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asset accumulation phase
a client is usually in this phase until approximately age 45 or later if the client's children are not yet independent
code of ethics and standards of conduct
establishes the level of professional practice that is expected of cfp professionals
conservation or protection phase
a client is usually in this phase from approximately age 45-60 or immediately preceding the client's planned retirement date
distribution or gifting phase
a client is usually in this phase from approximately age 60, or the planned retirement date, until the date of death
financial advice
the development of a financial plan
financial planning
the integrated, coordinated management of an individual's financial situation
practice standards for the financial planning process
a section of the code and standards in which the financial planning process is divided into seven distinct steps
relevant elements
incorporated into the financial planning process when financial planning takes place
active listening
paying full attention to what their clients are saying and responding by paraphrasing the clients' comments
affinity bias
the tendency to make decisions based on how individuals believe the outcomes will represent their interests and values
anchoring
individuals making irrational decisions based on information that should have no influence on the decisions at hand
attitudes
reflect a person's opinions, values, and wants
auditory learning style
retain information by hearing or speaking
behavioral finance
a field of study that relates behavioral and cognitive psychology to financial planning and economics in an attempt to understand why people act irrationally during the financial decision-making process
beliefs
a type of attitude because they reveal the understanding of some aspect of a person's life
body language
involves facial expressions, eye contact, gestures, and body posture; it actually impacts how clients receive messages more than any other type of communication
closed-ended questions
the types of questions that limit data gathering because they only require a "yes" or "no" answer
cognitive dissonance
mental discomfort when newly acquired information conflicts with pre-existing understanding
cognitive errors
decision-making based on well-known concepts that may or may not be correct
confirmation bias
when individuals look for new information or distort new information to support an existing view
conservatism bias
when individuals initially form a rational view but fail to change that view as new information becomes available
context
includes past history or any conditions that presently exist
emotional biases
decision-making based on well-known concepts that may or may not be correct, not related to conscious thought and stem from feelings, impulses, or intuition
emotional intelligence
the ability to recognize emotional expressions in themselves and their clients, as well as selecting socially appropriate responses to the circumstances and their clients' emotions
endowment bias
when an asset is felt to be special and more valuable simply because it is already owned
framing bias
asserts that people are given a frame of reference—a set of beliefs or values that they use to interpret facts or conditions—as they make decisions
herding
when investors trade in the same direction or in the same securities, and possibly even trade contrary to the information they have available
hindsight bias
a selective memory of past events, actions, or what was known in the past
illusion of control bias
when clients believe they can control or affect outcomes of, say, the market when they cannot
interpersonal communication
communicating one on one, is important throughout the financial planning process
judgment
making conclusions about what has been perceived
kinesthetic learning style
understand concepts better using a hands-on approach
leading responses
guide clients to give more details, making a meeting of the minds more likely
loss aversion theory
clients fearing losses much more than they value gains, and prefer avoiding losses to acquiring the same amount in gains
mental accounting
the tendency of individuals to mentally put their money into separate accounts (or money jars) based on the purpose of these accounts
mirroring
a technique that imitates clients' gestures and physical positions or by using a similar verbal style, used to improve rapport with clients
money illusion
the misunderstanding people have in relating nominal rates or prices with real (inflation-adjusted) rates or prices
money jar mentality
another term for mental accounting, the tendency of individuals to mentally put their money into separate accounts (or money jars) based on the purpose of these accounts
open-ended questions
require clients to answer in their own words, will also facilitate effective communication between clients and planners as goals and expectations are developed
outcome bias
the tendency for individuals to take a course of action based on the outcomes of prior events
overconfidence
leads clients to believe they can control random events merely by acquiring more knowledge and consider their abilities to be much better than they are
perception
an individual's personal awareness of things, people, events, or ideas
physical mirroring
the financial planner copies the clients' body language
pitch
the sound quality of highness or lowness; it is primarily dependent on the frequency of the sound wave
psychological profiles
understanding the unique profile of a client will allow the planner to accurately predict the way the clients will perceive and judge any recommendations
recency bias
new information, which is more recent, is considered more important and valuable than less current information
regret aversion bias
when individuals do nothing out of excess fear that decisions or actions could be wrong
representativeness
the tendency, when considering choices when making a decision, to recall a past experience similar to the present decision-making situation and assume one is like the other
risk capacity
the degree to which a client's financial resources can cushion risks
risk perception
the client's assessment of the magnitude of the risks being traded off
