The Financial Planning ProcessV2.pdf

BMFS 204: FINANCIAL PLANNING 1 PROFESSOR: KELLY ADAM SEPTEMBER 3, 2024 CLASS TIME: TUESDAYS 10:45AM – 1:25PM HELLO & WELCOME TO FINANCIAL PLANNING 1! 2 A bit about me… Professor: Kelly Adam Education: ◦ BBA Wilfrid Laurier University ◦ MBA Simon Fras...

BMFS 204: FINANCIAL PLANNING 1 PROFESSOR: KELLY ADAM SEPTEMBER 3, 2024 CLASS TIME: TUESDAYS 10:45AM – 1:25PM HELLO & WELCOME TO FINANCIAL PLANNING 1! 2 A bit about me… Professor: Kelly Adam Education: ◦ BBA Wilfrid Laurier University ◦ MBA Simon Fraser University Banking Experience (27 years at BMO Bank of Montreal): HELLO & ◦ Early years - Branch Banking, Commercial Account Manager (commercial & personal qualified lender) WELCOME ◦ National Office roles in change management, project management and salesforce effectiveness with both Personal & Business Banking as well as Private Banking ◦ Final years - Anti-Money Laundering Canada team ◦ Retired March 2024 In my 6th year as a part-time Professor at Humber teaching Financial Planning In my spare time I enjoy many outdoor activities like golf, skating, skiing and walking my dog Lily. 3 Contact information: via Blackboard message or email [email protected] ICE BREAKER 4 Welcome to the Financial Planning 1 Course What can you expect from this course? - Fast Pace - in the first of 2 financial planning courses students learn about the planning process and key financial topics from a financial planning perspective - New Topic Most Weeks - we will cover a new personal finance topic (ie. managing money, investing, retirement planning etc.) each week, therefore, it is important to attend all classes. FP1 learning provides the foundation for FP2. - Gain Knowledge on personal finances – to pursuit a Financial Planning EXPECTATIONS designation (ie. CFP), a career in the financial services industry and/or to help you manage your own personal finances. What is expected of you? - Engagement - time & effort spent on learning & understanding course material. Recommend you complete the recommended reading for the week in advance of class and bring any questions you have to class for clarification. - Respect – of your classmates and your professor - Academic Integrity 5  BMFS 204 Financial Planning 1 Critical Path - Fall 2024 Date Unit Topic(s) Assessment Resources Welcome & Introductions 03-Sep Section 1 Financial Planning Process Textbook: Section 1 Financial Planning Process continued 10-Sep Section 2 Money Management & Lending Textbook: Section 2 *Individual Assignment 17-Sep Section 2 Mortgages & Home Ownership available in Blackboard Textbook: Section 2 24-Sep Section 3 Tax Planning Textbook: Section 3 Section 3 CRITICAL 01-Oct Tax Planning continued Individual Assignment due 08-Oct Mid Term Exam Mid Term Covers all content 15-Oct Section 3 NO CLASS Introduction to Investment Planning Take up Mid-term exam & Assignment Textbook: Section 3 PATH 22-Oct Reading Week Investment Planning continued Retirement 29-Oct Section 4 Planning Textbook: Section 4 05-Nov Section 4 Retirement Planning Textbook: Section 4 Test Test *Group Assignment *covers investments & 12-Nov available in Blackboard retirement modules 19-Nov Section 5 Wills and Powers of Attorney Textbook: Section 5 26-Nov Section 6 Risk Management and Life Insurance Textbook: Section 6 Group Assignment Due Group Presentation in 03-Dec Group Project Class All course content Covers content from the 6 10-Dec Final Exam Final Exam entire course REQUIRED TEXTBOOK Financial Planning 1 Course. Canadian Institute of Financial Planning. This is an online textbook that can be accessed through the CIFP.ca website. Detailed instructions are provided on Blackboard, under Getting Started, in the Course Outline section 7 Type of Assessment % Individual Assignment & Test (12.5% each) 25% Mid-Term Exam 20% Group Assignment & Presentation 20% STUDENT Professional Contribution (Financial News of the Week & 2 in class 10% Pop Quizzes) EVALUATION Final Exam 25% Total 100% To successfully complete this course students must: 1. Earn a final grade of at least 50% in this course AND 2. Earn a final grade average in all major tests/exams of 50% 8 QUESTIONS 9 THE FINANCIAL PLANNING PROCESS ADVISING IN THE FINANCIAL SERVICES INDUSTRY Role of the Financial Planner The Six-Step Planning Process Client Engagement Skills Financial Planning Profession Know Your Client and Suitability  HISTORY OF THE CANADIAN FINANCIAL SERVICES SECTOR In 1992 the Bank Act was Beginning in the 1930’s amended ending the concept Canadian financial institutions Chartered Insurance Banks Companies of 4 pillars. were regulated according to - Banks & Trust Companies the “pillar” system. could establish subsidiaries No overlap was permitted. engaged in investments & Established due to concerns Investment Trust insurance over the stability of the Dealers Companies - Banks & Insurance banking system. Companies could own Trust Companies etc. 11 FINANCIAL PLANNING PROCESS Why do people seek help with personal finances? - As a conscious decision to take control of their financial affairs - Have experienced a significant problem or concern with their finances (i.e.. Investment losses, unmanageable debt payments etc.) - Have recognized they do not have the time or expertise 12  FINANCIAL PLANNING PROCESS The Role of the Financial Planner is:  to help clients set and meet financial goals that will enhance their lives and financial security  primarily focused on retirement planning but not just determining how much a client needs to save and projecting retirement income, but also in the development of a realistic retirement lifestyle  to help his or her client retire to something, not just from something What are examples of how a Planner can help clients with retirement?  