CFP Unit 1 Chapter 1 (1).pdf

CHAPTER 1: INTRODUCTION TO FINANCIAL PLANNING THE CERTIFIED FINANCIAL PLANNER® CERTIFICATION PROGRAM..........................................................1 THE BODY OF KNOWLEDGE...................................................................................................................................5 THE EXAM PROCESS................................................................................................................................................5 THE FINANCIAL PLANNING PROCESS.................................................................................................................5 Explain the Role of the Financial Planner and the Value of the Financial Planning Process..........................6 Define the Terms of the Engagement..............................................................................................................6 Letter of Engagement......................................................................................................................................7 Identify the Client’s Goals, Needs, and Priorities...........................................................................................9 Gather the Client’s Information.......................................................................................................................9 Assess the Client’s Current Situation............................................................................................................ 10 Identify and Evaluate Appropriate Financial Planning Strategies................................................................. 11 Develop the Financial Planning Recommendations...................................................................................... 11 Compile and Present the Financial Plan and Supporting Rationale.............................................................. 11 Discuss Implementation Actions, Responsibilities, and Time Frames.......................................................... 12 Implement the Financial Planning Recommendations.................................................................................. 12 SAMPLE FINANCIAL PLAN.................................................................................................................................... 13 CASE STUDIES......................................................................................................................................................... 13 HOW DOES IT WORK?............................................................................................................................................. 13 SOURCES FOR THIS CHAPTER:............................................................................................................................ 14 THE CERTIFIED FINANCIAL PLANNER® CERTIFICATION PROGRAM Welcome to the CFP®/QAFP™ certification program.1 Throughout this program you will learn the information required to obtain the Certified Financial Planner certification and/or the Qualified Associate Financial Planner certification. It is important that we understand exactly what is covered in the program, and what is expected of you as a student. Before we look at that information, we will discuss the philosophy behind this program. As you may be aware, there are several possible avenues available for you to obtain your CFP certification. This program was built using FP Canada Standards Council’s Body of Knowledge. The Competency Profile explains in some detail what is expected of you before you earn the right to use the CFP mark or the QAFP mark. We know from the Competency Profile that you are expected to be able to collect and analyze information and provide valid recommendations. The information might fall into any of 6 areas, which are the six components of financial planning: Financial Management 1 CFP®, Certified Financial Planner® and the blue flame logo are certification trademarks owned outside the U.S. by Financial Planning Standards Board Ltd. (FPSB). FP Canada is the marks licensing authority for the CFP Marks in Canada, through agreement with FPSB. QAFP™, QUALIFIED ASSOCIATE FINANCIAL PLANNER™ and the QAFP logo are certification marks of FP Canada. Used under license. 1-1 Investment Planning Insurance and Risk Management Tax Planning Retirement Planning Estate Planning and Legal Aspects Anytime you are conducting planning activities, you are expected to do so in a professional manner. Correspondingly, FP Canada has indicated what it considers to be the Professional Skills required of a planner: Critical Thinking Skills Interpersonal and Relationship Skills Communication Skills Teamwork and Collaboration Skills A vast range of technical knowledge is required to carry out financial planning activities across the six components and with respect to the Professional Skills. The technical knowledge required is broken down into 12 categories:2 Financial Planning Profession and Financial Services Industry Regulations Financial Analysis Credit and Debt Registered Retirement Plans Government Benefit Plans Registered Education and Disability Plans Economics Investments Taxation Law Insurance Human Behaviour Throughout this program of study, we have tried to explain the required concepts in plain language, using examples where appropriate. The initial portion of the program, which is a prerequisite for both the CFP certification and the QAFP certification, is laid out in 18 chapters, divided into 6 courses. The courses cover six broad sets of subject matter: Course 1: Personal Finance Building Blocks – is designed to cover the foundational concepts of financial planning. Students should complete this course with an understanding of the environment in which financial planning engagements take place. Course 2: Benefits, Math, and Legal Building Blocks – is designed to provide understandings of government benefits programs, financial math, and legal concepts. These