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Asset accumulation phase
Life cycle phase through which clients pass; usually between the ages of 20 and 25 and last until about age 50. Characterized by limited excess funds for investing, high level of debt, and low net worth. A client is usually in this stage until approximately age 45 or later if the client's children are not yet independent.
The process of determining whether and how an individual can meet life goals through the proper management of financial resources.
Conservation or protection stage
Life cycle stage through which clients pass characterized by an increase in cash flow, assets, and net worth, with some decrease in the proportional use of debt. A client is usually in this stage from approximately age 45 to 60 or immediately preceding the client's planned date fo retirement.
Distribution or gifting stage
Life cycle phase through which clients pass characterized by excess relative cash flows, low debt, and high relative net worth. A client is usually in this stage from approximately age 60, or the planned date of retirement, until date of death. Distribution strategies including retirement income sources and gifting strategies, are often a primary focus of a client's estate planning.
Financial planning engagement
Exists when a certificant performs any type of mutually agreed-upon financial planning services for a client.
Financial planning practitioner
Person who engages in financial planning using the financial planning process when working with clients.
Financial planning process
Allows a client to get a realistic overview of his current financial status, set and analyze goals, develop a plan to meet these goals, and follow the plan so that goals can be accomplished. Re-evaluating the plan periodically and monitoring the client's progress is also an important step in the financial planning process.
Subjective data. Those data that are concerned with the quality of a client's life. Examples include financial goals and objectives, health status, and a client's risk tolerance level.
Objective data. Those data that are measurable or conveyed as a quantity. Examples of quantitative data include current financial status (e.g., assets & liabilities), copies of wills and trusts, list of current investments, and so forth.
Statement of financial position,
Personal balance sheet
Net worth statement
Provides a snapshot of the client's net worth on any given date (usually at the and of a calendar year). December 31st.
Assets - liabilities = net worth
Assets = liabilites + net worth
Personal use asset
An asset that is owned by a client for non-business use. A common example of thid type of asset is a home or primary residence.
Categories of total assets
- 1. Cash or cash equivalents
- 2. Investments (or invested assets)
- 3. Personal use assets
Cash & cash equivalents
Tend to be short term in nature (maturity of greater than one year and commonly invested in the money market)
6 Step financial planning process
- 1. Establish the client-planner relationship
- 2. Gather client data and determine client goals and expectations
- 3. Determine client's financial status
- 4. Developing & presenting the financial plan
- 5. Implement the financial plan
- 6. Monitor the financial plan
Step 1: Establish the client-planner relationship
- • Services that will be provided
- • compensation/billing
- • Responsibilities of both client/planner
- • Time frame of relationship
Step 2: Gather client data and determine client goals and expectations
- • Obtain both quantitative and qualitative data
- • It is important that goals be defined before any recommendations
- • A goal should be specific, prioritized and quantified
- • Fact finder form
Step 3: Deteremine client's financial status by analyzing and evaluating general financial status, special needs, insurance and risk management, investments, taxation, employee benefits, retirement planning, and estate planning
- Most demanding off all the steps because it requires detailed knowledge.
- • Identify strengths and weaknesses
- • Analysis of current position
- • Should be based on realistic assumptions
Step 4: Developing and presenting the financial plan
- • Objective
- • Should be presented to client
- • Mutually decide on revisions
- • Prioritized list of implementation steps and timing
Step 5: Implement the financial plan
- • Work closely with other professional team members
- • Help client with product acquisitions or updates/changes
Step 6: Monitoring the financial plan
- • Fed tax changes
- • Economic changes
- • Modifications to plan
- • Integrity
- • Objectivity
- • Competence
- • Fairness
- • Confidentiality
- • Professionalism
- • Diligence
Confidential Information can be disclosed only when...
- • The client consents
- • Court ordered
- • CFP must defend accusations
- • Civil suit between client and CFP
Statement of financial position (balance sheet)
Cash budget (statement of cash flow)
- • Balance sheet
- • Income statement
- • Statement of cash flows
- • Pro forma statements
Pro Forma statements
Planning tool that is derived from future projections of the balance sheet and cash flow statements.
Discretionary vs. nondiscretionary expenses
• Discretionary expenses are variable
• Nondiscretionary expenses are fixed costs that are sunk costs (meaning they must be regularly incurred)
Recommended monthly mortgage payment
28% of gross income
Recommended monthly payment on all debt
Total debt ratio
36% of gross income
Recommended Consumer debt (credit card) payment
Consumer debt ratio
20% of net income
ARM Mortgage (adjusted rate mortg)
Interest rate changes with changes in level of interest in economy. Have additional risk to borrower so carry initial lower interest rates
Pension Benefit Guaranty Corporation (PBGC)
Defined-benefit pension plan benefits are insured by the federal Pension Benefit Guaranty Corporation (PBGC)