Early working years – start to save and invest early  Peak earning years - accumulate sufficient requirement funds and invest appropriately  Project savings required to reach retirement objectives  Counsel clients approaching retirement about financial adjustments they may need to make  Counsel clients regarding pension benefits  Counsel clients who may be required to liquidate assets to meet living expenses in retirement 13 FINANCIAL PLANNING PROCESS Five Phases of Retirement:  beginning the planning process  implementing the plan and building the retirement fund  monitoring progress  approaching retirement  retirement and distribution of assets A client may seek the advice of a retirement planner at any point during a particular phase. 14 FINANCIAL PLANNING PROCESS The 6 Step Planning Process: 15  FINANCIAL PLANNING PROCESS Step 1: Establish client / planner engagement When meeting with the client:  Ensure both the client and the planner are aware of what to expect from each other and be clear on each party's responsibility to contribute to this relationship.  The planner should spell out exactly what the financial planning process entails and the benefits.  The planner should detail the services he or she is able and willing to provide the client.  The planner must also disclose how the planner is compensated for the services he or she provides.  Any potential conflicts of interest must be raised and addressed.  The client and planner should discuss the scope of the client planner engagement and come to agreement as to how decisions are going to be made going forward  Once all is agreed, a properly drafted client planner engagement will set expectations for both parties and reduce the potential for disputes in the future. 16 FINANCIAL PLANNING PROCESS Step 1: Establish client - planner engagement Brainstorm 3 – 4 questions you would ask and information you would disclose during an initial financial planning meeting if you were: 1. Prospective client with $1 million dollars to invest 2. Financial Planner Client Planner This is my problem/issue/concern, can you help? What can I help you with? How long have you been a financial planner? How are you feeling about your current financial situation? What experience do you have working with clients like me? Introduce yourself and your qualifications/experience as a What are your qualifications? financial advisor What product and services do you offer? Describe the financial planning process and how it helps clients How much does this cost? Provide an overview of fees and how the advisor is How will we work together? compensated. Identify any conflicts of interest FINANCIAL PLANNING PROCESS Step 2: Establish objectives and gather data The planner should work with the client to ensure their retirement objectives are:  Specific and measurable  Defined by time frame  Realistic How would you rate the following retirement objectives? 1. I want to retire comfortably, at an age when I can still enjoy my retirement 2. I want to retire at age 60 with an equivalent income of $50,000 per year If you don't know where you're going, how do you decide what route needs to be taken, or when you get there? 18  FINANCIAL PLANNING PROCESS Step 2: Establish objectives and gather data Data to be gathered may include:  Current income & expenses  Assets & liabilities  Tax returns  Insurance contracts  Risk tolerance  Wills / legal contracts Is it easy to collect information from a client? 19 FINANCIAL PLANNING PROCESS Step 3: Clarify present status and identify problem areas and opportunities  It is important for the financial planner to fully understand a client's current financial position as well as his or her future income potential.  The planner should also be aware of any other financial obligations that may conflict with the client's retirement objectives.  The client's current financial position and income potential can be estimated by having him or her fill out data gathering worksheets.  Analysis of the data provided in the worksheets will help to determine assets and income that are currently available, how the client currently disposes of income, and what's resources may be available for future retirement income. 20  FINANCIAL PLANNING PROCESS Step 4: Identify appropriate strategies and present plan  With a good understanding of the client's current financial position and their retirement objective(s), the planner will be able to project the retirement income needed and determine the savings the client must accumulate to fund that level of income.  The amount of retirement savings required may impacted by:  Time until retirement  Anticipated income from other sources (pensions, part-time employment etc.)  