s firm, including, for example, as a result of the CFP’s ownership stake in a business entity; includes family members and business entities in which the CFP or CFP’s firm is a control person/entity

Scope of Engagement

the professional services to be provided pursuant to an Engagement

CFP Board’s Code of Ethics

includes the CFP’s responsibility to: 1) act with honesty, integrity, competence, and diligence; 2) act in the Client’s best interests; 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 and CFP certification

CFP Board’s Standards of Conduct

includes the CFP’s responsibilities relating to: 1) duties owed to Clients; 2) financial planning and application of the practice standards for the financial planning process; 3) practice standards for the financial planning process; 4) duties owed to firms and subordinates; 5) duties owed to the CFP Board; 6) prohibition on circumvention

Fiduciary, Duty Owed to Clients

includes: 1) the duty of loyalty; 2) the duty of care; 3) the duty to follow client instructions

Integrity, Duty Owed to Clients

demands honesty and candor, which may not be subordinated to personal gain or advantage; CFP may not defraud, make untrue statements, or engage in any conduct which would defraud or cause deceit upon any person

Competence, Duty Owed to Clients

demands that professional services are provided with competence, and that where competence is lacking, the CFP seeks to either: 1) gain competence, 2) obtain assistance of a competent professional, 3) limit or terminate the Engagement, OR 4) refer the Client to a competent professional

Diligence, Duty Owed to Clients

demands that the CFP provide professional services, including responding to reasonable Client inquiries, in a timely and thorough manner

Disclose and Manage COIs, Duty Owed to Clients

demands that the CFP make full disclosure of all material conflicts of interest that could affect a relationship with a Client, and that the CFP must adopt and follow business practices reasonably designed to prevent material conflicts of interest from compromising the CFP’s ability to act in the Client’s best interests

Sound and Objective Professional Judgment, Duty Owed to Clients

demands that the CFP exercise professional judgment on behalf of the client that is not subordinated to the interest of the CFP or others; CFP may not accept or solicit any soft dollar compensation that reasonably could be expected to compromise objectivity

Professionalism, Duty Owed to Clients

demands that the CFP must treat Clients, prospective Clients, fellow professionals, and others with dignity, courtesy, and respect

Comply with the Law, Duty Owed to Clients

demands that the CFP must comply with the laws, rules, and regulations governing professional services, and that the CFP may not intentionally or recklessly participate or assist in another person’s violation of the CFP Standards of Conduct or laws, rules, or regulations

Confidentiality and Privacy, Duty Owed to Clients

demands that the CFP must keep confidential and may not disclose any non-public personal information about any prospective, current, or former Client, except for ordinary business purposes or for legal and enforcement purposes; may not use any non-public personal information for own benefit; must take reasonable steps to protect security of non-public personal info; must adopt and implement policies regarding the protection, handling, and sharing of a Client’s non-public personal info; shall be deemed to comply if CFP’s firm is subject to, and CFP complies with, Regulation S-P under the federal securities laws or equivalent federal or state laws or rules

Providing Information to a Client, Duty Owed to Clients

-demands that the CFP provide the following information when providing financial advice, at or prior to the time of the Engagement, and document that the information has been provided to the client: 1) a description of the services and products to be provided; 2) how the Client pays for the products and services, and a description of the additional types of costs that the Client may incur; 3) how the CFP, CFP’s firm, and any related parties are compensated for providing products and services; 4) the existence of any public discipline or bankruptcy, and the location(s), if any, of the webpages of all relevant public websites of any gov’t authority, SRO, or professional org that sets forth the CFP’s public disciplinary history or any personal bankruptcy or business bankruptcy in which the CFP was a control person; 5) the information required under Section A.5.a.; 6) the information required under section A.9.d.; 7) the information required under Section A.13.a.ii.; 8) any other information about the CFP or CFP’s firm that is material to a client’s decision to engage or continue to engage the CFP or CFP’s firm
-demands that the CFP provide the following information when providing financial planning at or prior to the time of Engagement, in one or more written documents: 1) the information required to be provided in Sections A.10.a.i.-iv. and vi.-viii. AND 2) the terms of the Engagement, including: A) the Scope of Engagement and any limitations, B) the period(s) during which the services will be provided, and C) the Client’s responsibilities. The CFP is responsible for implementing, monitoring, and updating the financial planning recommendation(s) unless specifically excluded form the Scope of Engagement
-demands that the CFP provide the following information when updating information: the CFP has an ongoing obligation to provide the client with any information that is a material change or update to the information required to be provided to the Client; material changes and updates to public disciplinary history or bankruptcy information must be disclosed to the Client within 90 days, together with the location(s) or the relevant webpages

Duties When Communicating with a Client, Duty Owed to Clients

demands that the CFP provide Clients with accurate information, in accordance with the Engagement, and in response to reasonable Client requests, in a manner and format that a Client may reasonably be expected to understand

Duties When Representing Compensation Method, Duty Owed to Clients

demands that the CFP may not make false or misleading representations regarding the CFP’s or the CFP's firm’s method(s) of compensation

Duties When Recommending, Engaging, and Working with Additional Persons, Duty Owed to Clients

