Final Level (Mod. 1) - Book

will help to keep it from becoming a problem later. It’s also the right thing to do as a professional. It has already been discussed about the need for and value of recognizing your limits of competence. Doing so fits into the professional responsibility category. It’s better to refer a client to another professional than not to do so and provide poor or incompetent service. For most new financial planners, being equally competent in all topic areas is a practical impossibility. There’s simply too much to know and too many nuances to be fully competent in every financial planning area. Many financial professionals specialize in one area or another, and develop significant competence in those areas. These individuals can provide valuable expertise when a financial planner works with a client. Consider serving a client who has a tricky legal concern relating to life insurance beneficiary arrangements for the children shared with an ex-spouse. You may not feel fully competent to advice about making the arrangement appropriately, but you know it must be done. Rather than attempting to create the beneficiary arrangement yourself, you should refer the client to a life insurance professional who has many years of experience doing what’s required. By making the referral, you will help the client accomplish the desired objective. You will also learn more of what you need to know, and may be able to apply that knowledge with another client who has a similar need. We can summarize the preceding content with the following points:  Establish trust in all professional relationships  Act in the best interest of the client in providing professional services  Demonstrate ethical judgment  Demonstrate intellectual honesty and impartiality  Recognize limits of competence and voluntarily seek the counsel of and/or defer to other professionals when appropriate  Recognize the public interest role of the profession and act accordingly 7 Professional Practices For professional practice, following is the summary of pertinent skills.  Comply with relevant financial services laws and regulations  Adhere to the professional code of ethics and standards of practice  Make appropriate judgments in areas not addressed by existing practice standards  Maintain awareness of changes in the economic, political and regulatory environments CFP Final Level: Financial Planning Process, Principles and Practice: Module 1 Page 47

 Engage in continuous learning to ensure currency of knowledge and skills  Conduct appropriate research when performing analysis and developing strategies  Exercise autonomy and initiative in the performance of professional activities  Exercise responsibility for own ability to deliver services to the client for the duration of the engagement We have used the term financial planning professional in the text. You might reasonably wonder what the term means. Further, is there a difference between those who provide financial advice generally and those who consider themselves to be financial planning professionals? The answer is a qualified yes. The qualification being that not everyone who uses the term professional is necessarily justified in doing so. Following is the criteria that should be employed by financial planning professionals. More universally, there is a set of criteria that can be applied:  Unique and specialized body of knowledge – one that you have to get advanced schooling for, not generally accessible to the public;  Education and experience requirements so the public is assured that someone has learned and can apply their professional knowledge;  Recognition by society itself as a service that has a public good and necessity;  Bound by a code of ethics regarding what defines professional practice and disciplines those who fail to act professionally; and  A profession controls the use of terms and labels, so the public can clearly distinguish between the professionals who meet those requirements and those who don’t meet the requirements or aren’t bound by or accountable to any kind of professional standards. As you view the list, you should recognize that we have identified criteria for being a financial planning professional. Knowledge alone does not qualify someone as a professional. Competent social skills alone do not satisfy the professional criteria. Great abilities as a financial planner alone are not enough. Each of the preceding – knowledge, skills and abilities – practiced in a framework of putting the client’s interests above any personal criteria or gain, while upholding the interests of the financial planning profession for the benefit of society, sets apart a practitioner who is a professional from one who is not. As the financial planning professional integrates professional skills with appropriate knowledge and abilities, and continually updates these to maintain competency, he or she upholds and promotes the interests of the global financial planning profession for the benefit of society. CFP Final Level: Financial Planning Process, Principles and Practice: Module 1 Page 48

Information Required to Make Recommendations We cannot expect financial planner to have total knowledge of all the information required to make viable financial recommendations. Taking the help of other professionals is often essential for the financial plan’s success. To illustrate the applicability of this statement, let’s look in on a portion of a meeting between Financial Planner and Ashishand Smita. Financial Planner: Ashish and Smita, you have told me that you are concerned about how to provide for Rohan’s college education. Is this the only financial concern you have? Smita: Well, since I quit my job to stay home with the baby, I’m not sure if we could keep the house if something happened to Ashish. Ashish: I have been thinking about that, too. I checked with my benefits counsellor at work, and she said I had a short-term disability policy and two times my salary in life insurance. Is that enough? Financial Planner: That’s certainly an area for us to look at. I understand your concerns about the house and your income. Are there other areas in which you may have questions or concerns? Ashish: Well, my brother has been after me to start investing in a real estate partnership he just got into. He said I could use it for my retirement account. I really don’t know anything about real estate. Would it be a good place for our money? Smita: Your brother’s last “hot tip” cost us a bundle, and we got stuck with a huge tax bill we weren’t supposed to have. Besides, we can’t invest anything right now. With only one income, we barely have enough to pay the bills. We just got the premium notice on our homeowner’s insurance, and I can’t pay it yet. Dear Financial Planner , can you tell if we’re paying too much for our insurance? In just a few minutes, Ashish and Smita have touched on issues involving many financial topics. As Financial Planner evaluated the conversation, she noted several important parts. Ashish and Smita were concerned about advice for college. However, they also had questions in several other areas: management of personal risks and insurance requirements, investment strategies CFP Final Level: Financial Planning Process, Principles and Practice: Module 1 Page 49

and appropriate product selection, tax implications, general retirement concerns and strategies, and cash management. They also showed that they had somewhat different ideas about how to approach their finances. Financial Planner needs to be aware of this when talking with the couple about financial solutions. In fact, about the only area Ashish and Smita did not specifically identify was their estate distribution concerns and strategies, although these often are included when discussing life insurance needs. Even in a short exchange, you can see how much knowledge may be required for appropriate analysis of a client’s financial situation. FPSB’s other subjects offer in-depth coverage on the types of information required to create a financial solution. The following lists cover each topic area, and the general types of information needed. Cash Flow Management and the Use of Debt  Identify personal income from all sources such as salary, bonus, self-employment, dividends and interest, trusts, and other fixed and variable sources.  Identify fixed expenses such as housing, utilities, food, clothing, taxes, transportation, medical, debt repayment, insurance, school expenses, and household maintenance.  Identify variable expenses such as vacations, entertainment, contributions, savings, and investments.  Identify safe and convenient investment vehicles in which to place liquidity funds.  Identify the types of debt and, through debt ratios, assess if too much debt is being incurred.  Review current loans for the possibility of refinancing, consolidating, or accelerating in order to make more cash available.  Take into account any discretionary income after expenses.  Decide what can be adjusted to better allocate resources. Management of Personal Risks and Insurance  Identify potential areas of risk (e.g., income loss due to unemployment, disability, death, or divorce; medical expenses; losses to property; and personal liability).  Determine appropriate risk management techniques (such as retention, avoidance, minimization, or transfer).  Identify existing insurance coverage (such as types, carriers, cost, and amount of coverage). CFP Final Level: Financial Planning Process, Principles and Practice: Module 1 Page 50

Retirement Advice Issues  Determine desired retirement income objective.  What is desired retirement age, and are any early retirement penalties involved?  Identify all current sources of retirement income (personally funded, employer- provided, government-provided).  Are there any matching provisions of employer-sponsored or other retirement plans?  What are the vesting provisions of any employer-sponsored retirement plan?  Does the client meet the qualifications for government-provided plans?  Are there any other general investment constraints? Investment Strategies and Products  Determine investment objectives (such as saving for retirement, funding college tuition, planning for a special vacation, purchasing a new house or car, etc.).  Determine time frames involved. How long can money stay invested before needing it for a financial goal?  Identify existing investments and review diversification and asset allocation.  Identify the types and degrees of risk of each individual investment.  Compare current portfolio risk/return level with desired risk/return level.  Identify special requirements (social investment criteria).  Determine amounts available for investment. Tax and Estate Distribution  Learn about the client’s current income tax situation and get copies of tax returns for the last three years.  Discuss any potential changes that might have an effect on their tax status (e.g., children being born or leaving home, purchase of home, retirement, change in income level, tax law changes).  Identify areas that might be changed to lower income tax burden (e.g., shifting some investment money to a tax-deferred account, deferring income, shifting income to children).  Identify special income tax situations (such as those subject to a prior tax lien, foreign income, or investment-specific taxes).  Determine the size (or potential size) of the estate.  What laws apply? CFP Final Level: Financial Planning Process, Principles and Practice: Module 1 Page 51

 How do the clients want the estate to be distributed (e.g., to whom, when, in what manner, and over what period of time)?  Identify the living issues (such as control of assets, gifting, advice for incapacity, income needs, personally owned business considerations, etc.).  What has already been done, and are there any legal constraints (e.g., are there wills or trusts already established, have any irrevocable decisions been made)?  List titles to currently owned property. No two clients are the same. They have different goals, different backgrounds, different amounts of income and assets; they are different from one another. Clients think and respond differently from one another, and financial planners relate to them in different ways. Clients have different characteristics that impact financial planning engagements. We will explore this in the next chap Chapter – 3: Client Characteristics Learning Outcomes Page 52 Upon completion of this section, students should be able to:  Apply knowledge of personality and behaviour when working with clients  Analyze the impact of a life event on a client’s financial plan CFP Final Level: Financial Planning Process, Principles and Practice: Module 1

