Final Level (Mod. 1) - Book

CFP FINAL LEVEL FINANCIAL PLANNING PROCESS, PRINCIPLES AND PRACTICE (MODULE - 1) 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 Financial Planning Process, Principles and Practice Module 1 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 Introduction 1 Chapter-1: The Financial Planning Process and Practice Standards (4 - 42) The Work of the Financial Planner 6 Financial Planning Practice Standards 8 Assets and Liabilities 15 Financial Objectives 17 Develop the financial planning recommendations 19 Information Gathered Based on Goals 25 Liability and Risk Management 32 Determining the Client’s Financial Status 34 Chapter - 2: Professional Skills (43 - 52) Professional Responsibility 44 Information Required to Make Recommendations 49 Management of Personal Risks and Insurance 51 Chapter – 3: Client Characteristics (53 - 70) Individual Personality and Behaviour 54 Life Events 56 Working with seniors 58 Working with Special Needs Situations 61 Journey toward Partnership 65

Chapter – 4: Client Engagement and Communication (71 - 84) Communication Skills 71 Discovery Process 76 Guidance and the listening process 79 Chapter 5: Critical Thinking (85 - 92) Stranded on a Mountain Exercise 86 Financial Planner Biases 88 Chapter 6: Regulatory Environment of Financial Planning - India (93 - 112) Financial Products under Respective Regulations 95 SEBI (Investment Advisers) Regulations, 2013 96 Investment Advisers Regulations 97 Requirement to Register and Exemptions from Registration 98 Investment Advisers 101 Regulation 22 103 Annual Audit and addressing audit observations 107 Broad Powers of SEBI to adjudicate and impose penalty 108

Introduction We create plan for various activities in our life. For example, to visit nearby place for weekend, we plan about stay, mode of travel and many other small related activities but when it comes to our finances, many of us are not able to take right decisions about our money. Sometimes because of lack of financial knowledge and sometimes out of fear, we take wrong choices about our investments. There is immense need to plan our finances so that right amount of money is available at right time to meet our various financial goals. Financial planning is the processes of helping clients understand their financial goals, developing strategies in managing their financial affairs to meet life goals. The financial planning process involves going through relevant aspects of a client’s financial situation across a number of financial planning activities. CFP Final Level: Financial Planning Process, Principles and Practice: Module 1 Page 1

Financial planning professionals are proficient in the competencies required to practice personal financial planning. Regardless of whether the financial planning professional offers comprehensive financial planning or the client has chosen to limit the scope or level of services (e.g., in one or two components such as Retirement Planning or Estate Planning), the financial planning professional needs to have command of the complete set of abilities required to create a comprehensive financial plan for the client. Whom should people approach and whom should they trust when seeking help to create a financial plan to achieve their goals? Financial Planning Standards Board’s 2015 global consumer research shows that many individuals turn to CERTIFIED FINANCIAL PLANNER professionals as trusted financial professionals to set them on the path to financial wellbeing. Investors want the services of financial planners who are knowledgeable, experienced, and trustworthy. Individuals want to work with a financial planner who will put the client’s best interests first — above the financial planner’s own goals and objectives. There is a difference in the services offered by distributors and financial planners. The focus of the distributor is on products and of the financial planner is on comprehensive plan based on analysis of client’s situation and their financial goals in future. Helping clients achieve life goals is not part of a distributor’s normal activities. On the other hand, financial planners may sell financial products, but his or her focus is helping clients achieve their life goals. Without acquiring the required competencies in CFP course, a financial planner will not be able to competently serve his or her clients. More specifically, proficiency in synthesis-level competencies allows the financial planner to pull together all the pieces of information shared by the client to develop, along with the client, a financial plan of action. Command of the financial planning competencies identified in this course, as well as the professional skills necessary to practice represent a good start but they are not everything. The financial planner must commit, above all else, to serve the client and put the client’s needs first. This principle is the foundation. With a client-first focus, long-term and effective client relationships can be built and clients can feel secure in the knowledge that their financial planner is looking out for their best interests. Combined with proficiency in the financial planner competencies and professional skills, the principle and practice of putting the client first is the hallmark of financial planning professionalism. CFP Final Level: Financial Planning Process, Principles and Practice: Module 1 Page 2

The material in this course covers the fundamental financial planning process and practices. Upon completion of this course, students should have a good understanding of the financial planning process and how a financial planner would apply it within the context of a client engagement. Students should have an appreciation for the value of professional standards of practice. Students should recognize and be able to apply skills to facilitate better communication. Finally, students should have a basic understanding of client characteristics, that is, the behavioral aspects of financial planning, and how they can significantly impact clients’ financial health. Chapter-1: The Financial Planning Process and Practice Standards CFP Final Level: Financial Planning Process, Principles and Practice: Module 1 Page 3

Learning Outcomes  Upon completion of this section, students should be able to:  Apply the financial planning process to meet client objectives  Apply the Financial Planning Practice Standards  Develop a suitable financial planning goal  Identify characteristics of sound professional judgement  Apply rules of conduct for a CFP professional Introduction Shanaya and Prateek are recently blessed with a baby girl and they have starting thinking about saving and investing some money every month to accumulate money for her education, a dream all Indian parents have as soon as the child is born. But they have no idea whom to approach to take guidance about same. Shanaya may have to take break from her job to take care of the little one. Raghav has recently met with an accident and is bed ridden for 6-8 months. His income has stopped coming and he had not taken accident insurance policy. He has to be dependent on his existing investments for few months till he is able to go back to his job. Sunita has been offered compulsory retirement from employer. Although she is able to accumulate lots of money but still worried if that amount will be sufficient till the couple lives. Each of the situations above illustrates the importance of financial planning they also give some insight into the variety of situations that can be handled by the financial planning process. The intent of personal financial planning is to focus on an individual’s financial objectives and use various methods to achieve them. Objectives can be met by implementing strategies across financial planning practice areas, including cash flow and debt management, savings plans, insurance coverage and other risk management techniques, investment vehicles, tax strategies, employment benefits, retirement plans, and estate planning techniques. CFP Final Level: Financial Planning Process, Principles and Practice: Module 1 Page 4

The Financial Planning Practices represent the competencies that relate to the financial planning professional’s ability to: 1. Understand and master the inter-relationships among the various Financial Planning Components; 2. Integrate among the various Financial Planning Components to derive a financial plan; and 3. Apply the six-step financial planning process in performing the core Financial Planning Functions. The financial planning professional will use one or more of the Financial Planning Practices when providing financial planning to a client. In doing so, the financial planner will coordinate what he or she does within the context of the financial planning process. Typically, that process will integrate and coordinate appropriate Financial Planning Components to help clients meet life goals by developing strategies to assist them in managing their financial affairs. Financial Planning is the process of meeting financial goals in our life through the proper management of finances. Financial goals can include buying a house, saving for your child’s higher education or planning for retirement. A financial plan is a road map to help you achieve your life’s financial goals. Here are three basic questions that you will answer during financial planning:  Where are you today?  What is your current financial situation?  Where do you want to get to?  What is your vision of your future financial situation?  Will you be able to get there?  How do you plan to achieve your vision? The financial planning process involves gathering relevant financial information, setting life goals, examining your current financial status and coming up with a strategy or plan for how you can meet your goals given your current situation and future plans. It is a critical exercise in ensuring long-term financial security. During the financial planning process you analyze what your financial needs and goals are. Then, you quantify in money terms what resources you need to meet those goals, and quantify the time period during which you want to achieve these goals. Finally, you write an action plan on what you need to fulfil your plan in terms of what products to buy and what types of savings to make. CFP Final Level: Financial Planning Process, Principles and Practice: Module 1 Page 5

Sometimes you may feel you can do financial planning on your own, you might want to answer the following questions:  Is your family going to be financially secure, whatever happens to you?  Is your finances tax efficient?  Do you know how to legally save taxes?  Are you confident that investments give you the best return in a rising or a falling stock market?  Do you have enough money to pay for your son or daughter’s education? What about provision for their wedding?  Do you wish to retire in the mountains or next to the beach? Is this just a wish, or have you enough money to turn this wish into reality?  If you don’t have a Will, do you know what will happen to your hard earned assets upon your death Financial Planning is a broader term than mere investment advice / recommendations and subsequent placement of funds. It is comprehensive planning which covers all aspects of a client’s financial well- being from wealth creation to wealth protection; selecting the products which suit specific needs; monitoring and reviewing his/ their financial situation on a regular basis and revising the plan if need arises. Financial Planning is nothing but simply arranging the finances in the light of keeping in mind the financial goals, i.e. taking a goal – oriented approach and mapping out appropriate strategies to realize them goals as defined by the client. The Work of the Financial Planner Financial planning, as a distinct professional service, has been growing and developing internationally since the early 1980s and while the work of the early financial planner largely centred on investment products distribution, the work of financial planners is now increasingly based on a comprehensive approach to advice-giving. Accompanying this change to comprehensive advice-giving is an increasing emphasis on the provision of on-going service to the client. At this point, let us briefly give you a ‘thumb nail’ sketch of just what a financial planner does, before we explore the work of the planner in more detail throughout this topic. In essence, financial planners help people achieve their financial goals, whether it is buying a home, saving for their children’s education, protecting their family through insurance, investing their hard earned money, managing debt, or planning for retirement. The planner helps clients to: a) Make informed decisions about their money and how it can be used to best advantage; CFP Final Level: Financial Planning Process, Principles and Practice: Module 1 Page 6

