Topic 1: Financial Planning Process

1. Topic 1: Financial Planning Process • Steps • E • G • A • D • I • M • Establish • Services to be provided • Comprehensive • Education planning • Disclose compensation • Prior to services • In writing • Form of compensation

2. Topic 1: Financial Planning Process • Gather • Collect information • Questionnaires • When should client complete? • Interviews • Qualitative • Attitudes, financial knowledge/experience, lifestyle • Who pays the bills? • What influences your feelings about money? • Open ended questions… • If you had five years…if you had $40 billion • Financial risk tolerance • Mental ability to withstand investment losses • Financial knowledge / current portfolio • Financial capacity

3. Topic 1: Financial Planning Process • Gather • Collect information • Documents • Balance sheet / loan application • Investment accounts • Retirement accounts • Summary Plan Description for qualified plans • Income tax return • Insurance policies • Loan statements • Wills, Powers of Attorney, Trust Documents

4. Topic 1: Financial Planning Process • Analyze • Goals • Wants • Needs • Ranking of goals • Retiring at age 55 versus funding all of child’s college expenses • With time frame • Short: < two years • Intermediate: 2 – 10 years • Long-term: > 10 years • Assumptions: mutually agreed upon… • Life expectancy • Inflation • Move after retire? • Rate of return for various asset classes • Income tax rates

5. Topic 1: Financial Planning Process • Develop • Alternatives • Roth versus Traditional IRA versus 401(k) • Term versus permanent life insurance • 529 versus UTMA versus Roth for education expenses

6. Topic 1: Financial Planning Process • Develop • Financial plan: financial checkup • Adequate insurance? • Adequate emergency funds? • Adequate savings for goals? • Comfortable with asset allocation? • Understand income tax calculation? • Comfortable with plans for eventual asset transfer?

7. Topic 76: Ethics • CFP Board’s Code of Ethics • Applies to candidates as well as CFPs • Principles • Integrity: don’t mislead • Objective: disclose conflicts of interest • Competence • Fairness: disclose compensation; don’t commingle • Confidentiality: don’t disclose unless permitted/required • Can’t notify IRS of tax return issues without client consent • Professionalism: don’t use RIA • Notification of CFP Board of crime conviction • CFP Board of Professional Review: • Inquiry Panel: probable grounds / Hearing Panel :can appeal to Board of Appeals • Diligence: suitable recommendations

8. Topic 76: Rules of Conduct • Mutually define relationship • Prior to entering agreement discuss • The obligations and responsibilities of each party under the agreement with respect to: • Defining goals, needs and objectives, • Gathering and providing appropriate data, • Examining the result of the current course of action without changes, • The formulation of any recommended actions, • Implementation responsibilities, and • Monitoring responsibilities. • Compensation • Terms under which the agreement permits the certificant to offer proprietary products. • Terms under which the certificant will use other entities to meet any of the agreement’s obligations.

9. Topic 76: Rules of Conduct • A written agreement governing the financial planning services (“Agreement”).  The Agreement shall specify: • The parties to the Agreement, • The date of the Agreement and its duration, • How and on what terms each party can terminate the Agreement, and • The services to be provided as part of the Agreement. • Can use ADV • Must act as a fiduciary • Must also disclose in writing: • Compensation • Conflicts

10. Topic 76: Rules of Conduct • Client information confidential • Keep information secure • Get all required information • Don’t commingle assets with personal assets if take custody • Don’t borrow/lend money from/to client unless bank or family • Be competent • Notify CFP Board of any crimes

11. Topic 77: Disciplinary Rules/Procedures • CFP Commission • Review violations of Rules of Conduct, Practice Standards and Fitness Standards • Hearing Panel • Determines if violation occurred • Forms of Discipline • Private censure • Public letter of admonition • Suspension • Revocation

12. Topic 78: Practice Standards • Applies to CFPs engaged in financial planning • Not CFPs who are teaching, for example • E: mutually define scope; compensation • Must have in writing financial planning services to be provided • Must also determine duration of engagement • G: not enough data, restrict or terminate • A: • D: • I: agree on responsibilities • M: mutually agree with client on responsibilities • Regarding scope, goals, implementation and monitoring • Planner only responsible for • Developing alternatives and selection of products/services

13. Topic 2: Personal Financial Statements • Statement of Financial Position • Use assets: cars, home, etc. • Statement of Cash Flow • Accrual versus cash basis • Pro Forma Statements: projections

14. Topic 4: Financing Strategies • Mortgage financing • Conventional: fixed rate 15- 30 years • ARM: adjustable, tied to index • 2/5 ARM • Lower rate due to less risk for lender • Likelihood of living in home for 15 years • Points • Cost • When to pay them • Interest only • Tax, equity perspective • Sale of home: $500,000 gain exclusion MFJ

15. Topic 4: Financing Strategies • Home equity loan • Amount of equity • Percent can borrow • Line of credit • Interest on borrowings up to $100,000 deductible • Refinancing • Cost of refi: appraisal, title insurance • Decrease in interest expense • How long own home? • Keep payment same? • Reverse mortgage • Receive monthly income increasing mortgage balance • Income tax implications? • At death, home is sold to pay mortgage balance • Loss of Medicaid eligibility if sell before death

16. Topic 5: Financial Institutions • Banks • FDIC insurance • $250,000 per account • Joint • Your share of joint accounts up to $250,000 • Mr. X and Mrs. X, JROS account of $300,000 • Mr. X owns $150,000; fully insured as long as his share of other joint accounts is < $100,000 • Also, separately insured • Retirement account • Irrevocable trust • POD and Totten trusts • Not separately insured • Custodial accounts, revocable trusts, checking/savings • per bank • Brokerages • SIPC insurance: $500,000/$250,000 max for cash