 Describe factors related to working with senior adults  Apply financial planning professional skills to working with special needs situations  Describe how to effectively work with a challenging client Introduction Financial planning clients are different. Although the financial planning process is constant and financial information and topics remain the same, the way in which a financial planner engages each client must be tailored or customized to that client. Each client’s goals, knowledge, background, financial needs and resources are unique. They may fit within general group parameters, but they are, nonetheless, different and unique. Additionally this is the fact that each person is an individual and different from others (separate and apart from their financial planning needs). Clients may be female or male, young or old (or in- between), well-educated or not very well educated. They may be single, divorced, married, with or without children. If there are children, they may be living at home, attending university, or away from home and on their own. Clients may be caring for dependent children or parents. They may be able and healthy or struggling with major illness and disabled to some degree. Clients may be wealthy or have more modest means. Either way, they may have adequate cash flow or just able to meet monthly budget requirements. Rarely are any two clients identical. In this chapter we will explore several client characteristics and how they may impact the financial planning engagement. We will look more specifically at working with older adults and clients (and spouses, or dependents) who may have health issues and disabilities. The health issues may be physical, mental, emotional, or a combination. Any of these conditions may create difficulties and conflicts within the financial planning relationship, as can situations in which the client may hold a different position than us or have a different ethnic, financial or generational background than we do. We will also explore ways to recognize and address these conflicts. Working with Individual Personality and Behaviour In Investment Planning and Asset Management course, you have studies the concepts related to behavioral finance. For a review, please read the behavioral finance chapter of that course. People have beliefs about money that subconsciously control their financial well-being. Wealthy people become poor, because they have a script that says having money is evil. People accumulate large amounts of credit card debt because they believe retail therapy (i.e., buying things) is the solution to emotional distress and bad feelings. Money scripts often control the degree to which an individual CFP Final Level: Financial Planning Process, Principles and Practice: Module 1 Page 53

will accumulate assets for future goals, build an emergency fund, reduce debt, live on a budget and many other financial factors. Traditional finance and economic theory suggests that most people behave in a logical and rational manner. As a result, they do the things that are most beneficial for them. Behavioral finance questions these assumptions. The truth for most people is that they tend to make financial decisions in an irrational manner. Their behavioral biases are one of the primary reasons for this. Hugh Massey, in Behaviorally Smart Financial Planning, says this about behavioral biases: “Behavioral biases are human tendencies that lead us to follow a particular quasi-logical path, or form a certain perspective based on predetermined mental notions and beliefs (Massey, 2016, p. loc. 233).” If Massey is correct, clients’ biases, and more broadly, personality traits, impact their financial decision- making and behaviour. Massey developed a program/process to help individuals and advisors recognize and understand some things about themselves that have an impact on their financial planning success. The program, known as Financial DNA, includes a three-stage discovery process that looks at different aspects of a person’s financial personality (Massey, Financial DNA, 2006, p. 50): Stage 1: Behaviour  Communication  Relationship  Information  Decision Style  Control  Stress  Natural Risk  Setting Goals  Trust Stage 2: Financial Propensities  Attitudes  Fears  Asset Aptitudes  Investment Style  Management  Motivation  Values  Emotion CFP Final Level: Financial Planning Process, Principles and Practice: Module 1 Page 54

Stage 3: Quality Life Goal Visioning  Passion and Vision  Environment  Values  Astuteness  Futurity  Future Needs and Wants  Strategies Ideally, to get the most value from the Financial DNA program, individuals should engage Financial DNA Resources directly. However, for our purposes, we will shorten the process and show the 16 profiles that result from Financial DNA’s in-depth testing (Massey, Financial DNA, 2006, pp. 64-67): 1. Adapters – compliant, respectful, courteous, conservative and professional 2. Administrators – discerning and harmonious facilitators, persistent and well-balanced 3. Analyzers – investigators who examine and scrutinize, decision-makers, organized, with a predictable style 4. Cautious Thinkers – vigilant, logical, fastidious, organized and analytical 5. Deep Thinkers – logical, stable, think things through carefully, seek stability and a proven track record, open to education 6. Detailists – diligent and fastidious thinkers, prefer analysis, security and accuracy; gravitate toward tradition over innovation 7. Directors – assertive, visionary ringleaders, energetic motivators, confident and focus on results 8. Drivers – logical, determined, driven by results, fast-paced, demanding, excited by change and logical in relationships 9. Encouragers – easy-going, amiable promoters, enthusiastic and team-focused, easily persuaded and keen to please 10. Harmonizers – supportive, tactful and encouraging 11. Motivators – vigorous and decisive promoters, highly energized and make quick, instinctive decisions 12. Networkers – resourceful, inventive, instinctive, gregarious and see wealth creation as a stepping-stone in upwardly mobile lifestyles 13. Researchers – studious, analytical investigators, cautious and require time to explore, investigate, and test advice 14. Strategic Thinkers – evolutionary, visionary entrepreneurs, highly charged and creative, with their feet firmly set on the ground 15. Stylish Innovators – sharp, demanding, on the cutting edge, ambitious and demand highly sophisticated advice CFP Final Level: Financial Planning Process, Principles and Practice: Module 1 Page 55

16. Supporters – dependable and loyal advocates, make decisions based on history and security, highly practical and reliable Looking at the list should help you see a few things. First, the people with whom you come in contact almost certainly will have different characteristics, personality traits and approaches to life. Second, the different profile types demand financial planning engagement styles that are appropriate to their Financial DNA (i.e., their client characteristics). Most people have a normal or typical way they approach life. The approach tends to remain fairly consistent as they move through life’s stages. However, sometimes an individual may experience an event that upends, at least temporarily, their normal life approach. These life events can create the potential for financial distress, which may become substantial. We will look at some of these life events in the next section. Life Events Most of us sometimes in our life may be faced with situations which upsets normal life experience. Normally everyone has experience of more good than bad experiences. Depending on the event, the financial outcome may be minimal. Unfortunately, significant events can create equally significant financial distress. Sometimes, prior financial planning done and forward movement toward achieving life goals is seriously delayed or completely stopped. Sometimes serious illness and related expenses is one potentially devastating life event. While governments in some countries provide benefits that pay for medical expenses or provide them at little or no charge to the individual. In other situations, the cost of care can be unbearable. As discussed in the Risk Management and Insurance course, when government benefits are not provided or not sufficient, privately-owned health insurance cover is necessary. Clients undergoing significant medical events when the cost to them is unknown can become panicked and put plans on hold. Relationally, they may become less cordial and more difficult to engage. It is not so much that the client has changed character as it is a reflection of the life event. The financial planner can help by guiding the client to available resources. The financial planner may also need to provide guidance with which financial resources can best be applied to the medical expenses. During this period, the financial planner should remain supportive, understanding and available for consultation. CFP Final Level: Financial Planning Process, Principles and Practice: Module 1 Page 56

We should also point out that the best time to discuss the potential for a medical life event and how to cover related expenses is long before the event happens. This general principle is applicable to all life events. It may not be possible to fully prepare, but even partial preparation is better than none. Discussing this with clients also reduces potential financial planner liability. If the medical event turns chronic or lifelong, the financial planner may want to provide contact with professional and community resources to help the client cope. Divorce is one of the most difficult life events. It impacts almost every component of a person’s life. In many ways, it has been identified as being worse than the death of a spouse, because it can be more financially harmful and has at least as much emotional impact. Death is difficult on any number of levels, but life insurance and other financial resources may be used to address the financial need. Divorce creates financial difficulties for both parties and there is no insurance cover to address those difficulties. A divorce comes with significant emotional and mental impact, but there is little that a financial planner can – or should – do to address those needs. The financial planner may also have to choose one of the spouses as an on-going client, and refer the other to another financial planner. This helps to avoid conflicts of interest and addresses the inherent difficulty of maintaining a professional relationship with both spouses during a divorce. Many of the client’s needs during a divorce are best addressed by the legal profession and professional counsellors. However, the financial planner can help by reworking budgets, emergency funds, insurance cover, retirement plans and projections, life insurance beneficiary arrangements and estate planning. You should not make specific recommendations as to how assets should be divided, but you can respond to appropriate legal inquiries about income and assets. Do so carefully, however, and seek guidance from senior members of your firm (if available) and/or other qualified professional advisors. It goes without saying that, during this emotional time, the client’s personality will be stressed, and working with one or both people may become more difficult. As with medical events, compassion, understanding and empathy will go a long way toward maintaining the financial planning relationship (and helping the client). Job loss has the potential to be one of the most financially weakening life events. Almost all financial planning assumes an on-going income stream and asset accumulation. The income stream may be interrupted by medical issues or disability, but insurance cover often is available to help. When income stops as a result of a job loss, the financial solution usually defaults to invading personal savings and invested assets. It’s helpful to know that some countries provide on-going payments, at least for a period, in the event of job loss. However, even in countries that provide financial assistance, eventually, the individual is likely to experience a financial drain. CFP Final Level: Financial Planning Process, Principles and Practice: Module 1 Page 57