Current amount saved  Life expectancy  Rate of return on investments  Income tax rates  Inflation  Recommended strategies may be as simple as having the client contribute $6000 annually to an RRSP, however, if the annual saving amount required is more than the client can afford the retirement objectives, investment choices or other factors may need to be revisited. 21 FINANCIAL PLANNING PROCESS Guidelines for making professional & ethical recommendations to clients:  Keep the client’s goals, values and risk tolerance foremost  Communicate options/ recommendations clearly and comprehensively  Disclose what led to your recommendations  Disclose everything about products and services recommended  Clearly explain all fees and provide a fee schedule  Present your recommendations in writing  Solicit feedback  Outline the level of service you will provide  Refer your clients to other experts with their permission, as required 22  FINANCIAL PLANNING PROCESS Step 5: Implement the plan  By this step, the client has made their decision, the planner implements the chosen products or services, and the client follows the plan (ie. contributes to their RRSP).  Implementing the plan may also involve the client seeking advice from a specialist, for example, an Investment Specialist, however the planner remains engaged to ensure consistency with the plan.  The planner should also encourage and educate the client (ie. benefits of early contributions and automatic monthly contributions to an RRSP, future opportunities etc.) 23  FINANCIAL PLANNING PROCESS Step 6: Monitor and update  Monitoring is an essential component of any financial plan for both the planner and the client.  Periodic reviews and updates are needed to evaluate progress towards objectives.  If the plan is falling short of meeting objectives assumptions or actions may need to be altered.  The frequency of monitoring will depend on the client (typically annually).  A retirement plan should be reviewed to identify material changes in the life of the client, changes in the client's financial objectives, and economic conditions. 24  FINANCIAL PLANNING PROCESS Characteristics of a Sound Financial Plan  Dynamic  Custom-made  Proactive  Efficient  Effective Documentation Retirement planning must include full documentation of the data gathered and the assumptions used to develop the plan. Strategies developed in Step 3 are critical to the success of a financial plan, therefore, they need to be delivered in writing and fully understood by the client. Documenting recommendations is required by the professional standards established for personal financial planners. 25  FINANCIAL PLANNING PROCESS Client Engagement Skills To be a successful financial planner it is important to develop and maintain soft skills in order to both attract and retain clients. Hard skills are also required in all areas of financial services. Soft skills are social skills that are intangible, innate and integral in effectively dealing with family and friends, co-workers, existing and potential business partners and clients and even with complete strangers. Hard skills are more tangible and must be learned to provide expertise in a certain area/industry. What some examples of soft skills and hard skills? SOFT SKILLS HARD SKILLS Empathize Product knowledge Listen Education proficiency Communicate Technical skills Build trust 26  FINANCIAL PLANNING PROCESS Soft skills can be categorized as follows: Type of Skill Required Soft Skills Communication skills listening questioning probing clear presentation Client and co-worker interaction skills attitude awareness conflict handling co-operation diversity tolerance teamwork willingness to help taking and understanding direction supervision problem solving Self-management skills decision making willingness to learn time management self-discipline stress management 27  FINANCIAL PLANNING PROCESS Effective Listening In a typical client-planner relationship, the planner is viewed as the expert while the client is relegated to the position of being dependent on the planner’s advice. On the surface, the dynamic of this relationship would lead one to think that a client-planner meeting would predominantly be a one-way conversation with the planner doing the talking and the client doing the listening. However, the reverse is true. In order for the planner to formulate the best strategies for the client, he/she must learn details of the client’s financial situation and their goals and objectives by listening and probing. What are some listening techniques?  stop talking  face the speaker  maintain eye contact  listen without interruption  be patient  pause before replaying  question for clarification  paraphrase 28  FINANCIAL PLANNING PROCESS Effective Questioning Asking the right type of question at the right time is a skill a planner must master in order to effectively elicit the vital information needed to construct a comprehensive plan. Effective questioning involves the use of two types of questions: open-ended questions and close-ended questions. Open-ended questions are used to encourage a client to speak freely and openly about his or her circumstances. They are best used to begin a discussion with the client, during discovery (ie. Step #2) to help the planner gather client information. Once sufficient information has been gathered, the planner can employ a series of closed-ended questions to clarify the client's situation and to confirm the accuracy of the information collected. In table groups, create 3 open ended questions a financial planner might want to ask a new client who is seeking help with retirement planning. 