b) Develop a sound financial plan covering all aspects of their financial well- being (from wealth creation to wealth protection); c) Choose products that meet their specific needs; and d) Review their financial situation on a regular basis and revise their financial plans as necessary. As you would gather from the list above, this involves on the part of the planner not only technical skills, but also communication and inter-personal skills. Drawing on an analogy, a financial planner is akin to the medical general practitioner (GP), but cares for the financial health of the client. And just as the good GP spends a lot of time listening and getting to know and understand the patient’s health condition, so the planner spends time getting to know the client’s financial position and exploring their financial goals and what they wish to achieve in life. So, financial planning is very much a people - oriented profession. It’s about establishing long term, trusting relationships with clients, which confers on planners a number of professional responsibilities and obligations that we explore in this topic and in the appendix to the unit. In this first section of the topic we look at a number of issues that surround the work of financial plannersand their relationship with other professionals. FPSB categorizes the financial planning knowledge framework into: 1. Personal Financial Management 2. Investment Planning 3. Regulatory Environment, Law and Compliance 4. Risk Management 5. Estate Planning 6. Retirement Planning 7. Tax Planning 8. Financial Planning Principles, Processes and Skills 9. Integrated Financial Planning The Process Process is one of the fundamental tenets of financial planning as financial planning is a process, not an event. A medical doctor follows a process flowing from intake, through examination and evaluation, to diagnosis and treatment recommendation. In the same way, a financial planner follows a process that allows him or her to be effective and efficient in serving clients. The financial planning process has six steps: 1. Establish and define the relationship with the client 2. Collect the client’s information CFP Final Level: Financial Planning Process, Principles and Practice: Module 1 Page 7

3. Analyze and assess the client’s financial status 4. Develop the financial planning recommendations and present them to the client 5. Implement the client’s financial planning recommendations 6. Review and monitor the client’s situation The Process Financial Planning Practice Standards FPSB’s Financial Planning Practice Standards establish the level of professional practice reasonably expected of financial planning professionals during financial planning engagements, regardless of practice type, setting, location or method of compensation. FPSB expects that clients of financial planning professionals will benefit from a globally accepted set of Practice Standards for financial planning professionals. In this section, we will view each step in the financial planning process in the context of what a financial planning professional should address as he or she works through the steps. We will present each of the six steps along with the standards of practice that apply to the step (FPSB, 2015) 1. Establish and Define the Relationship with the Client Inform the client about financial planning and the financial planning professional’s competencies. CFP Final Level: Financial Planning Process, Principles and Practice: Module 1 Page 8

The financial planning professional informs the client about the financial planning process, the services the financial planning professional offers, and the financial planning professional’s competencies and experience. Explanation Prior to entering into a financial planning engagement with the client, the financial planning professional helps the client understand the financial planning process and the nature of financial planning engagements, and provides information on the financial planning professional’s qualifications. This information may include:  How financial planning can help the client meet objectives;  A description of the financial planning professional’s methodology when providing financial planning;  Information about the financial planning professional’s licenses, experience and expertise. The financial planning professional provides to the client, as required, information about the services the financial planning professional provides as well as what charges may be incurred by the client. Determine whether the financial planning professional can meet the client’s needs The financial planning professional and the client determine whether the services offered by the financial planning professional and his or her competencies meet the needs of the client. The financial planning professional considers his or her skills, knowledge and experience in providing the services requested or likely to be required by the client. The financial planning professional determines if he or she has, and discloses, any conflict(s) of interest. (Note: we all have conflicts of interest.) Explanation The financial planning professional considers if he or she, or his or her staff, has the appropriate abilities, skills and knowledge to meet the client’s expectations. The financial planning professional considers if there are any personal conflicts that would affect his or her ability to work successfully with the client. The financial planning professional determines if there are any other circumstances, relationships or facts that would place the interest(s) of the financial planning professional in conflict with the client’s interest(s), or the interest(s) of one client in CFP Final Level: Financial Planning Process, Principles and Practice: Module 1 Page 9

conflict with another client. The financial planning professional discusses the confidentiality of the client’s information. Define the scope of the engagement The financial planning professional and the client agree on the services to be provided. The financial planning professional describes, in writing, the scope of the engagement before any financial planning is provided, including details about: the responsibilities of each party (including third parties); the terms of the engagement; and compensation and conflict(s) of interest of the financial planning professional. The scope of the engagement is set out in writing in a formal document signed by both parties or formally accepted by the client and includes a process for terminating the engagement. Explanation Mutually defining the scope of the engagement establishes realistic expectations for both the client and the financial planning professional. It can be comprehensive or limited advice.The financial planning professional and the client may agree that the scope of the engagement covers one, several or all of the Financial Planning Components (i.e., Financial Management, Asset Management, Risk Management, Tax Planning, Retirement Planning and Estate Planning). A written document ensures mutual understanding and agreement between the financial planning professional and the client about the terms of the financial planning engagement. In setting out the terms in an engagement letter or disclosure document, the financial planning professional includes the following:  Specific services to be included or excluded, such as implementation and review;  The financial planning professional’s compensation arrangements with respect to the engagement, including fees to be paid by the client;  Existing conflicts of interest, including those involving compensation arrangements with third parties, and agreement to disclose subsequent conflicts of interest if or when they occur;  Specific parties to the engagement, including details of any legal and agency relationships which may exist;  Assurance of protection of client confidentiality;  Duration of the engagement;  The client’s responsibilities, including the full and timely disclosure of information;  The financial planning professional’s responsibilities;  Provisions for terminating the client engagement; and CFP Final Level: Financial Planning Process, Principles and Practice: Module 1 Page 10

 Procedures for resolving the client’s claims and complaints against the financial planning professional. Additional information that may form part of the formal written document includes:  The potential need to use other professionals during the engagement;  An explanation of qualifications, licenses and experience of individuals who will work with the client;  Specific limitations on the use of client information; and  Any other information necessary to adequately inform the client. Circumstances may change the financial planning professional’s ability to provide services to the client, or the client may decide to terminate services or transfer to another professional. The financial planning professional disengages the client or facilitates the client’s transfer to another advisor in a professional manner. 2. Collect the Client’s Information Identify the client’s personal and financial objectives, needs and priorities. After a relationship of trust has been built, the next step of financial planning is to identify the investment objectives of an individual. The financial goals can be segregated into:  Short term goals  Medium term goals  Long term goals Each of the goals has a time frame and an amount attached to it. Some goals have priority over the others. Goals and objectives should be quantified in terms of money, for example, I wish to spend Rs.10 lakhs on the marriage of my daughter which will take place any time after 12 years or, I wish to save Rs.8 lakh for my son’s education Rs.8, 00,000 which he will be requiring after 8 years, etc. and so on. These goals should be realistic. Goals and objectives give focus, vision and direction for the financial planning process. CFP Final Level: Financial Planning Process, Principles and Practice: Module 1 Page 11

Another important factor in the financial planning process is to determine the risk tolerance of the client. The risk absorbing capacity of a person depends on his income levels, age, liabilities, attitude towards risk and also on the time horizon. The data that is gathered from the client about his existing financial position should be accurate and complete, as without accurate and complete information about a person’s existing financial position, without this it will become difficult for a financial planner to make a comprehensive financial plan and provide recommendations which will enable the client to achieve his goals at the appropriate time. Knowing Your Client As was mentioned under ‘Gathering the data’, as a financial planner you should follow international best practices of gaining a thorough understanding of the client’s situation before proceeding to provide recommendations about securities. Prior to making recommendations to a client and depending upon the type of client engagement and its scope, you should determine what quantitative information and documents are sufficient and relevant. You should obtain sufficient and relevant quantitative information and documents pertaining to the client’s financial resources, obligations, and personal situation. This information may be obtained directly from the client or other sources through interview, questionnaire, client records and documents. A financial planner should also communicate to the client a reliance on the completeness and accuracy of the information provided and that incomplete or inaccurate information will impact conclusions and recommendations. If you are unable to obtain sufficient and relevant quantitative information and documents to form a basis for recommendations, you can either: (a) Restrict the scope of the engagement to those matters for which sufficient and relevant information is available; (b) Terminate the engagement (c) You should always communicate to the client any limitations on the scope of the engagement, as well as the fact that this limitation could affect the conclusions and recommendations. Types of Information Required CFP Final Level: Financial Planning Process, Principles and Practice: Module 1 Page 12