In addition to seeking guidance from government or social service agencies, there are two primary methods of maintaining financial stability during a job loss – cut expenses and use accumulated assets. Recognize that there is a limit to the amount of either the client can do. Eventually, expenses will be cut to a bare minimum and assets could be reduced to zero (or close). It’s often better to be proactive employing cost-cutting solutions rather than waiting until they become mandatory. As an example, the individual may be able to reduce motor vehicle expenses by switching to a smaller, more efficient vehicle. Doing this while there is still some discretionary money to apply will be easier than waiting until there are no assets. Similarly, although the decision to do so will be difficult, it may be reasonable to sell the family home and move into a smaller, less expensive house. A better initial solution will almost certainly be to contact the mortgage holder to make arrangements if at all possible. Likewise, paying down at least some existing debt may create some margin in the budget (assuming asses are available to do so). As a financial planner, even though this is technically not your job, you may be able to provide assistance by pointing your client to job hunting resources. You also may be able to make a referral to help the process. Not all life events are negative. Some, like children’s weddings, entering a university, and similar are positive, but also can be expensive and may be stressful. Helping the client to plan for these events and save enough funds will help the positive life events remain positive.Sometimes, client sub-groups may need special care. Seniors are one group that may require somewhat of a different approach, given their time of life and related goals. We will look at client characteristics of seniors next. Working with seniors Seniors or older adults are no different from any other group of adults. They are just as diverse, with just as many different character traits, as younger adults. However, they do tend to have different life goals and objectives as a result of their life stage. Further, seniors often exhibit mental and sometimes emotional characteristics that vary from their younger counterparts. Financially, this group may include people struggling to meet day-to-day living expenses, as well as those who are financially very well established. Often, senior adults have not regularly worked with a financial planner, although some certainly have done so. One thing is certain; seniors comprise an increasingly large group of people as a result of longevity improvements. They also, often, have specialized financial needs that a competent financial planner can help address. It will be helpful to remember that as people enter their later years, they may not process information as well as when they were younger. Sometimes this is a result of mental impairment, but often it’s simply a part of growing older. They don’t process information as quickly as they once did. CFP Final Level: Financial Planning Process, Principles and Practice: Module 1 Page 58

Seniors also tend to grow more cautious and financially conservative. Part of this is a result of recognizing that the money they have is the money they have. They are no longer able to make significant additions to their income or asset base. As a result, their financial focus shifts from wealth accumulation to distribution. Also, they often recognize that they do not process information as well as they used to, so they become slower and more deliberative when making decisions. When working with seniors, it will be very important for financial planners – especially those that are quite a bit younger – to understand the shift in mental faculties and to treat seniors with respect. AARP and the Financial Planning Association (FPA, US) created a document that helps financial professionals work with older clients (AARP_FPA, 2017). In that document they highlight ways in which a financial planning professional can help older clients make good decisions. These include:  Communicating in clear language, free of jargon, that laypersons can understand  Providing written information to take away to study after the meeting  Answering questions in person, without making the potential client feel he or she is being rushed to finish the interview  Creating an office environment that respects the physical and mental needs of older people  Being sensitive to the social, cultural and family dynamics that may influence the client’s state of mind when approaching a financial professional One of the facts of life for older adults is they are growing older. This means that the same is true for spouses, children and other important people in their lives. It’s not uncommon to learn from a client that their spouse has died. As a result, at least in some ways, their lives are turned upside down and inside out. Form many, their spouse was their primary social support, confidant, partner, thinking helper, source of wisdom, sense of stability and purpose . . . in other words, especially when the two have been together for decades, their life. Now, all that is gone and the surviving senior likely is lost and grieving. In this time and frame of mind, that person is vulnerable, and there are those who seek opportunities to take advantage of that vulnerability. You, as their professional financial planner, can, and should, provide stability, guidance and direction. You cannot replace the one who is gone, but you can, in a caring, thoughtful way, come alongside the grieving individual and provide professional compassion and support. Maybe the lost person was not a spouse, but a child or sibling. It doesn’t matter. Situations like this create times of distress and uncertainty, into which you can step up to guide and help the client move forward. Another factor of aging is physical deterioration. Regardless of how a person tries to halt the aging process, it is persistent. Part of that process includes diminished physical prowess and increased physical discomfort. Seniors often are forced to slow down. They get stiff sitting too long. They are less stable as they walk. If they get sick or hurt, it often takes longer to heal. As a result, sometimes seniors CFP Final Level: Financial Planning Process, Principles and Practice: Module 1 Page 59

may seem a little cranky. If so, there’s a good likelihood that it comes from the increasing discomfort of the aging process and the dawning realization that they will only continue to deteriorate. They cannot grow younger and fit. This is why one of the bullet points above suggests that financial planning professionals create an office environment that respects the physical and mental needs of older people. As a simplistic example, does your office have chairs that are comfortable and easy to get up from? Do you have a meeting room close to the entrance, or do clients need to walk a long distance to meet with you? These considerations, and others like them, will help you create a more inviting environment for senior adults. If your senior clients have disabilities, such as arthritis, hip or knee immobility, or similar, try to make your office space safe for them. As nice as they may look, don’t include throw rugs in your décor. Keep electrical cords out of the way along with any other items that may cause the person to trip. For some disabilities, where mobility is greatly compromised, it will be helpful to have doors wide enough for a wheelchair, ramps from the parking lot, handrails on any stairs and on restroom walls. Most seniors do not hear as well as they once did. They also don’t see like they used to. They may not realize it, but it’s probably true. As a result, the senior may seem inattentive or they may not respond well to you. If so, it’s likely not because they are disengaged, they just can’t hear you. When speaking, don’t shout, do make eye contact, don’t speed talk, and provide a written summary of the information you discuss. Similarly, if they cannot see well, they need reports and similar items to have large, clear print – whether online or some other type of media. Lighting is important as is signage and other directional information. Even something as simple as sitting with your back to a window can be improved so they do not have to look into the bright light outside. Many of the financial planning needs of senior clients are covered in the Retirement Planning course, so we will not repeat that information here. Remember that seniors are looking at how best to distribute assets rather than accumulate them. It may be that they need help with their budget for current living expenses. Housing may need to be discussed and perhaps modified. Estate distribution concerns are likely to rise to the top of their minds. If you are not used to working with seniors, you may need to work on shifting your perspective so you enter their world with their adjusted focus. Thinking through the characteristics of senior clients brings to mind another group of clients who will require special attention. These people are not necessarily age-delimited. Instead, this group can broadly be identified as those having special needs. We will explore them next. Working with Special Needs Situations When people think of those with special needs, they often focus on children. While it’s certainly true that children may have special needs, adults share the same potential. As a result, it may be possible to CFP Final Level: Financial Planning Process, Principles and Practice: Module 1 Page 60

work with clients who have special needs themselves, and have dependent children, and perhaps dependent parents, who also have special needs. People with special needs include anyone who requires, or would benefit from, special help or care. This may also include students who suffer from a wide range of physical disabilities, mental or emotional difficulties, or learning disabilities. Special needs reference any of the things needed by people who have an illness or other condition that makes it difficult to function in the way many other people normally function. The things that cause special needs are many and varied. These may include developmental difficulties, physical disabilities, inability to see or hear, speech or language impairment, cancer, heart problems, muscular dystrophy, cystic fibrosis, asthma, diabetes, cerebral palsy and problems related to allergies (which can be much more significant than simply giving someone the sniffles at certain times during the year). There may be a multitude of learning disabilities and behavioral issues. These can include attention deficit hyperactivity disorder (ADHD), autistic spectrum, Tourette’s syndrome and various emotional and psychological disorders. Especially with older adults, special needs may also include various types of cognitive impairment and dementia. To this list we could add many additional conditions, each of which causes the people experiencing them to have some level of struggle adapting to, and integrating into normal life. As this is not a medical or psychology text, nor does it attempt to speak to the sociological nuances relative to special needs, we will limit our exploration to addressing ways in which special needs situations can impact the people involved and their financial planning. Children Children with special needs create a range of emotions and concerns in their caregivers (e.g., parents and other family members). We cannot go into the emotional distress such a situation can cause in the caregivers, but it often is considerable. As such, it can consume much of a person’s ability to think, reason, concentrate, and even to function on a day-to-day basis. Financial planners should keep this in mind when working with the parents of special needs children. We will focus our coverage on financial-related considerations. Planning and paying for care: The degree of extra care required for special needs children depends on the degree to which they may be impaired. Sometimes required care is nominal and does not demand much planning or financial support. However, many situations do require high levels of planning along with increased costs of care. These concerns involve two distinct time periods – while the parents are alive (whether the dependent is a child or an adult) and after the parents have died. In both cases, it CFP Final Level: Financial Planning Process, Principles and Practice: Module 1 Page 61

