topic 1: financial planning process

1

Topic 1: Financial Planning Process Steps

E G A D I M

Establish Services to be provided

Comprehensive Education planning

Disclose compensation Prior to services In writing Form of compensation

2

Topic 1: Financial Planning Process Gather

Collect information Questionnaires

When should client complete? Interviews

Qualitative Attitudes, financial knowledge/experience, lifestyle Who pays the bills? What influences your feelings about money? Open ended questions… If you had five years…if you had $40 billion

Financial risk tolerance Mental ability to withstand investment losses Financial knowledge / current portfolio Financial capacity

3

Topic 1: Financial Planning Process Gather

Collect information Documents

Balance sheet / loan application Investment accounts Retirement accounts Summary Plan Description for qualified plans Income tax return Insurance policies Loan statements Wills, Powers of Attorney, Trust Documents

4

Topic 1: Financial Planning Process Analyze

Goals Wants

Needs Ranking of goals

Retiring at age 55 versus funding all of child’s college expenses

With time frame Short: < two years Intermediate: 2 – 10 years Long-term: > 10 years

Assumptions: mutually agreed upon… Life expectancy Inflation Move after retire? Rate of return for various asset classes Income tax rates

5

Topic 1: Financial Planning Process

Develop Alternatives

Roth versus Traditional IRA versus 401(k)

Term versus permanent life insurance

529 versus UTMA versus Roth for education expenses

6

Topic 1: Financial Planning Process

Develop Financial plan: financial checkup

Adequate insurance?Adequate emergency funds?Adequate savings for goals?Comfortable with asset allocation?Understand income tax calculation?Comfortable with plans for eventual

asset transfer?

7

Topic 76: Ethics

CFP Board’s Code of Ethics Applies to candidates as well as CFPs Principles

Integrity: don’t mislead Objective: disclose conflicts of interest Competence Fairness: disclose compensation; don’t commingle Confidentiality: don’t disclose unless permitted/required

Can’t notify IRS of tax return issues without client consent Professionalism: don’t use RIA

Notification of CFP Board of crime conviction CFP Board of Professional Review:

Inquiry Panel: probable grounds / Hearing Panel :can appeal to Board of Appeals

Diligence: suitable recommendations

8

Topic 76: Rules of Conduct

Mutually define relationship Prior to entering agreement discuss

The obligations and responsibilities of each party under the agreement with respect to: Defining goals, needs and objectives, Gathering and providing appropriate data, Examining the result of the current course of action without changes, The formulation of any recommended actions, Implementation responsibilities, and Monitoring responsibilities.

Compensation Terms under which the agreement permits the certificant to offer

proprietary products. Terms under which the certificant will use other entities to meet any of the

agreement’s obligations.

9


A written agreement governing the financial planning services (“Agreement”). The Agreement shall specify: The parties to the Agreement, The date of the Agreement and its duration, How and on what terms each party can terminate the

Agreement, and The services to be provided as part of the Agreement.

Can use ADV Must act as a fiduciary Must also disclose in writing:

Compensation Conflicts

10


Client information confidential Keep information secure Get all required information Don’t commingle assets with personal assets if take custody Don’t borrow/lend money from/to client unless bank or family Be competent Notify CFP Board of any crimes

11

Topic 77: Disciplinary Rules/Procedures

CFP Commission Review violations of Rules of Conduct, Practice

Standards and Fitness Standards Hearing Panel

Determines if violation occurred Forms of Discipline

Private censure Public letter of admonition Suspension Revocation

12

Topic 78: Practice Standards

Applies to CFPs engaged in financial planning Not CFPs who are teaching, for example

E: mutually define scope; compensation Must have in writing financial planning services to be provided Must also determine duration of engagement

G: not enough data, restrict or terminate A: D: I: agree on responsibilities M: mutually agree with client on responsibilities

Regarding scope, goals, implementation and monitoring Planner only responsible for

Developing alternatives and selection of products/services

13Topic 2: Personal Financial Statements

Statement of Financial Position Use assets: cars, home, etc.

Statement of Cash Flow Accrual versus cash basis

Pro Forma Statements: projections

14

Topic 4: Financing Strategies

Mortgage financing Conventional: fixed rate 15- 30 years ARM: adjustable, tied to index

2/5 ARM Lower rate due to less risk for lender Likelihood of living in home for 15 years

Points Cost When to pay them

Interest only Tax, equity perspective

Sale of home: $500,000 gain exclusion MFJ

15

Topic 4: Financing Strategies

Home equity loan Amount of equity Percent can borrow

Line of credit Interest on borrowings up to $100,000 deductible

Refinancing Cost of refi: appraisal, title insurance Decrease in interest expense How long own home? Keep payment same?