components are all necessary for what follows in the rest of the courses. Course 3: Blueprints (Taxation) – deals with tax and business structures. While this is a complicated area, an understanding of our tax system is necessary to make sense of almost any financial planning engagement. Course 4: Investment & Insurance Tools – covers products – think of course 4 as describing the tools in the financial planning toolbox. Course 5: Retirement & Estate Planning Tools – covers concepts that provide the rest of the tools in the financial planning toolbox. Course 6: Construction (Behaviour, Practice, & Regulation) – describes the practice of financial planning. Client interactions, human behaviour and the regulatory environment are described in detail here. 2 These 12 areas are detailed in the FP Canada Body of Knowledge: https://www.fpcanada.ca/bok 1-2 If you plan to proceed to the CFP certification program, you will have to complete the following additional steps: Advanced Core Curriculum with Business Career College (or another educator) dealing with advanced planning concepts. The largest portions of this course deal with planning for business owners, estate planning, and living benefits insurance. CFP Professional Education Program (PEP) with FP Canada Institute. This course can only be done with FP Canada Institute. It primarily deals with the professional skills involved in the practice of financial planning. Introduction to Professional Ethics with FP Canada Institute. This course provides a look at the ethical obligations expected of the financial planning professional. The CFP Exam. This exam comprises a mix of constructed response (think short answer questions based on short case studies) and multiple-choice questions. This is the final step in the process. If you don’t intend to proceed all the way to CFP certification, you can obtain the QAFP certification. This program is intended as a financial planning certification for those who may deal with clients whose financial planning situations are not overly complex. If this is your plan, you will have to complete the following additional steps: QAFP Professional Education Program with FP Canada Institute. This course can only be done with FP Canada Institute. It primarily deals with the professional skills involved in the practice of financial planning. This course can be done prior to the QAFP Exam, or within 12 months after writing that exam. Introduction to Professional Ethics with FP Canada Institute. This course provides a look at the ethical obligations expected of the financial planning professional. This course must be completed before writing the QAFP Exam. QAFP Exam. This is a multiple-choice exam covering the material that you will learn in the Core Curriculum. Bridging. It is possible, upon completion of the QAFP certification, to bridge to the CFP certification. This comprises the completion of the Advanced Core Curriculum with Business Career College (or another provider) and a Professional Ethics Program that includes the components not covered in QAFP PEP. To understand the financial planning process, it is useful to examine the Competency Profile. We encourage you to read the Competency Profile in full (it is available at the FP Canada site at https://www.fpcanada.ca/docs/default-source/standards/fp-canada-standards-council-competency-profile.pdf) at some point during your studies. A brief look at one page from the Competency Profile can help you to understand the contents of a financial plan. You are expected to be able to collect and analyze information so that you can provide recommendations. The FP Canada Competency Profile describes the financial planning process. Here is an excerpt from that document: 1-3 This is just a one-page excerpt. This section of the Competency Profile is 27 pages long, all covering the steps that should take place in a comprehensive financial plan. The top half of this excerpt describes the steps the planner should take in analyzing potential risk management strategies. The bottom half discusses the steps the planner would take to implement those strategies. What does that mean? Basically, we are going to work with the client to know their current situation (this would have already been done in the collection phase) and now we are going to look at what the client can and should be doing, as far as their risk management goes. This would all form part of the creation of a comprehensive financial plan. The comprehensive financial plan must be based on a sound analysis. In order to conduct a competent analysis then, we are going to have to be comfortable with the concept of risk, the various types of insurance that are available, other risk management strategies, and a variety of other factors that may be relevant. Not to get too far ahead of ourselves, but this is exactly the kind of information that you will be required to provide when you write the exams provided by the FP Canada. A substantial amount of knowledge is required in order to be able to conduct a competent analysis. The texts associated with this program are designed to provide you with the required technical knowledge and to help you learn how to apply that knowledge. There is a massive amount of information that could be covered here. You are not expected to know tax to the level that an accountant would, or insurance to the level that an actuary would, or trusts to the extent that a lawyer would. However, you are expected to have a level of familiarity with all these concepts. For that reason, these texts are not intended to be used as a comprehensive technical reference. Some items, such as pension legislation, are incredibly technical and are subject to different rules based on the province. Considering that, these texts provide the basic information that you are expected to know as a financial planner. Where practical, the texts also include references to further reading. 