Keir s FINANCIAL PLANNING. Revised December 2015

Transcription

1 Keir s FINANCIAL PLANNING 2016 Revised December 2015 Published by: KEIR EDUCATIONAL RESOURCES 4785 Emerald Way Middletown, OH Fax [email protected] Keir Educational Resources 1

2 TABLE OF CONTENTS Chapter Title Page One Introduction to the Financial Planning Process 7 One: The Financial Planning Process 7 Two: Gathering Information 8 Three: Personal Financial Statements 12 Four: Analyzing the Client s Situation 14 Five: The Plan 16 Six: Achieving Special Goals 16 Two Communication for Financial Planning 28 One: Communicating with a Client 28 Two: Financial Counselor Characteristics and Communication Principles 28 Three: Leading Client Discussions 30 Three Ethical Considerations for Financial Planners 36 One: Ethical Issues in Financial Planning 36 Two: Ethical Decisions 41 Three: Duties of a Financial Planner 42 Four: Contract laws 44 Four Client Attitudes and Risk Tolerance 50 One: Client Attitudes 50 Two: Risk Tolerance 51 Five Introduction to the Time Value of Money 57 One: Basic Terms and Concepts 57 Two: Basic Calculations 58 Three: Intermediate Calculations 65 Four: Advanced Calculations 69 Six Education Planning and Special Needs 99 One: Meeting College Education Costs 99 Two: Special Needs Planning 102 Seven Cash Flow Management, Debt Management, and Lease-Buy Decisions 109 One: Cash Flow Management 109 Two: Debt Management 110 Three: The Lease-or-Buy Decision 111 Eight The Regulatory Issues for Financial Planners and the Financial Industry 118 One: Regulatory Issues for Financial Planners 118 Two: FINRA and ERISA 121 Three: Regulatory Issues for Financial Institutions 122 Four: Consumer Protection Laws 124 Nine Introduction to Economics 137 One: The Business Cycle 137 Two: The Money Supply Monetary and Fiscal Policy 139 Three: Measures of Economic Activity 144 Four: Leading and Other Economic Indicators 149 Glossary 163 Index Keir Educational Resources 2

3 Section One: The Financial Planning Process Chapter One Introduction to the Financial Planning Process 1. Personal financial planning involves the development and implementation of coordinated, comprehensive strategies to achieve personal financial objectives. A disciplined approach to financial planning can reveal existing or potential financial problems; moreover, protection and preservation of assets is basic to financial planning. The organization of resources during financial planning can help with choice making and in determining the resources available to attain financial goals. In addition to providing an organized approach, a financial planner makes recommendations and provides professional management to help people achieve their financial objectives. 2. In the real world, not all financial planning is done with a comprehensive view. The singlepurpose view of financial planning involves selling a single financial product or service to help a client solve a single problem or meet a single objective. The multiple-purpose view of financial planning is that true financial planning must deal with a broader range of client financial concerns, such as all or most of the following three categories: investments, insurance, and taxes. The comprehensive view of financial planning is that true financial planning must cover all of a client s financial concerns and goals, using the expertise of financial specialists and a planner as the coordinator of the team. Purists argue that comprehensive planning should be done in a single client engagement (subject to ongoing monitoring of the plan) and should be provided on a fee-only basis. 3. The financial planning process can be divided into six stages. The six stages can be remembered by memorizing EGADIM, a mnemonic device whose letters correspond to the stages of the financial planning process as follows: E - Establish client-planner relationships, indicating what each should expect. G - Gather data, including objectives to be achieved. A - Analyze and evaluate the client s financial status. D - Develop a plan and present recommendations and/or alternatives. I - Implement the plan. M - Monitor the plan. 4. Establish client-planner relationships. At this initial stage, the planner and the client need to establish and define each person s responsibilities during the working relationship. The client should alert the planner as to what is needed, and the planner should only engage in those responsibilities that are warranted by the client. Both have to be flexible and agree to work with one another. Responsibilities to discuss include DIDDA: D - Defining the scope of the engagement I - Identifying the types of services to be provided D - Disclosing the method of payment, i.e., commissions, fees, or other basis D - Determining which party is responsible for what actions A - Agreeing to the length of the engagement 5. Gather data. After each side has established what is needed from the other, the second stage of financial planning is gathering data and establishing goals and objectives. The tasks associated with determining the client s objectives are: (1) quantifying specific financial goals in terms of dollars and within definite time frames (generalized aspirations must be made specific), (2) ranking the objectives according to the client s priorities, and (3) examining the objectives with regard to the client s resources and limitations or constraints. Planners should emphasize the importance of establishing objectives by making this one of the first priorities Keir Educational Resources 3

