INTEGRATED FINANCIAL PLANNING

CFP FINAL LEVEL INTEGRATED FINANCIAL PLANNING DEVELOPING EFFECTIVE FINANCIAL PLANS (MODULE - 3) Approved courseware for the Certified Financial PlannerCM certification education programme in India\" Published by 'International College of Financial Planning Ltd.' \"Every effort has been made to avoid any errors or omission in this book. Inspite of these errors may creep in. Any mistake, error or discrepancy noted may be brought to our notice, which, shall be taken care of in the next printing. It is notified that neither the publisher nor the author or seller will be responsible for any damage or loss of action to anyone of any kind, in any manner, there from. No part of this book may be reproduced or copied in any form or by any means or reproduced on any disc, tape, perforated media or other information storage device, etc. without the written permission of the publisher. Breach of this condition is liable for legal action. All disputes are subject to Delhi jurisdiction only.\" CFP Final Level: Integrated Financial Planning Developing Effective Financial Plans: Module 3 Published by the International College of Financial Planning Ltd. © International College of Financial Planning Limited 2002

This subject material is issued by the International College of Financial Planning Ltd. on the understanding that: 1. International College of Financial Planning Ltd., its directors, author(s), or any other persons involved in the preparation of this publication expressly disclaim all and any contractual, tortuous, or other form of liability to any person (purchaser of this publication or not) in respect of the publication and any consequences arising from its use, including any omission made, by any person in reliance upon the whole or any part of the contents of this publication. 2. The International College of Financial Planning Ltd. expressly disclaims all and any liability to any person in respect of anything and of the consequences of anything done or omitted to be done by any such person in reliance, whether whole or partial, upon the whole or any part of the contents of this subject material. 3. No person should act on the basis of the material contained in the publication without considering and taking professional advice. 4. No correspondence will be entered into in relation to this publication by the distributors, publisher, editor(s) or author(s) or any other person on their behalf or otherwise. Author Sanjiv Bajaj CFPCM, MBA (Finance), International Certificate for Financial Advisors (CII – London) Content Developed by: Madhu Sinha CFP CM , CIWM Author (“Financial Planning A Ready Reckoner” and “Retirement Wealthy” Easy strategies for all, Campus Director, International College of Financial Planning, Mumbai Former Director, FPSB India \"Unless otherwise stated, copyright and all intellectual property rights in all course material(s) provided, is the property of the College. Any copying, duplication of the course material either directly, and or indirectly for use other than for the purpose provided shall tantamount to infringement and shall be strongly defended and pursued, to the fullest extent permitted by law.\"

TABLE OF CONTENT Chapter 1: Financial Planning Background (3 - 12) Financial Planning Standards Board 3 Practice Standards 4 Professional Skills 5 Legal and Professional Compliance 8 Financial Planning Process and Practice Standards 10 Financial Planning Components 11 Chapter 2: Collection (13 - 20) Defining the Relationship with the Client 13 Managing Client Expectations 15 Know Your Client – Discovery 16 The Data Collection Process 17 Disclosing Client Information to a Third Party 19 Chapter 3: Financial Plan Development Guidelines Financial (21-27) Management 21 The Importance of Cash Flow 24 Taxes 25 Property and Liability Coverage 25 Investment Planning 26 Retirement Planning 26 Tax Planning 27 Estate Planning (28 - 32) Chapter 4: Analysis 28 Analysis, Strategies and Recommendations 30 Activity

Chapter 5: The Financial Plan (33 - 40) Financial Plan Framework 33 Financial Plan Elements 33 Retirement income requirements 34 Evaluating Risk Tolerance 35 Attitudes, Goals and Objectives 36 Synthesis and Recommendations 38 Developing a Financial Plan 39 Executive Summary 42 Chapter 6: Synthesis (43 - 51) Synthesis, Recommendations and Implementation 43 Monitoring and Review 44 Summary 45 Retirement Capital-Needs Analysis 48 Assumptions 50

Integrated Financial Planning Developing Effective Financial Plans Introduction FPSB has designed the CFPCM Professional Course into two modules: Financial Planning Principles, Process and Skills and Integrated Financial Planning. Integrated Financial Planning is comprised of two components: Engaging Clients in the Financial Planning Process and Developing Effective Financial Plans. These modules help to guide individuals interested in applying financial planning principles and process to meaningfully engage clients; identify client needs, objectives and goals; a The course addresses supporting topics that are indirectly related to the financial plan development. The course teaches students how to identify key areas to be addressed in the financial plan, as well as how to identify information that may be missing. The skills of listening, inquiry and discovery, engaging, framing, committing and presenting are equally important. Upon completing all four education courses and related exams, and meeting FPSB Ltd. CFP exam and experience requirements, individuals can be recognized as a CERTIFIED FINANCIAL PLANNERCM professional Course Introduction: This course is designed to: 1. Provide training to identify and apply appropriate skills, knowledge and abilities needed to develop effective written financial plans. 2. Prepare students to integrate financial planning body of knowledge, theory and practice to real- world client situations. 3. Highlight the inter-relationships among the various Financial Planning Components, as described in FPSB’s Financial Planner Competency Profile. Structure and Framework of the Course Integrated Financial Planning: Developing Effective Financial Plans includes the following content areas and FPSB frameworks: CFP Final Level: Integrated Financial Planning Developing Effective Financial Plans: Module 3 Page 1

Financial Planning Process and Financial Planning Practice Standards (see FPSB’s Financial Planning Practice Standards). Financial Planning Components (see FPSB’s Financial Planner Competency Profile). Professional Skills required in financial planning (see FPSB’s Financial Planner Competency Profile). This is covered extensively in the Financial Planning Principles, Process and Skill course. Ethics (see FPSB’s Code of Ethics and Professional Responsibility). This is covered extensively in the Ethics course. Integrated Financial Planning (Engaging Clients in the Financial Planning Process and this course: Developing Effective Financial Plans) CFP Final Level: Integrated Financial Planning Developing Effective Financial Plans: Module 3 Page 2

Chapter 1: Financial Planning Background Financial Planning Standards Board (FPSB) The concept of financial planning as a distinct discipline took root in the United States in the early 1970s, when a small group of financial services professionals began promoting the need for a more client-centric approach to providing advice. The group discussed the need for more knowledge and training to best engage and understand client goals, needs and objectives before providing advice or product recommendations. The CERTIFIED FINANCIAL PLANNER certification was created as a result of this meeting. In 2004, Financial Planning Standards Board (FPSB), a global non-profit standards-setting body, was created to manage, develop and operate certification, education and related programs for financial planning organizations and to oversee the international CERTIFIED FINANCIAL PLANNER certification program. FPSB benefits clients and potential clients of financial planners by establishing, upholding and promoting worldwide professional standards in financial planning. Working through its non-profit member organizations, FPSB seeks to ensure that standards for CFP certification are both globally consistent and locally relevant so that:  The public can identify qualified financial planners  Practitioners can distinguish themselves as trusted financial planners  Consumers and regulators can have confidence in the financial planning profession and recognize the benefits of financial planning As shown in Figure below, FPSB has developed a framework for financial planning professionalism that integrates competency, ethics and professional practice standards for financial planning. This professional framework operates alongside financial planner certification requirements in the areas of education, assessment, experience and continuing professional development. CFP Final Level: Integrated Financial Planning Developing Effective Financial Plans: Module 3 Page 3