29  FINANCIAL PLANNING PROCESS Meeting with a client is typically structured as follows:  Opening – usually starts with general, meaningful conversation, objective is to make the client feel comfortable and gain their agreement on what should be accomplished (proposed agenda).  Questioning / Listening / Probing - using the meeting agenda as a guide, a planner will begin the process of gathering data and speaking to the client about his or her vision and goals. Depending on the complexity of the client's circumstances, it is unlikely that all the relevant information can be obtained during the course of a single meeting so, both client and planner should be prepared for questioning, listening and probing to take place over a series of meetings.  Supporting - a planner should summarize his or her client's requirements by paraphrasing them and then describing features and benefits of a product or service that may address the client's needs. It is important to ask the client for agreement and acceptance on each point and to answer any questions the client may have before moving to the next stage.  Closing – by the final stage of the meeting the client's situation has been discussed, his or her needs have been uncovered through open and closed-ended questions and confirmation from the client has been obtained regarding a course of action. This is a good time for a planner to congratulate the client on taking positive steps forward. 30  FINANCIAL PLANNING PROCESS Resolving Client Concerns It is inevitable, during a meeting that client objections will arise. Is this a bad thing? Handling Objections It is critical for the planner to address objections head on in order to establish the client’s trust. If unable to answer immediately the planner should acknowledge this and follow up on a timely basis with a suitable response. How should a financial planner respond if a client is happy with their current situation and not in favour of a proposed idea?  acknowledge the client's point of view  request permission to probe  probe to raise awareness regarding client's need to change  explore the client's circumstances for opportunities  confirm the existence of a need  reiterate the features and benefits of the proposed resolution 31  FINANCIAL PLANNING PROCESS Stages of Life Planning A comprehensive financial plan in general, and a retirement plan more specifically, must address the changing circumstances and changing needs of an individual at each stage of life. 20’s, 30’s, 40’s 40’s - early 50’s Mid 50’s – early 60’s 65 - 70 Later retirees -typically, clients have -established in their -early retirement -this phase marks -conversion of RRSP high debt, minimal career, peak earning yrs possible, -determine the beginning of the required savings and modest but -growth or balanced retirement income individual's retirement— -some seniors may increasing income. investment strategy is -Investment strategy by no means does the choose to or may be -Short-term goals often appropriate. more conservative planning stop just required to work part- involve paying down -focus may be on paying -some clients are because he or she has time student debt, purchasing off mortgage and other prepared, others stopped working. -medical issues could a car, a home, and maybe debts, saving for panicking about -investment strategy have a significant impact getting married and children’s education etc. retirement conservative to preserve on lifestyle and finances. starting a family -potential for significant -ideally individuals have capital, but should still -retirement is a long way life events to cause significant net worth, include some growth off but a planner should financial strain (ie. minimal debt depending on client’s risk educate clients on the divorce) *as much as 50% of tolerance as they could 32 benefits of starting to -increase in retirement retirees have left the live for another 20 – 30 save early. savings workforce by age 62. years  FINANCIAL PLANNING PROCESS Retirement Vision vs Retirement Goals:  Retirement Vision – client’s thoughts tend to be a more general and holistic with a strong focus on the quality of an individual's retirement (ie. spend my time pursuing a favorite hobby).  Retirement Goals - In contrast, discussing a client's retirement goals tends to deal with issues that are more definitive, tangible and financial in nature (ie. maintain a comfortable lifestyle).  