HS 300 Financial Planning: Process and Environment

1. HS 300 Financial Planning: Process and Environment Chapter 1: The Financial Planning Process

3. Horizons Instructor Don Taylor, PhD, CFA Associate Professor of Finance at The American College Other professional endeavors Personal finance columnist Financial consultant Treasurer Government agency debt analyst Investment assistant Academic career spans twenty years teaching finance Professional career spans 15 years Academic career spans twenty years teaching finance Professional career spans 15 years

4. Course Overview HS 300 Financial Planning: Process and Environment First course in CFP certification curriculum ChFC� designation curriculum Elective in the CLU� designation curriculum Not a formal prerequisite for other courses but is the course most students start with when enrolling at The American College.Not a formal prerequisite for other courses but is the course most students start with when enrolling at The American College.

5. CFP Topics List General principles of financial planning Insurance planning and risk management Employee benefits planning Investment planning Income tax planning Retirement planning Estate planning This course covers the general principles of financial planning. The remaining topics are covered in the other 5 CFP Certificant courses offered by The American College.This course covers the general principles of financial planning. The remaining topics are covered in the other 5 CFP Certificant courses offered by The American College.

6. Horizons HS 300 Overview Facilitator guided Ten classes covering ten chapters Review class Improved success rate

7. Course Resources Textbook DVDs Facilitator�s guide Supplement Audio review Flash cards (optional) Review book (optional)

8. Other Course Resources AC Online http://blackboard.theamericancollege.edu Announcements Forum Interactive exercises Assessment Quizzes Practice exams Segue to ID Group doing a blackboard demoSegue to ID Group doing a blackboard demo

9. Pretest Question Is financial planning a product or a process?

10. Learning Objectives

11. Learning Objectives 1. Explain the six steps in the financial planning process. 2. Describe three different approaches to financial planning, and identify several areas of specialization in which advisors concentrate their activities. Primacy of the six step process in CFP Certificant ProgramPrimacy of the six step process in CFP Certificant Program

12. Learning Objectives 3. Identify the subjects that should be included in a comprehensive financial plan. 4. Describe what is meant by a person�s financial life cycle, and explain how it relates to life-cycle financial planning.

13. Learning Objectives 5. Explain how a financial plan can be developed around the steps in the financial planning process. 6. Explain how a financial plan can be developed using the financial planning pyramid.

14. Learning Objectives 7. Explain the trends that are creating opportunities in the financial planning marketplace.

15. Learning Objectives 8. Identify the principal financial goals/ concerns of most consumers, and describe three major obstacles that prevent them from achieving these goals.

16. Financial Planning Defined CFP Board definition: �Financial planning is the process of meeting your life goals through the proper management of your finances.�

17. Financial Planning Defined Text definition: �Financial planning is a process that ascertains the client�s financial goals and develops a plan for achieving the client�s goals.�

18. Six Steps in the Financial Planning Process

19. Six Steps in the Financial Planning Process 1. Establishing and defining the client-planner relationship 2. Gathering client data, including goals

20. Six Steps in the Financial Planning Process 3. Analyzing and evaluating your financial status 4. Developing and presenting financial planning recommendations and/or alternatives

21. Six Steps in the Financial Planning Process 5. Implementing the financial planning recommendations 6. Monitoring the financial planning recommendations

22. The General Model Step 1: Establish and define advisor-client relationship Build relationship Explain process Describe products and/or services Clarify responsibilities Disclose advisor�s background, philosophy, method of compensation

23. The General Model Step 2: Determine goals and gather data Encourage client to determine and prioritize goals Gather client information Fact-finding forms Questionnaires Counseling Examination of documents

24. The General Model Step 3: Analyze and Evaluate the Data Analyze and evaluate client�s financial condition relative to achieving goals Revise goals if necessary

25. The General Model Step 4: Develop and present a plan Design recommended strategies to achieve goals Include alternatives Use outside experts as needed Present plan Obtain client approval

26. The General Model Step 5: Implement the plan Help client acquire products and services Establish accounts Use outside experts as needed

27. The General Model Step 6: Monitor the plan Evaluate performance of implementation vehicles Review changes in client�s circumstances and the financial environment Revisit other steps as necessary

28. Financial Planning in Action

29. Discussion Break The six steps of financial planning convey a fairly linear approach to planning. Discuss how you could adapt this process to be more free wheeling while still covering the six steps.