In this section, we explore the types of information that you should collect. Broadly speaking, information can be classified as either  Quantitative information  Qualitative information: Quantitative information might be described as statements of fact. A client’s name, date of birth and salary are examples of quantitative information. Qualitative information is more difficult to obtain and indeed define. In some respects, it might be defined as ‘relevant information that is not factual in nature’. Examples of qualitative information include attitude to risk, and future employment prospects. Qualitative information relates more to the personal and social attitudes of the client. These aspects are very important in assisting with the development of a plan containing recommendations in keeping with what a client will find acceptable. Sometimes it can be difficult to elicit certain information from a client, and later in this topic we will explore some strategies and techniques which might be used. It is usually relatively easy to obtain quantitative information from a client but eliciting useful qualitative information can be more difficult. In some cases you may need to obtain qualitative data inferentially. This means that through a client’s statements or comments, you may be able to infer information that will be used in framing your advice. You should not underestimate the need for, or importance of qualitative data. One of the roles of being a professional is to provide advice specifically to the client’s needs and wishes. Sometimes, what may be apparent initially may not be the final position. By obtaining good qualitative data, your perception of what is required may change. The following example may help to illustrate this point. Quantitative data: Client is a scientist. Client does not want shares in her portfolio. Qualitative data: She has never invested in shares, but bases her concern on the fact that her brotherlost several thousand rupees in ‘junk’ stocks in the mid 1990s. Inferential qualitative data: Client probably has limited knowledge of shares but is reasonably intelligent, and if properly discussed with her, may see the benefits of including quality shares in her portfolio. Data Collection Forms By now you should appreciate the need to keep accurate records of client data and some of the issues that will need to be considered in obtaining that data. By far the easiest way to ensure that you have the required quantitative and qualitative information is to use a data collection form. This form takes a variety of names CFP Final Level: Financial Planning Process, Principles and Practice: Module 1 Page 13

Client data sheet, client questionnaire, and fact finder. This example is not definitive and you should be prepared to enhance the form as you see necessary, and as required by your client. Sufficient space should be provided for notes; this allows you to record comments and objectives that will assist you in preparing the advice. The data collection form should contain at least the following sections: Personal Details Names, birth dates: Include full names, dates and places of birth for all family members and dependants. Health status of all members: Consider not only current status, but also possible future status through family health history (e.g. are the parents still alive and well?). Also consider whether ‘smoker’ or ‘non-smoker,’ as this influences future health status and is a relevant factor in determining personal insurance premiums. Family structures and history: Family situations can be complex, with separation, divorce and re -marriage complicating issues for the financial planner. Categories can include: single, married, de facto, divorced, separated, widowed, dependants young and old. Getting details of dependants, whether young or old, iscrucial to the process. Employment information: Employment history can give insights into the client’s values, lifestyle and aspirations and can clarify their potential for future earnings, or likely business outcomes. Work status for a client and partner could include: fully employed, part time, self- employed, home duties, unemployed, early retired, retired, student. Social security situation: Present or future eligibility for pension benefits. Categories to consider include ex-service, government or private sector employment. Each of the above categories, while quantitative in nature, can provide a gateway to qualitative discussion with the client. Assets and Liabilities The planner should gather a comprehensive picture of all existing assets using a checklist to assist the client to recall any of the following examples (generally classified as non-income producing lifestyle fixed assets): principal residence, holiday home, farm, land, business interests, collectibles and commodities, motor vehicles, and recreational equipment. It is also CFP Final Level: Financial Planning Process, Principles and Practice: Module 1 Page 14

important to identify which items have estimates of value only, compared to ones which have a recent accurate valuation. At the same time each item needs to have noted any outstanding liability attached to it. Detailed information on income producing (investment) assets needs to include: Investment name/type Owner (client: partner or joint) Original date invested Original quantity Original amount invested maturity date (if applicable) Present number current value Return rate (per annum) estimated growth rate (per annum) Cash Flow Detailed information on income sources and expenditure is a critical part of establishing the reality of a client’s needs. Unfortunately, estimates of the domestic budget are often given only cursory attention and, more often than not, rough estimates are provided by the client; hence the need for a more rigorous approach to this area. To assist clients calculate their domestic budget, financial planners mostly use an expense calculator. Often at this point of the interview the client needs to go away and undertake moredetailed research in order to arrive at more accurate details. Estimates of these types of expense can be notoriously inaccurate (with 50% error not uncommon) with serious consequences for the outcome of the final recommendation. Unidentified expenses can have a dramatic effect on the outcome of an otherwise well-balanced plan. Following can be covered in a detailed expense calculator:  Home rent/loan repayments (EMI)  Water rates, utilities (electricity)  Monthly Living expenses  Telephone/s, Internet fees  Home and contents insurance  House repairs and maintenance  Transport petrol/fuel  Services/repairs  Registration and third party insurance  Comprehensive insurance  Public transport/taxi fares  Loan/lease repayments  Parking/tolls/other CFP Final Level: Financial Planning Process, Principles and Practice: Module 1 Page 15

 Health benefits insurance  Doctors expenditure/specialists/dentist/optical  Pharmacy This exercise is often complicated by the lack of detailed records, different perceptions, variable memory and the fact that expenditures can occur weekly, monthly, six-monthly or annually Insurance The financial planner has a responsibility to identify the insurance policies currently in place. These should include life insurance, asset protection, income protection, disability cover, and trauma/critical illness cover. In addition, the financial planner should identify the level of insurance protection over fixed asset Estate Planning The financial planner should confirm that the client has a current, valid will and that its location is known. Similarly, is the client aware of the benefits of having relevant powers of attorney in place for all those in the family with assets? Qualitative Information and Attitude to Risk This should begin with a grasp of the client’s general knowledge of financial matters. When the financial planner begins the process of strategy selection within the plan, it becomes critical that there is a good understanding of the client’s attitude to risk.This requires some judgements to be made from their answer to the question: ’What type of investor are you?’ The planner needs to establish degrees of concern in regard to the following:  Inflation: How concerned is the client about having their portfolio keep pace with inflation?  Tax advantage: To what extent is the client concerned about getting tax relief which is legal, logical and suitable?  Security/volatility: To what extent is the client concerned about capital stability of their investments?  Liquidity/flexibility: How concerned is the client that cash be available to meet emergencies or investment opportunities? CFP Final Level: Financial Planning Process, Principles and Practice: Module 1 Page 16

 Income and growth: What levels of importance does the client place on generating maximum income as opposed to achieving capital growth? over the short term or the long term?  Ease of management: To what extent is the client concerned that their investment portfolio can be easily managed?  Estate: To what extent is the client concerned about maximising the value of the estate?  Other qualitative information you might seek include:  Investment experience: Has the client invested in shares and/or non-residential property investments?  Income needs: Does the client wish to live off only the income from investments, or income and capital? To what extent is capital to be preserved?  Pension plans: What is presently in place is it sufficient and what else might be included? What is the client’s vision for retirement?  Investment time horizon: What time frame is the client looking to invest over? Is there a specific purpose for which funds will be needed in the short, medium, or long term? One method of determining a client’s attitude to risk is through risk profiling. Essentially, this technique involves asking the client a prescribed series of questions, whose answers are designed to produce a ‘value’, or point on a scale, that indicates the client’s risk acceptance. As part of eliciting qualitative data on the client’s attitude to risk, it is sound practice to discuss the nature of various investment risks with the client so that the data you gather is based on a full client understanding of those risks. In fact, such a practice is consistent with the planners’ overall obligation to disclose fully the nature of investment risks Financial Objectives This is the reason the client has sought advice. It should cover short, medium and long term goals and, in most cases, follows a detailed data collection process. Estimates of future requirements (e.g. rupee amounts for desired retirement expenditure) should be closely scrutinised for best information and care should be taken to include future ‘special’ requirements such as a wedding, children’s higher education, new car or extensive holiday. 3. Analyze and Assess the Client’s Financial Status Analyze the client’s information The financial planning professional analyses the client’s information, subject to the scope of the engagement, to gain an understanding of the client’s financial situation. CFP Final Level: Financial Planning Process, Principles and Practice: Module 1 Page 17

The financial planning professional analyses the client’s current situation and information, and works with the client to resolve obvious omissions and/or inconsistencies in the information collected. As part of this analysis, the financial planning professional uses client-specified, mutually agreed upon objectives and other reasonable assumptions, which may include the client’s retirement age, life expectancy, income needs, risk factors, time horizon and special needs, as well as economic assumptions such as inflation rates, tax rates and investment returns. Assess the client’s objectives, needs and priorities The financial planning professional assesses the strengths and weaknesses of the client’s current financial situation and compares them to the client’s objectives, needs and priorities. The financial planning professional considers the opportunities and constraints presented by the client’s financial situation and current course(s) of action, and determines the likelihood of the client reaching his or her objectives by continuing present activities or making anticipated changes. The financial planning professional may identify other issues that may impact the client’s ability to achieve objectives, which he or she discusses with the client. It may be appropriate for the financial planning professional to amend the scope of the engagement and/or to obtain additional information. This step has three basic sub-steps: 1. Analyze the current situation 2. Review prospective planning strategies 3. Begin to develop client-based recommendations It also serves as a bridge to accomplish the next step. 4. Develop the Financial Planning Recommendations and Present Them to the Client Identify and evaluate financial planning strategies The financial planning professional considers one or more strategies relevant to the client’s current situation that could reasonably meet the client’s objectives, needs and priorities. CFP Final Level: Financial Planning Process, Principles and Practice: Module 1 Page 18