Competency FPSB’s Financial Planner Competency Profile — comprised of Financial Planner Abilities, Financial Planner Professional Skills and the Financial Planning Body of Knowledge—describes the abilities, skills, attitudes, judgments and knowledge on which a financial planner draws. To competently deliver financial planning to a client, a financial planning professional needs to combine:  The ability to carry out the tasks of financial planning (identified in Financial Planner Abilities),  Using appropriate professional skills (identified in Financial Planner Professional Skills),  Drawing on his or her knowledge of financial planning matters (identified in the Financial Planning Body of Knowledge). Competent financial planning reflects the effective combination of abilities, skills and knowledge as identified in the Financial Planner Competency Profile. Even financial planners who limit the scope of their practice through specialization (e.g., in Estate or Tax Planning) do so within the context of the entire set of financial planner abilities. Ethics FPSB’s Financial Planner Code of Ethics and Professional Responsibility incorporate ethical behaviour and judgment, and compliance with ethical standards, into a global framework for professional ethics. The Code emphasizes recognition of responsibilities to the public and to the profession. Practice Standards FPSB’s Financial Planning Practice Standards establish the level of practice expected of a financial planner engaged in the delivery of financial planning to a client; establish norms of professional practice and allow for consistent delivery of financial planning by financial planners; clarify the CFP Final Level: Integrated Financial Planning Developing Effective Financial Plans: Module 3 Page 4

respective roles and responsibilities of financial planners and their clients in financial planning engagements; and enhance the value of the financial planning process. Financial Planning FPSB’s vision is to establish financial planning as a distinct, global profession. What Is Financial Planning? FPSB defines financial planning as “the process of developing strategies to assist clients in managing their financial affairs to meet life goals.” The process of financial planning involves: •Collection of relevant information •Analysis of that information in the context of the client’s goals •Synthesis of all pertinent data to develop appropriate strategies •Presenting recommendations designed to enable clients to meet their life goals What Is a Financial Planner? Because the term “financial planner” is loosely regulated and often poorly understood by the public, it has been subject to various definitions and diverse application. FPSB defines a financial planner as “a professional who uses the financial planning process to provide a client with integrated strategies to achieve financial and life goals and who has demonstrated the abilities, skills and knowledge outlined in FPSB’s Financial Planner Competency Profile.” Professional, Interpersonal Skills and Ethics Professional Skills Central to the concept of professionalism is the need for a financial planner to use his or her professional skills to work in the interest of clients, and to uphold and promote the interests of the financial planning profession for the benefit of society. The professional skills applicable to this course are identified in FPSB’s Financial Planner Competency Profile. FPSB categorizes the professional skills required of a financial planner into four areas: Page 5  Professional Responsibility  Practice  Communication CFP Final Level: Integrated Financial Planning Developing Effective Financial Plans: Module 3

 Cognitive As a financial planner interacts with clients, he or she integrates appropriate professional skills with relevant knowledge and abilities. The same integration applies to developing strategies and recommendations to be included in a written financial plan. Financial planning professionals often concentrate on developing technical skills. This is appropriate as long as the planner devotes equal attention to effective client engagement and relational or interpersonal skills. The following discussion highlights some factors that contribute to developing a productive relationship with clients. Interpersonal Skills Interpersonal skills (also known as soft skills) play a key role in establishing a positive client relationship. Determining the client’s preferred behavioral style can be accomplished in a variety of ways, including a concept known as “social styles.” Client behaviours might, for instance, be categorized as amiable (sociable), driven (task-oriented), analytical (interested in facts and figures) or expressive (talkative). In most cases, these categories are based on the client’s communication style. For example, is the client more likely to ask questions or tell you what he or she wants? Would the client prefer to think through an option, or just do it? Although categorization tools can help you better understand clients and enhance your communication, they should never solely dictate how to approach a client. Depending on circumstances, a client might be acting in a way that is contradictory to his or her normal style. It is important to remain open and not make judgments about the client’s preferred style too soon. You also may find it productive to adapt your approach so you can communicate with clients according to their preferences. For example, if the client is analytical, consider focusing more on facts and figures when sharing information. In short, adapting to a client’s preferred communication style can have a positive impact on the professional relationship. Listen carefully to what clients say about themselves. Build rapport and find common ground so your client is open to sharing personal information and concerns with you. A client’s body language also conveys useful information, and you may even find yourself mirroring the posture of a client and the tempo of their speech. Look for signs that the client is losing concentration or showing other nonverbal concerns about the matters being discussed. CFP Final Level: Integrated Financial Planning Developing Effective Financial Plans: Module 3 Page 6

Ethics Ethical conduct and behaviour are fundamental to a financial planner’s ability to retain the trust and confidence of clients and to ensure quality financial advisory outcomes. Financial planning professionals exercise ethical judgment appropriately when identifying and resolving complex issues encountered in client engagements. Research demonstrates that ethical conduct, behaviour and judgment are linked. Ethics are personal – individuals with high ethical reasoning ability typically display high levels of ethical conduct and behaviour and engage in effective decision-making. Ethics are also institutional. Research suggests that most employees make ethical decisions consistent with organizational norms, policies and procedures. By adhering to a professional code of ethics, financial planners agree to provide financial planning in the interest of clients, with the highest ethical and professional standards, and to uphold and promote the interests of the financial planning profession for the benefit of society. As part of this professional commitment, planners provide appropriate disclosures and agree to be bound by ethical standards when delivering financial planning to clients. FPSB’s Ethical Principles are statements expressing ethical standards to which a professional financial planner must adhere. Clients of financial planners will benefit from these globally accepted ethical standards. Following is a summary of FPSB’s Financial Planner Code of Ethics and Professional Responsibility: Principle 1—Client First  Place the client’s interests first. Principle 2—Integrity  Provide professional services with integrity. Principle 3—Objectivity  Provide professional services objectively. Principle 4—Fairness  Be fair and reasonable in all professional relationships. Disclose and manage conflicts of interest. CFP Final Level: Integrated Financial Planning Developing Effective Financial Plans: Module 3 Page 7

Principle 5—Professionalism  Act in a manner that demonstrates exemplary professional conduct. Principle 6—Competence  Maintain the abilities, skills and knowledge necessary to provide professional services competently. Principle 7—Confidentiality  Protect the confidentiality of all client information. Principle 8—Diligence  Provide professional services diligently. Legal and Professional Compliance Complying with legal and professional obligations forms an integral part of the practice of financial planning. Practitioners should understand and adhere to all applicable legal and professional compliance requirements when providing financial planning to clients. Disclosures to the Client When first engaging a new client, make sure to disclose adequate information about the services offered, the nature and business activities of your firm, your compensation, and any actual or potential material conflicts of interest. Follow up with a written summary of the discussion, outline agreed-upon actions, and ask the client to sign and return the summary document. Unclear disclosures can create client misunderstandings and dissatisfaction. By documenting initial disclosures and getting client acknowledgment of on-going discussions and agreements, you can better ensure that the client is fully aware of the scope of the financial planning engagement and the nature of the decisions being made. Conflicts of Interest The dictionary defines conflict of interest as a conflict between the private interests and the official responsibilities of a person in a position of trust, and financial planners sometimes have them. Disclose anything you believe might affect the impartiality of your judgment and advice. Also, recognize your CFP Final Level: Integrated Financial Planning Developing Effective Financial Plans: Module 3 Page 8

fiduciary obligations to clients and consciously make decisions that are in the clients’ interests rather than your own. The best way to deal with a possible material conflict of interest is to provide a written disclosure to the client as soon as the situation arises and request written acknowledgement of the disclosure by the client. Examples of potential material conflicts of interest include the following:  Fees that are based on a percentage of assets under management, as any advice or action taken that causes the client’s assets under management to change will affect the financial planner’s compensation.  Commissions that the practitioner receives for recommending or selling financial products. Firms sometimes place limitations on which financial tools may be used (e.g., only certain pooled investments; unit trusts). These limitations should also be disclosed.  Any sum that may be paid by third parties as a result of placing business; for example, recommending the purchase of a property in which the practitioner is also acting as an intermediary with respect to the sale.  Recommending a proprietary product or service from a firm where the practitioner is a shareholder.  Fees based on turnover or the number of transactions.  Large up-front fees for certain products. Example 1 Your client’s circumstances and background suggest a need for investment in a growth mutual fund. There are two suitable funds on your recommended product list, but they pay different commissions. This is a potential conflict of interest. Disclose the potential conflict and recommend the fund that best meets the client’s needs. Example 2 Your client is interested in two life insurance policies, A and B, issued by two large insurance companies with top financial strength ratings. Your firm has a relationship with the insurance company of policy A, but not policy B. Explain your firm’s relationship with the insurance company as well as the rationale behind your recommendation. A good goal is to provide enough information so the client can make an informed decision as to which policy to choose. It is important to understand that all conflicts or potential conflicts of interest do not create adverse consequences for the client. Some conflicts of interest may be inherent in financial planning and CFP Final Level: Integrated Financial Planning Developing Effective Financial Plans: Module 3 Page 9

