1Introduction to Financial Planning

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1. What is personal financial planning?Personal financial planning is the comprehensive process of formulating, implement-ing, and monitoring financial decisions into an integrated plan that guides an individ-ual or family to achieve financial goals.

2. Define the process of financial planning.The process of financial planning includes, but is not limited to, the following steps:establishing and defining the client relationship, gathering client data, analyzing andevaluating the client’s financial status, developing and presenting financial plan recom-mendations, implementing financial plan recommendations, and monitoring the plan.

3. What are examples of internal data items collected from the client as part of the“gather client data” part of the financial planning process?Client internal data includes family information, insurance portfolio information,banking and investment information, tax information, retirement and employee bene-fit information, estate planning information, and financial statements. Qualitativeinternal data includes education goals, retirement goals, employment goals, savingsgoals, risk tolerance, and the client’s general attitude towards spending.

4. What are examples of external data items required as part of the “gather clientdata” part of the financial planning process?Client external data includes interest rates, housing market environment, job marketenvironment, investment market environment, current business cycle status, local costof living, expected inflation, costs of education and medical care, and expected taxrates.

DISCUSSION QUESTIONS

DISCUSSION QUESTIONS 1

5. List some important elements of a financial planning engagement letter.Basic necessary components of an engagement letter should include defining the parties to the agreement, theduration of the agreement, the services to be provided, a description of the fees and costs, and the conditionsunder which the agreement can be terminated. Additional details can include the time horizon for the work tobe completed, the obligation and responsibilities of each party (planner/client), and agreement as to the possi-bility of using other professionals or entities to meet obligations of the engagement.

6. What are some of the benefits a client receives from choosing to use a professional financial planner?Clients usually do not have the knowledge to prepare their own comprehensive financial plan. Those that areknowledgeable can still benefit from the opinion of a financial planning professional. The professional finan-cial planner brings education, objectivity, and experience to apply to the client’s specific financial situation.Through a developed relationship of trust, the planner can guide the client to financial recommendations tomeet the values, priorities, and goals that are important to the client.

7. What is the job and economic outlook for the financial planning profession?The financial planning profession is anticipated to have 32% growth from 2010-2020 (latest reporting). Withthe increasing baby boomer generation reaching retirement age, there will be an increased need for experi-enced, knowledgeable financial planners to assist with the growing complexity of retirement plans. The aver-age earnings of $64,750 (excluding bonuses) for financial planners will remain an attractive option forprofessionals.

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1. Lisa Cooper recently came to your office for her second appointment after receiving your engagementletter. During the meeting you collect several documents from her including her prior year tax returns,estate planning documents, and investment statements and history. You also worked with her onidentifying her goals and objectives. Which of the following is the next step in the financial planningprocess?

a. Establish and define the client relationship.

b. Analyze and evaluate the client’s financial status.

c. Implementing the financial plan recommendations.

d. Developing and presenting the financial plan recommendations.

The correct answer is b.During the planning process you have already established the relationship as well as gathered the client data.Your next step is to analyze and evaluate the data you received.

2. Your client, Jed, engaged you to help him with his financial situation. During the course of yourmeetings you sold Jed a $1,000,000 life insurance policy. Which part of the financial planning processwere you engaged in?

a. Analyze and evaluate the client’s financial status.

b. Monitoring the plan.

c. Developing and presenting the financial plan recommendations.

d. Implementing the financial plan recommendations.

The correct answer is d.By actually selling the insurance product you are now implementing plan recommendations.

3. After meeting with your new client, Sid, you prepared his current financial statements. Which part ofthe financial planning process were you engaged in?

a. Monitoring the plan.

b. Establish and define the client relationship.

c. Analyze and evaluate the client’s financial status.

d. Developing and presenting the financial plan recommendations.

The correct answer is c.Preparing financial statements are part of the analyzing and evaluating the client’s financial status step of thefinancial planning process.