1-4 THE BODY OF KNOWLEDGE Starting in 2019, FP Canada made public a very robust Body of Knowledge. This is the type of document that is typical in professional certification programs. It is based on Bloom’s Taxonomy of Educational Objectives, which is a method of organizing information and setting learner objectives. This document runs almost 500 pages in length. Students should trust that the texts meet the requirements set out by FP Canada in the Body of Knowledge, but it can still be useful to refer to it from time to time. If you’re ever working through the course, and you ask yourself, ‘Do I really have to know this?’, a look at the Body of Knowledge can be reassuring. As an example, here are some educational objectives established in the Credit and Debt section covering Conventional and High-Ratio Mortgages:3 Define a mortgage Identify that a pre-approval process exists for obtaining a mortgage Explain the advantages and disadvantages of a rate guarantee Calculate the mortgage amount required given the value of a down-payment Compare paying homeowner mortgage insurance premiums at the time of purchase versus financing them with the mortgage Evaluate how each of the factors may impact the suitability of an open mortgage The bolded action word in each of these sentences provides an indication of the level of proficiency expected of a financial planner. The course text is written to provide students with the required competency. THE EXAM PROCESS Many students have questions about the examination process. Throughout this program, you will face a series of quizzes, both multiple choice and constructed response. The exam questions will be similar in style and content to the types of questions used by FP Canada. The minimum passing grade on the quizzes provided will be 60%. You will need to score 60% on each component in order to be permitted to move on to the next course. Once you have completed the first 6 courses, you will have completed the Core Curriculum. FP Canada’s exams are hosted in late May or early June and late November and early December across the country, with a third write held in January or February tentatively starting in 2022 and the fall exam moving to October or November. The pass mark varies from exam to exam. In our Exam Prep course (not directly a part of this program) we cover the format and style of that exam in some detail. The questions that comprise the practice quizzes and exams in this program are designed to prepare you for the style of questions on those exams. For complete details on the two exams, you can check out FP Canada’s Exam Toolkit: https://www.fpcanada.ca/resources/exam-tools The two “Exam Blueprints” posted there give the most concise look at the exams. Now that we know what we are facing, let’s move on to our studies. THE FINANCIAL PLANNING PROCESS As financial planners, we must be familiar with the financial planning process. Why do we engage in financial planning? What is a financial plan? These are questions that will be answered as we examine the financial planning process. FP Canada has, hand in hand with the Institut québècois de planification financière (IQPF), developed the Canadian Financial Planning Definitions, Standards, & Competencies. 4 This document outlines the financial planning process. It is important to keep this process in mind as we work through the program. It will help you to recognize why you are learning a concept. 3 https://www.fpcanada.ca/en/bok/bok-statement?topicUrl=credit-and-debt&articleUrl=conventional-and-high-ratio- mortgages 4 https://www.flipsnack.com/CDC696EEFB5/canadian-financial-planning-blue-book-eng/full-view.html FP Canada and IQPF’s Canadian Financial Planning Definitions, Standards, & Competencies is a must-read. Its contents are considered to form part of the examinable content of this program. 1-5 Explain the Role of the Financial Planner and the Value of the Financial Planning Process The client may not recognize what a financial plan is, or what a financial planner does. This can lead to a lack of acceptance by the client, and result in a failure of the planning process. The client should recognize that there is value in engaging in a robust financial planning process. Each planner will develop their own ‘elevator pitch’ or, possibly, a more involved presentation helping to explain this process. This author uses a presentation that presents the planning process as a road map, but different planners will come up with different approaches. Some suggestions for explaining the value of the financial planning process include: A financial plan is like a road map for your financial future. A financial plan will help you make better decisions about your money. A financial plan will help you gain confidence about your financial decisions. The pitch may focus on a particular area, depending on the financial planner’s specialization. For example: A financial plan helps young professionals make better housing decisions. A financial plan helps business owners better manage their personal financial risks. The planner who develops a useful explanation of their planning services will have an easier time engaging potential clients and likely has a better idea of how they are building their practice. It can be useful to think about a financial planner as a guide on the client’s financial journey. The planner is not there to tell the client what to do next. The planner is there to provide the client with necessary information at each step along the way. The planner will be a source of both technical information (“With an RRSP deduction limit of $16,400 for you, here are some viable options) and behavioural guidance (“Because you are newly married, there is often uncertainty. Do you have an idea about what your household expenses are going to look like in the first 6 months together?”). The planner’s advice and recommendations should be custom-built to the client’s own circumstances.5 Define the Terms of the Engagement The planner will then have