will be beneficial for parents, and financial planners, to have an understanding of available resources from the government or third-parties (e.g., various care-giving organizations). They will also benefit from knowing the legal issues involved and as already mentioned the additional cost of care (which can be considerable, depending on the level of impairment or disability, and societal-based benefits available through government and other sources). Finding qualified caregivers, especially for children with developmental or physical disabilities, can be difficult. It can also be expensive. As mentioned. sometimes funds from the government, foundations or other organizations can help defray costs. However, almost certainly, parents will have to apply some amount of their income and assets to provide care for their children. At the least, this means a financial planner should incorporate these expenses into the family budget, which will result in less money available for other fixed and variable expenses. As the child moves into adulthood, he or she may require specialized housing arrangements, perhaps with one or more medical (or psychological) attendants. It may be possible to move the young adult into group housing or similar arrangements especially designed to provide an increased level of care. This is helpful for all involved, but also generally increases the family’s expenditures. One way to pay for the increased expenses (during childhood and into adulthood) is through grant money that may be available. Depending on the territory, this money may be provided by the government (perhaps as tax incentives or as outright financial contributions), corporations, foundations or caregiving organizations. For example, Canada has what they refer to as a Registered Disability Savings Plan (RDSP). According to the website, it is a savings plan that is designed to help parents and others save for the long term financial security of a person who is eligible for a disability tax credit. Other territories may offer similar plans. In addition to housing, special needs children/adults often require increased levels of medical care. This may include medications, therapy (physical and mental/emotional), inpatient and outpatient care, specialized caregivers and sometimes travel to places where they can receive special care. Again, all this costs money and takes away from other uses to which those funds might otherwise have been put. Estate planning: If the child outlives the parents, the parents will want to ensure on-going care for him or her. The financial aspect of this is easily understood, but there is an additional concern. While alive, parents often are able to provide guidance and support for their children. After they are gone, however, that guidance goes away, but it still is likely to be needed. Many, if not most, special needs individuals require on-going support for all the areas already mentioned. Parents want to ensure this support continues to beprovided after they are gone. It is likely that the children will benefit from a guardian/administrator/conservator. Some territories use these terms legally and specifically, but even where this is not true, the functions will be needed. For our purposes, CFP Final Level: Financial Planning Process, Principles and Practice: Module 1 Page 62

a guardian is one who functions as a fiduciary (put the child’s interest first). This individual helps ensure that the child (i.e., ward) receives required medical treatment and adequate care for personal needs. A conservator is one, also a fiduciary, who is responsible for managing the financial affairs of the child/adult. This can include everything from paying bills, investing funds, paying for housing and much more. You may also see the term trustee used in a similar capacity. Regardless of the specific term, the special needs child/adult will benefit from having someone who can help them financially and help with day-to-day decisions and concerns. This may be the same person, but often will include more than one individual – sometimes including financial institutions and legal firms. As you would suppose, these services, while valuable, require payment of some sort, which must be included in the parents’ estate planning. Financial planners will not be able (legally or otherwise) to address all these needs personally. When the need presents itself, the financial planner should have resources available to make qualified referrals to competent providers. You can talk through the needs with clients, but almost certainly, you cannot implement everything yourself (and it may be illegal to attempt to do so). Adults Adults with special needs may be the grown-up children we already have mentioned. However, adults may also include one or more parents of your clients or your clients themselves. In addition to the things already covered, these special needs individuals may experience a variety of difficulties. Clients with one or more parents who have special needs share many of the concerns of those with dependent children. However, there is a greater difficulty. Adults are adults, not children, and parents remain parents even when they experience mental or physical impairments. This can make caring for them a bit more difficult. You often can “force” a pre-adolescent dependent child to take medication, embark on a therapeutic regimen, enter a medical facility or similar (although this may become difficult as the child enters adolescence and beyond). It can be almost impossible to do similar with special needs parents. Additionally, the parents are used to a level of personal freedom that they may not be able to continue as they develop various disabilities. They may reject treatment that they should accept. Sometimes, caring for special needs parents may require going through the process of having them declared legally incompetent and therefore unable to care for themselves. This opens the door to exert some level of control over the special needs parent(s) and to provide care as it is needed. It also opens the door to acrimony, legal challenge and family disharmony. As a financial planner, you can provide support and guidance to available resources. You should not allow yourself to become involved in the deeper family dynamics that may arise. CFP Final Level: Financial Planning Process, Principles and Practice: Module 1 Page 63

The amount of financial expense involved greatly depends on the nature and degree of disability. In some cases, the parents may be cared for in their children’s homes, with periodic medical care. Perhaps the home will have to be modified to include mobility aides such as handrails or ramps. In other situations, the parents may require taking residence in an extended care facility with extensive medical intervention. The greater the care requirements, the greater the potential financial need. This is another situation where knowing the available resources (from the government, health care providers, insurers, etc.) can provide needed help. You may also be able to guide the clients to legal and related professionals as they may be required. It will be a good idea to develop a strategy to have on hand to guide you in what to do, how to do it, when to make referrals, and be able to point the clients toward available resources. Some territories have more-or-less standard forms and protocols to employ in these situations. This may include trusts, legal documents that appoint guardians and administrators, health care directives, and similar. Financial planners should know the documents that may be required (or helpful) and where to get them. Be careful about agreeing to complete any document for clients as this may shift into the legal arena and may expose the financial planner to increased liability (and may be illegal). When the Client has Special Needs Sometimes your client is the individual with special needs. Usually, this means the disabilities are less severe than those who come to you via a guardian or administrator. This also means that some of what you may do is prepare the client for the potential of future incapacity. You can help them make arrangements regarding health care directives, establishing guardianship when needed, or creating a special needs trust (this may be a formal trust or a more general one that can be used to address future incapacity). As their financial planner, you will also want to make sure you have a good understanding of their wishes, current and future potential needs. It will be especially important to clearly articulate the scope of the engagement so all parties understand what you will/can do and what you cannot. Depending on the situation and the territory, you may also need to get official legal clearance to work with the client as their financial planner. Some adults with special needs may have learning disabilities. Many of these individuals are able to integrate in society and live on their own. They likely will need some degree of accommodation as they work with you, though. Johan Lang field, a speech and language pathologist-therapist has a website that may provide some helpful guidance for you when working with these adults. Other adults may be living with long-term physical disabilities. In many situations of severe disability, the individual may be struggling with income, housing, healthcare, mobility, along with additional CFP Final Level: Financial Planning Process, Principles and Practice: Module 1 Page 64

concerns. Chances are good you will be part of a care team when you work with an adult in this situation (and if there is not already a team, you can provide guidance so the individual can assemble one). The greatest assistance you can provide is likely in the area of directing the individual to available resources – financial and professional, along with whatever may be provided by the government. You will probably want to provide guidance in developing a special needs trust (this may or may not be a formal tool available in your territory, but the concept is likely is applicable) and with estate planning. Special needs clients will want to ensure they receive needed care in the event they become incapacitated to the extent they cannot effectively communicate their wishes and/or needs. The financial planner will want to engage family members and significant others in a support network so on-going care are relevant and beneficial. Financial care may be needed in areas above and beyond medical care. These include things such as prescription drugs, rental/housing assistance, meals and grocery shopping, caring for dependents, emergency aid, help with utilities and similar, items such as walkers, wheelchairs and additional mobility devices. Motor vehicles may need modification to accommodate mobility devices or to provide improved access. As previously mentioned, homes may require modifications such as ramps, handrails, wider door openings, and specialized furnishings. Two of the more obvious needs in which a financial planner can provide assistance are insurance cover and overall financial management, which can include budgeting, retirement income, and a host of additional need areas. In many cases, getting appropriate insurance cover is difficult or impossible following the onset of a significant disability, so you should plan these discussions early in your financial planning relationship when possible. Following a disability, assistance will likely shift to filing for and receiving available benefits. This may include budgeting, investing (saving) along with the process of filing for the benefits. Financial planners should be able to provide assistance with all these needs. Journey toward Partnership There may be times when you do not get along with a client – for any number of reasons, or no particular reason. Emotionally and relationally, you are likely to have difficulty connecting or relating with one or more individuals. The psycho-scientific area of study around emotions and relationships is known as emotional intelligence, and understanding it may help in these situations. Emotional intelligence (EQ) is the ability to recognize and understand emotions in you and others, and the ability to use this awareness to manage behaviour and relationships (Greaves, 2009). According to the research, “EQ affects how people manage behaviour, navigate social complexities, and make personal decisions that achieve positive results.” There are four skills in two areas of competence that support EQ: CFP Final Level: Financial Planning Process, Principles and Practice: Module 1 Page 65

 Personal Competence  Self-awareness  Self-management  Social Competence  Social awareness  Relationship management Self-awareness is the ability to accurately perceive your own emotions and understand your tendencies over a variety of situations. It includes staying on top of typical reactions to events, challenges and people. Doing this requires extended periods of self-reflection and trying to understand the origin of the emotions and why they exhibit themselves. It’s important to understand why something gets a reaction out of you. The goal is less to discover deep secrets about yourself and more to develop an honest understanding of how you operate, think and feel. Self-management is what happens when a person does or does not act. It depends on self-awareness and is the second component of personal competence. Self-management is the ability to be aware of emotions and direct your behaviour appropriately. Self-management allows an individual to delay initial, current needs so you can pursue more important, significant goals. The second group of skills – Social Competence – begins with social awareness. It is the ability to pick up on other people’s emotions (accurately) and understand what is happening with them. It may include stepping into the other person’s shoes to feel what they feel, even when doing so does not mirror your own feelings. It allows you to consider the other person’s perspective, in part, so you can gather important information for the engagement. The two most important skills of social awareness are listening and observing. It can be difficult to do this when you are in the middle of a client engagement, with the on-going need to be a contributor in the interaction. The final skill is relationship management. In many ways, this skill includes aspects of each of the other three skills. Relationship management is the ability to use awareness of your own emotions, along with those of others, to successfully manage the interaction. Doing this encompasses clear communication and effective handling of conflict. This skill supports your ability to engage with many people, including those of which you may not be particularly fond. It also helps you to get across your point in an engagement. As you develop stronger connections, your ability to engage with the client increases. Stress creates a barrier to positive relationship management, and many client interactions involve some degree of stress. The points discussed above should help you recognize and begin to understand how and why you interact with clients – especially those with whom you are not getting along. It may help you to adjust CFP Final Level: Financial Planning Process, Principles and Practice: Module 1 Page 66