advisory relationships. The important thing is to make full and transparent disclosure, thereby allowing clients to discern whether a conflict of interest may negatively impact them. This will give clients the opportunity to determine whether to enter into or continue a professional relationship with the financial planner. Financial Planning Process and Practice Standards Practice standards identify performance precepts for professional financial planners. These standards:  Establish the level of practice expected of a financial planning professional engaged in the delivery of financial planning to a client;  Establish norms of professional practice and allow for consistent delivery of financial planning by financial planning professionals;  Clarify the respective roles and responsibilities of financial planning professionals and their clients in financial planning engagements; and  Enhance the value of the financial planning process. FPSB has established the following financial planning Practice Standards (see FPSB’s Financial Planning Practice Standards for more detail): 1. Establish and define the client/planner relationship 1.1 Inform the client about financial planning and the financial planning professional competencies 1.2 Determine whether the financial planning professional can meet the client’s needs 1.3 Define the scope of engagement 2. Collect client data and information, and frame goals and objectives 2.1 Identify the client’s personal and financial objectives, needs and priorities 2.2 Collect quantitative information and documents 2.3 Collect qualitative information 3. Analyze and assess the client's financial status 3.1 Analyze the client’s information 3.2 Assess the client’s objectives, needs and priorities 4. Develop the financial planning recommendations and/or alternatives and present them to the client 4.1 Identify and evaluate financial planning strategies 4.2 Develop the financial planning recommendations 4.3 Present the financial planning recommendations to the client CFP Final Level: Integrated Financial Planning Developing Effective Financial Plans: Module 3 Page 10

5. Implement the client’s financial planning recommendations 5.1 Agree on implementation responsibilities 5.2 Identify and present product(s) and service(s) for implementation 6. Monitor and review the financial planning recommendations and the progress toward the client’s goals 6.1 Agree on responsibilities and terms of review of the client’s situation 6.2 Review and re-evaluate the client’s situation Financial Planning Components The six Financial Planning Components described in FPSB’s Financial Planner Competency Profile are: 1. Personal Financial Management 2. Investment Planning 3. Insurance Planning 4. Tax Planning 5. Retirement Planning 6. Estate Planning Refer to earlier chapters for the detailed mind maps. Personal Financial Management The Personal Financial Management component covers strategies and techniques to optimize short- and mid-term cash flow, assets and liabilities, as well as collecting and synthesizing information relating to personal financial statements, cash flow and debt, asset acquisition, liabilities, education planning and emergency fund provisions. Investment Planning The Investment Planning and Asset Management component covers strategies and techniques to optimize returns on assets keeping in mind the client’s requirements and constraints. This requires an understanding of various types of securities traded in financial markets, investment theory and practice, portfolio construction and management, and investment strategies and tactics. (Note: Under Investment Planning and Asset Management, the terms “risk,” “risk exposure” and “risk tolerance” refer to the risk of financial loss due to market circumstances.) CFP Final Level: Integrated Financial Planning Developing Effective Financial Plans: Module 3 Page 11

Insurance Planning The Risk Management and Insurance Planning component focuses on strategies and techniques to manage financial exposure due to personal risk. This component addresses the use of insurance to protect against personal risk. Risk, in this instance, does not refer to investment risk. This type of risk focuses on the possibility of personal loss: property, life and health, financial liability, income (due to sickness or injury). Tax Planning The Tax Planning component involves the evaluation of strategies and techniques to maximize the present value of the client’s after-tax net worth. This component considers tax principles, current tax law, taxation of income and investment earnings, and the resulting impact on a client’s financial situation. Retirement Planning The Retirement Planning component focuses on strategies and techniques for wealth accumulation, and withdrawal during retirement years, taking into consideration the structure and impact of public and private retirement plans on the client’s financial plan. Estate Planning The Estate and Wealth Transfer Planning component evaluates strategies and techniques to handle the preservation and distribution of accumulated assets consistent with the client’s goals, and to understand the legal, tax, financial and nonfinancial aspects of this process CFP Final Level: Integrated Financial Planning Developing Effective Financial Plans: Module 3 Page 12

Chapter 2: Collection Learning Outcomes Upon completion of this chapter, students will be able to: Identify client objectives, needs and values that have financial implications. Identify information for the financial plan. Identify client legal issues that affect the financial plan. Describe client attitudes and level of financial sophistication. Identify material changes in the client’s personal and financial situation. Categorize information to enable analysis. Defining the Relationship with the Client The process of financial planning begins by establishing and defining the relationship between you and your client. This process begins at the point of initial contact with potential clients (through referrals or other marketing strategies), and continues through meetings with prospective clients, and formalizing the scope of the engagement. As the planner-client relationship begins, the planner should highlight responsibilities, scope of the engagement, and the nature of the contractual arrangement. Scope of Engagement To establish the scope of engagement, communicate the following to the client:  Possible material conflicts of interest  Limits of the services and products that you will provide  Planner and client responsibilities  Agreed-upon compensation arrangements  Length of the agreement period  Frequency and nature of your monitoring activities (as appropriate) First Meeting with the Client The first meeting between a financial planner and a client is an opportunity for each to determine whether they want to work together. Use the meeting to determine if you can address the client’s CFP Final Level: Integrated Financial Planning Developing Effective Financial Plans: Module 3 Page 13

needs, and the likelihood of being able to establish a long-lasting relationship based on mutual trust and respect. A well-defined discovery process will effectively help to:  Identify and evaluate the client’s goals, needs and objectives  Gather sufficient data to support the development of the financial plan  Recognize any mismatch between your capabilities and the client’s expectations that may have to be addressed The following information outlines steps for the first meeting (but not necessarily the order in which the items are covered).  Discuss a positioning statement about the financial planning process and the services you provide and confirm that the purpose of the meeting is introductory in nature.  Provide information about your experience, professional qualifications (e.g., CFP certification), licenses, etc.  Disclose how you are compensated (i.e., from fees, commission, salary, etc.), mention any special policies or procedures of your firm, including fee charges, agency relationships, and any potential conflicts of interest.  Ask questions to help you understand the client’s values and relationship to money. For example, you might discuss how the potential client spends money, uses money, or what the potential client would do if he or she received a sudden inheritance.  Ask questions to understand the client’s financial goals and objectives, as well as any financial concerns he or she may have. Examples include:  Desired retirement age and how the client views retirement  Net after-tax income required to achieve the desired standard of living;  Education fund for children/grandchildren;  Budgets for projects over the next 10 years;  Prioritized financial objectives. Gather all relevant financial information. Discuss expectations and identify required documentation. Explain to the client that this information will enable you to better determine how you can help the client to meet his or her life goals through the proper management of assets and finances and comply with client identification rules. Request the client bring the following documentation to the next meeting (depending on the document, it may be appropriate for the client to send requested records for your review prior to the next meeting):  Investment statements  Financial statements CFP Final Level: Integrated Financial Planning Developing Effective Financial Plans: Module 3 Page 14

 Details of employment benefits  Insurance policies  Tax returns (normally, at least the preceding two years)  Identification documents  Copies of utility bills  Proof of address  Additional documentation required to comply with regulatory requirements Review client information, and, where possible and appropriate, provide a preliminary assessment. If you think you can help, explain which services will be most beneficial to the client and how you will provide those services. Discuss the scope and responsibilities of the client and planner Assess the client’s tolerance for financial risk (this sometimes may be done using computer-based or online assessment programs either in the office or at a more convenient time for the client). Have a discussion about the nature and amount of risk the client is willing or not willing to take. Inform the client that:  All personal information will be kept private and confidential, and  The quality of recommendations will largely depend on the quality of information provided by the client. Agree on how decisions will be made. This includes learning who are the decision-makers, whether other professionals will be involved in decisions, and similar. Describe the next steps (i.e., an engagement document and contract (if appropriate) will be drafted and signed, additional data will be gathered, a financial plan will be developed, and the plan’s recommendations will be implemented if the client agrees). Also confirm the client’s preferred form and frequency of contact. Managing Client Expectations Both parties in the financial planning relationship must have realistic expectations of the planning process. The following suggestions can help you manage client expectations: CFP Final Level: Integrated Financial Planning Developing Effective Financial Plans: Module 3 Page 15