to establish the engagement. The mechanism for doing so will vary, and might include things like face-to-face conversation, e-mails, phone calls, visiting a web site, and a formal letter of engagement. At the conclusion of this step, the planner and client should have a good understanding of what each expects out of the relationship. The planner should know what issues the client considers important. The client should know what services the planner will provide, what the financial planning process consists of, and how the planner will be compensated. Some planners will create comprehensive financial plans, covering all six competencies. Some plans will just be updates of existing plans. Some plans will focus on just a few areas – these are referred to as modular financial plans. The client and planner should have a clear idea as to how and when information will be shared. It is also useful at this stage to determine how decisions will be made. It will also be necessary to define exactly who the client(s) is/are. Is the planner just preparing a plan for one spouse? Is the plan for both of them? Does the plan include the children? What about the client’s business interests? The planning process can be ambiguous but defining who the parties involved in the plan is will help the planner to prepare a more concise plan, and help the client know what to expect. It can be useful for both parties if the planner clarifies all these points in writing. As we will see throughout this program, documentation is key. A plan that is not communicated clearly in writing is near worthless. 5 https://www.kitces.com/blog/client-review-meetings-communication-questions-agenda-topics-value/ This podcast explores the role of the financial planner. 1-6 Letter of Engagement The Letter of Engagement is not technically a step in the process, but it is included here, as this is where the Letter of Engagement is typically used in the process. The financial planning process should include some method of acknowledging that there is a financial planning engagement. The most common way to do this is through a written letter of engagement, though other methods might be available. For planners who work within financial institutions, this document is likely to show up as a prepared item from your compliance department. For planners who work independently, you may create your own, or find a resource that you are happy with. At a bare minimum, FP Canada’s Standards of Professional Responsibility 6 require that the following is disclosed in writing to the client: A description of the known costs of services and products. How much will the client pay for any cost or service to be provided? This does not require disclosure of the planner’s compensation. Some planners will prefer to disclose that; others may not. This might also be influenced by other regulatory requirements. For example, mutual fund salespeople are required to provide annual disclosure of their compensation to their clients. For financial planning services, the planner should disclose how compensation is received for providing those services. Is it provided for free, allowing for insurance and investment products to generate any compensation? Or is it provided at a cost, separate from any other purchases or investments the client might make? This item can be disclosed either in writing or verbally. Referral or contingency fees. Does the planner get any fees for providing referrals? The most common example of this would be planners who work with discretionary asset managers. In such cases, it’s common for the planner to receive, for example, a.5% annual referral fee for assets under management. This fee should be disclosed in writing to the client. A summary of potential conflicts of interest. A conflict of interest is a situation in which the client might not have their interests represented as the primary concern for the planner. The client should be made aware of any conflicts of interest. Compensation-based conflicts are important, but conflicts can arise when a planner is dealing with two people who might have direct relationships other than their relationship with the financial planner. As an example, a planner might be dealing with an employer as a client, and one of their employees as a separate client. There might be a concern here that, if the employer reveals that they are experiencing financial struggles, that the planner should discuss a potential job loss with the client. This would expose the planner and the clients to a conflict of interest. This should be addressed in the initial engagement, where the planner would indicate to both that, should any information that is material to the client arise from a discussion with another client, that information would not be brought into this relationship. This type of handling would also reduce the likelihood of a breach of confidentiality. Conflicts of interest and confidentiality will be discussed in greater detail in chapter 17. What financial planning services will the planner provide for the client? The planner should also specify what services will not be provided, as a best practice. The Competency Profile is a good start for this. It describes all the components of a comprehensive financial plan. The planner can review that document and determine what services they are prepared to offer to clients. Information about either the planner or the planner’s client that could materially impact the engagement. For example, does the planner’s company employ the client’s company for some services? Maybe the planner recently rented an office space and met the proprietor of the building where the office is. If that person becomes a client, there might be a concern that one party has some leverage over the other. 