risk tolerance
the tradeoff that clients are willing to make between potential risks and rewards
self-attribution bias
an ego defense mechanism where individuals take credit for their successes and either blame others or external influences for failures
self-control bias
when individuals lack self-discipline and favor immediate gratification over long-term goals
status quo bias
when comfort with an existing situation leads to an unwillingness to make changes, even though the change is likely beneficial
tone
the inflection of voice or emphasis on certain words and shows attitude, whether humor, anger, sincerity, or sarcasm
values
attitudes and beliefs for which a person feels strongly
verbal mirroring
the financial planner imitates the clients' word use, tone of voice, and communication method
visual learning style
tend to respond to visual objects, such as graphs, charts, pictures, and reading information
adjustable-rate mortgages (arms)
mortgage where the interest rate and payment may change every month, quarter, year, three years, or five years
back-end ratio
total debt should not exceed 36% of gross monthly income
balloon mortgages
a mortgage in which the borrower makes fixed payments, which are based upon the established interest rate for a long-term mortgage
budget
helps clients actively manage their money so they can achieve their financial goals
cash and cash equivalents
low-risk assets that may be readily converted to cash, also known as current assets
closed-end lease
the lessee agrees to pay a stated monthly fee for the use of the asset for a specified time period
consumer debt ratio
the ratio of monthly consumer debt payments to monthly net income
conventional mortgage loans
made by commercial lenders in the private sector, also known as conforming loans
current (short-term) liabilities
liabilities that are due within one year from the statement date, such as a promissory note
emergency fund
cash or cash equivalents set aside to offset the expenses of unexpected events, such as a job loss, a medical crisis, or major home repair
fair market value
the price at which a willing and knowledgeable buyer would purchase an asset from a willing and knowledgeable seller
federal housing administration (fha) loans
mortgages appeal to buyers who may not meet the financial underwriting requirements for a conventional home loan that the federal government guarantees
fixed outflows
relatively predictable and recurring expenses over which the client does not have much control
fixed-rate loan
a loan with an interest rate that remains constant until paid in full
fixed-rate mortgagqes
have a level interest rate for the term of the loan and a fixed payment amortization schedule
front-end ratio
housing costs should not exceed 28% of gross monthly income
graduated payment mortgage
payable over a long time period, such as 30 years, and has a fixed interest rate
home equity line of credit (heloc)
provides a set amount of credit from which funds may be drawn as needed
home equity loan
receives a lump sum in the amount of the loan, borrowers repay the loan with equal monthly payments over a fixed term
housing cost ratio
the ratio of monthly housing costs to monthly gross income
inflows
include gross salaries and wages, interest and dividend income, rental income, tax refunds, and other amounts received by the client
installment loan
a loan for which the client borrows a single amount of money and repays the balance with interest at stated intervals
interest-only mortgage
the homeowner tries to keep the mortgage payment at a minimum while hoping that the fair market value of the home will increase so that the principal amount will be paid off by the sale proceeds
invested assets
included in this category are stocks, bonds, mutual funds, gems, gold and other precious metals, collectibles, investment real estate, fine art, ownership interests in closely held businesses, vested pension benefits, and similar assets
investing
involves your clients using their money, or capital, to purchase an asset that offers the probability of generating an acceptable rate of return over time, providing potential for earnings while assuming more volatility
liquid assets
assets that may be quickly accessed by the client without the risk of a significant loss to principal
long-term liabilities
liabilities that are due more than one year from the statement date
long-term loan
a loan due more than one year from a specified date
mortgage insurance
a policy that protects lenders against losses that result from defaults on home mortgages
negative amortization
when the agreed-upon monthly payment is less than the accruing interest charges and unpaid interest is added to the mortgage balance, increasing the debt
net worth
the residual value after the value of liabilities has been subtracted from asset values
nonmortgage debt-to-income ratio
a generally accepted rule in personal financial planning is that monthly consumer debt payments should not exceed 20% of net monthly income
open-end lease
generally has a lower monthly payment than a closed-end lease but, at the end of the lease, the lessee may owe the lessor additional money if the asset rents or sells for an amount that is less than the value projected at the time the lease was initiated
outflows
should be divided into savings and investments, fixed outflows, and variable outflows
personal use assets
includes the client's residence, automobiles, boats, recreational real estate, and personal effects such as furnishings, clothes, jewelry, and similar assets
prime loans
mortgages made to borrowers with good credit
pro forma cash flow statement
a planning tool that projects the anticipated inflows and outflows for a future period
reverse amortization
negative equity accumulation in the early years of the loan because the payments during that period typically are not sufficient to pay the interest due
reverse mortgages
a special type of home loan that allows senior citizens with limited income to stay in their homes
saving
the process of putting cash aside in safe, liquid accounts, such as the emergency fund
secured loan
short-term loan
a loan that is due within one year (up to and including one year from a specified date)
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