Use written client agreements to clearly state:  Responsibilities of the financial planner and client  Services to be provided  Timeframe for goal achievement as well as expected engagement period (e.g., limited to the current need, on-going, or other specified term)  Performance metrics Obtain the client’s acknowledgement of his or her role in the decision-making process, particularly investment decisions. Provide client education through:  Face-to-face meetings  On-line meetings  Seminars  Client newsletters  E-mails  Website postings (e.g., blogs, podcasts, social media, etc. as appropriate – being sure to comply with all applicable regulations) Know Your Client – Discovery While client information and data questionnaires have been created to assist you in fulfilling professional obligation, the process of getting to know your client is much more than what can be gained from a questionnaire. The simplest solution, and also the best, arecommunicating and build a relationship. Only when you know your client can you determine whether recommendations are appropriate. Consciously following a know-your-client/Discovery process protects both the client and you. It is worth noting that in any claim of negligence by the client (e.g., giving inappropriate advice), your best defence is to produce documentation to show you made every effort to know the client and understand his or her goals (and complied with all legal and regulatory requirements). Furthermore, in the light of enhanced regulation concerning money-laundering activities, you may be required by law to know your client’s sources of funds. The know-your-client process is one way to ensure that your client is not engaged in money laundering or other illegal activities. CFP Final Level: Integrated Financial Planning Developing Effective Financial Plans: Module 3 Page 16

The Process of Knowing Your Client  Whenever possible, meet the client face-to-face before beginning the financial planning engagement.  Ask questions to know and understand the client.  Complete the financial planning questionnaire and needs analysis documents.  Evaluate the client’s attitudes and tolerance for financial risk.  Take notes about the client’s background, and keep the notes with the questionnaire in the client’s file.  Ask the client to inform you as soon as possible of any changes in his or her personal situation. Explain that the plan may have to be revised as a result of those changes.  Update client information periodically as appropriate.  Send the client a copy of updated information for their records. The Data Collection Process Engage the client fully in the Discovery process to gain an understanding of their life goals Complete the client data questionnaire. Obtain copies of the client’s relevant documents for your files. Examine these documents first-hand. Examples of documents you may want to obtain are:  Marriage contract/separation agreement/divorce document  Will, power of attorney and disability mandate, health care directive/living will (where recognized)  Mortgage and other loan agreements  Property purchase deeds  Insurance contracts (individual life, disability, group, general)  Income tax returns  Description of employee benefits and income details  Financial statements  Trust agreements (as applicable)  Recent brokerage firm statements  Recent mutual fund/managed investment statements  Recent records of share and bond certificates CFP Final Level: Integrated Financial Planning Developing Effective Financial Plans: Module 3 Page 17

Incomplete or Inaccurate Information What should you do in situations where the information provided by the client is incomplete or inaccurate? Take the following steps:  Immediately discuss the matter with the client so he or she is able correct any inaccuracy or omission involved  Explain to the client the limitations of the advice and planning recommendations given as a result of incomplete or inaccurate information  If you believe that the advice may be based on misleading information, you may want to consider ending the financial planning engagement There may be circumstances where the client is unwilling to provide information as requested, but still wants your advice. In such cases, carefully consider whether you want to continue the financial planning engagement. Confidentiality and Privacy Issues You must keep all existing and former client information in strict confidence. This includes the client’s identity, financial circumstances, security holdings and the nature of the advice furnished to the client by the firm. You cannot disclose information about the client to other parties without proper consent (except in certain situations related to legal due process). Also, ensure that all client information and files are kept secure to prevent access by unauthorized persons. Maintaining client confidentiality is not only good business practice, it is part of your responsibility as a financial planner. Security relates to paper as well as electronic documents. Safeguarding Client Information Following are suggestions to consider for safeguarding client information.  Each staff member should sign a confidentiality agreement that makes breaking a client’s confidentiality grounds for dismissal.  All client files taken from the filing cabinets must be signed out. Electronic retrieval must be authorized and noted.  All physical client documents must be locked up overnight and cannot leave the office, except to be returned to the client. Electronic (e.g., computer-based) file systems should be secure and protected using appropriate means. CFP Final Level: Integrated Financial Planning Developing Effective Financial Plans: Module 3 Page 18

 Important documents must only be sent to clients via secure means. Use a courier service, a secure online delivery system, or deliver the documents by hand.  No photocopies of documents can be made without a specific purpose, such as being able to return the client’s original document.  Limit access to files only to persons who need to work on a file.  Refrain from mentioning the client’s name or matters in public places.  Shred or securely delete all old documents from client files that are to be destroyed. Disclosing Client Information to a Third Party  Explain to the client what information you need to disclose, the purpose for disclosure and how it will be used.  Obtain written consent from the client.  Be aware of and follow current regulations regarding the retention of client data Activity 1 Start to develop a financial plan by collecting the quantitative and qualitative information from your client for each of the financial planning areas: Financial Planning Area Collection Personal Financial Collect information regarding the client’s assets and liabilities Management Collect information regarding the client’s cash flow, income and/or obligations Collect information necessary to prepare a budget Prepare statements of the client’s net worth, cash flow and budget Determine the client’s propensity to save Determine how the client makes spending decisions Determine the client’s attitudes toward debt Investment Planning Collect information to prepare detailed statement of investment holdings Determine the client’s current asset allocation Identify cash flows available for investment, and expected withdrawals from the investment portfolio Determine the client’s attitudes/biases towards and experience with investments Determine the client’s investment objectives Determine the client’s tolerance for investment risk CFP Final Level: Integrated Financial Planning Developing Effective Financial Plans: Module 3 Page 19

Insurance Planning Identify the client’s assumptions and return expectations and mutually agree on planning assumptions Tax Planning Identify the client’s goal achievement time horizons Collect details of the client’s existing insurance coverage Retirement Planning Identify potential financial obligations of the client Determine the client’s risk management objectives and risk exposures Estate Planning Determine the client’s tolerance for risk exposure Determine relevant family and lifestyle issues and attitudes Integrated Financial Determine health issues Planning Determine the client’s willingness to take active steps to manage financial risk, including lifestyle and health issues Collect the information necessary to establish the client’s tax position Identify taxable nature of assets and liabilities Identify the tax structure of client accounts Identify current, deferred and future tax liabilities Identify parties relevant to the client’s tax situation Determine the client’s attitudes toward taxation Collect the details of potential sources of retirement income Collect the details of estimated retirement expenses Determine the client’s retirement objectives Determine the client’s attitudes towards retirement Mutually agree on the client’s comfort with retirement planning assumptions Collect legal agreements and documents impacting estate planning strategies Identify the client’s estate planning objectives Identify family dynamics and business relationships that could impact estate planning strategies Identify the client’s objectives, needs, values and constraints (e.g., taxes) that have financial implications, with time and funding (money) specificity and prioritization Identify the information for the financial plan Identify the client’s legal issues that affect the financial plan Determine the client’s attitudes, biases, drivers and level of financial sophistication Identify material changes in the client’s personal and financial situation Prepare information to enable analysis CFP Final Level: Integrated Financial Planning Developing Effective Financial Plans: Module 3 Page 20

Chapter 3: Financial Plan Development Guidelines Financial Management The Importance of Cash Flow The financial plan must balance the commitment to achieving the client’s goals with the reality of the assets or cash flow available for funding those goals. By focusing on cash flow (which may include discretionary income as well as other available assets), you can attempt to ensure, but cannot guarantee, that funding will be available both for client goals and for meeting daily living expenses. A goal orientation keeps the plan’s focus on the client’s values, needs and desires, both now and in the future. As a Financial Planner, you will typically analyze the following:  Whether the client is living within his or her financial means—calculate surplus/shortfall  Whether any existing emergency fund is adequate  Debt-load and debt service amounts  The impact of potential changes in the client’s income and expenses  Conflicting demands on the client’s cash flow Systematic analysis and evaluation of the client’s cash flow for planning purposes includes the following:  Analyze current situation  Determine and quantify the cash flow planning needs and objectives by:  Developing a cash flow statement  Developing a balance sheet  Calculating the applicable diagnostic ratios  Document and evaluate current progress by:  Reviewing client spending  Optimizing emergency fund balance  Maximizing earnings on monetary assets  Maximize tax and cash flow efficiency of debt  Review prospective planning strategies  Develop client-based recommendations  Identify and select appropriate strategies to meet need CFP Final Level: Integrated Financial Planning Developing Effective Financial Plans: Module 3 Page 21