the interaction so that you are better able to engage the client. Especially when you are in an atmosphere of conflict, there are other skills that can help with this process, too. Becoming Allies When you try to work with a client (new or existing) you have the need to influence the client, at least to some degree. “Influence is the ability to move a person to a desired action, usually within the context of a specific goal (Burg, 2013, p. 5).” You cannot force someone to receive your insight or mandate they take a particular action. You have to attract them, or draw them to yourself and your position. You have to persuade them to take action. If you are a financial planning professional, the action you recommend is in their best interest. So essentially, you have to attract and persuade the client to do the thing (or things) that are in his or her best interest and will serve their desire to achieve one or more goals. Doing this requires application of a large amount of respect in how you think of them and treat them. If at any time you find yourself attempting to manipulate your client, you are disrespecting them. The engagement will not work in that environment. Often (but not always), when a client is responding poorly to a financial planner, disrespect or manipulation has a part. The financial planner’s goal has to be, and be seen as, a partner to the client. You are someone who is joining the client on their quest to achieve important life goals. When the client sees the financial planner in this way, he or she will align themselves to the financial planner, because it is in the client’s best interest to do so. Your influence then is a direct result of the degree to which you place the client’s interest first. As simple as this sounds, it is not always easy to do. Even when your suggestions come from a place of partnership, the client may not believe you. He or she may be in a state of being that causes a negative response to you. This may or may not have anything to do with you, but it most certainly will have an impact on you and the engagement. When this is the situation, your goal is to move from being adversaries to being allies, for the client’s benefit. There are five principles to employ as you try to move to being seen/accepted as a partner (Burg, 2013, p. 11):  Control your own emotions  Understand the clash of belief systems  Acknowledge their ego  Set the proper frame  Communicate with tact and empathy CFP Final Level: Financial Planning Process, Principles and Practice: Module 1 Page 67

Human beings typically see themselves as rational, logical beings. Sometimes this is true, but often not. Many times, we make decisions and act based on our emotions rather than a logical position. Emotions are based on feelings, and it’s nearly impossible to rationally interact with someone who is experiencing strong feelings about something. We often take our emotions as being completely true, at least when we are experiencing them. Financial planners experience strong emotions, too. Doing so is not the problem. The problem arises when emotions are allowed to take control. Not only do you need to control your emotions, you need to help your client work within the context of their own emotions. A simple guide is to learn how to respond rather than react. While communicating with clients, using the same words and phrases as your client does not mean you are giving those words the same meaning. You believe one thing about the conversation and the client believes another. Neither side may be totally right or wrong, but the clash of belief systems creates sometimes insurmountable conflict. Belief systems can be rather trivial or they can be based on a lifetime of reinforcement. Either way, when a person (you or the client) has strong beliefs that are in direct conflict with the other, an adversarial relationship can result. It’s not our function to determine which side is “correct”. Our job is to help move beyond this area of conflict. To do so, you can ask some clarifying questions (Burg, 2013, p. 65).  How is my personal belief system distorting the actual truth of the situation?  How is his or her personal belief system distorting the actual truth of the situation?  What questions can I ask this person that will clarify my understanding of their version of the truth (their belief system)?  What information can I give that will help them clarify their understanding of my version of the truth (my belief system)? What either party believes may or may not be the truth. It’s certainly the truth for that person, but it may or may not reflect the actual truth. The questions above can help both parties to understand the clash of belief systems, and begin to move toward partnership. Everyone has an ego. It may be big or small, generally positive or not, but everyone has an ego. Ego is seldom a problem until it gets in the way of engagement and communication. Before thinking that ego is always negative, consider that without it, few things of significance ever are accomplished. A person has to believe he or she can (and perhaps should) accomplish something before there is a chance it will happen (e.g., “I believe I can do this thing”). Ego is simply the state of being . . . the self. It is the idea or opinion you have of yourself, and includes the perceived level of your ability, intelligence and importance. Your client has an ego, and so do you and neither will create problems, unless one or both of you allow your ego to get out of control. When you interact with a client, understand that they have an ego (just like you do) and they want to feel important and valued. CFP Final Level: Financial Planning Process, Principles and Practice: Module 1 Page 68

Your job is to help accomplish this. One tool at your disposal is to find ways to acknowledge that the client is doing good things in good ways. Find one or more things that are right and support them in it. Sometimes, an interaction can seem to get off on the wrong foot. Rather than creating a positive and supportive environment, one or more things cause the engagement to deteriorate. When this happens, the financial planner can often improve the situation by setting the proper frame. By this we mean that you create a context in which the engagement can take place. The frame can be positive or negative, combative or supportive. If the client is in a combative frame and sets it for the engagement, it is unlikely to go well. If the client is combative, and you are able to set a supportive frame, the interaction may take a more positive turn. Doing this, in many ways, allows you to control the engagement. As you set the frame and guide the engagement, it’s best for you to do so by communicating with tact and empathy. While communicating with client, communicating with tact shows respect for the individual. It allows you to communicate in such a way as to make the other person feel more open to what you are saying; less defensive. To be tactful requires empathy. That is, you must consider the other person’s feelings, and say the right words in the right ways to support their feelings. You acknowledge their ego and control your own emotions. A very good way to do this is to think before you speak. Ask yourself how you think the other person will feel as a result of what you say and how you say it. If you need to, edit your remarks before making them. You may also want to review yourself after speaking to determine whether you did so in a positive, affirming manner. None of this means you have to agree with the client. It does mean you should acknowledge that they believe in a certain way and support them. This includes those times when you feel you should guide them away from a plan of action. You can do so (in fact, you may have the responsibility to do so), but do it as a supportive partner. Remember, you cannot make a client do anything. You can only try to influence them appropriately so they agree to move in a direction that will benefit them. It may sound an overstatement, but little or nothing of value can be accomplished unless the financial planner and the client are in partnership. Sometimes this is simple, but other times it can be difficult. In all cases, being a partner requires the financial planner to learn about and understand the client and his or her situation. They may be addressing normal life events or have special needs. They may be young, just starting on life’s journey, or older adults considering how their lives will end. Regardless of the situation, the financial planner has to step into their life situation enough so that he or she can empathize, communicate with tact, and become an ally. Skill in communicating is one of the significant tools at a financial planner’s disposal that can help facilitate a positive client engagement. We will look into this in the next chapter. CFP Final Level: Financial Planning Process, Principles and Practice: Module 1 Page 69

Chapter – 4: Client Engagement and Communication Learning Outcomes Page 70 CFP Final Level: Financial Planning Process, Principles and Practice: Module 1

Upon completion of this section, students should be able to:  Apply effective communication skills in a client engagement situation  Employ effective discovery skills in a client engagement situation Introduction The process of entering into and developing a financial planning relationship with a client is called engagement. Client engagement is more than simply meeting with a client, hearing what they want and providing a potential solution or two. For a Financial Planner, client engagement requires learning about the client and their dreams and goals. It includes helping them to develop and implement strategies to meet those dreams and goals. It often, though not always, involves a period of many years as financial planner and client continue the engagement as financial situations develop and change. When you enter into a financial planning engagement, communication is a significant factor in how well the relationship works. Think about your existing relationships—both personal and professional. In general, the better the communication flow, the better the relationship. Unfortunately, while many of us might think of ourselves as decent communicators, the truth may be somewhat different. Communication Skills Let’s look at two examples of communication problem situations, and then we will explore some ways that may produce positive results (Lowndes, 1993). • Have you ever had an argument over a problem with a spouse, friend, or significant other where one or both of you pointed a finger (literally or figuratively) and placed the blame squarely on the other person? • What was the outcome? • Did you solve the problem, or did the situation escalate into bad feelings and undesirable actions (like yelling things, stomping out of the room, etc.)? • Have you lost a client, and wondered about your contribution to the problem and whether you could have done anything to keep the client? • Is it possible you may have contributed in some way? CFP Final Level: Financial Planning Process, Principles and Practice: Module 1 Page 71

Hopefully these questions help you understand about the place of communication in relationships – both professional and personal, and whether there may be a way to improve your communication skills. Why this discussion about communication is taking place in a financial planning course? 1) You must communicate with clients, and the better you can do so, the better chance you will have to develop a positive and long lasting financial planning relationship. 2) Your client will also be communicating with others: spouse or partner, family members, friends, and other professionals. Not only are you bringing issues and a set of skills into the relationship, the client is as well. While you cannot do much to improve the client’s communication skills, you can improve yours (Kahane, 2007). Following is a list of items and suggestions to consider as you are evaluating your communication skills (Stone, Patton, & Heen, 2010). • When discussing goal and planning scenarios, create hypothetical situations and then discuss the logical outcomes. Reduce the possible outcomes to just the one or two that have the greatest possibility of occurring. • As a financial planner, you are a facilitator. It is not up to you to present the one right answer. In addition to being a financial planning “expert” resource, your primary contribution may be to help the clients explore options, discuss their feelings about those options, and to make a decision with your input (note that the decisions are theirs, not yours, which is why Step 4 in the financial planning process is worded “Developing and Presenting Financial Planning Recommendations and/or Alternatives”). • Include as many stakeholders (significant family, professionals, etc.) as possible in the discussions. • Don’t just try to apply past experiences to the current situation. Remember that past actions/results may or may not be relevant now (and current actions may not have the same results as before). Bring history into the discussion, but be open to exploring alternatives. A better idea is to approach each new client individually and try to arrive at solutions that specifically meet the client’s goals. It may be that “tried-and-true” methods will not provide the best solution in the current situation. • Highly complex problems can only be solved using processes that are systematic, fresh, and participatory (involving you, the client, and other stakeholders). • Remember that the client(s) dynamics may be such that they may be afraid to “open up.” There may have been a lot of “I’m right, you’re wrong” in previous conversations. In such a situation, if you weigh in as the authority figure, you will likely cause distrust and anger. Again, any solutions have to be the client’s solutions, not yours. CFP Final Level: Financial Planning Process, Principles and Practice: Module 1 Page 72