Reverse mortgage Receive monthly income increasing mortgage balance

Income tax implications? At death, home is sold to pay mortgage balance

Loss of Medicaid eligibility if sell before death

16

Topic 5: Financial Institutions

Banks FDIC insurance

$250,000 per account Joint

Your share of joint accounts up to $250,000 Mr. X and Mrs. X, JROS account of $300,000 Mr. X owns $150,000; fully insured as long as his share of

other joint accounts is < $100,000 Also, separately insured

Retirement account Irrevocable trust POD and Totten trusts

Not separately insured Custodial accounts, revocable trusts, checking/savings

per bank Brokerages SIPC insurance: $500,000/$250,000 max for cash

17

Topic 5: Financial Institutions

Credit unions No tax

Better interest rates for consumers Not FDIC insured Membership requirement

Brokerage companies Insurance companies Mutual fund companies

In 2009, Federal government is insuring money market mutual funds Trust companies

18

Topic 73: Special Circumstances

Divorce Division of assets

Tax basis Child support/alimony

Nontraditional families No unlimited marital deduction

Use of trusts, naming beneficiary Special needs children

Establish trust to assist with needs Properly drafted, won’t impact ability for public assistance Trust can only be used for “extras”

Transportation, therapy and day care Not food, clothing or housing

19

Topic 8: Economic concepts

Supply and demand Increase in supply/demand: impact on prices

Fiscal policy Taxes and spending by federal government

Appropriate strategy during recession? Monetary policy: Federal Reserve

Reserve requirement: nuclear weapon Discount rate: borrowing from Fed

Fed funds rate: borrowing between banks Open market operations

Used most often; buy/sell Treasuries Appropriate strategy during recession?

20

Topic 8: Economic concepts

Leading indicators: future of economy Stock prices Size of money supply New claims for unemployment Weekly hours worked by factory workers Building permits for new homes (not starts)

Stagflation: slowing economy but rising prices Durable goods: cars, couches, etc. vs. nondurable Yield curve

Normal Inverted Increasing interest rates: impact on dollar

21

Topic 9: Time Value of Money

Annuity due Start of period

Investing $1,000 for 10 years at beginning of year instead of end Calculations

Changing from begin to end and back NPV and IRR

Required return 7%, NPV $1,000 for $20,000 investment. IRR? Investment with highest NPV will also have highest IRR

22

Topic 9: Time Value of Money

Serial payments Increase in asset value net of inflation (I = Rate of return/ Education Inflation Rate – 1) x 100

Education inflation Calculating PV needed at start of college

Retirement income Calculating PV needed at start of retirement

23Topic 10: Financial Service Regulations

Investment Advisers Act of 1940 Investment adviser

Provide advice/analysis on securities In the business of doing this Receive compensation for advice/analysis

Must meet all three tests


Investment adviser Exceptions

Banks Lawyers, teachers, accountants, engineers

If incidental Brokers

Incidental Just executing trade…

Publisher of financial newsletter Less than 15 clients and don’t advertise being

investment adviser


Investment adviser Must register with either

SEC More than $100 million ADV: registration statement filed with SEC Adviser has fiduciary obligation

State Less than $100 million


Investment adviser Don’t use initials RIA

Registered Investment Advisor permitted Register with SEC requires filing ADV

Part I: background on firm and clients Part II:

Fees Balance sheet

Brochure Prior to providing advisory services

Client has five days to cancel Annually to clients


FINRA (formerly NASD) Self regulated Must register if selling stocks, bonds,

options, mutual funds Must be sponsored by broker/dealer Pass exam

Series 6: mutual funds, variable products Series 7: everything but commodities, options Series 65: investment adviser


FINRA (formerly NASD) Disputes between advisers/clients go to arbitration

Insurance sales Regulated by states

Life insurance rates, capital, claims practices Must have a license in each state doing business

NAIC promotes model state laws, accredits state insurance offices –

29

Topic 11: Business Law

Contract requires: Offer and acceptance Competent parties Consideration Lawful

Agents Must be loyal to principal Carry out principal’s instructions with

reasonable care and diligence

30


Principal’s duties to agent Opportunity to work Pay agent Reimburse agent for authorized expenses Keep accurate financial records Indemnify agent when acting for principal

Agent’s authority Express, implied and apparent

31


Bankruptcy Property debtor can keep

Retirement plans including IRAs IRAs limited to $1 million IRA, 529 and Coverdell exempted if made more

than a year ago Life insurance Home (varies) Limited amount of property

Debts not discharged Taxes Alimony., child support Student loans Fines and penalties

32


Bankruptcy Reform Act 2005 Requires debtor to be offered

Credit counseling Budgeting assistance Financial management course

Chapter 7 bankruptcy Voluntary or involuntary Allowed to keep some assets, remainder used to pay

creditors Keep life insurance, qualified plans and perhaps home

Pass means test to see if debtor has income to pay debts

Creditors cam object if above average income

33

Topic 11: Business Law Chapter 13

Voluntary Debtor restructures debt and keeps assets Creditor can’t foreclose or harass debtor

Fair Credit Reporting Act Have right to see and correct credit reports Disclose cost of credit life insurance

Consumer Credit Protection Act Maximum liability for lost/stolen credit card $50 Lender must provide borrower with APR Three days to rescind any contract involving home

used as collateral

34

Topic 11: Business Law Foreclosure Relief

Can exclude up to $2 million in debt forgiven on primary residence in foreclosure Also applies to

mortgage reduction short sale

35


Identity theft Shred all documents containing

Social security numbers Credit card numbers Usernames/passwords

Don’t disclose this information unless you initiated contact