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Chapter 1 What is Financial Planning?

Chapter 1 What is Financial Planning?. The Process of Financial Planning: Developing a Financial Plan Lytton, Grable & Klock 2006. History. 1969 : Meeting that changed the face of financial services From sales to service From discrete product sales to a comprehensive plan

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Chapter 1 What is Financial Planning?

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  1. Chapter 1What is Financial Planning? The Process of Financial Planning: Developing a Financial Plan Lytton, Grable & Klock 2006

  2. History • 1969: Meeting that changed the face of financial services • From sales to service • From discrete product sales to a comprehensive plan • From commissions to more stable income, with a business to sell at retirement

  3. History (cont’d) • 1971:College for Financial Planning • 1973: Designation of the first 42 CFP certificants • 1985: College for Financial Planning + CFP Board of Standards, Inc. • 1987: 20 universities approved with registered programs

  4. History (cont’d) • 1992: 12-hour comprehensive exam replaces the modular exam • 2000: IAFP and ICFP merge into FPA • 2007: BS, required prerequisite to sit for CFP exam

  5. Delivering Value to Client’s Lives • Expensive service: time, money, personal vulnerability • Trust: Planners should expertly guide their clients through the best and worst life and economic events

  6. 10 Most Important Factors When Choosing a Planner • Top of the list: • Trustworthiness • Listening skills • Problem solving abilities • Proven performance and expertise • Others: • professionalism; allowing clients to choose the degree of control over decisions; reasonable costs; technological competence; and professional accreditation

  7. For Potential Planners… • Do you have… • Client-identified traits? • Commitment to professional development and lifelong learning? • Salesmanship? • Is financial planning a profession?

  8. What is Financial Planning? • “Financial planning denotes the process of determining whether and how an individual can meet life goals through the proper management of financial resources.” CFP Board of Standards • 6-step process that grounds the CFP Board professional practice standards

  9. 6-Step CFP Board Process • Establishing and defining the client-planner relationship; • Gathering client data, including goals; • Analyzing and evaluating the client’s financial status;

  10. 6-Step CFP Board Process (cont’d) • Developing and presenting financial planning recommendations and/or alternatives; • Implementing the financial planning recommendations; and • Monitoring the financial planning recommendations.

  11. Comprehensive Financial Planning “process of helping clients achieve multiple financial goals and objectives through the application and integration of synergistic personal finance strategies” • Goal: global statement of a client’s personal or financial purpose • Objective: definitive financial target that supports a goal

  12. What is Life Planning? • “attitudes toward life and money” • “emotional, experiential, and spiritual concerns influencing life choices and money uses” • “significance or legacy of the individual that supersedes net worth or assets”

  13. Comprehensive vs. Targeted or Modular Plans • Industry Trends • Continuing demand for investment, college funding, tax, estate, elder care and insurance modular plans • Investment plans are most commonly requested • Demand for targeted (43% more) and comprehensive plans (28% more) increased from 2003 to 2004

  14. Suitability • “Presumed” failure to recommend products suitable to the client’s financial limitations and investment objectives • Documentation of the situation protects the advisor • Plans reduce disputes – encourages the planner to be thorough; requires client approval prior to implementation

  15. Why a Financial Planning Career? • 2006, Money and Salary.com ranked it 3rd in 50 best jobs in U.S. • Projected 35% growth through 2012; another source 26% growth for 10 years • Helping relationship + good salaries • $28,330 - $145,600 (top limit of BLS data) • Ave. salary of $122,462

  16. 1. Retirement funding 2. Paying for health care 3. Investment and asset growth 4. Tax planning 5. Longevity planning 6. Money management 7. Estate planning 8. Funding education 9. Managing personal debt 10. Planning for job loss or downsizing Planners Say Clients Seek Help With

  17. 1. Retirement funding 2. Home purchase planning 3. Building an emergency fund 4. Managing debt 5. Planning for a vacation 6. Funding education 7. Accumulating capital 8. Insurance planning 9.Tax planning 10. Generating current income Consumers Say They Seek Help With

  18. Industry Affiliation, FPA Members with CFP

  19. Financial Advisors By Channel

  20. Fiduciary The professional has entered a relationship built on trust, confidence and responsibility and will, as a result of ethical, professional, or legal duty, act for the benefit of the other party. In the legal sense. . .responsibility for managing another person’s or entity’s financial, business, or property assets.

  21. Insurance Advice/Product Sales • Insurance licenses issued by the state where business is conducted and vary with the products sold: • Life, health, long term care, property and casualty, etc.

  22. Investment Advice/Product Sales • “advice incidental to the sale” – then licensed as a Registered Representative with the FINRA (formerly NASD) See Figure 1.4 and Figure 1.5 • “advice” – whether or not accompanied by a product sale, must register with SEC or equivalent state board (where clients reside) as a Registered Investment Advisor

  23. Planner Compensation

  24. Planner Compensation (cont’d) • Commission: Varies with the product, but an example might be 5% of initial product purchase is paid as a front-end load • Flat Fee: Less than $1,000 to $5,000 or more for preparation and delivery of a financial plan; less than $100 to $1,500 or more for a modular plan • By-the-Hour: Less than $100 to $300 or more per hour to work on specific client projects

  25. Planner Compensation (cont’d) • Assets Under Management (AUM): Annual fee for assets actively managed by the planner (typically a sliding scale such as 0.25% to 1.50% based on the dollar value of assets managed) • Retainer Fee: Flat $5,000 or higher fee provides year-round access to a planner and may include preparation of a plan

  26. Planner Compensation (cont’d) • Planning Fee plus Fee for Investment Services or Commissions: Plan preparation fee is charged in addition to AUM or other fee structure for investment management services or commissions earned on sales of financial products (e.g., investments, insurance) • Fee-Offset: Charge $3,000, for example, for a comprehensive plan, but use commissions earned on plan implementation (e.g., products sold) to offset initial planning fee

  27. Planner Compensation (cont’d) Note: Proper disclosure and explanation is very important due to possible FINRA (NASD) ramifications and confusion with the illegal practice of rebating. For more information see Chapter 2, Ethics, Laws and Regulations.

  28. Summary: Lots of Controversy! • Financial planning: profession, process, product • Variety of disciplines, designations, credentials, licensures • CFP Board’s Standards of Professional Conduct • Variety of business models and compensation

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