Whether addressing a client's retirement vision or his or her retirement goals, the main obstacle to gathering data from the client is the client's natural tendency to speak in generalities. To encourage a client to clarify his or her vision or goals, a planner must call on their soft skills, in particular: carefully crafted, open-ended questions. What are some key topics that may impact a client’s retirement that the planner should know about in order to address as part of the client’s retirement plan? Financial issues, Family issues, Health issues, Managing time/Daily Routine, Working during Retirement, Social Network, Estate Planning issues. 33  FINANCIAL PLANNING PROCESS Know Your Client (KYC) and Suitability:  The “Know Your Client” (KYC) rule is one of the most important rules that a salesperson must keep in mind when selling securities/investments. It is designed to provide them and their firms with guidelines for making sure that they collect important information necessary to enable them to assist in fulfilling a client’s investment needs.  In accordance with IIROC’s Dealer Member Rule 2500 and Rule 1300, “each Dealer Member shall use due diligence to ensure that the acceptance of any order from a customer is suitable for such customer based on factors including the customer’s financial situation, investment knowledge, investment objectives and risk tolerance.” It is only by gathering important details about a prospective client that a salesperson is able to piece together a vital starting point for understanding the client’s investment goals. The more information that is gathered, the better equipped a salesperson will be in ensuring that proper recommendations are made for a client’s portfolio. The collection of this information is required under all jurisdictions, including Quebec.  In addition to abiding by IIROC and KYC suitability rules, the collection of information may also be required to abide by other securities commission rules, federal legislation, regulations and international agreements. 34  FINANCIAL PLANNING PROCESS How to collect and record KYC information:  Through initial face-to-face conversations with a client, the information gathered is recorded on an account application form, typically referred to as a “New Account Application Form” (NAAF).  The form sets out the minimum information an advisor or financial planner must collect from a prospective client, and is generally set out in 4 different sections:  Personal Information  Financial Information  Investment Objectives  Other information, including date and signature 35  FINANCIAL PLANNING PROCESS In your table groups, for the assigned category:  Identify at least 3 specific pieces of information a financial planner must collect.  For each piece of information indicate the reason for and benefit of collecting that piece of information  Personal Information  Financial Information  Investment Objectives 36  FINANCIAL PLANNING PROCESS Personal Information Required Information Reasons and benefits of information gathered Client’s Legal Name -ensures accounts opened in proper name, avoids nick names, alerts legal name changes Identification (Passport, Drivers -confirms identity, required under federal Proceeds of Crime legislation, enables firm to withhold tax on foreign license, Citizenship card) investments etc. Client must provide original ID, photocopies typically not accepted. Date of Birth -identifies minors, alerts planner of upcoming account changes that may be required, age influences goals Client Address -required to mail clients documents, identifies a problem with client moves outside of trading jurisdictions Phone numbers, email -allows the planner to contact the client quickly Occupation -may influence the plan if client is paid on commission, self employed, and identifies any conflict of interest Employer -alerts advisor if client has a pension plan or may be a politically exposed person Social Insurance Number (SIN) -ensures compliance with CRA relating to income tax reporting and client identification Source of contact -establishes how first contact was made (ie. referral, advertising) 37  FINANCIAL PLANNING PROCESS Financial Information Required Information Reasons and benefits of information gathered Approximate income -from all sources. Together with understanding regular expenses gives the planner an understanding of the client financial condition Approximate net worth -provides a clear picture of the client’s financial history, including assets (i.e. property, car, home), liabilities (i.e. loans, other debts, mortgages etc.) Investments held -identifies the types of investments, if any, previously made by the client Investment knowledge -together with “investments held”, it highlights the client’s familiarity, knowledge and experience with investment matters and products -aids in assessing the client’s investment knowledge level: sophisticated, good, fair, novice -determines if a client has investment plan already in place -helps to determine what the client may need: awareness, education, decision-making 38  FINANCIAL PLANNING PROCESS Investment Objectives Required Information Reasons and benefits of information gathered Investment objectives -determines if investment objectives are reasonable and in keeping with the client’s overall circumstances. Enables appropriate weighting to: safety, income, growth, aggressive growth Liquidity or time horizon -identifies the length of time that the client expects or is willing to hold their investments