 A good approach for recommendations is to answer: who, what, when, where, why, how and how much Cash Flow One of the fundamental building blocks of financial independence is having lower outflows than inflows. This is so simple that it is often overlooked, but it is a significant factor in positive financial health. Cash flow management addresses this key area. In creating a cash flow statement for a client, record all sources of the client’s income and expenses. The difference between the two identifies whether the client has a positive or a negative cash flow. Positive (discretionary) cash flow can be used to make investments and address risk management or other goals. A budget can be described as a long-term cash flow exercise. It helps to assess whether clients can accumulate sufficient assets to achieve their life goals. Cash flow management involves identifying sources of income along with where that income is being spent. Carrying out a cash flow exercise:  Enables you to ascertain available funds for investment and other purposes  Facilitates the financial planning process  Creates the opportunity to review spending and to see where expenses could be lowered, thereby increasing the funds available for goal achievement  Facilitates the budgeting process for the client There are two main cash flow components:  Income (inflows)  Expenses (outflows) Income Income can come from sources such as: Page 22  Salaries  Bonus/tips/commissions  Fees  Self-employment  Consulting CFP Final Level: Integrated Financial Planning Developing Effective Financial Plans: Module 3

 Investment (i.e., unearned) sources (e.g., dividends, interest payments, real estate rental receipts)  Government benefits Examples of retirement income sources include pensions, social security, and annuity and retirement plan distributions. Many individuals have limited control over their income. Suggestions to potentially increase income include working longer hours or at a second job, adding clients, or choosing investments that provide higher levels of income. Expenses Expenses are normally divided into two categories: fixed and discretionary (or variable).  Fixed expenses may include:  Rent or mortgage payments  Car loan payments  Insurance premiums  Investment contributions (these also may be considered discretionary or variable)  Alimony/child support Once expenses are incurred, people usually have little control over fixed expenses. Often, minimizing fixed expenses requires significant lifestyle changes (e.g., moving to a less expensive home, driving a less expensive car, etc.). Investments should be included as an outflow, even though we normally don’t think of a monthly investment contribution as an expense. If the investment generates income, the income will be entered as an inflow. For accounting purposes, it’s important to identify both sides of investment- related cash flows.  Discretionary expenses (sometimes referred to as variable) may include:  Transportation  Household (groceries, clothing, accessories)  School fees and education  Communication (telephone, mobile phone, Internet)  Utilities  Health and personal care  Entertainment/hobbies CFP Final Level: Integrated Financial Planning Developing Effective Financial Plans: Module 3 Page 23

 Maintenance (home or auto)  Spending money  Vacations The client often has more control over these types of expenses. Note that an expense that one individual considers to be variable or discretionary, a different individual may feel should be in the fixed category. Don’t be too tied to placing any of the expenses in either the fixed or discretionary categories. Explain the rationale to the client, but in most cases, be willing to accept the client’s allocation decision if it differs from your own. Taxes Depending on where the client lives, taxes can have a major influence on cash flow. Sometimes taxes, such as income tax, can be modified by timing of income or by other means, but taxes seldom can be totally ignored. Summary Personal financial management is an essential part of financial planning and supports all other components. The Financial Management Component includes the collection of client information relating to personal financial statements, cash flow (income and expenses), assets, liabilities, education costs and the provision of an emergency fund. In this section, we have focused cash inflows and outflows. When doing cash flow calculations, it is important to include both the client’s current position and the anticipated future position to indicate the impact of recommendations on the client’s cash flow (sometimes called a pro forma statement Following is brief guidance for the remaining financial plan components Insurance Planning A financial planner typically analyses the following aspects of a client’s Risk Management and Insurance Planning Component:  Characteristics of the client’s existing insurance coverage (including possible tax on insurance proceeds)  The client’s exposure to financial risk (e.g., liability, personal property) CFP Final Level: Integrated Financial Planning Developing Effective Financial Plans: Module 3 Page 24

 Survivor expectations if an insured event should occur  Current insurance coverage and risk management strategies for known and likely risks  The client’s preference for insurance and alternative strategies for managing risk exposure  The implications of changes to the client’s insurance coverage Critical Illness If you do not evaluate the client’s health insurance, you might say, “Your health insurance coveragewere not evaluated because of your assurances that this coverage is adequate. We suggest a thorough review by a competent insurance professional.” However, at the least, the planner normally should review coverage and provide a summary statement. Property and Liability Coverage Many financial planners are not fully knowledgeable about property and liability insurance coverages. As a result, this is often an area where evaluations and recommendations should come from a specialist. As an overview, such insurance should cover at least the following risk categories:  The risk that any owned building or their contents will be damaged by a covered event or peril, such as fire, rain, wind, hail or other natural occurrence  The risk that personal property, either in the home or in another location, will be stolen or damaged by others  The risk of liability, or being held legally responsibility for another person’s losses Clients who have property and perhaps household staff in more than one country/territory have particular exposures that demand significant expertise to determine appropriate coverage. Financial planners should not ignore this area, even though they may not have sufficient expertise for effective evaluation. To repeat the recommendation, the property and liability area is one where it is almost always beneficial to consult those with appropriate expertise. Investment Planning A financial planner typically analyses the following aspects of a client’s Asset Management component:  Required rate of return to reach the client’s objectives  The client’s investment income needs  Characteristics of the client’s investment holdings  Implications of acquiring/disposing of assets CFP Final Level: Integrated Financial Planning Developing Effective Financial Plans: Module 3 Page 25

 Whether the client’s current asset holdings, investment expectations, risk tolerance and required rate of return are consistent Retirement Planning Financial planners typically analyze the following aspects of a client’s Retirement Planning component:  Projections based on the client’s current position, investment plans and pension arrangements  Appropriateness (specificity, measurability, achievability, reasonableness) of the client’s retirement goals and objectives  Financial requirements during retirement (cash flow desires)  Sensitivity of retirement plans to changes in key assumptions  Compromises necessary to achieve retirement objectives  New recurring investment needed  Review Prospective Planning Strategies  Develop Client-based Recommendations  Identify and Select Appropriate Strategies to Meet Need  Frame Recommendation into: who, what, when, where, why, how, and how much  Present Financial Planning Recommendations  When advisable, make adjustments as requested  Develop the financial plan based on recommendations (as amended)  Implement the Plan  Monitor the Plan, Implementation and Goal Progress When trying to determine retirement and other long-term needs requiring funding, a working knowledge of time value of money concepts and calculations is beneficial. If needed, review the TVM information in Appendix 2. Tax Planning The following aspects are typical of what a financial planner normally considers when analyzing a client’s tax situation:  Current and expected future tax position  Significant tax-related changes in the recent past  Suitability of existing tax strategies and structures  Financial impact of tax planning alternatives  Review Prospective Planning Strategies  Develop Client-based Recommendations CFP Final Level: Integrated Financial Planning Developing Effective Financial Plans: Module 3 Page 26

 Identify and select best strategies to meet need  Frame recommendation into: who, what, when, where, why, how, and how much  Develop Comprehensive Plan and Present Recommendations  Implement the Plan  Monitor the Plan, Implementation and Goal Progress Note that some firms, territories and regulators require financial planners not to do in-depth tax- related analysis. Always comply with relevant regulations Estate Planning The following aspects are typical of what a financial planner would consider when analyzing a client’s estate planning:  Current succession plans and implications  The client’s net worth at death  Risks and benefits in alternative asset ownership and transfer alternatives  Potential expenses and taxes due at the client’s death  The liquidity of the client’s estate at death  Liquidity of heirs at client’s death (e.g., can inheritance tax be met?)  Document and Evaluate Estate Plan  Review In-Force documents  Review Guardianship and Beneficiary information  Consider potential changes  Be careful not to run afoul of legal and regulatory requirements regarding unauthorized provision of legal advice. It often is beneficial to consult with a lawyer or your legal department.  Review Prospective Planning Strategies  Develop Client-based Recommendations  Identify and select best strategies to meet need Frame recommendation into:  What, when, where, why, how and how much  Develop Comprehensive Plan and Present Recommendations  Implement the Plan Monitor the Plan, Implementation and Goal Progress CFP Final Level: Integrated Financial Planning Developing Effective Financial Plans: Module 3 Page 27