The financial planning professional identifies alternative strategies for achieving the client’s confirmed objectives. The financial planning professional evaluates the ability of each strategy to reasonably address the client’s objectives, needs and priorities. This evaluation may involve discussing with the client the importance, priority and timing of the client’s objectives and needs; considering multiple assumptions; and/or conducting research or consulting with other professionals. This process may result in a single strategy, multiple strategies or no change to the client’s current course(s) of action. In considering alternative strategies, the financial planning professional takes into account his or her legal and/or regulatory limitations or requirements and his or her competence to address each of the client’s objectives, needs and priorities. More than one strategy may meet the client’s objectives, needs and priorities. Strategies and consequences identified by the financial planning professional may differ from those of other practitioners or advisors, illustrating the subjective nature of exercising professional judgment. Develop the financial planning recommendations The financial planning professional develops the financial planning recommendations based on the selected strategies to reasonably meet the client’s confirmed objectives, needs and priorities. Explanation After identifying and evaluating various strategies and the client’s current course(s) of action, the financial planning professional develops financial planning recommendations that can reasonably meet the client’s objectives, needs and priorities. The recommendations may be an independent action or a combination of actions which may need to be implemented collectively. The recommendation may be to continue the current course of action. If the financial planning professional recommends a change, it may be general or specific in nature. It may be necessary for the financial planning professional to recommend that the client modify an objective, need or priority. The recommendations developed by the financial planning professional may differ from those of other practitioners or advisors, yet each may reasonably meet the client’s objectives, needs and priorities. It is important that this part of the financial planning process be sufficiently documented. Present the financial planning recommendations to the client CFP Final Level: Financial Planning Process, Principles and Practice: Module 1 Page 19

The financial planning professional presents the financial planning recommendations and the supporting rationale in a way that allows the client to make an informed decision. When presenting the financial planning recommendations, the financial planning professional helps the client understand the client’s current situation, the factors and assumptions that were critical to the recommendations, the risks of the recommended strategies and the likely impact of the recommendations on the client’s ability to meet his/her objectives. The financial planning professional avoids presenting his or her opinion as fact. The financial planning professional informs the client that the financial planning recommendations will likely need to be modified as the client’s personal, economic and other conditions change. The financial planning professional discloses to the client any conflict(s) of interest not previously disclosed, and explains how such conflicts impact the financial planning recommendations. At this stage of the financial planning process, the financial planning professional can further assess whether the financial planning recommendations meet the client’s expectations, whether the client is willing to act on the recommendation(s), and whether modifications are necessary. 5. Implement the Client’s Financial Planning Recommendations Agree on implementation responsibilities The financial planning professional and the client agree on implementation responsibilities that are consistent with the scope of the engagement, the client’s acceptance of the financial planning recommendations, and the financial planning professional’s ability to implement the financial planning recommendations. The financial planning professional gains the client’s agreement on implementation of the recommendations and provides the required documentation. The financial planning professional may change the scope of the engagement, as originally defined, based on the agreement reached with the client. The financial planning professional’s responsibilities may include:  Identifying activities necessary for implementation;  Determining respective responsibilities of the financial planning professional and the client; CFP Final Level: Financial Planning Process, Principles and Practice: Module 1 Page 20

 Referring to, and coordinating with, other professionals;  Sharing client information as authorized;  Selecting and securing products and/or services. If there are conflicts of interest, sources of compensation or material relationships with other professionals that have not been previously disclosed, the financial planning professional discloses these to the client. The financial planning professional explains the rationale for referrals and the qualification(s) of the referred professional(s). If a financial planning professional is engaged by the client to provide only the implementation step of the financial planning process, this is clearly defined in writing in the scope of the engagement. This scope may include the extent to which the financial planning professional relies on information, analysis or recommendations provided by others. Identify and present product(s) and service(s) for implementation Based on the scope of the engagement, the financial planning professional identifies and presents appropriate product(s) and service(s) that are consistent with the financial planning recommendations accepted by the client. The financial planning professional investigates and recommends products or services that are suitable to the client’s financial situation and reasonably address the client’s objectives, needs and priorities. The financial planning professional uses professional judgment in identifying the products and services that are in the client’s best interest. Professional judgment incorporates both qualitative and quantitative information. Solutions identified by the financial planning professional may differ from those of other professionals since more than one product or service may meet the client’s needs. The financial planning professional makes all disclosures to the client required by applicable regulations. Recommendations regarding products or services may be presented concurrently with the financial planning strategies and recommendations. 6. Review the Client’s Situation Agree on responsibilities and terms for review of the client’s situation The financial planning professional and client mutually define and agree on terms for reviewing and re-evaluating the client’s situation. CFP Final Level: Financial Planning Process, Principles and Practice: Module 1 Page 21

The financial planning professional communicates to the client that financial planning is a dynamic process that may require updates due to changes in the client’s personal, economic or other conditions. The financial planning professional and the client mutually agree on, and understand, their respective roles, if any, in ensuring that the client’s situation is being adequately reviewed. The financial planning professional defines and communicates to the client the nature and scope of the reviewing activities that the financial planning professional will provide. The reviewing process may require the financial planner professional to modify the original scope of engagement or initiate a new engagement. Review and re-evaluate the client’s situation. If conducting a review, the financial planning professional and the client review the client’s situation to assess progress toward achievement of the objectives of the financial planning recommendations, determine if the recommendations are still appropriate, and confirm any revisions mutually considered necessary. The review process may include: confirming that the financial planning recommendations agreed on by the client and the financial planning professional have been implemented; assessing progress toward and achievement of the objectives of the financial planning recommendations to date; re-evaluating initial or subsequent assumptions made by the financial planning professional for reasonableness; determining whether changes in the client’s circumstances or objectives require adjustments to the financial plan; and mutually agreeing on any required changes. As circumstances and needs change, a financial planning professional may need to revisit earlier steps in the financial planning process. Goals Goal-setting represents a significant communication exercise[2]. Many of the clients with whom you work will have difficulty identifying and articulating their goals. As you know, financial planning is the process of developing strategies to assist clients in managing their financial affairs to meet their life goals. With this as the focus of financial planning, the financial planner should understand how to discuss goals with a client. As a reminder, it can be a good idea to focus on developing SMART goals, which are: • Specific • Measurable • Achievable • Relevant • Time-bound/limited CFP Final Level: Financial Planning Process, Principles and Practice: Module 1 Page 22

The major factor in determining what to do and how to do it is determined by an individual’s goals — what the client wants to accomplish, such as setting up a plan to purchase a personal residence. Another way to frame goals is to state them in terms of financial needs. A “financial goal” is specific in terms of objective, amount of money required, and time frame, such as: “accumulate $20,000 in five years to fund the down payment for a new house.” Financial planning is all about helping people manage their financial affairs to meet life goals, so financial planning activities on based on helping clients achieve life/financial goals. Considering an example of saving for a house, a financial planner would evaluate how using the money for a house might impact the individual’s retirement planning. A financial planner may also look at various investment options through the lens of their potential income tax implications. How will cash flow be affected? Does it make more sense to buy a home in seven years as opposed to five, or does it make more sense to lease a home rather than buying? One of the best things the financial planning process can accomplish is to help individuals identify and prioritize their goals. Ask an average person about his or her financial goals, and you may hear an answer similar to, “I want to have enough now, and later on, to live comfortably.” You also might hear, “I want my children to go to college” or “I want to make money in the stock market.” The big problem with all of these “goals” is that they are too vague and therefore, not actionable. How much is enough? What is a comfortable retirement? What will it take to pay for a college education? Many people have a hard time identifying their goals. Answering questions like these helps put unclear goals into perspective. Steps to Setting Goals What are the steps to setting a financial goal? First, a potential goal should be identified. Many people find this part of the process to be the most difficult. Although it is beyond the scope of this chapter, you should begin learning how to help people take their hopes and dreams and turn them into realistic, achievable goals. A significant part of this process is developing active listening skills and learning how to check your understanding by restating, paraphrasing, and summarizing what you think you heard. Next, a financial goal should be clearly defined, understood, and written down. Finally, the goal should be quantified (e.g., how much, over what period, beginning when) so it can be monitored. Many people have financial concerns in the following areas: • Risk management and protecting against losses (to income or property), living too long or dying too soon, and health care expenses; • Foundational savings (for emergency funds and short-term expenses); CFP Final Level: Financial Planning Process, Principles and Practice: Module 1 Page 23

• Building an investment portfolio; • Advice for adequate retirement income; • Managing one’s income tax burden; and • Needs related to estate distribution and incapacity. A financial planner will help clarify these broadly stated concerns and turn them into well- defined goals. For example, the desire to build an investment portfolio can be refined in the following manner and restated. In refining goals, a financial planner can ask questions such as the following: • What are the purposes of the investments? • When will the money be needed? • What portion of the portfolio can be tax-deferred? • Are there both long and short-term needs? • How much is available to invest? • How large a fund needs to be accumulated? • What is the individual’s risk tolerance? These questions provide a springboard to setting specific goals relative to building an investment portfolio. Here are some sample answers to the questions above. The investments have two primary purposes: to fund a college education and to help provide for retirement income. College will start in 12 years, with retirement following in 25 years, beginning at age 60. They have Rs.10, 00,000 available to invest immediately, and they can add Rs.50, 000 each month. The retirement income goal is harder to determine, but they assume the need to provide an additional Rs.100, 000 per month at retirement. There are no unusual risk-related concerns, and they are willing to assume reasonable investment risk relative to potential return. Knowing the information above, how can the client’s wants be restated as financial goals? Here are some possibilities. First goal: Accumulate a total sum of Rs.26, 86,300 over the next 10 years to be used to fund college tuition. Second goal: Develop a portfolio designed to provide an amount at retirement equal to Rs.1, 00,000 per month. Monthly investments of Rs.50, 000 will be made into the equity mutual fund schemes initially and slowly reduce exposure to equity. CFP Final Level: Financial Planning Process, Principles and Practice: Module 1 Page 24