6 https://www.fpcanada.ca/docs/default-source/standards/standards-of-professional-responsibility.pdf 1-7 Any information that a client might reasonably want to know about the planning engagement. This catch-all is designed to encourage the planner to provide a general overview of the type of planning engagement. Contact information for the planner and the planner’s employer, if there is one. This should go without saying, but the client needs a way to be in touch with the planner. If any of these items change in the course of the relationship, the planner is required to notify the client in writing of the changes. In addition to these required items, there are some further possible items to consider including in a letter of engagement: Who is the financial planner? Possibly a short bio or some other useful description. What credentials are held? In addition to possibly QAFP or CFP certification, what other credentials does the planner hold? Only credentials that have relevance to financial planning should be identified. The planner should be careful to adhere to any rules or guidelines produced by the credentialing body. For those who are licensed to sell securities through the Investment Industry Regulatory Organization of Canada (IIROC), there are rules governing acceptable credentials.7 Who is on your team? What other people should the client expect to interact with in the financial planning engagement? Licensing. What licenses are held by the planner? Who is the regulatory body associated with each of those licenses? It may be necessary, depending on the regulator, to also identify the sponsoring firm for any licenses held. Privacy and Confidentiality. The planner’s commitment to maintain client confidentiality may be clarified here, as well as circumstances where it may be necessary to breach confidentiality. This will be further discussed in chapter 17. Product providers. While a comprehensive list may not be appropriate, if there are certain product providers that the planner normally deals with, it may be helpful to disclose that to the client. Referral arrangements. If the planner refers the client for outside work, such as sending the client to a lawyer specializing in estates, how does the planner choose that estate lawyer? Do they provide a list of 3 names for the client to shop around? Do they receive reciprocal referrals? Do they select a lawyer to refer based on geography, personality, culture, or some other factor? Complaints handling. How should the client complain, if necessary? What systems are in place for the client to formally or informally complain? While a planner might prefer to leave this out, this can be an important financial education step for the client. A measure like this can also help to engender trust, which we will discuss further in chapter 16. Terminating the engagement. What happens if the financial planning engagement must end? This can happen for a variety of reasons. Perhaps the client or planner moves. Maybe the relationship just doesn’t work out. Maybe the client is part of a joint engagement (common for a couple) and the relationship breaks down. The planner should clarify how the client would be notified of a terminated relationship and what will happen with any documents or work prepared for the client. Client responsibilities. What does the planner expect from the client? How can the client achieve the best results? This might include expectations around honest communication, attending appointments, responding to emails, or means of communication. 7 http://www.iiroc.ca/Documents/2014/3254a1ea-88c7-4ebb-b00c-4167f2708b67_en.pdf 1-8 Professional liability insurance. Does the financial planner carry errors and omissions (E&O) insurance? Any further comment about this insurance should be cleared with the planner’s compliance department and possibly with the E&O insurer. Professional liability insurance is discussed in chapter 12. It is possible for the letter of engagement to turn into a very involved document. It’s important to strike a balance between producing a document that clearly establishes the relationship between the planner and the client, but also is of a length that the client will read. If you produce something that looks like the Apple Terms and Conditions, it’s unlikely to bring any value to the relationship. A sample letter of engagement is included in the chapter 1 materials. Identify the Client’s Goals, Needs, and Priorities What is the client trying to establish? The planner who does not focus on what’s important to the client is not doing financial planning. The purpose of the financial plan is to help the client accomplish as many of their goals as possible in a manner that works for that client. Many planners choose to take a cookie-cutter approach to this. For example, a planner might specialize in tax planning. Not every client needs tax planning solutions – this approach to the plan might not match the client’s goals, needs, and priorities. In the case that the planner specializes in an area that does not match the client’s goals, needs, and priorities, the planner might consider referring the client to another professional to help with their financial plan. Many planners operate as generalists, and deal with all clients. This approach is perfectly acceptable, if the planner recognizes the limits of their competence and refers appropriately. In the end, the planner should develop a financial plan that reflects what the client is trying to accomplish. Gather the Client’s Information Because the financial plan is going to cover a broad range of topics, the planner must gather information covering that same range of topics. A thorough job of collection here will ensure that the planner has the proper information available to carry on with the rest of the process. Information collected at this point will be both quantitative and qualitative. Quantitative information includes things like monthly income statements, statements of net worth, investment holdings, savings, and tax information. Qualitative information includes the client’s values and attitudes. A great deal of information will be necessary here. Some