• Politeness can be a way of not talking, and helps to maintain the status quo. This may sound like a good thing, but it’s likely not. Just because an individual is silent does not mean that individual has no opinion or feelings about the current topic. It may be that cultural background or experiential training keeps the individual from contributing to the conversation, and part of the facilitator’s job is to help encourage the individual so he or she will communicate. • Listening openly is of equal or greater importance than talking (and effective talking is crucial). Dialogue is a conversation between two or more people; an exchange of ideas or opinions. At its best, it is not a debate, or an attempt to convince the other person. Rather, good dialogue provides an opportunity for mutual exploration leading to greater understanding. • Do everything you can to ensure that all participants are being heard. To do this, you must be deeply interested in the client. • Leadership does not equal control. A significant difference exists between forcing change and generating change. • When we care deeply about what is being discussed, the issues are important and/or the outcomes uncertain (i.e., just about all financial planning situations), we may experience the conversation as being quite difficult. • Every difficult conversation has three categories: 1. Determining what really happened (or what may happen), 2. Identifying the emotions and feelings about this issue, and 3. Deciding what this situation means to me (and it may involve issues far beyond just the present situation). • Argument is often the result of our inability to see and/or deal with differences in our backgrounds, experiences, and any “rules” we have learned for dealing with situations. • Rather than assuming that we know everything we need to know, we need to discover what we do not yet know. • Proving your point or “being right” seldom accomplishes the real objective. A better solution is to incorporate all positions into potential solutions. The “ultimate” positive outcome is to generate a solution where all parties win. When all parties benefit and no one lose, you have accomplished a positive objective. • Remember that emotions can play a big part in the conversation and decision-making process. Many studies have shown that many investors’ portfolios underperform the market as a result of poor choices. The reasons for making a considerable number of these choices can have roots in the individual’s past. The emotional impact of few major events in a person’s early life often contributes to making inappropriate financial choices today. CFP Final Level: Financial Planning Process, Principles and Practice: Module 1 Page 73

Helping the client to gain understanding into emotional roadblocks to better financial health can be one of the most significant activities a planner can undertake. The preceding list does not represent the definitive word on communication. Use the bullet points to help explore your communication skills and how you might improve them. You should also use these points as you consider client interactions and the dynamics involved. In any case, the financial planning process requires sharing a lot of information, and that requires good communication skills. Addressing Communication Concerns Communication with clients often involves persuasion (Goulston, 2009)[14]. That is, trying to move people from one point or state to another (e.g., angry/frustrated/fearful to understanding/calm/unafraid). When trying to persuade an individual, remember that all persuasion tends to progress through the steps of the persuasion cycle. To move through the cycle, speak with people in a way that moves them from: • Resisting to listening • Listening to considering • Considering to willingness to take action • Willingness to act to acting • Acting, glad they did and continuing to do so To reach (communicate) with fearful or angry clients, you will need to help them avoid getting locked into amygdala control. If the amygdala is already in control, then the best you can do is to try moving them from that point into a more rational position, though ideally much easier to help them not get to that point than to move them out of it. The mirror neuron is another component of the brain that impacts our ability to do all of this. Mirror neurons allow one person to mirror another person’s actions or state. It may be that mirror neurons are largely responsible for people’s ability to empathize. It appears that we have a built-in need to mirror the world, and in turn, be mirrored by those important to us. Unfortunately, that mirroring does not always happen, with the result that we can develop what Dr. Goulston refers to as “mirror neuron receptor deficit” (Goulston, 2009, p. 19). This deficit leaves us feeling under-heard and unappreciated. By mirroring or empathizing with another individual, we can open the lines of communication that previously had been closed. These guidelines can help you get through to another person. (Note: the following list only provides an outline. Actual implementation involves more specific steps that can be learned from Dr. Goulston’s book.) CFP Final Level: Financial Planning Process, Principles and Practice: Module 1 Page 74

• Move from “all is lost” to “things are OK” • Get your own emotions under control first • Don’t dawdle; get yourself under control quickly • Rewire yourself to listen • There is a major difference between hearing and listening • Be cautious about forming a “gut” opinion or categorization before you learn the facts • Make the other person feel “felt” • Instead of trying to get the upper hand, focus on cooperation and collaboration • Listen to truly understand • People may reject what you are offering because they are afraid they will make a mistake • When they realize that you understand, many of the walls they have erected can start coming down • Be more interested than interesting • Be more interested in listening to the other person than in impressing them. • Being interested in someone allows you and them to mirror feelings. • Don’t try to fake being interested. Really be interested. • Ask questions, such as, “What person has had the biggest influence on your life?” or “How did you get into the work you are doing?” These types of questions allow the other person to open up about themselves far better than if you just ask yes/no questions. • Bonus: by being interested and expressing interest in another person, you open the door for them to be interested in you (mirroring). • Make people feel valuable • A common denominator with high-maintenance people is they feel as if they are not being treated well enough. That is, they do not feel valuable or important. • If you want a person to stop “driving you crazy”, you will have to satisfy their need to matter. • Help people to exhale emotionally and mentally • When people move into distress, they often lose sight of their long-term goals as they look for ways to find relief. This tends to make them less rational/reachable. • When a person is deeply distressed, do not add to their stress. • Exhaling moves the person from deep stress to a more relaxed state – they gain breathing room. • Helping someone to do this also builds a bridge between you and them. • Check your dissonance at the door • Dissonance occurs when you think you are coming across one way, but people see you in a totally different way. • Dissonance makes a person stop thinking about what you can do for them, as they start to wonder what you might do to them. CFP Final Level: Financial Planning Process, Principles and Practice: Module 1 Page 75

• Since you cannot read minds, you have to check with people to learn how you are coming across (and be willing to change what needs to be changed). • When all seems lost — open up • Rather than trying to seem perfect or invulnerable, be willing to open up about relevant mistakes, fears and insecurities. • Based on the concept of mirroring, when you do this, the other person may well do the same, or at least become more empathetic with you. Communication takes work — focus, involvement, openness, and a willingness to adapt. The guidelines above suggest ways to do that. You might look at the preceding list and wonder exactly how to implement all of the items. Perhaps a better approach is to internalize the concepts, then determine their application in your own life and practice the best implementation methods one step at a time. Discovery Process Gathering client data is crucial to good financial planning, but it is not the same as discovery. Discovery is the process of learning about the client – really learning about the client. Discovery can include both qualitative and quantitative information, and the primary focus for the financial planner is to discover the client’s life dreams and goals, along with information to help facilitate the process of developing strategies to help the client achieve those goals. Curiosity is one of the best financial planner characteristics for the discovery process. When the financial planner is curious to learn about clients, the discovery process will be more beneficial and will flow naturally. During the discovery process the financial planner can begin to understand the client’s background, attitudes, values and dreams about their life now and in the future. The process includes client’s feelings about philanthropy/charitable giving, their legacy and leaving bequests when their life ends. It includes their money psychology and overall feelings about and motivations around money. Discovery includes gathering quantitative data, but it embraces much more than that. “As an example, while a data gathering question might ask, “Have you taken steps to reduce taxes at your death?” A discovery question will ask, “How do you want to be remembered?” Page 76 A data gathering question may ask, “Do you consider yourself a conservative, moderate or aggressive investor?” Discovery might ask, instead, CFP Final Level: Financial Planning Process, Principles and Practice: Module 1

