HS 300 Financial Planning: Process and Environment

1. HS 300 Financial Planning: Process and Environment Chapter 5: Gathering Data and Preparing Financial Statements

2. Learning Objectives

3. Learning Objectives 1. Describe initial financial planning session, and explain importance of fact finders. 2. Describe types of information in comprehensive fact finders, and explain the importance of periodic review and update. 3. Explain importance of personal financial statements in financial planning.

4. Learning Objectives 4–6. Explain financial position statements: what they mean to financial advisors key components steps in preparing how used in the process

5. Learning Objectives 7–10. Explain cash flow statements: what they mean to financial advisors key components purpose of cash flow management steps in preparing how used in the process 11. Define, calculate, and explain the importance of consumer financial ratios in financial planning. 12. Discuss importance of monitoring the client’s financial position and the use of pro forma forecasts as evaluation tools in the monitoring process.

6. Discussion Break How do you feel about the client collecting and documenting the “fact-finder” data for a second meeting? If your firm has a fact-finder form, what are the form’s strengths and weaknesses?

7. Initial Session

8. Initial Session Single prospect versus seminar Need for complete financial information Nature and scope of services What’s in a plan Your background/qualifications/ strengths Compensation

9. Fact Finder

10. Fact Finder Chronicles client’s current: Financial position Income Out-go Holdings Domestic situation Comprehensive vs. single-/multi-purpose planning

11. Fact Finder Personal data Includes other advisory relationships Domestic Spouse, children Trusts, gifts, inheritances Benefits

12. Fact Finder Financial objectives Client listing Budgeting Savings Investments Planning process may redefine Gifting (yea/nay/in play) Satisfaction in current strategies

13. Fact Finder What’s on the client’s mind Desired age of retirement Distribution of estate Attitudes and moods Expectations of financial planning process

14. Financial Condition

15. Financial Condition Sources of income Inventory of assets and liabilities Individually-owned insurance Employment-related benefits

16. Financial Condition Income and lump-sum needs for disability, retirement, and death Tax-planning checklist Personal assessment of the client

17. Risk/Return

18. Risk/Return Profile Effect of client’s attitude toward risk on building a financial plan Fact finder provides a quick assessment

20. Base of the Pyramid Strongest portion, which supports everything above it Comprised of investments that are low in risk and have foreseeable returns May be largest area and comprise bulk of your assets Emergency fund and transaction balances part of base

21. Middle Portion Medium-risk investments Offer a stable return while still allowing for capital appreciation Relatively safe investments

22. Summit High-risk investments Smallest area of the pyramid (portfolio) Money you can lose without serious repercussions Not needed for liquidity so you won't have to sell prematurely at a loss

23. Discussion Break Prospective clients often aren’t particularly organized about their finances but an incomplete financial picture makes it next to impossible to prepare a comprehensive plan. How do you get the client to provide a complete picture and/or how do you protect yourself from incomplete pictures?

24. Financial Position Statement

25. Preparing a Financial Position Statement Assets Cash Other financial assets Personal assets Total assets Liabilities Unsecured Secured Total liabilities Net worth

26. Net Worth = Total Assets – Total Liabilities Ours = Own – Owe Preparing a Financial Position Statement

27. Financial Position Statement

28. Cash Flow Planning

29. Cash Flow Planning Examines sources of cash Examines uses of cash Affects all of the major planning areas

30. Fixed Contractual Mandatory Needs Discretionary Lifestyle Investments/ savings Wants Preparing a Cash Flow Statement

31. Cash Flow Statement

32. Cash Flow Statement

33. Cash Flow Statement

34. Cash Flow Statement

35. Cash Flow Statement

36. Pro Forma Financial Statements Projections for the future Useful for Benchmarking Variance analysis

37. Ratio Analysis

38. Ratio Analysis Corporate finance focuses on Profitability Liquidity Solvency Debt management Asset management Personal ratio analysis has different perspective

39. Ratio Analysis Liquidity ratio = liquid assets / total current debts Total current debts = current liabilities + annual loan payments Liquidity and emergency fund needs are related Solvency ratio = net worth / total assets

40. Ratio Analysis Debt service = mortgage payment + debt payments / net income Savings ratio = NCF + savings / annual after-tax income

41. Setting Goals

42. Goals Use those listening skills Don’t presume Don’t assume Get client talking about life goals and translate to financial goals

43. Goals Financial statements provide initial point of reference Client’s life goals are points out in the future Financial plan lays out the strategy to fund life goals by achieving financial goals Financial calculators and software help put a number on the financial goals

44. Monitoring the Plan Pro formas Variance analysis Benchmarking investments

45. Financial Planning in Action

46. Chapter Five Review

47. Chapter Five Review Gather facts Build financial statements Determine life goals Translate life goals to financial goals Build a plan that has a high probability of achieving the goals Monitor the financials as part of monitoring the plan