of the information that the planner might gather will include: Copies of wills Bank statements Investment statements (RRSP, RESP, RDSP, TFSA, etc.) Property appraisal Mortgage documents Credit card statements Line of credit statements Car loan or lease information Insurance policies (home, auto, life, disability, liability, etc.) Budget Listing of assets Corporate financial statements Group benefits booklets Pension statements Pay stubs Recent utilities bills Charitable donation receipts Copies of powers of attorney Any relevant trust documents Matrimonial or family law agreements 1-9 Notice of Assessment Other documents will likely be needed as well, depending on the client. For example, a client where debt and credit are a concern might be asked to provide a recent credit bureau report, such as those available from Equifax or TransUnion. A client who is approaching retirement might be asked for a Canada Pension Plan statement. The planner may have to ask for a set of documents to be presented further into the planning process, as it becomes obvious that more information is required. Planners will develop their own lists of information that they will request from clients, but the list presented in this chapter provides a useful starting point. Not all information will be available. The planner must be competent at filling in the blanks where there is potentially useful information missing. For example, many benefits plans no longer provide printed booklets describing the plan. The client might not provide the planner with the booklet. In such a case, the planner should be able to use their expertise to make reasonable assumptions about the likely benefits that the client would have. If having the correct information is material to the plan, the planner can update the plan, replacing the assumptions with the correct information when it becomes available. From time to time, a client may present the planner with inconsistent information. A common example of this concerns group retirement plans. Many clients don’t understand the alphabet soup of potential retirement plans (we will discuss DPSPs, GRRSPs, DCPP, DBPP, PRPP, and SPP in chapter 13, and then add IPP, EPSP, RCA, and SERP in chapter 3 of advanced curriculum).8 The client may, for example, tell the planner that they contribute to a DPSP. You will learn (or perhaps know already) in chapter 13 that this is not possible for an employee. When this happens, the planner must be careful not to pass judgment on the client and must confirm all the facts before correcting the client’s misunderstanding. It is perfectly normal for clients to be confused about financial matters. This is a complicated world and the planner is here to help the client deal with that complexity. Making people feel stupid isn’t likely going to help them take financial advice. As Nobel-prize winning economist Richard Thaler says, “People aren’t dumb. The world is hard.”9 FP Canada and IQPF have jointly developed a document that provides some data that can be used to generate assumptions where better information is not available. This document will be used throughout this course. You should bookmark it. It’s available at FP Canada’s website, and will be discussed in more detail in chapter 3. https://www.fpcanada.ca/docs/default-source/standards/2019-projection-assumption-guidelines.pdf Assess the Client’s Current Situation Once the planner has enough information to get started, the work begins in earnest. Using the Competency Profile as a guide, the planner can generate tables and lists that explain the quantitative elements of the client’s situation. Qualitative elements of the client’s situation are more likely to be explained using textual descriptions. At the end of this step, the planner should have a clear picture of the client’s situation. This clear picture can be referenced as the planner works through the rest of the planning process. Comparisons to information presented in this stage will help the planner to indicate how to execute a financial planning recommendation and can also help with goal setting. It is important that the planner not apply value judgments about the client. For example, the client may take the perspective that Canada Pension Plan is underfunded and not to be relied on. We will see in chapter 4 that there is likely no factual support for this position. However, the client’s own circumstances will provide some reason for this belief to be held. The planner who assumes that the client is naïve or irrational because of a belief like this may not end up providing the client with unbiased advice. It is not the planner’s place to pass judgment on the client. The planner should take the information presented by the client as true and accurate given the client’s circumstances. If necessary, the planner may provide some education about technical matters and may end up providing some financial coaching as described in chapter 16. In my experience, this and the next step are generally the weakest for practitioners. I find that many practitioners have developed rules of thumb and bad habits. For those who are already working in the business, learning to assess the client situation and identify and evaluate appropriate strategies are usually the two biggest 8 Deferred Profit Sharing Plans; Group Registered Retirement Savings Plans; Defined Contribution Pension Plans; Defined Benefit Pension Plans; Pooled Registered Pension Plans; Specified Pension Plans; Individual Pension Plans; Employee Profit Sharing Plans; Retirement Compensation Arrangements; Supplemental Executive (or Employee) Retirement Plans 9 https://freakonomics.com/podcast/richard-thaler/ 1 - 10 benefits of pursuing CFP certification. Especially when we get to courses 4 and 5, we will work a lot on using the evidence at hand to make the best set of recommendations for a client. Identify and Evaluate Appropriate Financial Planning Strategies Now the planner is ready to begin the