Chapter 4: Analysis Learning Outcomes Upon completion of this chapter, students will be able to: Analyze client objectives, needs, values and information to prioritize financial planning components. Determine the inter-relationships among the financial planning components. Determine opportunities and constraints and assess collected information across financial planning components. Determine the impact of economic, political and regulatory environments. Analyze progress toward achieving objectives of the financial plan. Apply FPSB’s Financial Planning Practice Standards to the financial planning process. Analysis, Strategies and Recommendations Proper analysis of the client’s information is dependent on the interaction of certain personal and situational factors. Factors indicated in the following figure play a significant role in the outcome of the financial plan for the client. CFP Final Level: Integrated Financial Planning Developing Effective Financial Plans: Module 3 Page 28

The analysis and synthesis processes depend on accurate and complete data. The collection process includes determining the client’s attitudes, goals and objectives, and any related issues and problems. When the collection process is finalized, start the process of analysis and synthesis. The analysis process includes assessment, analysis and calculation (where applicable) of data collected. For comprehensive financial planning, do this for each of the six Financial Planning Components. Following the analysis process, evaluate the probability of achieving client goals in light of the results from the assessment and analyses of data. This evaluation may identify additional areas of concern. Before making recommendations and developing goal-achievement strategies, synthesize the results of the various Financial Planning Component analyses. Be aware of how each suggested strategy could have a possible implication for the client’s current financial situation and the different planning components. First, analyze the client’s current financial situation. Make a second analysis to assess the impact of strategies on the client’s current financial situation and adjust as necessary. After the second analysis, you should be able to make proper recommendations for goal achievement. The process can be summarized as follows:  Identify the client’s goals, objectives and attitudes  Establish the current financial position  Identify and assess issues, problems and opportunities  Develop strategies to achieve the client’s goals and objectives  Establish the impact of the strategies on the client’s current financial planning position  Make recommendations to enable the client to meet his or her future financial planning position  Revise as necessary CFP Final Level: Integrated Financial Planning Developing Effective Financial Plans: Module 3 Page 29

Activity Analyze potential opportunities and constraints and assess information to develop strategies for your client for each of the financial planning areas: Financial Analysis Client Planning Area Information Personal Determine whether the client is living within financial means Document Financial Determine the issues relevant to the client’s assets and Analysis and Management liabilities Calculations Determine the client’s emergency fund provision Compare potential cash management strategies for the client Assess whether the emergency fund is adequate CFP Final Level: Integrated Financial Planning Developing Effective Financial Plans: Module 3 Page 30

Investment Assess the impact of potential changes in income and Document and Planning expenses Analysis Identify conflicting demands on cash flow Calculations and Insurance Assess financing alternatives and Planning Calculate required real rate of return to reach the client’s Document and objectives Analysis and Tax Planning Determine the characteristics of investment holdings Calculations Retirement Determine the implications of acquiring/disposing of assets Planning Analyze potential investment strategies Document Assess whether investment return expectations are Analysis Estate Planning consistent with the risk capacity and tolerance Calculations Assess whether asset holdings are consistent with risk Document capacity, tolerance and required rate of return Analysis Analyze client’s current holdings Calculations Assess potential investment vehicles for use in client portfolios Document Analysis Determine characteristics of existing insurance coverage Examine current and potential risk management strategies Assess exposure to financial risk Assess the client’s risk exposure against current insurance coverage and risk management strategies Assess the implications of changes to insurance coverage Prioritize the client’s risk management needs Review relevant tax documents Analyze existing and potential tax strategies and structures for suitability Assess financial impact of tax planning alternatives Develop financial projections based on current position, including any gap between income needs and funding Determine if the client’s retirement objectives are realistic Examine potential retirement planning strategies Assess financial requirements at retirement to maintain desired lifestyle Assess the impact of changes in assumptions on financial projections Assess trade-offs necessary to meet retirement objectives Project net worth at death Analyze constraints to meeting the client’s estate planning CFP Final Level: Integrated Financial Planning Developing Effective Financial Plans: Module 3 Page 31

Integrated objectives Calculations and Financial Compare potential estate planning strategies Planning Calculate potential expenses and taxes owed at death Document Assess the specific needs of beneficiaries Analysis Assess the liquidity of the estate at death Calculations financial planning areas Examine inter-relationships among financial planning areas Compare opportunities and constraints and assess collected information across financial planning areas Examine the impact of economic, political and regulatory environments CFP Final Level: Integrated Financial Planning Developing Effective Financial Plans: Module 3 Page 32

Chapter 5: The Financial Plan Purpose and Benefit of a Financial Plan Comprehensive financial plans give clients an opportunity to fully review and understand the financial planning recommendations. A well-developed plan presents agreed-upon action steps along with a rationale and supporting documentation. Financial Plan Framework The elements described in FPSB’s Financial Plan Framework are not meant to be an exhaustive listing of all the items, topics or situations that might arise during a financial planning engagement. Similarly, because recommendations in a specific client’s financial plan are determined by the strategic priorities and objectives established between the planner and client, it is unlikely that the sequence of elements presented in a given client’s financial plan will exactly match the ordering of elements in FPSB’s Financial Plan Framework. Financial Plan Elements Professional and Interpersonal Skills Has been explained in Chapter 1 and in Engaging Clients in the Financial Planning Process. Legal and Professional Compliance Has been explained in Chapter 1 Data Collect both qualitative and quantitative information to provide a thorough understanding of the client’s approach to financial issues and his or her goals, needs and objectives. It is also a good idea to understand the client’s attitude toward money and their financial life. This information may be harder to determine, but it can have a significant impact on the degree to which the client is able to achieve life goals and financial objectives. CFP Final Level: Integrated Financial Planning Developing Effective Financial Plans: Module 3 Page 33

Assumptions Some data used to develop a financial plan cannot be directly ascertained. When this is the case, the planner often assumes certain things. These assumptions should be specified in the financial plan, along with a clear explanation of the reason for each assumption. Examples of assumptions include the following: Life expectancy (this depends somewhat on where the client lives)  A good practice is to assume the client will live at least to age 100, unless there are specific circumstances, such as ill health or family history, that suggest the client’s longevity may be negatively affected.  If a shorter life expectancy is used, it is wise to have the client acknowledge/initial that assumption in the financial planner’s copy of the plan. Retirement income requirements  Clarify whether the requirement is stated in gross amounts or net of tax.  To avoid understating retirement income requirements, work with the client to sort out core retirement issues like housing, medical expenses, daily expenses, recreational expenses, etc., to establish a figure that closely reflects and accurate cost of living. Rates of return  A good practice is to base assumptions on the asset allocation approach that the client will maintain over the long term.  Use a weighted rate of return based on the indices (i.e., benchmarks) that most closely represent each asset class in the portfolio, ideally over five to seven market cycles. Inflation  A good practice is to use long-term inflation history as a guide, normally for the same period of time used for the investment return history. However, if current inflation rates are significantly higher than historical averages, it will make sense to skew inflation assumptions accordingly. CFP Final Level: Integrated Financial Planning Developing Effective Financial Plans: Module 3 Page 34