17. Topic 5: Financial Institutions • Credit unions • No tax • Better interest rates for consumers • Not FDIC insured • Membership requirement • Brokerage companies • Insurance companies • Mutual fund companies • In 2009, Federal government is insuring money market mutual funds • Trust companies

18. Topic 73: Special Circumstances • Divorce • Division of assets • Tax basis • Child support/alimony • Nontraditional families • No unlimited marital deduction • Use of trusts, naming beneficiary • Special needs children • Establish trust to assist with needs • Properly drafted, won’t impact ability for public assistance • Trust can only be used for “extras” • Transportation, therapy and day care • Not food, clothing or housing

19. Topic 8: Economic concepts • Supply and demand • Increase in supply/demand: impact on prices • Fiscal policy • Taxes and spending by federal government • Appropriate strategy during recession? • Monetary policy: Federal Reserve • Reserve requirement: nuclear weapon • Discount rate: borrowing from Fed • Fed funds rate: borrowing between banks • Open market operations • Used most often; buy/sell Treasuries • Appropriate strategy during recession?

20. Topic 8: Economic concepts • Leading indicators: future of economy • Stock prices • Size of money supply • New claims for unemployment • Weekly hours worked by factory workers • Building permits for new homes (not starts) • Stagflation: slowing economy but rising prices • Durable goods: cars, couches, etc. vs. nondurable • Yield curve • Normal • Inverted • Increasing interest rates: impact on dollar

21. Topic 9: Time Value of Money • Annuity due • Start of period • Investing $1,000 for 10 years at beginning of year instead of end • Calculations • Changing from begin to end and back • NPV and IRR • Required return 7%, NPV $1,000 for $20,000 investment. • IRR? • Investment with highest NPV will also have highest IRR

22. Topic 9: Time Value of Money • Serial payments • Increase in asset value net of inflation • (I = Rate of return/ Education Inflation Rate – 1) x 100 • Education inflation • Calculating PV needed at start of college • Retirement income • Calculating PV needed at start of retirement

23. Topic 10: Financial Service Regulations • Investment Advisers Act of 1940 • Investment adviser • Provide advice/analysis on securities • In the business of doing this • Receive compensation for advice/analysis • Must meet all three tests

24. Topic 10: Financial Service Regulations • Investment adviser • Exceptions • Banks • Lawyers, teachers, accountants, engineers • If incidental • Brokers • Incidental • Just executing trade… • Publisher of financial newsletter • Less than 15 clients and don’t advertise being investment adviser

25. Topic 10: Financial Service Regulations • Investment adviser • Must register with either • SEC • More than $100 million • ADV: registration statement filed with SEC • Adviser has fiduciary obligation • State • Less than $100 million

26. Topic 10: Financial Service Regulations • Investment adviser • Don’t use initials RIA • Registered Investment Advisor permitted • Register with SEC requires filing ADV • Part I: background on firm and clients • Part II: • Fees • Balance sheet • Brochure • Prior to providing advisory services • Client has five days to cancel • Annually to clients

27. Topic 10: Financial Service Regulations • FINRA (formerly NASD) • Self regulated • Must register if selling stocks, bonds, options, mutual funds • Must be sponsored by broker/dealer • Pass exam • Series 6: mutual funds, variable products • Series 7: everything but commodities, options • Series 65: investment adviser

28. Topic 10: Financial Service Regulations • FINRA (formerly NASD) • Disputes between advisers/clients go to arbitration • Insurance sales • Regulated by states • Life insurance rates, capital, claims practices • Must have a license in each state doing business • NAIC promotes model state laws, accredits state insurance offices –

29. Topic 11: Business Law • Contract requires: • Offer and acceptance • Competent parties • Consideration • Lawful • Agents • Must be loyal to principal • Carry out principal’s instructions with reasonable care and diligence

30. Topic 11: Business Law • Principal’s duties to agent • Opportunity to work • Pay agent • Reimburse agent for authorized expenses • Keep accurate financial records • Indemnify agent when acting for principal • Agent’s authority • Express, implied and apparent

31. Topic 11: Business Law • Bankruptcy • Property debtor can keep • Retirement plans including IRAs • IRAs limited to $1 million • IRA, 529 and Coverdell exempted if made more than a year ago • Life insurance • Home (varies) • Limited amount of property • Debts not discharged • Taxes • Alimony., child support • Student loans • Fines and penalties

32. Topic 11: Business Law • Bankruptcy Reform Act 2005 • Requires debtor to be offered • Credit counseling • Budgeting assistance • Financial management course • Chapter 7 bankruptcy • Voluntary or involuntary • Allowed to keep some assets, remainder used to pay creditors • Keep life insurance, qualified plans and perhaps home • Pass means test to see if debtor has income to pay debts • Creditors cam object if above average income

33. Topic 11: Business Law • Chapter 13 • Voluntary • Debtor restructures debt and keeps assets • Creditor can’t foreclose or harass debtor • Fair Credit Reporting Act • Have right to see and correct credit reports • Disclose cost of credit life insurance • Consumer Credit Protection Act • Maximum liability for lost/stolen credit card $50 • Lender must provide borrower with APR • Three days to rescind any contract involving home used as collateral

34. Topic 11: Business Law • Foreclosure Relief • Can exclude up to $2 million in debt forgiven on primary residence in foreclosure • Also applies to • mortgage reduction • short sale

35. Topic 11: Business Law • Identity theft • Shred all documents containing • Social security numbers • Credit card numbers • Usernames/passwords • Don’t disclose this information unless you initiated contact