Fundamentals Chapter 1 Recap: “Introduction to Financial Planning”

Chapter Recaps: my notes to chapters of the financial planning coursework material through New York University’s CFP^® Program (in conjunction with Dalton Education).

Chapter 1: Introduction to Financial Planning

Note: Two main topics: Personal Financial Planning (the process) and the Financial Planning Profession

1. Personal Financial Planning
   1. The Financial Planning Process:
      1. Acronym: EGADIM
         1. Establish and define the relationship.
         2. Gather client data.
         3. Analyze and evaluate client’s financial status.
         4. Develop and present financial plan recommendations.
         5. Implement financial plan recommendations.
         6. Monitor the plan.
   2. Contents of financial plan:
      1. Financial plan is a written document that generally sets out a list of recommendations to achieve a set of goals and objectives based on an understanding of a client’ scurrent financial and personal situation.
      2. Two kinds of data to collect:
         1. Internal = client’s financial goals and values.
         2. External = current and expected future income, gift and estate taxes, investment returns, inflation and interest rates.
      3. Concepts applied in plan:
         1. Evaluate client’s risk management portfolio (risks retained and transferred through insurance).
         2. Financial statements prep and analysis (including cash flow analysis and budgeting).
         3. Short-term goals: emergency fund and debt management.
         4. Long-term goal planning:
            1. Retirement planning.
            2. Education planning for children or grandchildren.
            3. Major lump-sum purchases planning.
            4. Income tax planning is integrated throughout entire plan.
            5. Investment portfolio (used to fund many of short-term and long-term goals.
   3. Closer look at the Steps of financial planning process
      1. Step 1: Establish and define the relationship.
         1. Engagement letter:
            1. Define parties.
            2. Scope of services.
            3. Completion timeline.
            4. Fees and costs description.
            5. Obligations/responsibilities of each party:
               1. Defining goals, needs, and objectives.
               2. Gathering data.
               3. Projecting result of no action.
               4. Formulating alt possibilities.
               5. Selecting from those alternatives.
               6. Implementation & monitoring responsibilities.
      2. Step 2: Gather Client Data.
         1. Internal data collection:
            1. Quantitative = measurable data including client’s age, income, number of children, death benefit of life insurance policies, etc.
            2. Qualitative = how client feels about something, or their attitude or belief including working versus retiring and spending versus saving.
         2. External data collection:
            1. Interest rates (current and prospective), housing market (buyer or seller’s market), job market (unemployment rate), investment market (current and prospective outlook), business cycle stage, local insurance costs, local cost of living, expected inflation rate (ST and LT), education & medical care inflation, any relevant legislation, and current & expected income, gift and estate tax rates.
      3. Step 3: Analyze and evaluate the client’s financial status
         1. More in Chapter 3.
      4. Step 4: Develop and present recommendations
         1. Usually an iterative step.
         2. May require outside expertise (attorneys, accountants, and/or actuaries).
      5. Step 5: Implementation
         1. Again, may need to work with outside expertise to implement.
      6. Step 6: Monitor plan
         1. Implementation is just the beginning: must monitor actual results:
            1. Planned retirement saving amounts and rates of returns versus actual).
         2. Also must incorporate any other relevant changes (tax law changes).
2. Financial Planning Profession
   1. Benefits from Financial Planning
      1. Identify risks and establish and prioritize goals.
         1. Anticipate financial needs (examples: education and retirement.)
         2. New risks (example: LT care insurance)
      2. Establishes benchmarks within a time frame to facilitate comparisons of actual results and create an early warning system for deviations.
      3. Plan aids client to stay focused.
      4. Provides choices and alternatives to consider.
      5. Confidence with clear direction to achieve goals.
   2. Why Use a Professional Planner
      1. Most people do not know how to prepare a comprehensive financial plan and/or do not want to spend the time to learn how.
         1. Even when have the knowledge, typically lack the confidence to undertake the process and likely seeks confirmation of own financial planning decisions.
      2. A financial planning expert probably spent 10,000 or more hours learning financial planning over at least 10 years.
         1. A competent financial planner generally requires at least an undergraduate degree (4,000 hours) and additional planning-related courses (1,000 hours).
         2. If the planner is a Certified Financial Planner, likely passed a comprehensive exam requiring another 300-400 hours of study.
      3. A professional planner also brings objectivity.
         1. Clients rarely have knowledge of objective factors, perceiving subjectively that situation is fine (doesn’t need life or disability).
   3. The Practice of Financial Planning
      1. Largely unregulated: neither fed or state laws directly regulate FP.
      2. Licenses req’d for selling insurance products & securities (FP is much broader than selling insurance products & securities).
   4. Recognized Certifications in Financial Planning
      1. Certified Financial Planner^TM certification (CFP^®):
         1. Has global recognition.
      2. Chartered Financial Consultant (ChFC):
         1. Conferred by the American College.
         2. 60,000 have attained.
      3. European Financial Planner (EFP)
   5. Employment and Job Outlook
      1. As of 2014, U.S. Dept. of Labor reports 249,4000 jobs. Projected to be 323,300 in 2024. Growth partly due to baby boomer retirees.
      2. Earn on average $89,160 annually (not including bonuses or the wages of self-employed practitioners).