“What do you consider the greatest risk to accomplishing your goals?” Data gathering needs to know how much money is needed to educate children. Discovery may want to know what the clients’ goals are for their children.” This does not mean data gathering is unimportant. It is vital, and must be done. However, it can most effectively be accomplished as part of a well-planned discovery process. There are many ways in which a financial planner can guide the discovery process. As we have said, one of the core attributes that will help the financial planner conduct a successful discovery is to be curious. This means, for example, being more interested in learning about your client than how much money they have and what insurance they may need. Developing a curious mind, then, is one of the primary building blocks of for a financial planner to guide the discovery process. Among the questions you will want to answer are: • What is important to your client? • Why are they sitting in front of you? • What do they want to accomplish in their lives? • How can you, as their financial planner, guide them to achieve their goals? The first part of this chapter’s title is Client Engagement. Engagement requires the financial planner to understand the client’s concerns and life goals and dreams for themselves, their family and other important people in their lives. As a financial planner, you function as a facilitator. This means, in part, your job is to help clients explore various options; help clients to discuss their feelings and concerns about the options; and make good decisions with your input. Remember, as a facilitator, it is best for the financial planner to guide, but not control the conversation. Broadly speaking, engagement happens when the financial planner and the client are both working to accomplish the same goals; that is, supporting the client so he or she can effectively move forward to achieve their life goals. One path to doing this involves applying the appreciative inquiry process, which we will explore below. Listening Think of client engagement as a learning journey where your goal is to learn both from what is said and what is unsaid. From this, you can identify potential roadblocks and what really is important to the client. The only way to discern this is to listen. Listening is a learned skill and one with which many CFP Final Level: Financial Planning Process, Principles and Practice: Module 1 Page 77

people struggle. Most people do not listen with the intent to understand. They listen with the intent to reply. For this not to typify your client engagement you must learn – or relearn – listening skills. Listening skills It will be helpful to understand that there is a fundamental difference between hearing and listening. Hearing is easier and more common than listening. To listen, a financial planner must do away various preconceptions and filters and engage his or her mind, making it fully attentive on the entire interaction with the client. As Dr. Goulston explains, “Without realizing it, we categorize people instantly in the following sequence (Goulston, 2009): • Gender • Generation (age) • Nationality (or ethnicity) • Education level • Emotion “The sequence goes in this order because we see a person’s gender, generation and nationality first, hear the person’s education level second, and feel the person’s level of emotionality third.” As you work with clients, keep this filter sequence in mind and it will help you do a better job of really listening to your clients. It may seem simplistic, but part of your objective is to move beyond knowing things about your clients, to actually knowing your clients. It’s true that you cannot do this very well in one short meeting. You can get started, but the process will require extended time together. That said, by starting the process at the beginning of the relationship you will be better able to continue the process throughout the relationship. Doing this makes for a meaningful client-planner relationship and allows you, as the financial planner, to more effectively develop strategies to help your clients achieve their life goals and dreams. This is especially important in situations where your client is experiencing life and financial stress. What that individual often wants is to be heard – and to feel heard. What the financial planner sometimes wants is to get down to business. The two approaches do not work well together. It is not necessary for a financial planner to begin practicing as a psychologist or counsellor. In fact, unless educated and licensed in that capacity, doing so can be criminal. Instead, the practice of active, unfiltered listening often opens doors and allows for effective financial planning to happen. Expanding on this information, we can consider empathetic listening (Leal III, 2017). Empathetic listening skill, according to author Leal, has five steps: CFP Final Level: Financial Planning Process, Principles and Practice: Module 1 Page 78

• Quiet your mind and focus on the other person as they are speaking. Put yourself in their world, look from their point of view. • Listen fully and openly to what they are saying. • Listen through the words to the deeper thoughts and feelings that you sense from the speaker. • Don’t interrupt them as they are speaking to you. Just listen! • Say back to them, in your own words, what they said and their feelings that you sensed from them to make sure you understand them correctly and they feel understood. Guidance and the listening process Part of the listening process includes guiding the conversation. As a practical matter, discovery can extend for a long time if the financial planner does not direct it. Although it might seem like it, this does not contradict earlier suggestions of listening without filters and without preparing for what you will say in response to what you are hearing. In fact, you can prepare to provide guidance even before the discovery meeting begins. The first part of doing this is to develop questions to guide the conversation. The second is to have a structure within which you will conduct the meeting. Developing both prior to meeting with the client will give you greater freedom to listen to the client. We have already explored the first two aspects to setting the structure: engaging the client so he or she sees you recognize there is an issue (or more) worth discussing and listening to the client in such a way that he or she comes to believe you understand them. Building on the first two steps, the financial planner needs to frame the discussion. This means that the client will gain clarity on the issues involved in his or her situation. You cannot frame the discussion unless you first listen well. The fourth step is to help the client envision, or see the true aim. That is, they understand what achieving their goal looks like and will know when they have achieved it. Finally, the financial planner must help the client commit to a plan of action by helping him or her to understand what it will take to achieve the vision, and understand that the financial planner is able and wants to help implement the plan. To summarize, the five steps in setting the structure are: • Engage • Listen • Frame • Envision CFP Final Level: Financial Planning Process, Principles and Practice: Module 1 Page 79

• Commit Asking questions is part of the process of guiding the discovery session. The financial planner should develop potential questions prior to beginning the meeting with a client. Following are some suggestions for doing this. • Is there anything urgent we need to deal with right away? • Why are you here / what would you like to accomplish? • What can you tell me about yourself? • Describe a time when you feel you were living positively. • What do you value most in your life? • Imagine you are financially secure, that you have enough money to satisfy all your needs, now and in the future. • How would you live your life? • Would you change anything? Answers to these, and similar, questions will help you begin and work through the discovery process. Looking at questions a bit more broadly, here are a few things to think about as you consider questions to ask and reflect on the answers you receive. Evidence • How do you know what is true or false? • What evidence counts? Viewpoint • How might this look if you stepped into other shoes, or looked at the situation from a different direction? Connection • Are you seeing a pattern? • Have you seen something like this previously? Relevance Page 80 • Why does this matter? Conjecture • Ask your client, “What if things were different?” CFP Final Level: Financial Planning Process, Principles and Practice: Module 1

The last consideration (Conjecture) is one of the most important for individuals who feel stuck in their current situation. In many cases people who feel stuck cannot envision any alternatives. By asking what if things were different, you may be able to break them out of their current thinking pattern so they can consider alternatives. When you do this, you will be better able to guide them to consider steps to move forward. We have referred to active listening as being a significant part of engaging clients. To listen actively includes the things that have been identified above. The active listening process also includes direction or guidance, as we have suggested. Is there an overall focal point or objective to how a financial planner guides the client interaction? There is. The primary goal of client conversation is to get all relevant information out into the open (Kerry Patterson, 2011). This is the essence of a successful client conversation, and doing this may not be as easy as it seems. For any number of reasons, clients may hold back on providing important information. Sometimes this is a trust issue. Other times they may be embarrassed to reveal certain details. At times, they may not be aware of information that the financial planner knows is relevant and important. By skilfully guiding the discovery process, asking carefully crafted questions and listening well, the financial planner can accomplish much that might otherwise not happen. There are many ways to work through an effective discovery process. One that has proven to be especially worthwhile is incorporating Appreciative Inquiry. We will look at this next. Appreciative Inquiry Appreciative Inquiry (AI) was first developed as an alternative system to traditional change management for businesses. It has since become part of many interactions, including financial planning client engagement. The traditional approach is to identify problems, do a diagnosis, and find a solution. Because the focus is traditionally on identifying problems, that is what is found. The result is to amplify what’s wrong rather than look for what might be right or good. Many business systems have this focus, and a majority of solutions use this approach as their starting point. Appreciative Inquiry shifts the focus by looking at what is good and what is working. This is not mindless happy talk. One of the AI assumptions is, what we focus on becomes our reality; focus on what is wrong or missing, and we tend to see things through that filter. By focusing on the positive CFP Final Level: Financial Planning Process, Principles and Practice: Module 1 Page 81

aspects of a client’s situation, the financial planner can more easily help the client move forward and accomplish goals rather than plod along solving problems. Problems may well exist, but the focus shifts to goal-achievement. By doing this, problems get solved in the context of reaching goals and achieving life dreams. Any issues that are not necessary to accomplish this more positive purpose fall by the wayside. Helping the client visualize the future they desire allows them to employ their resources to accomplish that future. They may not have thought doing so to be possible, but as they visualize the possibilities, they will also begin looking at ways to achieve their goals. This is a much better approach than having clients focus on what they are missing, the money or time they do not have, and the reasons accomplishing their dreams/goals is impractical, if not impossible. Look at the contrast between problem solving and Appreciative Inquiry (Hammond, 2013). Problem Solving • Identify the problem • Analyze the causes • Analyze possible solutions • Create an action plan to solve the problem Appreciative Inquiry • Appreciate and value the best of what has been done (what is) • Envision what might be • Dialogue what should be (what would be the ideal condition or future) • Innovate potential solutions for what will be To help as you consider how to include the AI process, consider the following set of case facts. Amresh and Priyanka, age 45: Case Facts Amresh is a successful businessman, working with a large manufacturing firm. He is paid very well, and has little debt. However, he has hardly saved any money, and therefore has only a relatively small net worth. Amresh is currently single, and has a daughter (Angel, age 18) from a prior marriage. He has an active lifestyle and is in good health. Goals: • Amresh’s primary goal is to retire in 20 years at age 65. He has never told anyone, but his great interest and desire is to move to wine country, purchase a vineyard, and begin producing wine. CFP Final Level: Financial Planning Process, Principles and Practice: Module 1 Page 82

