Chapter 1What 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

• From commissions to more stable income, with a business to sell at retirement

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

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

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

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

For Potential Planners…

Do you have…• Client-identified traits?

• Commitment to professional development and lifelong learning?

• Salesmanship?

Is financial planning a profession?

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

6-Step CFP Board Process

1. Establishing and defining the client-planner relationship;

2. Gathering client data, including goals;

3. Analyzing and evaluating the client’s financial status;

6-Step CFP Board Process (cont’d)

4. Developing and presenting financial planning recommendations and/or alternatives;

5. Implementing the financial planning recommendations; and

6. Monitoring the financial planning recommendations.

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

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”

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

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

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

Planners Say Clients Seek Help With

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

Consumers Say They Seek Help With

1.Retirement funding2.Home purchase

planning3.Building an

emergency fund4.Managing debt5.Planning for a

vacation

6.Funding education

7.Accumulating capital

8. Insurance planning

9.Tax planning

10. Generating current income

Industry Affiliation, FPA Members with CFP

0%

20%

40%

60%

80%

100%

FinancialPlanning

InvestmentPlanning

Securities Insurance Accounting Banking Other

2004 2005

Financial Advisors By Channel

Partners at Fee-Only Firms,

30024

Wirehouse Brokers, 76230

Regional Broker/Dealer Reps, 24265

Independent Rep, 82306

Bank Trust Officers, 101421

Family Offices, 391

Insurance Agents, 51607

Bank Reps, 21308

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.

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.

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

Method of Compensation Example 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

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

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

Planner Compensation

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

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

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

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.

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