30. Different Approaches to Planning

31. Different Approaches to Planning Single-purpose How do I invest my 401(k)? Multi-purpose How can I meet my goals to retire at 60 and fund my children�s education? Advisor�s responsibilities often increase over time as trust and a relationship builds with the client. Advisor�s responsibilities often increase over time as trust and a relationship builds with the client.

32. Different Approaches to Planning Comprehensive How can we manage our wealth to meet our needs for current and future income including the income needs of our planned estate? Advisor�s responsibilities often increase over time as trust and a relationship builds with the client. Advisor�s responsibilities often increase over time as trust and a relationship builds with the client.

33. Financial Planning Pyramid

34. Life-Cycle Financial Planning

35. Life-Cycle Financial Planning Early career (ages 25�35) Career development (ages 35�50) Peak accumulation (ages 50�62) Preretirement (3�6 years before planned retirement) Retirement (ages 62�66+)

36. Financial Planning Needs Up and coming (ages 20�39) 28 percent have a written financial plan Most tolerant of risk Mid-life (ages 40�54) 39 percent have written financial plan Low to moderate risk tolerance Up & Coming Prepare for retirement Manage/reduce debt Build Emergency Fund Build College Fund Home Purchase/Renovation Mid-life Strongest focus is retirement Emergency Fund Vacation/travel Finance college Manage/reduce Debt Shelter income from taxes Retirement Cusp Prepare for retirement Vacation/travel Accumulate capital Generate income Shelter income from taxes Provide for future medical needs Build Emergency Fund Up & Coming Prepare for retirement Manage/reduce debt Build Emergency Fund Build College Fund Home Purchase/Renovation Mid-life Strongest focus is retirement Emergency Fund Vacation/travel Finance college Manage/reduce Debt Shelter income from taxes Retirement Cusp Prepare for retirement Vacation/travel Accumulate capital Generate income Shelter income from taxes Provide for future medical needs Build Emergency Fund

37. Financial Planning Needs Retirement cusp (ages 55�69) 47 percent have written financial plan Most likely to have financial professional as advisor Up & Coming Prepare for retirement Manage/reduce debt Build Emergency Fund Build College Fund Home Purchase/Renovation Mid-life Strongest focus is retirement Emergency Fund Vacation/travel Finance college Manage/reduce Debt Shelter income from taxes Retirement Cusp Prepare for retirement Vacation/travel Accumulate capital Generate income Shelter income from taxes Provide for future medical needs Build Emergency Fund Up & Coming Prepare for retirement Manage/reduce debt Build Emergency Fund Build College Fund Home Purchase/Renovation Mid-life Strongest focus is retirement Emergency Fund Vacation/travel Finance college Manage/reduce Debt Shelter income from taxes Retirement Cusp Prepare for retirement Vacation/travel Accumulate capital Generate income Shelter income from taxes Provide for future medical needs Build Emergency Fund

38. Top 10 Reasons People Begin Financial Planning

39. Top 10 Reasons People Begin Financial Planning 10. Sheltering income from taxes (25 percent) 9. Generating current income (26 percent) Planning often starts with a goal and builds to a planPlanning often starts with a goal and builds to a plan

40. Top 10 Reasons People Begin Financial Planning 8. Providing insurance protection (29 percent) 7. Accumulating capital (31 percent) 6. Building a college fund (32 percent) Planning often starts with a goal and builds to a planPlanning often starts with a goal and builds to a plan

41. Top 10 Reasons People Begin Financial Planning 5. Planning vacation/travel (34 percent) 4. Managing/reducing current debt (34 percent) 3. Building an emergency fund (40 percent) Planning often starts with a goal and builds to a planPlanning often starts with a goal and builds to a plan

42. Top 10 Reasons People Begin Financial Planning 2. Purchasing/renovating home (41 percent) 1. Building a retirement fund (82 percent) Source: CFP Board of Standards, Inc. 2004 National Consumer Survey Planning often starts with a goal and builds to a planPlanning often starts with a goal and builds to a plan