-demands that the CFP, when engaging or recommending the selection or retention of additional persons to provide financial or professional services to a client: 1) have a reasonable basis for the recommendation or Engagement based on the person’s reputation, experience, and qualifications; 2) disclose to the Client, at the time of the recommendation or prior to the Engagement, any arrangement by which someone who is not the Client will compensate or provide some other material economic benefit to the CFP, the CFP’s firm, or a related party to the recommendation or Engagement; 3) when engaging a person to provide services for a Client, exercise reasonable care to protect the Client’s interests
-demands that the CFP, when working with another financial or professional services provider on behalf of a Client: 1) communicate with the other provider about the scope of their respective services and the allocation of responsibility between them; 2) inform the Client in a timely manner if the CFP has a reasonable belief that the other provider’s services were not performed in accordance with the scope of the services to be provided and the allocation of responsibilities

Duties When Selecting, Using, and Recommending Technology, Duty Owed to Clients

demands that the CFP: 1) exercise reasonable care and judgment when selecting, using, or recommending any soft2ware, digital advice tool, or other technology while providing professional services to a client; 2) have a reasonable level of understanding of the assumptions and outcomes of the technology employed; AND 3) have a reasonable basis for believing that the technology produces reliable, objective, and appropriate outcomes

Refrain from Borrowing or Lending Money and Commingling Financial Assets, Duty Owed to Clients

-demands that the CFP may not, directly or indirectly, borrow money from or lend money to a Client unless: 1) the Client is a member of the CFP’s family, or 2) the lender is a business organization or legal entity in the business of lending money
-demands that the CFP may not commingle a Client’s financial assets with the financial assets of the CFP or CFP’s firm

Integration Factors in Determining if a CFP is Providing Financial Advice/Planning

includes the following factors: 1) the number of relevant elements of the Client’s personal and financial circumstances that the financial advice may affect; 2) the portion and amount of the Client’s financial assets that the financial advice may affect; 3) the length of time the Client’s personal and financial circumstances may be affected; 4) the effect on the Client’s overall exposure to risk if the financial advice is implemented; 5) the barriers to modifying the actions taken to implement the Financial Advice

No Client Agreement to Engage in Financial Planning

if a Client does not agree to engage the CFP to provide financial planning, the CFP must either: 1) not enter into the Engagement, or 2) limit the Scope of the Engagement, or 3) provide the requested services after informing the Client how financial planning would benefit the Client and how the decision not to engage the CFP to provide financial planning may limit the CFP’s professional financial advice, or 4) terminate the Engagement

CFP’s Duties Owed to Firms and Subordinates

includes the CFP’s responsibilities to: 1) use reasonable care when supervising; 2) comply with lawful objectives of the CFP’s firm; AND 3) provide notice of public discipline to CFP’s firm

Felony

a felony offense, or for jurisdictions that do not differentiate between a felony and a misdemeanor, an offense punishable by a sentence of at least one-year imprisonment or a fine of at least $1,000

Relevant Misdemeanor

a criminal offense, that is not a felony, for conduct involving fraud, theft, misrepresentation, other dishonest conduct, crimes of moral turpitude, violence, or a second (or more) alcohol and/or drug-related offense

Regulatory Investigation

an investigation initiated by a federal, state, local, or foreign governmental agency, SRO, or other regulatory authority

Regulatory Action

an action initiated by a federal, state, local, or foreign governmental agency, SRO, or other regulatory authority

Civil Action

a lawsuit or arbitration

Finding

includes an adverse final action and a consent decree in which the finding is neither admitted nor denied, but does not include a deficiency letter, examination report, memorandum of understanding, or similar informal resolution of a matter

Minor Rule Violation

a violation of an SRO rule designed as a minor rule violation under a plan approved by the SEC; may be designated if the sanction imposed consists of a fine of $2,500 or less, and if the sanctioned person does not contest the fine

CFP’s Duties Owed to the CFP Board

includes the CFP’s responsibilities to: 1) refrain from adverse conduct; 2) report, within 30 calendar days, specific instances of violations; 3) provide a narrative statement with the notice of violation; 4) cooperate with the CFP Board; 5) comply with the terms and conditions of certification and trademark license

Prohibition on Circumvention

demands that the CFP not indirectly, or through another person or entity, any act or thing that the Code of Standards prohibit the CFP from doing directly

Law of Supply

states that an increase in market price will lead to an increase in quantity supplied, and a decrease in market price will lead to a decrease in quantity supplied

Quantity Demanded

refers to the number of units of a product that a household would buy in a given period if it could buy all it wanted at the current market price; relationship is inverse to price

Equilibrium Price

the point at which the supply curve intersects the demand curve of a good or service; the price at which there is no tendency for change

Three Prevailing Market Conditions

at any moment, one of the three conditions is active in any given market: 1) excess demand, 2) excess supply, or 3) equilibrium

Price Elasticity (of Demand) (PED)

a measure of a buyer’s responsiveness or sensitivity to changes in price; if good/service is elastic, quantity demanded is affected by a change in price; if good/service is inelastic, quantity demanded responds very little, or none, to changes in price

Fiscal Policy

refers to the government’s tax and spending policies and how these interventions influence the economy; only the federal government has the power and flexibility to run budget deficits or surpluses large enough to influence total consumer demand