Monthly investments will continue until retirement and will be evaluated annually to determine potential adjustments. While developing the financial recommendations, the financial planner could include suggestions for specific investments, risk levels, adjustments to invested amounts, tax strategies (as allowed by local laws and regulations), contingency plans, and similar matters. Type of Information Gathered Based on Goals The client’s goals will help determine the quantity and type of information collected by a financial planner. A client may come to a financial advisor for specific advice related to a limited area of concern, such as risk management issues or investment selection. In these cases, gathering information may be limited in scope to issues relating to the specific area of concern to the client. Note, however, that the financial planning process does not change for individuals desiring financial help with a limited focus, as opposed to advice covering a broader scope; the process involving the establishment of a client-planner relationship, the collecting of information, developing and presenting recommendations, and agreeing to implementation and follow-up arrangements—still applies to these individuals. An individual coming to a financial planner for financial advice usually has some specific reasons for doing so. These reasons typically are transformed early in the relationship into well-defined goals that the client hopes to achieve as a result of financial advice. The goals may be as varied as the clients themselves: to do a better job of allocating funds to investments and having them grow, to plan for retirement or for children’s education, to minimize taxes, or to simply get one’s financial life under control. Achieving these goals becomes central to the recommendations developed by the financial planner. However, the recommendations also take into account issues that the client may not have considered on his or her own. For example, an important part of ensuring the achievement of financial goals is establishing protection against events causing unanticipated financial difficulty that would hinder long or short-term goals. If the client were to experience a period of disability, the financial losses associated with this could, and probably would, hinder plans for educating children in the near future, unless the financial planner anticipated this possibility. The financial planner should keep these things in mind, and may discuss them with the client as part of his or her ongoing service. Type of Information Collected To facilitate the gathering of information, many financial planners use a data gathering form to collect pertinent information (hard copy or electronic). An information form is completed for CFP Final Level: Financial Planning Process, Principles and Practice: Module 1 Page 25

each client. Sometimes, information collection is done by the financial planner through interviewing the client and reviewing pertinent documents. The advantage of this approach is that the planner gains information from the interaction with the client that goes beyond the gathering of simple facts. It allows him or her to see and hear the client’s reactions to questions and better understand the client’s perspective, values, and needs. In addition, it frequently enhances the planner-client relationship, helping to build trust between the parties as information is shared. The financial planner should give thought to what he or she hopes to accomplish for and with clients, and structure the information collection process in a way that promotes this aim. General Information The information form usually requests personal client information, such as name, e-mail, address, and telephone number. If the client is a couple, the form will request the same information about both individuals. The financial planner should record the date so all parties understand that this information is factual only as of the date specified. Over time, the client’s financial situation and goals are likely to change. The financial planner also will request information such as the client’s, spouse’s, and dependents’ identification numbers (e.g., government-related, passport, license, or other), dates of birth, and health problems, if any. Identification numbers are needed for verifying government benefits, for tax purposes, and for general identification purposes. Dates of birth help to ascertain when future normal retirement benefits may be available, to plan a schedule for the children’s education, and to determine insurability and life expectancies, among other uses. Health concerns are important to consider in assessing potential for achieving future goals, insurance needs and insurability, and estate distribution needs. Information about other Advisors One important piece of information frequently requested in the information collection process is a listing of other professional advisors, such as an insurance agent, stockbroker, accountant, or attorney. The financial advisor does not necessarily replace the other advisors of the client; rather, he or she frequently works with these individuals to address the client’s financial needs, develop client-oriented, cohesive recommendations, and implement those recommendations as appropriate. In some cases, by asking these questions, the advisor may gain information such as that the client is currently doing his or her own taxes, or perhaps has already used some type of online tools to complete estate distribution documents. CFP Final Level: Financial Planning Process, Principles and Practice: Module 1 Page 26

In some cases, the financial planner may need to recommend changes or additions to the client’s other advisors. For example, in a case where a will must be executed for a client, the financial planner may recommend that the client see an attorney. Information about Assets The financial planner will request information about the client’s assets, including cash/cash equivalents, invested assets, and use assets (discussed later). The manner in which assets are owned is of particular interest to the financial planner, since the type of ownership may have tax and estate (i.e., wealth transfer) implications. How assets are owned also may be important in lifetime distribution of property or division of property between spouses, if required. In addition to noting how property is owned, this section should identify with whom any joint property is held, and, for spouses, which one owns each item of property. You may wonder why this information is relevant to meeting a particular financial need. In addition to what has already been said, knowing the way in which an asset is titled lets the financial planner know whether it may be available for funding the current financial need. Assets may be titled in ways that limit their availability, and the financial planner should know about these limitations. The date assets were acquired may be relevant for tax purposes. The base cost or basis in the property often is necessary for tax purposes, too. In addition, the date and cost of acquiring invested assets may be helpful in determining how well currently owned investments are performing. The financial planner will ask for the current fair market value of all assets, which is essentially the expected sale price if the asset were sold in an orderly fashion today. The financial planner also will request information on encumbrances against the property owned by the client. The planner should know the amount of payments made to reduce debt to assess expenses, the balance remaining on the loan, and the date that the loan payments will cease under the terms of the agreement, so that he or she can evaluate whether assets are working best toward the client’s goals and how liabilities affect the client’s expenses and overall financial situation. The financial planner also wants to know the current yield of assets, where applicable. As an example, the planner might ask about interest rates on bank savings vehicles, and whether there are term limits that might limit liquidity or access to the money. This information CFP Final Level: Financial Planning Process, Principles and Practice: Module 1 Page 27

allows the financial planner to assess inflows, and provides additional information for determining if the client’s investment portfolio is performing in a manner fitting the needs of the client. Information regarding assets is useful in assessing whether the client’s investments are well diversified and consistent with their risk tolerance level. Asset information is used heavily in the construction of the statement of financial position, also called the personal balance sheet, which was discussed in the Personal Financial Management course. Information about loans /Debt Because debts have a strong impact upon the client’s financial situation, increasing expenses and limiting funds available for other consumption and savings, the financial planner requests information on other debts of the client that are not associated with property ownership. In addition, debts often must be repaid upon the death of the individual, impacting estate and insurance advice. Pertinent details to be collected include the date debt was incurred, the original amount of debt, the current principal balance, periodic payments due, the maturity date, and the interest rate being charged. Life Insurance A client may want advice on whether dependents will receive adequate financial support in the event of an earning member’s premature death. The primary method of dealing with this risk is life insurance. The financial planner should request information about existing life insurance policies to help assess whether adequate support is available. Different types of policies are appropriate in differing circumstances. The planner will evaluate the amount of insurance available and also whether the types of policies in place are best suited to the needs of the client. Finally, insurance policy provisions have implications for estate distribution. In addition to collecting the pertinent information— type of policy, ownership, insured, beneficiary, premium and dividend options, current cash value, policy loan outstanding, and face amount—the financial planner also may want to collect copies of life insurance policies for more complete information. Information about Income An understanding of the client’s income is necessary for several reasons. First, it enables the financial planner to assess the importance of a particular income source and to plan for its potential replacement in case it suddenly ceases (such as salary during a wage earner’s disability). In addition, it helps the planner assess the client’s ability to meet financial goals by allocating some of the income to savings and investments or consumption, as appropriate. CFP Final Level: Financial Planning Process, Principles and Practice: Module 1 Page 28

A critical aspect of income is the stability of the income stream. Some incomes, such as pensions, often are very reliable and others, such as commission sales, often are not. Employment with a start-up company generally has more uncertainty than employment with a mature, financially sound company. The financial planner needs to make a judgment regarding the stability of the income stream because it can affect what types of investments might be appropriate, how much debt can be handled by a household, and other financial advice issues. The financial planner needs to ask for information on salaries and self-employment income for the client and spouse or partner, as well as sources of other income, including amounts received, and the expected duration of receipt of stated income. The timing of cash flows from income may be equally important in cash management. In addition, the financial planner will want to know any changes expected in income in the next few years. Income is a major category shown on the cash flow statement. The financial planner requests information on funds targeted for savings, investment and budgeting. Some individuals will have established a plan of savings and investing or will have made savings and investing a designated use for income. However, many new clients may not have considered the importance of aiming for a savings target each year as a means of achieving goals. These questions help the client focus on the need to do this. A client’s prior success in achieving savings and investment goals gives the financial planner an idea of the client’s self-discipline, and provides information about any circumstances that may make the achievement of particular goals difficult for clients. If the client has a budget, a copy of this should be supplied to the financial planner. An established budget provides factual information regarding cash flow and subjective (or qualitative) information about the client’s values. Some clients will have a written budget; some may have a less formal system of income versus expenditures. Subjective Investment Information Facts regarding invested assets are collected in the assets section of the data gathering form. However, subjective investment information also is needed because it provides insight into the client’s investment experience and: • How the client makes investment decisions, • What the client expects from investments, CFP Final Level: Financial Planning Process, Principles and Practice: Module 1 Page 29