within a particular plan Risk tolerance -opportunity for a planner to assess the client’s perception of risk and ability to tolerate it financially and emotionally (Risk Profile questionnaire with (ie. low, medium, high). Identifies if the degree of risk the client is willing to assume is reasonable and in keeping with what if scenarios used to their individual circumstances, including their investment knowledge and their understanding of a particular determine risk tolerance) investment and its inherent risks. Leverage – borrowing to -if established, which investment account are funds borrowed from invest -if interested, planner has an additional disclosure obligation to explain advantages & disadvantages Type of account - Identifies types of accounts: registered (ie. RRSP, TFSA) or non-registered (ie. individual, joint) 39  FINANCIAL PLANNING PROCESS Other Information Required Information Reasons and benefits of information gathered (all required under AML legislation) Third parties -identifies if any 3rd party has a financial interest or trading authority over a client’s account and allows the salesperson to record their name, date of birth, citizenship, employment information and their relationship to the client Source of funds and -identifies where the funds used to open the account came from -declares the intended use of the account for anti-money laundering purposes intended use Banking information -Identifies the client’s bank, branch address, transit number and client’s account number -required when deposits are to be made into or withdrawn from and account (ie. pre-authorized deposits) Signature & date -signature acknowledges consent for each account or plan In addition, planners need to understand the client’s family structure, marital status, and spousal / common-law partner details as this information affects everything from income tax, support obligations and property distribution upon divorce or death. 40  FINANCIAL PLANNING PROCESS KYC Record Keeping  KYC information should be reviewed with the client at least annually and if the clients provides an update, the planner must acknowledge and update records.  KYC information must be reviewed if a new planner / advisor takes over a client’s account.  Updated information is important as this information is used in compliance suitability reviews related to trading.  IIROC and the Canadian Securities Administrators reinforce and remind salespersons and their firms, of their duty to satisfy the suitability obligations to their clients. Not only must they "know their client", but salespersons and their firms must also "know their product" before making it available and ascertaining if it is appropriate for a client's account.  Ensuring, then, that the KYC information for each client account(s) is kept up to date and that future trading in the account(s) matches the KYC information provided is paramount to helping the client remain well served by investments that suit their individual financial needs.  Auditors will review records such as: accounting, trading records, data entry / back-end systems, client communications and client complaints.  As per privacy regulations and IIROC’s Dealer Member Rule 2400, all KYC and client information and other records must be kept confidential.  A client’s refusal to provide information is not a good enough reason to protect the salesperson and the firm from liability under securities legislation. If a client refuses to provide the necessary information required to assist in making proper recommendations for the account, then the salesperson should not proceed further with the client. 41  FINANCIAL PLANNING PROCESS RECAP 1. What services might a retirement planner provide? a) showing clients who are in their early working years the benefits of identifying retirement objectives, and starting to save and invest early b) reviewing existing resources and pension plan memberships, and projecting the savings required to reach retirement objectives c) counselling clients regarding their distribution options of pension benefits d) All of the above 2. How many steps in the financial planning process? 6 3. Name a soft skill financial planners should be proficient at? Listening, questioning, presenting, conflict handling, teamwork, problem solving, time management, decision making, stress management, willingness to learn 4. List the 4 types of KYC information that needs to be collected. Personal Information, Financial Information, Investment Objectives & Other Information 42  WHAT’S NEXT? ** If you haven’t already, please login to CIFP.ca to access the course textbook** Discussion Board Activity: Financial News of the Week a) Post a current financial news article & response to the questions on the Discussion Board, then present a brief summary in class. Signup sheet to select the week of your choice will be available until next week in class. Approximately 6 students per week – beginning next week. Worth Professional Contribution marks (4/10), b) In addition, during the term, you are to read and reply to 4 Financial News of the Week articles posted by your classmates. Worth Professional Contribution marks (2/10). Next week:  Money Management & Lending Topic 43