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 yearsif 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 childs
  college expenses
• With time frame
• Short lt two years
• Intermediate 2 10 years
• Long-term gt 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 Boards Code of Ethics
• Applies to candidates as well as CFPs
• Principles
• Integrity dont mislead
• Objective disclose conflicts of interest
• Competence
• Fairness disclose compensation dont commingle
• Confidentiality dont disclose unless
  permitted/required
• Cant notify IRS of tax return issues without
  client consent
• Professionalism dont 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 agreements
  obligations.

9
Topic 76 Rules of Conduct

• 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
Topic 76 Rules of Conduct

• Client information confidential
• Keep information secure
• Get all required information
• Dont commingle assets with personal assets if
  take custody
• Dont 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

13
Topic 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 lt 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, wont 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

23
Topic 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

24
Topic 10 Financial Service Regulations

• Investment adviser
• Exceptions
• Banks
• Lawyers, teachers, accountants, engineers
• If incidental
• Brokers
• Incidental
• Just executing trade
• Publisher of financial newsletter
• Less than 15 clients and dont advertise being
  investment adviser

25
Topic 10 Financial Service Regulations

• 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

26
Topic 10 Financial Service Regulations

• Investment adviser
• Dont 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

27
Topic 10 Financial Service Regulations

• 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

28
Topic 10 Financial Service Regulations

• 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 principals instructions with
  reasonable care and diligence

30
Topic 11 Business Law

• Principals duties to agent
• Opportunity to work
• Pay agent
• Reimburse agent for authorized expenses
• Keep accurate financial records
• Indemnify agent when acting for principal
• Agents authority
• Express, implied and apparent

31
Topic 11 Business Law

• 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
Topic 11 Business Law

• 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 cant 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
Topic 11 Business Law

• Identity theft
• Shred all documents containing
• Social security numbers
• Credit card numbers
• Usernames/passwords
• Dont disclose this information unless you
  initiated contact