• What the client knows about investing, • How the client views risk, and so on. This information is helpful to the financial planner in reallocating resources and selecting investment vehicles consistent with the client’s risk tolerance level, goals, and other factors. In addition, the client should be asked which investments have been earmarked for goals and thus are unavailable for repositioning. Estate Distribution This section focuses on the needs of the family in the event of a client’s death and also on the wishes of the client regarding provision for dependents and others after his or her death. Details requested help the financial planner evaluate if estate distribution documents, insurance, and other assets are structured in accordance with the client’s wishes. This information will likely lead to recommendations as to how these assets might be restructured to minimize estate settlement costs and estate taxes, distribute property, and provide for care of dependents in accordance with client wishes. In addition to general information, the client should supply copies of trust documents, wills, and other pertinent agreements. The financial planner then is able to determine how the client’s estate is arranged and whether changes need to be made. Further, it allows the planner to compare the client’s perception of how the estate is arranged with an eye toward future distributions, and determines if the client needs further education on any potential liquidity or tax ramifications. Information about Retirement Many clients want help with retirement plans. To help with this area, a financial planner will gather both subjective and objective information regarding the retirement that clients envision for themselves and the resources already in place to achieve their objectives. The financial planner should be sure to learn about any available government or employer-provided retirement benefits. Also, he or she should keep in mind how any spousal benefit options may be impacted. Upon reviewing this information, the financial planner is able to project whether clients are likely to meet retirement goals, and make recommendations as necessary about how they might better achieve them. It’s always a good idea to see copies of existing retirement plans, to make sure actual benefits match what the client believes the benefits will be. Miscellaneous Financial Goals Page 30 CFP Final Level: Financial Planning Process, Principles and Practice: Module 1

Some clients will have special goals they hope to achieve, such as large purchases (boats, cars, homes, etc.) and changes in lifestyle (returning to school, changing careers, etc.). This section asks them to list individual goals that are important to them. Potential Disability Potential disability is an area that is frequently overlooked. The likelihood of disability is greater than the likelihood of premature death for most people, and clients should be financially prepared for the impact of disability if other goals are to be met. This section focuses on providing the income that would be needed in the event of disability, and the income that would be available. The financial planner uses this information to determine how best to fill any gaps. Copies of any disability insurance policies or plans in place should be provided to the financial planner for further analysis. Health Insurance/Cover All information on medical expense coverage (government-provided and privately owned) should be supplied to the financial planner for analysis. Medical expenses can be extremely high, and, for most people, in addition to available government benefits, medical insurance is the best way to ensure that other goals will not have to be sacrificed because of unexpected medical costs. People may have medical coverage provided through their employer or from other sources. The financial planner should know the source of medical coverage to assess the conditions that must be met for continued coverage and whether these conditions may cause difficulties for clients in the future. In addition, information should be provided about cost-sharing devices, such as deductibles and coinsurance provisions that may impact future client expenses. Knowing insurance premium amounts is useful in balancing costs and benefits. Copies of medical insurance in place should be supplied for further analysis. Higher Education of children A major goal of many clients is providing education for their children or themselves. Educational expenses have increased substantially in the past few years and are expected to continue to do so, making education funding an event that requires planning. The financial planner should gather information regarding anticipated costs for education and any steps already taken to plan for costs. The financial planner should collect all statements of accounts CFP Final Level: Financial Planning Process, Principles and Practice: Module 1 Page 31

earmarked for education to see if they are appropriately titled in a manner that will allow the asset to be available for the intended purpose. Liability and Risk Management This section focuses on potential liabilities that clients may face as a result of the activities in which they are involved. Any number of activities—sports, hobbies, service on boards of directors, partnership activities, charity work, etc.—may result in legal liability that may require insurance coverage or private funding. This information will be weighed by the financial planner to determine the benefits and costs of ensuring that this risk is adequately covered. Copies of homeowner, auto, and other policies providing liability coverage should be provided for assessment. Goal priorities Clients have a number of goals they hope to achieve. Sometimes no amount of advice can help the client achieve his or her goals within the desired time frame, given available resources. Therefore, time frames may have to be adjusted, funding amounts required may need to be changed, or goals may need to be re-evaluated. During the information-gathering stage, clients prioritize their goals so the financial planner can work to help the client achieve the most important goal(s) within the desired time frames. If the financial planner finds that goals cannot be satisfactorily met with current resources, the client will need to be presented with options for potential adjustments. For example, a client might have one goal of a college education for a child and another goal of building a retirement fund. Although the college education goal might come first in time, it might be advisable to fund the retirement goal and use student loans and/or scholarships to achieve the college education goal to achieve both goals satisfactorily. Documents required Most financial planners ask clients to supply copies of all relevant documents. These documents may include the following: • Wills and other instructions to the executor • Last three income tax returns • Trust agreements CFP Final Level: Financial Planning Process, Principles and Practice: Module 1 Page 32

• Insurance policies, certificates, descriptive booklets, and any policy illustrations • Booklets discussing employer-provided benefits • Retirement plans (summary plan description and annual benefit summary) • Loan documents including interest rate, term, and current payment amounts • Investment statements • Outflows for the past year (records of checks written, bank statements, or computerized summary of same, etc.) • Articles of incorporation, corporate tax returns for small businesses owned • Partnership agreements or other formal business arrangements • Budgets To summarize, there are two general types of information needed—quantitative and qualitative. Quantitative Information • General family profile • Assets and liabilities • Cash inflows and outflows • Insurance policy information • Employee benefits and pension plans • Tax returns for last three years • Details of current investments • Education needs • Other retirement benefits available • Client-owned business information • Copies of important documents • Lifetime gifting programs Qualitative Information Page 33 • Goal and objective statements • Health status • Interests and hobbies • Expectations about employment • Risk-tolerance level • Anticipated changes in lifestyle CFP Final Level: Financial Planning Process, Principles and Practice: Module 1

• Financial decision-making style • Information about professional advisors (legal, tax, investment) • Estate advice issues • Retirement advice issues • Money values • Family relationships • Other advice assumptions, such as current and projected economic conditions Determining the Client’s Financial Status After collecting all the information, the financial planner analyses it to identify the likelihood of reaching the client’s financial goals. Also, client circumstances should be reviewed to identify strengths and weaknesses in the client’s total financial situation. Identifying existing or potential problems that can negatively affect the client’s ability to achieve objectives is a central part of financial advice. To help with the analysis, the financial planner needs to prepare a statement of financial position (or personal balance sheet), a current cash flow statement, and, if appropriate, a projection of cash flow and/or taxes. Both personal assumptions (such as retirement ages, life expectancies, and income needs) and economic assumptions (such as inflation rates, tax rates, and investment returns) are considered in this step. It is quite possible that the financial planner may need to consult with other professionals to help provide comprehensive service. For example, the planner might have a general understanding of estate distribution issues but may need to consult with a lawyer specializing in estate planning to adequately address this area. In analyzing information, here are a few things to look for: Sufficient liquid assets (emergency funds): Individuals should retain a sufficient amount of liquid assets – enough to cover at least three to six months’ worth of expenses – to handle potential emergencies without having to borrow or to sell assets at an inopportune time. Because investment vehicles with the greatest liquidity tend to have the lowest returns, the amount of money in emergency funds should be sufficient, but not excessive. Sufficient insurance coverage: Part of a solid financial plan is having insurance coverage that is adequate to protect against financial losses too great for the individual to accept on his or her own. Potential losses may include a house burning down, large medical expenses, or the loss of future income through either disability or death. CFP Final Level: Financial Planning Process, Principles and Practice: Module 1 Page 34