Income tax rates  It is possible to perform an actual tax calculation every year. However, many financial planners will assume an average tax rate over an extended time period. Evaluating Risk Tolerance To understand the client’s attitudes and risk profile, consider the following factors:  Temperament and personality  Risk tolerance (see discussion below)  Financial knowledge and experience  Socioeconomic situation  Personal/household situation  Income and net worth  Occupation  Education  Lifestyle Appropriate investment advice requires applying the client’s risk profile to his or her investment portfolio. Evaluating a client’s risk tolerance before making recommendations is consistent with “know-your-client” (see Chapter 3) and “know-your-product” principles. The client’s risk profile comprises three aspects: 1) Required risk, 2) Risk capacity and 3) Risk tolerance. You can make these evaluations by listening carefully during interview/discussion sessions with the client, and using risk profile questionnaires. It is good practice to re-evaluate the client’s risk profile every two or three years or so, because risk tolerance may change over time. Apply the client’s risk profile when developing an appropriate investment portfolio. A client’s real ability to accept investment risk can be difficult to determine, so he or she may want to change some of the initial investment suggestions. CFP Final Level: Integrated Financial Planning Developing Effective Financial Plans: Module 3 Page 35

Attitudes, Goals and Objectives Identifying client attitudes, goals and objectives before making meaningful recommendations seems like a straightforward aspect of the financial planning process. However, it is not unusual for the client to have a limited or less-than-perfect understanding of certain aspects of his or her financial situation. Taking time during the Discovery process to thoroughly discuss goals will help the planner to develop a financial plan that meets the client’s needs. Issues for consideration may include the following:  Are the client’s goals specific, measurable, achievable, realistic and time-bound?  What factors motivate the client?  How much capital is needed to meet future goals?  Is the capital likely to remain intact or diminish in value over time?  Does the client have the capacity to save? Will the client’s current savings rates change?  How much capital is needed to provide for dependents in the event of the client’s death or disability?  What is the client’s tolerance for risk? To summarize, the financial planner guides the client to establish goals that are realistic and achievable. Common Goal Areas of Interest Following are examples of financial goal areas of interest with many people. Most clients are unable to address all goals at the same time, because of financial constraints. The planner helps the client prioritize goals and determine what needs to address initially, and which ones need to wait or be adjusted. Note that these are not fully developed goals; they are areas to be discussed with the client as you develop goals. Retirement goals  What is the targeted retirement age?  What is the targeted retirement net after-tax cash flow?  If there is a conflict between the two, which is more important, target age or target cash flow? CFP Final Level: Integrated Financial Planning Developing Effective Financial Plans: Module 3 Page 36

Higher education funding goals  How many years of education does the client intend to fund?  What is the estimated cost per year, considering the type of educational institution, program pursued, etc.? Other shorter-term capital expenditure goals, such as getting married, buying a house, etc. Protection needs in the event of death or disability  How much income will the family require to maintain a target standard of living?  Will the surviving spouse continue or return to work?  What additional expenses will be incurred if the primary caregiver dies or is disabled? Estate planning goals  Does the client have a current will?  How will the estate be distributed?  Are there any specific requirements in the transfer of business interests?  Are there any family dynamics that might require special attention in the estate planning process?  Does the client have property in multiple territories requiring coordination of the different legal systems? The Client’s Situation and Goal Achievement Use a financial needs analysis to establish:  Clients’ existing financial situation (i.e., what they have)  Clients’ desired situation (i.e., long-term financial objectives they WANT to achieve)  Factors that could materially impact the financial plan (e.g., legal concerns, the client’s risk profile, the client’s level of financial sophistication, etc.). In addition, consider the possible impact of economic, political and regulatory issues on the financial plan where applicable. Considerations include:  Existing factors Page 37  Potential issues in the future  The client’s debt level (debt service and total amount of debt) CFP Final Level: Integrated Financial Planning Developing Effective Financial Plans: Module 3

 Whether the client’s risk profile is consistent with achievement of his or her goals  Whether the client’s current asset allocation is consistent with his or her risk profile Analysis Consider opportunities and constraints, including inter-relationships among Financial Planning Components (discussed below), as you analyze the client’s attitudes, goals, objectives, and information to develop and prioritize strategies. Strategies Develop goal-achievement strategies based on all previously analysed data. Keep in mind the client’s attitude toward risk, along with any additional qualitative information you have learned. Synthesis and Recommendations In developing and prioritizing financial planning recommendations, the planner should consider the impact of all Financial Planning Components, which include Personal Financial Management, Investment Planning and Asset Management, Risk Management and Insurance Planning, Tax Planning, Retirement Planning and Estate and Wealth Transfer Planning. This does not mean that all areas must be included in the current plan (e.g., a 20-year-old single person might not have any estate planning concerns). Even though the financial plan may not include solutions for all planning components, the planner should evaluate how a component may impact other components, and whether this will require making adjustments to the plan. Many clients will not be financially able to implement all recommendations immediately, so be prepared to discuss prioritization and perhaps goal-adjustment. Make sure the plan provides realistic and workable guidance for current, as well as future actions. This approach offers the client the greatest likelihood of achieving his or her financial and life goals. The goal of this stage of the planning process is an effective financial plan that provides a roadmap to help the client achieve financial and life goals. Presenting the Plan Good presentations are an outcome of effective communication skills (oral, verbal and nonverbal, written and graphic), thorough preparation, and a genuine concern for the client. Clients are best CFP Final Level: Integrated Financial Planning Developing Effective Financial Plans: Module 3 Page 38

served by unbiased presentations that acknowledge that tax; legislative, economic or personal life- changing events may positively or negatively affect projections. Implementation Once the financial plan is developed, recommendations are made and accepted, the implementation stage begins. The financial planner, other professionals, and the client all participate in implementing action steps. It is important for all parties to be clear about who is responsible to carry out which parts of the plan. The planner and the client should mutually agree on next steps, including:  Identifying activities necessary for implementation  Referring to and coordinating with other professionals  Sharing information as authorized  Selecting and securing products and/or services Remember, the plan belongs to the client and is targeted to help him or her achieve life goals. The plan does not belong to the financial planner, nor is it the planner’s responsibility to implement financial planning recommendations. It is the planner’s responsibility to encourage and assist with implementation. Periodic Reviews Discuss an appropriate review cycle and benchmarks to be used for measuring success against expectations. Developing a Financial Plan One of the challenges in developing comprehensive financial plans is how to account for the integrative nature of recommendations, implementation and monitoring within the plan. The analysis, recommendations and projected outcomes need to be fully integrated into various sections and financial planning components of the plan. In addition, a quality financial plan should be written in plain language and must be clear, concise and precise. CFP Final Level: Integrated Financial Planning Developing Effective Financial Plans: Module 3 Page 39

Sample Outline of a Comprehensive Financial Plan 1. Cover page 2. Letter/statement to client 3. Copy of the original client engagement document, which outlines the scope of the engagement 4. Table of contents 5. Other introductory materials (optional) 1. Mission/vision statement 2. Statement of principles or core values 3. Ethics statement, privacy statement 4. Review of assumptions 5. Investment policy statement 6. Financial planner name and contact details, including professional qualifications and types of licenses that he or she holds 7. Information on the remuneration (including commissions) and benefits the planner may receive in connection with providing the advice 6. Summary of the client profile, goals, financial objectives, financial situation, assumptions and risk profile 7. Executive Summary of the key recommendations and potential outcomes of the plan 8. Assessment of the client’s risk profile 9. Financial Planning Components Personal Financial Management including, for example: Cash flow analysis Net worth analysis Investment Planning and Asset Management, which reflects the analysis of the investment portfolio Risk Management and Insurance Planning, including an insurance analysis:  Life insurance  Health and disability insurance  Long-term care insurance  Property and liability insurance  Umbrella insurance  Other insurance needs Tax Planning and Optimization, which includes the analysis of tax-related matters (tax planning can also form part of the other Financial Planning Components CFP Final Level: Integrated Financial Planning Developing Effective Financial Plans: Module 3 Page 40