4 6. In this stage, the financial planner will undertake the tasks of: (1) persuading the client to complete a Data Survey Form or questionnaire; (2) winning the client s confidence in the initial interview, during a conversation interspersed with some basic questions; (3) leaving a questionnaire about financial information and other data with the client for completion before the next meeting, when the information can be reviewed; and (4) making use of a computer, if available, to process, store, and retrieve data obtained from the interview and questionnaire. The interview and questionnaire should provide information on the client s resources, along with other qualitative and quantitative information. Qualitative data provides general information concerning a client s goals and objectives, lifestyle, health status, and risk-tolerance level. Quantitative data provides basic, but specific, identifying information concerning a client and his or her spouse and children, if any, and details concerning the family s financial status. Examples include information about cash flows, insurance coverages, and present investments. 7. Analyze and evaluate. The third stage of the financial planning process is analyzing and evaluating the client s financial status. In this stage, the financial planner will undertake: (1) a review of existing insurance policies and other legal papers such as wills, trust agreements, and buy-sell agreements; (2) review of the statement of the client s financial position and current cash flow statement; (3) analysis of the information to determine the strengths and weaknesses in the client s financial position; (4) evaluation of the client s objectives in view of available resources; and (5) evaluation of economic conditions as they relate to future resources and cash flow for the client and his or her family, if applicable. In this stage, the planner evaluates the viable options for achieving the established objectives, i.e., examining the products and strategies that may be selected for implementing the final plan. 8. Develop and present recommendations. The fourth stage is developing and presenting financial planning recommendations and/or alternatives. The tasks associated with this step are: (1) identifying the strategies and products available for achieving the client s objectives, and (2) selecting the most appropriate from those available. 9. Implement the plan. The fifth stage in the financial planning process is implementing the financial planning recommendations. In this stage, the financial planner works closely with other professionals to carry out the financial plan designed for the client. The client may need help obtaining the products and pursuing the strategies identified in Step four. 10. Monitor the plan. The sixth and final stage is monitoring the plan. Periodically, the financial planner should review the plan to determine the significance of any changes in federal tax laws, economic conditions, and available investment techniques, and the planner must schedule review sessions with the client to evaluate progress toward achieving the client s objectives. Appropriate modifications should be made in the financial plan when there are changes in personal or family circumstances. Section Two: Gathering Information 11. The goals and objectives of the client determine, to a large extent, the quantity and types of information that a financial planner should obtain. If the client is seeking help putting together a comprehensive financial plan, the information required will be extensive. Many educational institutions and other organizations make Data Survey Forms available as guides for obtaining the detailed information required to prepare a comprehensive financial plan. If a client is seeking help of a more limited scope, such as the adequacy of his or her homeowners insurance coverage, obviously, the information required will be much less extensive Keir Educational Resources 4

5 Chapter One Introduction to the Financial Planning Process 1. Personal financial planning consists of development and implementation of: A. Comprehensive personal objectives B. Coordinated, comprehensive strategies C. Asset allocation techniques D. Cash flow analysis 2. All of the following statements concerning financial planning are correct, EXCEPT: A. It points out existing or potential financial problems. B. It presents resources available to attain goals in an organized manner. C. It expedites cash inflow. D. It helps make choices and plans to attain financial goals. (K. para. 1) (K. para. 1) 3. All of the following statements concerning comprehensive financial planning are correct, EXCEPT: (K. para. 2) A. In its purest form, it is provided only on the basis of commissions earned through the sale of financial products. B. It attempts to treat all of the client s financial concerns and objectives. C. It can be provided in either a single client engagement and updated periodically thereafter, or it can be provided incrementally in a series of engagements with the client. D. Its effective performance usually requires a team of specialists whose efforts are coordinated by the comprehensive financial planner. 4. After the relevant information about the client has been gathered and checked, the next step in the financial planning process is to: (K. para. 3) A. Implement the recommended plan. B. Obtain the client s approval of the recommended plan. C. Analyze the client s present financial condition. D. Develop a plan that will accomplish the client s objectives. 5. What is the first step in the financial planning process? A. Developing the plan B. Establishing objectives C. Analyzing information D. Gathering data E. Establishing the planner/client relationships (K. para. 3-4) 6. Which of the following is the proper sequence of the remaining steps after the first step in the financial planning process? (K. para. 5-10) A. Monitor the plan, develop the plan, implement the plan, establish objectives. B. Gather data, analyze information, develop the plan, implement the plan. C. Analyze information, develop the plan, monitor the plan, implement the plan. D. Implement the plan, analyze information, monitor the plan, develop the plan Keir Educational Resources 5

6 Chapter One Introduction to the Financial Planning Process 1. B is the answer. Personal financial planning is defined for purposes of this course as consisting of the development and implementation of coordinated, comprehensive strategies to achieve personal financial objectives. 2. C is the answer; C is a nonsense incorrect statement. Only indirectly (and very indirectly!) would financial planning do anything to expedite cash inflow. A, B, and D are correct statements. 3. A is the answer. In its purest form, comprehensive financial planning would be provided by the planner on a fee-for-service basis. This view is based on the assumption that a fee-only planner can be more objective than one who is compensated through the sale of products. 4. C is the answer. Only after the strengths and weaknesses of the client s current financial situation have been identified and analyzed, should a financial plan be developed, presented to the client for approval, and implemented. 5. E is the answer. The first step is establishing what the client and planner can expect from each other. 6. B is the answer. After the first step, the financial planner and client should gather data, including objectives; analyze information; develop the plan; and implement the plan. Ongoing monitoring of the plan is the last step Keir Educational Resources 6