MULTIPLE-CHOICE PROBLEMS

MULTIPLE-CHOICE PROBLEMS 3

4. Reverend Lola Pak, a prospective client, came to your office for the first time today. Which is the mostappropriate way to greet her?

a. “Welcome to my office.”

b. “Welcome to my office, Ms. Pak.”

c. “Welcome to my office, Reverend Pak.”

d. “Welcome to my office, Lola.”

The correct answer is c.You should always greet new clients with appropriate salutations. Since Lola is a Reverend you should identifyher as such, even if you do not subscribe to her particular faith. Your goal is to make the client feel at ease withyou and utilizing the client’s formal salutation will help you achieve this. If she encourages you to use her firstname then you can do so after your initial meeting.

5. Steve Stein, a local CFP® practitioner, recently met with one of his new clients, Merrell. During thecourse of the meeting Steve did the following things:

1. Steve did not meet with Merrell until 10 minutes after the scheduled start time.

2. In order to establish Merrell’s confidence in him, Steve told Merrell the names of several wellknown clients that currently do business with him.

3. Steve asked Merrell several questions regarding Merrell’s family situation, hobbies, and activities.

Which of these actions would be considered inappropriate?

a. 3 only.

b. 1 and 2.

c. 2 and 3.

d. 1, 2 and 3.

The correct answer is b.Asking questions about Merrell’s family situation, hobbies and activities are appropriate because they convey agenuine interest in the client. Starting the meeting late, regardless of the reason, is inappropriate. Listing cli-ents is generally inappropriate. If the clients have given prior permission then it would be fine, but withoutsuch permission, a financial planner should not divulge the names or specific financial information of existingclients.

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6. Roy Al Pain has been a client of yours for several years. During that time, Roy has been rude to bothyou and your staff on numerous occasions. He has used profanities in front of your staff and otherclients, thrown things, and screamed at your staff. You have tired of working with Roy and want toterminate your relationship with him. Which of the following is true?

a. You must continue the relationship since only clients can end the client/plannerrelationship.

b. You should consult your engagement letter to determine your rights to terminate therelationship.

c. You should start to offer subpar services to Roy in hopes that he will tire of you and end yourrelationship.

d. You should bad mouth Roy in the community and hope it gets back to him so he will decidenot to work with you anymore.

The correct answer is b.You should consult your engagement letter to determine your rights to terminate the relationship. All engage-ment letters should detail the services to be provided as well as details on how the relationship can be termi-nated. You should not begin to offer subpar planning as this can be considered malpractice. You should notbad mouth your clients as this violates confidentiality.

7. Which of the following items of information is least likely to be obtained from your client during thedata gathering portion of the client meeting?

a. General attitude towards spending.

b. The income tax bracket of your client’s adult children.

c. Employer sponsored employee benefits.

d. Repayment term of outstanding debt.

The correct answer is b.Knowing the income tax bracket of your client’s children may be helpful in some situations (for example,when you are determining the most appropriate gift to give a particular person) however, it is generally notessential to the financial planning process. The other three items are more relevant.

8. Dustin Towns is a well-known financial planner in your area. His clients rave about how great he is andafter meeting him you understand why. While describing him to your friend Jim, Jim wanted to knowwhat was so great about financial planners in general. You responded with the following statement“One of the most important qualities a professional financial planner brings to the client/plannerrelationship is: ________________.”

a. Subjectivity.

b. Empathy.

c. Objectivity.

d. Sympathy.

The correct answer is c.The most important quality the planner brings is objectivity. The client is often unaware of their true financialposition and the objectivity provided by a knowledgeable financial planner can provide insight into the client’sactual financial profile.

MULTIPLE-CHOICE PROBLEMS 5

9. You are a relatively new financial planner. You have been working for an investment firm in the UnitedStates and have decided that you would like to add more credibility to your practice. Which of thefollowing professional credentials would provide you with the most credibility since it is the oldest andbest known?

a. CFP®.

b. ChFC.

c. EFP.

d. ICFP.

The correct answer is a.The CFP® certification is the oldest and best-known certification for financial planners.

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