analysis portion of the process. Taking the information provided, the planner should be able to identify where the client requires help, where there is room for improvement, and possible problems that might arise. Using a careful analysis of the information gathered in Step 2, the planner will use their extensive expertise to find gaps, deficiencies, and opportunities. This will mean exploring the opportunities that might be available to the client. The client’s qualitative and quantitative factors must be considered. The planner should thoroughly examine possible strategies, and determine: What happens if the client implements a given strategy? What happens if the client does not implement a given strategy? What impediments the client might face How the strategy helps the client meet their objectives How the strategy compares to the client’s values and attitudes What elements that the planner previously assessed are impacted by the strategy What other strategies might be impacted by this strategy This is generally the most technical aspect of the financial planning process. The planner might generate projections using financial planning software or other tools to support the strategies being evaluated here. Develop the Financial Planning Recommendations Because the planner did a thorough job of identifying and evaluating appropriate strategies, this step should be relatively easy. The planner should be able to identify which of the strategies identified in the previous step are most likely to have the greatest impact and build recommendations on that basis. Compile and Present the Financial Plan and Supporting Rationale The recommendations, along with the evaluation described two steps prior, should be presented to the client. The client should have the opportunity to fully understand each recommendation. Recommendations that are not understood by the client are less likely to be successfully implemented. The planner should try to come up with language, pictures, and explanations that are appropriate to the client’s level of financial sophistication. The planner should work with the client to help understand trade-offs. Many (perhaps most) financial planning clients will have overly ambitious objectives and may not be able to achieve all those objectives in a realistic time frame. The planner can help the client to understand the effect of prioritizing one objective over another. For example, Raina, a young client, may have three objectives: Pay off a line of credit within 2 years. Immediately obtain sufficient disability insurance to provide coverage in case of a long-term disability. Save for a down payment on a house within 3 years. The planner may have developed recommendations for all 3 objectives. Let’s assume Raina has $500 of disposable income per month to commit to these objectives. The planner has identified that, in order to accomplish these objectives, the costs would be: $300/mo to pay off the line of credit. $200/mo to obtain appropriate disability insurance. $400/mo to save enough for the estimated down payment. This totals $900/mo, which is beyond Raina’s capabilities. The planner should help Raina understand the pros and cons of accomplishing each objective in the desired time frame. The planner may present alternatives, such as taking more time to pay off the debt, buying a less robust disability policy, or taking more time to save the down 1 - 11 payment. Ultimately, it should be Raina, and not the financial planner, who decides which objective is most important and which can be delayed. This can be made more complex by the interaction between these objectives. For example, paying off the line of credit may reduce Raina’s need for disability coverage, as she will have lower fixed monthly expenses. Helping the client understand trade-offs is a very important function for the financial planner. Through this course, we will examine the technical and behavioural concerns that might lead Raina to one decision or another. Discuss Implementation Actions, Responsibilities, and Time Frames This is discussed in detail in chapter 16. The planner must help the client by creating clear, executable action plan items. The planner may also assist by applying some of the behavioural finance techniques explained in chapter 16. Some students may benefit from skipping ahead to chapter 16 now, and then resuming with chapter 2. Chapter 16 explains the process of developing a financial plan. It presupposes a certain level of technical knowledge. Students who like to know the ‘why’ before the ‘what’ might look ahead to chapter 16. Implement the Financial Planning Recommendations Once the plan is created, presented to the client, and accepted by the client, the plan must be implemented. This will involve having the client deal with various professionals including accountants, insurance agents, investment advisors, lawyers, bankers, real estate agents, actuaries, business consultants, and a variety of others, depending on the needs of the client. You may be capable of filling some of these roles. For the purpose of the CFP certification program, and especially on the exams, it is important to consider yourself looking at this client from the role of the planner. If you intend to fill other roles, such as insurance agent or investment advisor, when dealing with this client, you must disclose that when establishing the engagement. It might be that the client already has trusted professionals that they deal with. You may provide introductions where appropriate. You might or might not attend meetings with these various professionals with or without the client present. If you create the greatest financial plan, but it does not get implemented, then your effort has really been wasted. 