Validity of the client’s stated goals in terms of other information: For example, Client A’s No. 1 goal is accumulating Rs.50, 00,000 within eight years for the purpose of acquiring a franchised fast-food restaurant. Information provided by this client indicates that her income and savings could not possibly support an investment program capable of producing this amount. Client B has established a capital accumulation goal that, given his current cash inflows and financial obligations, would be achievable through regular stock market investing. But your conversations with Client B reveal a personality so risk averse that the volatility of stocks would deeply disturb his peace of mind. Client C wants to send his son to a private college in five years, but your review of the information indicates that he has done little to set aside money for his son’s education and he will not be able to fund it from current cash flows. Mismatches between the client’s time horizon and stated goals: A 53-year-old client says saving for retirement is a top priority, and he plans to retire at age 60. However, he has done very little on his own to accumulate funds for retirement, and government benefits will be insufficient. Mismatches between the client’s time horizon and current investments: Short-term goals should be matched with investments that fluctuate little, if at all, and long-term goals should be matched with investments that may fluctuate more, but offer the possibility of higher returns. Short-term goals do not allow enough time to recover any significant investment losses incurred. This is not normally the case with long-term goals. Mismatches between the client’s personality, current investment position or resources, and stated goals: Client B is a young, self-professed risk taker with high current income and aggressive financial goals. Her current investment portfolio, however, is a set of bond mutual funds and government securities better suited to a much more conservative investor. Investment vehicles that do—or do not—match the client’s needs and goals: Analysis should determine, among other things, basic return characteristics of those investments and how they fit with the client’s need for current investment income and other goals. Perhaps long-term capital appreciation would be appropriate for a particular client. If income is important, bonds or other fixed income investments may be valid. The specific characteristics of those CFP Final Level: Financial Planning Process, Principles and Practice: Module 1 Page 35

investment vehicles already owned by the client should be explored as a first step in making the “retain” or “reposition” recommendation. An analysis of risk: These risks can be related to any of the areas discussed. For example: Is there sufficient liability coverage, is the stock portfolio mainly in highly speculative stocks of new, unproven companies, and is too high a percentage of the retirement funding in one stock (greatly increasing business risk)? Identifying unacceptable risks and taking measures to decrease or eliminate those risks are major factors in avoiding events that could harm or even devastate a client’s financial situation. Financial planner feels it necessary to counsel the client on budgeting and cash management. When available resources are compared to the client’s objectives, it may be necessary to modify the priority of goals, the goals themselves, or the client’s attitude about his or her current lifestyle. Economic conditions, both current and forecasted, are evaluated in this stage of the process. Professional Judgment The difference between exactly following the financial planning process and walking through the process mindfully can be described as applying professional judgment. Professional judgment helps bridge the process of financial planning with the practice of financial planning (Lytton, Grable & Klock, 2012). As described by Lytton et al., professional judgment has four general characteristics: 1. Analyzing the interests of stakeholders • Acting in the best interest of the client, who is the primary stakeholder, is a universal tenet for all professions. • The financial planner can help the client be actively involved in the process by providing all information relevant to the professional relationship. • The planner must also use professional judgment when interfacing with additional stakeholders, such as others on the planning team, peer professionals, client family members, etc. 2. Setting • Setting refers to the characteristics of the problem the financial planner must address. • This includes recognition of the types of decisions to be made, such as: • Time-constrained issues • Unexpected problems or issues CFP Final Level: Financial Planning Process, Principles and Practice: Module 1 Page 36

• Issues that require collaboration with other professionals • High or low-stakes issues • The financial planner and client may view the setting differently, e.g., to the planner, something may be routine, but to the client it may be viewed as a high stakes matter. 3. Problem framing and problem resolution • Problem framing focuses on the financial planner’s ability to use knowledge and experience to discern the nature of the situation, the information required, and the ability to generate appropriate solutions. • Problem resolution requires less professional acumen, in that, given well-considered framing, the resolution can be fairly straightforward. 4. Abiding by standards of practice • Rather than just adhering to the letter of the law, this requires the financial planner to consider questions, such as: • Is the recommended plan of action cost effective with a relatively high probability of success? • Are the assumptions valid, especially in the current economic and legal environment? • Can the plan be adjusted as necessary? • Are the recommendations socially and culturally acceptable? A financial planner must exercise professional judgment in each step of the financial planning process. The financial planner has to balance client goals with available resources. He or she will need to analyze each recommendation to determine which ones compete with one another, and the best ways to coordinate all recommendations. The financial planner must also use professional judgment in recognizing when recommended solutions may need to be modified because of changes in the environment, client goals, or other factors. Rules of Conduct How should a financial planner act? We have explored the financial planning process, which guides the financial planner’s actions and how he or she works with a client. We have looked at exercising professional judgment, and the need to use it when working through the financial planning process, but how should financial planners behave or carry themselves as financial professionals? FPSB has developed Model Rules of Conduct that establish standards for the level and type of conduct expected of CERTIFIED FINANCIAL PLANNER professionals. The rules serve as a guide CFP Final Level: Financial Planning Process, Principles and Practice: Module 1 Page 37

and benchmark for how CFP professionals should conduct themselves. Following are the Rules of Conduct for CFP Professionals (FPSB, 2011). Rules of Conduct for CFP Professionals 1 A CFP professional shall not communicate, directly or indirectly, to clients or any other parties, any false or misleading information directly or indirectly related to the CFP professional’s qualifications or services. 2. A CFP professional shall not mislead clients or any other parties about the potential benefits of the CFP professional’s service. 3. A CFP professional shall disclose all relevant facts where the disclosure is necessary to avoid misleading clients or any other parties. 4. A CFP professional shall not engage in conduct involving dishonesty, fraud, deceit or misrepresentation, or knowingly make a false or misleading statement to clients or any other parties. 5. A CFP professional shall clearly identify with the client the assets, if any, over which the CFP professional will take custody, exercise investment discretion, or exercise supervision. 6. A CFP professional shall identify and keep updated records of all funds or other property of the client in the custody, or under the discretionary authority, of the CFP professional. 7. A CFP professional shall not commingle the client’s property with the property of the CFP professional, the CFP professional’s employer, or with other clients’ property unless the commingling is permitted by law, is explicitly authorized and defined in a written agreement between the parties, and the CFP professional has sufficient record-keeping to track each client’s assets accurately. 8. A CFP professional shall at all times place the interest of the client first. 9. A CFP professional shall treat the client fairly and provide professional services with integrity and objectivity. 10. A CFP professional shall ensure that his or her personal biases or interests do not adversely affect his or her services to clients. 11. A CFP professional shall make and/or implement only recommendations that are suitable for the client. 12. A CFP professional shall offer advice to clients only in those areas in which he or she is competent. In areas where the CFP professional is not competent, the CFP professional shall seek the counsel of, and/or refer clients to, qualified professionals. 13. A CFP professional shall maintain competence in all areas of his or her professional practice. CFP Final Level: Financial Planning Process, Principles and Practice: Module 1 Page 38

14. A CFP professional shall keep informed about developments in financial planning and participate in continuing professional development. 15. If the services include financial planning or material elements of the financial planning process, a CFP professional shall disclose the following information in writing to the client: 1. An accurate and understandable description of the compensation arrangements being offered. This description must include information related to costs to the client and general form and source of compensation to the CFP professional and/or the CFP professional’s employer; and terms under which the CFP professional and/or the CFP professional’s employer may receive any other sources of compensation, and if so, what the sources of these payments are and on what they are based; 2. A general summary of likely conflicts of interest between the client and the CFP professional, the CFP professional’s employer or any affiliates or third parties, including, but not limited to, information about any familial, contractual or agency relationship of the CFP professional or the CFP professional’s employer that has a potential to materially affect the relationship with the client; 3. Any information about the CFP professional or the CFP professional’s employer that could reasonably be expected to materially affect the client’s decision to engage the CFP professional; 4. Any information that the client might reasonably want to know in establishing the scope and nature of the relationship, including, but not limited to information about the CFP professional’s areas of expertise; and 5. Contact information for the CFP professional and, if applicable, the CFP professional’s employer. On an on-going basis, the CFP professional shall make timely disclosure to the client of any material changes to the above information. 16. A CFP professional shall not borrow money from a client. This Rule does not apply when: 1. The client is a member of the CFP professional’s immediate family; 2. The client is an institution in the business of lending money and the borrowing is unrelated to the professional services performed by the CFP professional. 17. A CFP professional shall not lend money to a client. This Rule does not apply when: 1. The client is a member of the CFP professional’s immediate family; 2. The CFP professional is an employee of an institution in the business of lending money and the money lent is that of the institution, not the CFP professional. CFP Final Level: Financial Planning Process, Principles and Practice: Module 1 Page 39

18. A CFP professional shall treat the client’s information as confidential except as required in response to proper legal process or regulatory requirements; as necessitated by obligations to a CFP professional’s employer or partners; to defend against charges of wrongdoing; in connection with a civil dispute; or as needed to perform professional services on behalf of the client. 19. A CFP professional shall take prudent steps to protect the security of the client’s information and property, including the security of stored information, whether physically or electronically, that is within the CFP professional’s control. 20. A CFP professional shall exercise reasonable and prudent professional judgment in providing professional services. 21. A CFP professional shall be in compliance with all applicable legal and regulatory requirements governing professional services provided to the client. 22. A CFP professional who is an employee/agent shall perform professional services with dedication to the lawful objectives of the employer/principal and in accordance with the FPSB Member’s Code of Ethics. 23. A CFP professional shall abide by the terms of all agreements with the FPSB Member, including, but not limited to, using the CFP marks properly and cooperating fully with the FPSB Member’s trademark and professional review processes and requirements. 24. A CFP professional shall meet all of the FPSB Member’s requirements, including continuing professional development requirements, to retain the right to use the CFP marks. 25. A CFP professional shall notify the FPSB Member in writing of any conviction of a crime (as defined by the Member), or any professional suspension or revocation within the time specified by the FPSB Member after the date on which the CFP professional \"is notified of the conviction, suspension or revocation. 26. A CFP professional shall notify the FPSB Member of changes to contact information, including e-mail address, telephone number(s) and physical address, within the time specified by the FPSB Member of the change. 27. A CFP professional shall not engage in any conduct which reflects adversely on his or her integrity or fitness as a CFP professional, upon the CFP marks, or upon the financial planning profession. 28. A CFP professional shall provide professional services in a timely and thorough manner. 29. Consistent with the scope of the engagement, a CFP professional shall undertake a reasonable investigation of the products and services to be recommended to clients. A CFP professional may rely upon an investigation undertaken by a third party provided it is reasonable to place reliance on the quality of such investigation. CFP Final Level: Financial Planning Process, Principles and Practice: Module 1 Page 40

