chapter 1 what is financial planning? the process of financial planning: developing a financial plan...
TRANSCRIPT
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