Retirement planning (retirement analysis) Estate and Wealth Transfer Planning  Specialized analyses  Educational funding  Planning for special needs  Refinancing scenarios  Saving for special objectives 10. Recommendations with alternatives, where possible 11. Risks associated with each recommendation, including alternatives 12. Summary of the transaction costs and penalties (if applicable) to be incurred in implementing each recommendation, including alternatives 13. Situations where there may be a conflict of interest 14. A warning that the advice is based on incomplete or inaccurate information (if applicable) 15. Implementation and monitoring section 16. Client Acceptance or Client Engagement document 17. Complaint handling procedure 18. Appendices Assumptions Calculations and projections Educational materials When developing a financial plan, the following suggestions may be helpful: 1. Describe the current situation for each of the Financial Planning Components as if no other recommendations have been made or implemented. 2. Present all recommendations within a Financial Planning Component (e.g., Asset Management) on the basis of the current situation analysis. 3. Describe alternatives and potential outcomes when a recommendation in one Financial Planning Component is based on the implementation of a recommendation in another Financial Planning Component. 4. Conclude the financial plan by illustrating a client’s projected situation assuming all recommendations are implemented. CFP Final Level: Integrated Financial Planning Developing Effective Financial Plans: Module 3 Page 41

The last suggestion implies that a re-analysis and re-calculation of certain client data will occur. At a minimum, the following information should be re-calculated to project the client’s financial situation in one year (or some other timeframe), assuming that recommendations are implemented: Available discretionary cash flow Net worth balance Income tax situation Estate tax situation (when applicable) Re-calculating these measures to reflect the projected outcomes is another way to motivate clients. For instance, if you can show clients the positive effects of refinancing debt, re-allocating portfolio assets or purchasing additional insurance, it may encourage them to take action. You can use different timeframes aligned to individual goals or planning needs to project the short-, intermediate- or long- term impact of recommendations. In short, demonstrate the impact of the plan on the client’s future goals or financial situation. Executive Summary Include an executive summary in the financial plan. Typically, the summary is drafted after the analysis, strategies and recommendations are finalized. The executive summary highlights the most important aspects of the financial plan and typically includes:  Client goals, needs and objectives  Relevant financial data and key findings  Recommendations, including a clear action plan for the client and how the recommendations address the client’s goals, needs and objectives The executive summary should be able to stand alone as an independent document—a “snapshot” of the financial plan as a whole CFP Final Level: Integrated Financial Planning Developing Effective Financial Plans: Module 3 Page 42

Chapter 6: Synthesis Learning Outcomes Upon completion of this chapter, students will be able to: Prioritize recommendations from the Financial Planning Components to optimize the client’s situation. Categorize the recommendations and action steps into a financial plan. Evaluate the impact of economic, political, and regulatory issues with regard to the financial plan. Evaluate the appropriate cycle of review for the financial plan. Effectively present the financial plan, including information based on classwork, research or simulated client interaction Synthesis, Recommendations and Implementation Up to this point, the focus and analysis was on each of the financial planning components separately. Different strategies and alternatives were developed from the analysis of each financial planning component. These strategies are now integrated and presented as recommendations after being optimized and prioritized relative to the client’s goals and objectives. Financial planners must have the ability and knowledge to consolidate and synthesize recommendations and action steps. It is a good idea to demonstrate how to implement recommendations and to provide an action list that summarizes what needs to be done, by whom, and when. Apply an understanding of the impact of the economic environment is one of the ways in which a financial planner can add value to the client engagement. For a more comprehensive review of the economy and its impact on clients see the Investment Planning course.When synthesizing client information and formulating recommendations, the financial planner should include an analysis of relevant economic factors such as the current status of the business cycle, central bank monetary policy and fiscal policy. Each of these can have a significant impact on allowing a client to achieve financial goals. Without going into great detail, these considerations are the primary domain of top- down analysis. While the current economic environment should not dictate financial planning recommendations, it likely will be an important factor and should carefully be considered. CFP Final Level: Integrated Financial Planning Developing Effective Financial Plans: Module 3 Page 43

At the implementation stage, recommendations will be put into action. The following checklist can be used to guide implementation of all accepted recommendations. In implementing the recommendations, the following is important:  What should be implemented (insurance, investment, retirement, and/or other ancillary financial planning products, instruments and tools)  Why the recommendation should be implemented  Who should implement the recommendations (client, financial planner or other professionals)  Where will it be done (office, website and/or mailing address?)  When should it take place (short, medium, long-term?)  How should it take place?  Financial implications and impact (how much will it cost to implement or how much should be purchased, saved, or invested) Monitoring and Review As the financial planner, you should recommend an appropriate review cycle, determine benchmarks for measuring success against the client’s expectations, and identify each party’s responsibilities to review the financial plan. Issues to be addressed include:  The level of review service to be provided  The frequency of financial plan reviews  Other features and benefits associated with the review process  The cost of financial plan reviews  Anticipated changes in the client’s situation (e.g., birth, death, marriage, etc.) By analyzing each Financial Planning Component and using a process of synthesis between these components we can establish how a client’s financial life fits together and discover issues, concerns, and opportunities. The financial plan’s target is to help the client meet short, intermediate and long- term financial goals and objectives. Periodic monitoring and financial plan review will reveal whether the clients are on target to meet their goals and objectives. Periodic reviews track the following:  Economic, personal and/or goal changes influencing the financial plan Page 44  The progress of implementation of the recommendations t CFP Final Level: Integrated Financial Planning Developing Effective Financial Plans: Module 3

 The continued viability of the products and services recommended in the financial plan  Overall progress toward goal and objective achievement. Summary Financial planning professionals, among other activities, develop effective financial plans. The purpose of these plans is to provide a roadmap for planners and their clients to follow as they move forward implementing strategies to achieve the clients’ life goals. In times past, financial plans were often large documents, filled with various formulae, analyses, and quite a lot of supporting documentation. At times, this type of financial plan remains viable and valuable. Regardless of whether this type of documentation is included in the financial plan provided to the client, the financial planner should have all relevant information in his or her files so it can support the recommendations and be delivered to clients any time it is requested. Many financial planning professionals no longer produce such a voluminous financial planning document for clients. In its place, they provide an action plan – a simplified roadmap identifying each of the steps, along with related timelines, to be accomplished in pursuit of achieving the client’s goals. The benefit of such a focused document is that it is more likely to be followed by the client. At the end, without implementation, developing a financial plan has been, at best, an academic exercise with little applicable value. Let it be said that none of this means financial planners should not have the competence to develop a financial plan, with all related and applicable calculations, rationales, and documentation. The requisite skill to develop such a document is a fundamental requirement of being a financial planning professional. When developing financial planning recommendations and putting them into a plan, financial planners must consider and integrate as appropriate, all financial planning components. There is no one component that can stand on its own without understanding how it impacts the rest of a client’s financial well-being. Financial plans, therefore, must include consideration and evaluation of each financial planning component, even when a client’s goals directly involve only one or two components. Providing this type of analysis along with resulting recommendations is part of what sets financial planning apart from other financial disciplines. However, the key to success in this area is not the production of a financial plan. Success comes as a result of engaging a client and developing an effective financial plan . . . in whatever format is most useful for implementation. It’s only when a plan of action is implemented that a client’s financial life will be positively affected. This is how a financial planning professional can help clients achieve life goals, thereby creating a lasting, positive, life-changing impact CFP Final Level: Integrated Financial Planning Developing Effective Financial Plans: Module 3 Page 45

Activity 3 Synthesize information to develop and evaluate strategies to create a financial plan for your client for each of the financial planning areas: Financial Synthesis Client Planning Information Area Develop financial management strategies Create Personal Evaluate advantages and disadvantages of each financial recommendations Financial management strategy Management Optimize strategies to make financial management Create recommendations recommendations Investment Prioritize action steps to assist the client in implementing Planning financial management recommendations Create Develop asset management strategies recommendations Insurance Evaluate advantages and disadvantages of each asset Planning management strategy Create Optimize strategies to make asset management recommendations Tax Planning recommendations Select appropriate investment vehicles to implement the recommended strategy Prioritize action steps to assist the client in implementing asset management recommendations Prepare and Investment Policy Statement Prepare periodic reporting material Develop risk management strategies Evaluate advantages and disadvantages of each risk management strategy Optimize strategies to make risk management recommendations Prioritize action steps to assist the client in implementing risk management recommendations Develop tax planning strategies Evaluate advantages and disadvantages of each tax planning strategy Optimize strategies to make tax planning recommendations Prioritize action steps to assist the client in implementing CFP Final Level: Integrated Financial Planning Developing Effective Financial Plans: Module 3 Page 46