43. Planning�s Partners

44. Financial Planning in Action

45. Planning Trends Aging population Increase in dual income households Market volatility Technological change Increasing sophistication of consumers Financial planning profession still growing International economy

46. Building the Plan

47. Building a Plan Goals Budget Net worth Risk tolerance Investments

48. Using the Pyramid Model Liquidity and security Capital accumulation Income and purchasing power

49. What�s in a Comprehensive Plan? Goals, financial statements, risk tolerance, advisor and client responsibilities Insurance and risk management Employee benefits Not surprisingly, this is the CFP� topic list that we saw in an earlier slide. Not surprisingly, this is the CFP� topic list that we saw in an earlier slide.

50. What�s in a Comprehensive Plan? Investment planning Income tax planning Retirement planning Estate planning Not surprisingly, this is the CFP� topic list that we saw in an earlier slide. Not surprisingly, this is the CFP� topic list that we saw in an earlier slide.

51. Monitoring the Plan

52. Monitoring the Plan Determine level of service Perform periodic reviews Update financial situation Analyze variances Review goals and revise as needed Track performance of investments

53. Monitoring the Plan Establish need for rebalancing Time diversification Risk modeling

54. Obstacles to Success

55. Obstacles to Success Procrastination Works against the miracle of compound interest Deficit spending There�s nothing to save for tomorrow

56. Obstacles to Success Gaps in understanding Keeps client from visualizing planning solutions Unmanaged expectations Unrealistic goals meet unrealized returns

57. Goal Tending Consumption/investment decisions Budgeting allows client to manage cash flow Net worth keeps score (own-owe) A hockey, not basketball reference. In hockey the goaltender protects the goal.A hockey, not basketball reference. In hockey the goaltender protects the goal.

58. Goal Tending Asset allocation balances risk/return tradeoffs when investing for the future Liquidity Return Risk A hockey, not basketball reference. In hockey the goaltender protects the goal.A hockey, not basketball reference. In hockey the goaltender protects the goal.

59. Where the Industry Is Going

60. Where the Industry Is Going Aging baby boomers Sandwich generation Kids� college fund / our retirement / aging parents Investing inheritances Employment of personal financial advisors is expected to grow faster than the average for all occupations through the year 2012. The rapid expansion of self-directed retirement plans, such as 401(k) plans, is expected to continue. As the number and complexity of investments rises, more individuals will look to financial advisors to help manage their money. Financial advisors who have either the CFP (R) certification or ChFC designation are expected to have the best opportunities. Employment of personal financial advisors is expected to grow faster than the average for all occupations through the year 2012. The rapid expansion of self-directed retirement plans, such as 401(k) plans, is expected to continue. As the number and complexity of investments rises, more individuals will look to financial advisors to help manage their money. Financial advisors who have either the CFP (R) certification or ChFC designation are expected to have the best opportunities.

61. Where the Industry Is Going Social Security concerns Growth in planners BLS Occupational Survey expects 21�35 percent growth in field over next 10 years Employment of personal financial advisors is expected to grow faster than the average for all occupations through the year 2012. The rapid expansion of self-directed retirement plans, such as 401(k) plans, is expected to continue. As the number and complexity of investments rises, more individuals will look to financial advisors to help manage their money. Financial advisors who have either the CFP (R) certification or ChFC designation are expected to have the best opportunities. Employment of personal financial advisors is expected to grow faster than the average for all occupations through the year 2012. The rapid expansion of self-directed retirement plans, such as 401(k) plans, is expected to continue. As the number and complexity of investments rises, more individuals will look to financial advisors to help manage their money. Financial advisors who have either the CFP (R) certification or ChFC designation are expected to have the best opportunities.

62. Chapter One Review Planning is a six step process Single-purpose, multi-purpose, and comprehensive approaches to plans Only comprehensive uses all six steps

63. Review Looking back (monitoring) can help you move forward Overcoming obstacles and maintaining focus on client goals improves odds of success

64. Review (Continued) Population trends Demographics: statistical market characteristics age sex income educational level

65. Review (Continued) Population trends Psychographics: classification of population groups according to psychological variables attitudes values fears Source: Merriam-Webster�s Unabridged Dictionary

66. Review (Continued) Projected growth in profession