1 - 12 Summary The financial planning process is an ongoing process. It is not a one-and-done project, or an event. A financial plan for a client should be a living document that changes as the client’s circumstances change. The steps in the financial planning process are designed to be at least somewhat fluid, though there are some things that must be done in order. A key is that the collection of information should always happen before any analysis is completed, and recommendations should only be done following appropriate analysis. While they don’t necessarily need to be done sequentially, the steps in the financial planning process generally follow this sequence: SAMPLE FINANCIAL PLAN A sample financial plan is provided in the electronic resources attached to this chapter. Reading through this sample financial plan will help you to understand what goes into the financial planning process. Some of the information might be overly technical at this time, but you will learn those technical details as you work through the course. CASE STUDIES There are seven case studies provided in this course. These case studies are necessary to work through the quizzes and assignments. You should either print these off or save them to a handy location. You will be referring to them regularly as you work through the course. HOW DOES IT WORK? Lorna, a financial planner, receives a call one day from Samantha, whom she has never met. Samantha tells Lorna that her accountant recommended that she get some advice from a Certified Financial Planner® professional. Lorna proudly carries the CFP certification, and is more than happy to meet with Samantha. Lorna proposes a face- to-face meeting10 with Samantha in order to allow her to indicate what her concerns are. Lorna also provides Samantha with her web address so that Samantha can have some idea about what Lorna does. A week later, they meet in person at Lorna’s office. Lorna has a business practice of always meeting new clients on Tuesdays, and Samantha can accommodate this. Lorna initially asks Samantha what concerns she might have. Samantha indicates that she is considering starting a consulting business and that her accountant recommended that she make sure her financial affairs are in order prior to starting down this path. Lorna takes some notes and tells Samantha about her responsibilities as a financial planner. She tells Samantha what services she offers, how she is remunerated, and what she expects from Samantha going forward. They agree to meet again in two weeks. Lorna provides Samantha with a list of documents that she requires as part of her information gathering process. 10 Face-to-face meetings are not required. Lorna could choose to do business by email, web meeting, telephone, or whatever method she and Samantha can find to work together in. 1 - 13 After meeting face-to-face, Lorna prepares a personalized letter of engagement. The letter of engagement spells out exactly what the two of them had discussed in their meeting. Lorna sends the letter of engagement to Samantha prior to their next meeting. At their next meeting, Samantha provides Lorna with a stack of documents including pay stubs, tax returns, insurance policies, mortgage documents, investment statements, bank statements, a copy of her will, her business plan for her consultancy, her existing group benefits plan booklet, pension statements, and a litany of other documents. At the same meeting, Lorna and Samantha have an in-depth discussion about why Samantha is going into business for herself, her lifestyle and spending habits, her values, goals, and objectives. They discuss her investment philosophy, what she saw with her parents’ retirement, and a range of other issues. Over the next couple of weeks, Lorna analyses the information. She identifies where Samantha is in good shape, where she is exposed to too much risk, and where there are opportunities. She researches items that she is not immediately familiar with. A couple of times she contacts Samantha to ask for clarification. She consults with experts on issues that she is not sure of. Now she takes all the information she has available and creates a financial plan. The financial plan is a comprehensive document that includes projections for Samantha’s financial future, recommendations for products and services that will help Samantha, and a plan for further meetings between the two of them. Lorna provides Samantha with a one-page summary of the financial plan that includes clear action items. Over the next three months, Lorna will work with Samantha to see that all the immediate recommendations are implemented. Samantha deals with some professionals with whom she has a prior relationship, but in some cases, Lorna introduces her to the appropriate party. Once all the recommendations are either underway or implemented, they set a follow-up meeting for approximately 6 months later. Lorna also asks Samantha to contact her if any unexpected events happen in the interim. At the follow-up meeting, Lorna and Samantha review Samantha’s financial position. Her consultancy has started off strong, and Lorna tweaks elements of the plan to match with Samantha’s current financial position. Samantha indicates that she would be happy to receive the regular update that Lorna provides to all her clients by e- mail once per month, and that they should once again meet in person in about one year. Lorna has followed the financial planning process. Samantha is comfortable with her financial position, and she feels confident knowing that there is plan in place to help her deal with both the expected and the unexpected as she goes forward. SOURCES FOR THIS CHAPTER: Several documents produced by FP Canada are sourced throughout this chapter. You may find yourself referring to these documents regularly as you work through this course. The Projection Assumption Guidelines are required for several of the assignments. They are found at: https://www.fpcanada.ca/planners/financial-planner- toolbox#PAG This document is updated at least once each year. Its use will be discussed further in chapter 3. 1 - 14

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