30. A CFP professional shall provide reasonable and prudent professional supervision of, or direction to, any subordinate or third party to whom the CFP professional assigns responsibility for any client services. 31. A CFP professional shall return the client’s property upon request as soon as practicable or consistent with a time frame specified in an agreement with the client. 32. The CFP professional and the client shall mutually agree upon the services to be provided by the CFP professional. 33. If the services include financial planning or material elements of the financial planning process, prior to entering into an agreement, the CFP professional shall provide written information and/or discuss with the client the following: 1. The obligations and responsibilities of each party under the agreement with respect to defining the client’s objectives, needs and priorities; gathering and providing appropriate data; examining the result of the client’s current course(s) of action without changes; the formulation of any recommended actions; implementation responsibilities for the financial planning recommendations; and responsibilities for reviewing for the financial planning recommendations; 2. Compensation that any party to the agreement or any affiliate to a party to the agreement will or could receive under the terms of the agreement; and factors or terms that determine costs to the client, how decisions benefit the CFP professional and the relative benefit to the CFP professional; 3. Terms under which the CFP professional will use proprietary products; 4. Terms under which the CFP professional will use other entities/professionals to meet any of the agreement’s obligations; 5. The process for terminating the relationship; and 6. Procedures for resolution of client claims and complaints against the CFP professional. 34. If the services include financial planning or material elements of the financial planning process, the CFP professional or the CFP professional’s employer shall enter into a written agreement governing the financial planning services (“Agreement”). The Agreement shall specify: a. The parties to the Agreement; b. The date of the Agreement and its duration; c. How and on what terms each party is able to terminate the Agreement; and d. The services to be provided as part of the Agreement. 35. A CFP professional shall take all reasonable steps to ensure the client understands the financial planning recommendation(s) to allow the client to make informed decisions. CFP Final Level: Financial Planning Process, Principles and Practice: Module 1 Page 41

36. A CFP professional shall know and reasonably apply the Financial Planning Practice Standards that are relevant to the scope of the engagement with the client. 37. A CFP professional shall know and apply the Financial Planner Code of Ethics and Professional Responsibility in his or her professional activities. The financial planning principles, process and practice standards combine to move the provision of financial planning services, and those who provide them, into the realm of professionalism. We can build on this by looking at the professional skills that you can embrace and apply to the practice of financial planning. We will look at these in the next chapter. Chapter - 2: Professional Skills Page 42 Learning Outcomes Upon completion of this section, students should be able to:  Describe components of professional responsibility CFP Final Level: Financial Planning Process, Principles and Practice: Module 1

 Identify skills that support professional practice  Demonstrate the ability to gather and use information required to make relevant client recommendations Introduction Professionalism means being competent to practice. Competence in the financial planning profession includes having a solid understanding of financial planning knowledge, and all related topics. They also must recognize when their knowledge is limited and make referrals to professionals who are more competent in those areas. For example, if a financial planner does not have relative mastery of risk management and insurance, he or she should refer clients who have needs in those areas to an insurance professional who has the required competence. Sufficient knowledge is mandatory, but by itself, not enough to qualify an individual as a competent financial planner. In addition to understanding and operating according to required standards and rules of practice, a financial planner must also have the functional competence to apply professional skills in practice. These skills and social competencies support the high degree of trust clients place with CFP professionals. This is especially true when a financial planning engagement involves uncertainty and complexity. The financial planner must also apply functional competence to obtain mutual agreement with clients of varying circumstances, as well as when interacting with professional colleagues. We have already covered the financial planning process and practice standards. We will study critical thinking and the communication aspects of professional skills in Chapters four and five. Chapter three will cover client characteristics. In this chapter we will focus on professional skills and social competencies required of a financial planning professional in the areas of professional responsibility and practice. Professional Responsibility We begin this section by looking at the duty of care required of financial planning professionals. The seven principles are designed to guide the activities and behaviour of financial planners with clients during financial planning engagements. 1 Put the Client’s Interest First CFP Final Level: Financial Planning Process, Principles and Practice: Module 1 Page 43

Financial Planner stands in fiduciary relation with the client. A financial planner places the interest of the client first, at all times acting honestly, in utmost good faith, and in a manner he or she reasonably believes to be in the best interest of the client. The relationship between a financial planner and client is one of trust, requiring confidence on the part of the client that the financial planner is exercising his or her discretion and expertise for the benefit of the client. When holding out as a financial planner, regardless of whether he or she is engaging in financial planning services or in product sales, the financial planner owes the client a duty of care that puts the clients interest first, regardless of employment arrangement, and provides advice and product recommendations that are suitable for the client. 2 Acts in Accordance with Professional Expectations A financial planner meets professional conduct and ethical standards, developed and enforced by his or her professional or certification body. In addition to demonstrating ethical judgment and intellectual honesty and impartiality, the financial planner recognizes the public interest role of the profession and acts accordingly. 3 Provide Full and Appropriate Disclosure A financial planner discloses all relevant facts to the client, initially and on an on-going basis where changes take place, where the disclosure is necessary to avoid misleading the client or any other parties and to retain on-going agreement between the parties in a financial planning engagement. Such disclosure includes:  An accurate and understandable description of the compensation arrangements being offered, including information related to the costs to the client and general form and source of compensation to the financial planner and/or the financial planner’s employer; and terms under which the financial planner and/or the financial planner’s employer may receive any other sources of non-salary compensation, and if so, what the sources of these payments are and on what they are based;  A summary of potential, perceived or actual conflicts of interest between the client and the financial planner, the financial planner’s employer or any affiliates or third parties, including information about any familial, contractual or agency relationship of the financial planner or the financial planner’s employer that has a potential to materially affect the relationship with the client;  Any information about the financial planner or the financial planner’s employer that could reasonably be expected to materially affect the client’s decision to engage the financial planner; CFP Final Level: Financial Planning Process, Principles and Practice: Module 1 Page 44

 Any information that the client might reasonably want to know in establishing the scope and nature of the relationship, including information about the financial planner’s areas of expertise. Act with Transparency A financial planner-client relationship is transparent and based on open and regular communication that alerts the client to any potential conflict or bias, to any change in business practices or philosophy, or to any impending actions or consequences so that the client can anticipate or mitigate their impacts. 4 Manage Conflicts of Interest The financial planner manages his or her personal biases and avoids, or manages and mitigates unavoidable conflicts, so that they do not adversely affect his or her services or recommendations to clients. The financial planner does not place personal gain or advantage before the client’s interests, and evaluates the client’s situation or other professional relationships without bias, recognizing that legitimate differences of opinion exist among professionals. 5 Secure Fully Informed Client Consent The financial planner ensures that the client fully understands the nature and scope of services provided by the financial planner, as well as the financial planner’s areas of competence and practice. Additionally, the financial planner ensures that the client is fully aware of what services and products he or she is paying for and the financial planner secures the client’s acceptance of the terms and conditions of the professional engagement. 6 Communicate the Compensation/Remuneration Model The financial planner’s compensation/remuneration is disclosed to the client in a manner that is clear, concise, understandable and comparable, and aligned to services that deliver value to the client. The cost for financial planning advice is separately and clearly identified from other services provided by the financial planner and is disclosed as an amount rather than a percentage, unless the total costs are unknown at the time of disclosure. CFP Final Level: Financial Planning Process, Principles and Practice: Module 1 Page 45

Regardless of compensation model used, the financial planner communicates to the client sufficient information about the likely consequences for the client of the use of a particular charging model. In many ways, all items in the Duty of Care can be summarized by restating the first point – put the client’s interest first. A financial planner places the interest of the client first, at all times acting honestly, in utmost good faith, and in a manner he or she reasonably believes to be in the best interest of the client. Each of the points that follow the first serves to support the core principle of placing the client’s interest first and foremost. This is the hallmark of financial planning professionalism. How does the financial planning professional put a client’s interest first?  Abide by the supporting principles.  Act in accordance with professional expectations.  Provide full and appropriate disclosure.  Act with transparency.  Manage conflicts of interest.  Secure fully informed client consent.  Communicate the compensation and remuneration model.  Doing these things will go a long way toward being a financial planning professional. The focus is on activities specifically related to the financial planning engagement. In this context, disclosing a description of your compensation arrangements and remuneration supports transparency and openness. Clients have a right to know what your services will cost them, and you have a responsibility to let them know – clearly and accurately. This includes non-salary compensation, such as bonuses, trips, holidays and any similar items. Essentially, the financial planner should provide enough information so that the client (or potential client) can make a reasoned decision about whether to engage the financial planning professional and his or her services. This will include conflicts of interest that may arise between the financial planner and client, the employer and any affiliates or third parties. Conflicts of many types arise off and on, to the extent that it is hard to completely avoid all of them. A financial planner should work to minimize conflicts of interest. At the same time, when any arise, the financial planner must let the client know. Doing so may have no impact on the client’s decision to engage the financial planner, or it might. However, disclosing a conflict now CFP Final Level: Financial Planning Process, Principles and Practice: Module 1 Page 46