He has no experience as a wine maker, but has visited many vineyards and wineries and fully enjoys their production. • Amresh has a secondary goal of helping Angel complete her higher education, including her graduate studies. He is paying her expenses out of current income, but would be interested in a better funding solution. Concerns: • Primary concern – little savings other than retirement savings he has through his employer. He always seems to find ways to spend everything he earns. • As a result of his spending habits, Amresh does not believe he will ever be able to move to wine country and purchase his vineyard. This is one of the reasons he has not shared this goal with anyone. • Amresh enjoys his work, but is unhappy with the level of stress resulting from performance expectations. He is worn out, and would like to reduce his work load, but does not see any way to do so. • Supporting Angel’s education and other expenses is one reason Amresh feels he must continue with his current work load. Although he loves his daughter and wants to support her, the situation has Amresh feeling a bit “stuck”. Back Story: Amresh has been financially successful (e.g., high income, nice house and car, etc.) for many years. Most of his family, however, has been far less affluent. As a result, many family members have gotten into the habit of coming to Amresh for help whenever they have a financial need. The context in which the family has approached Amresh is through creating guilt – i.e., he should help them because he has money and they don’t. Subconsciously, over the years, Amresh determined that if he never had any money, he could not be guilted into giving in to his family’s demands. To support his subconscious decision, Amresh proceeded to spend almost all of his annual earnings every year. As a result, he has lots of nice things and has taken nice vacations, but he has little real net worth, meaning that not much of his assets are liquid and available for reaching goals. Discovery Process Objectives: • Learn about Amresh’s current situation, including little or no savings. • Learn about Amresh’s two main goals (vineyard/winery and Angel’s education) • What would make him happy? • What would a “perfect” retirement look like to him? • What would he like to do for Angel; how would he like to support her (in financial and non-financial ways)? In other words, what’s important to him? • Learn enough about his money psychology to gain some insight into why he has not saved money. CFP Final Level: Financial Planning Process, Principles and Practice: Module 1 Page 83

• Gain his agreement to begin moving forward together on developing a plan to achieve his real goals. After reading the information about Amresh, how might you go about learning the information provided in the case facts? a) What would be your approach if you were to use a more traditional process? b) What would your process be to discover Amresh’s problems and develop solutions to those problems? c) How would you approach be different if you shifted to more of an AI process? Would you learn more about Amresh’s desire to own and operate a vineyard? d) Would it be more possible to help Amresh overcome some of his behavioral/psychological biases? e) Do you have a sense of which approach might help you engage Amresh and develop a successful financial planning relationship? At this stage, it is important for you to recognize that this course is not suggesting that you apply the AI process to every client interaction. You should incorporate it, or aspects of it, as appropriate to each client engagement. That said, the course is suggesting that you consider AI as the foundation for how you approach the discovery process with clients who have more than basic financial planning needs. The topic of effective client engagement and communication is one that all financial planners should continue exploring throughout their career. Chapter 5: Critical Thinking Page 84 CFP Final Level: Financial Planning Process, Principles and Practice: Module 1

Learning Outcomes Upon completion of this section, students should be able to:  Demonstrate the ability to employ critical thinking to make appropriate decisions Introduction “Francis Bacon, the great English philosopher, statesman and advocate of the scientific method, wrote in 1605, “Critical thinking is a desire to seek, patience to doubt, fondness to meditate, slowness to assert, readiness to consider, carefulness to dispose and set in order; and hatred for every kind of imposture.” Robert H Ennis, who published a seminal paper on critical thinking in 1962, defines critical thinking as “reasonable reflective thinking that is focused on deciding what to believe or do.”Philosopher and educator, Matthew Lipman, wrote in 1988 that critical thinking is “skillful, responsible thinking that facilitates good judgement because it (1) relies upon criteria, (2) is self-correcting, and (3) is sensitive to context.”” (SWTJC, 2015) We can summarize each of these quotes by stating that critical thinking involves good judgment, reflection, patience, carefulness and sensitivity to context. You might reasonably ask what this has to do with the financial planning process. The short answer is – much. Among other things, critical thinking requires you to evaluate what you are taught about financial planning, put it in the context of your environment and experience, and determine to apply it in ways that will help clients best accomplish their goals. It is “the process of independently analyzing, synthesizing and evaluating information as a guide to behaviour and beliefs”. Critical thinking mandates that financial planners never simply embrace certain practices or recommend specific products because they seem to be popular or recommended by others. The most critical part of critical thinking is thinking. In this chapter, we will explore critical thinking and how it applies to financial planning, the financial planner and the client. Stranded on a Mountain Exercise Read through the following exercise and reflect on your response (Winnipeg Regional Health Authority, 2017): CFP Final Level: Financial Planning Process, Principles and Practice: Module 1 Page 85

After your small light aircraft crashes, your group, wearing casual clothing, is stranded on a forested mountain in appalling winter weather (snow covered, sub-freezing conditions), between 50 and 200 kilometres from civilization. You are not sure of your whereabouts, and radio contact was lost one hour before you crashed, so the search operation has no precise idea of your location either. The plane is about to burst into flames and you have a few moments to gather some items. Aside from the clothes you are wearing which does not include coats, you have no other items. It is possible that you may be within mobile phone signal range, but unlikely. Your aim is to survive as a group until rescued. From the following list choose just ten items that you would take from the plane, after which it and everything inside is destroyed by fire. List of items: • Pack of 6 boxes x 50 matches • Roll of polythene sheeting 3m x 2m • 1 bottle of brandy • 1 crate of bottled spring water (twelve liters in total) • Small toolbox containing a hammer, screwdriver set, adjustable wrench, hacksaw and large pen-knife • Box of distress signal flares • Small basic first-aid kit containing plasters, bandages, antiseptic ointment, small pair of scissors and pain-killer tablets • Tri-band mobile phone with infrared port and battery half-charged • Clockwork transistor radio • Gallon container full of fresh water • Box of 36 x 50gm chocolate bars • Shovel • Short hand-held axe • Hand-gun with magazine of 20 rounds • 20m of 200kg nylon rope • Box of 24 x 20gm bags of peanuts • Box of tissues • Laptop computer with infrared port, modem, unknown software and data, and unknown battery life • Inflatable 4-person life-raft • Compass • Large full Aerosol can of insect killer spray • Small half-full aerosol can of air freshener spray • Notebook and pencil • Travelling games compendium containing chess, backgammon & draughts CFP Final Level: Financial Planning Process, Principles and Practice: Module 1 Page 86

• Sewing kit • Whistle • Flashlight (torch) with a set of spare batteries • Box of 50 night-light 6hr candles • Bag of 6 large blankets In the original context, this was presented as a team-building exercise with the following instructions: First you have five minutes by yourself to consider and draw up your own individual list of what the team should have, without consulting with other members of the group. Keep this list after presenting it briefly to the group. Then you have 15 minutes as a group to discuss and agree a list on behalf of the group. Nominate a spokesperson and present this new list. Afterwards, you can discuss with the team as a whole the benefits of discussion, teamwork, collective expertise and group communication skills in the team approach to compiling the list, compared to each individual working alone to establish a list. For our application, consider how working through this exercise may involve critical thinking skills. How would you make the required decisions? On what basis would you make your choices? How would you evaluate suggestions from team members that differ from what you believe to be the best choices? How could you embrace a compromise position? There is no right or wrong answer to the preceding scenario. It is included solely as an exercise to help students consider their thinking and evaluation process. Here is another example that illustrates an important critical thinking component (Walter Danesi, 2015) Put these bodies of water in order in terms of volume, from smallest to largest. 1. Lake 2. Pond 3. Ocean 4. Brook 5. Sea The correct answer order is 4-2-1-5-3 . . . but is that actually correct? Is it possible that total water volume in a brook might exceed the water volume in a pond? Are all seas, by volume, greater than all lakes? What about bodies of water that sometimes are considered lakes and other times seas or oceans? Lake Tanganyika (Tanzania, Africa) has a water volume of 18,900 km (4,500 cu mi)[17]. Do any seas have a lower volume (yes, the Dead Sea in Israel is 147 km; 35 cu mi). While the suggested order CFP Final Level: Financial Planning Process, Principles and Practice: Module 1 Page 87

generally is true, you can see how even something this straightforward can benefit from a degree of critical evaluation. Critical Thinking in the Financial Planning Process The preceding exercise helps to identify what Daniel Kahneman identifies as System 1 and System 2 thinking (Kahneman, 2011). Kahneman, winner of the Nobel Prize in Economics, showed that System 1 thinking is automatic, with little or no effort, and System 2 requires some level of cognitive effort. Examples of activities attributed to System 1 include: • Read words on large billboards • Drive a car on an empty road • Understand simple sentences • Orient to the source of a sudden sound System 2 operations are more diverse, and include: • Maintain a faster walking speed than is natural for you • Fill out a tax form • Focus on the voice of a particular person in a crowded and noisy room • Check the validity of a complex logical argument Both lists could be quite a bit longer, but the examples provide enough contexts for our exploration. The last bullet point directly relates to the exercise example above. Most people working through the exercises arrive at solutions that seem logical to them. This typifies System 1 thinking – automatic and familiar. It is only after being presented with additional information that requires a shift in thinking that we tend to engage System 2. Financial Planner Biases Consider how this can play a part in the financial planning process and your interaction with clients. By the time most people are working through the education program to obtain CFP certification they have been exposed to the financial services arena for at least a few years . . . long enough to develop a basic understanding of clients and the general issues they tend to bring into a financial relationship. Many students also have already developed standardized answers and solutions to typical client requests and situations. CFP Final Level: Financial Planning Process, Principles and Practice: Module 1 Page 88

For example, if a client were to ask for help investing money to achieve a future goal, the average student will mentally begin putting together a solution based on previous encounters and information. If a client self-identifies as being a parent, divorced, widowed, single, young or old, educated or uneducated, wealthy or not quite there, it’s common to make assumptions – automatically – about what they want, need, and will be interested in. While there is nothing intrinsically wrong with this, there is not much right about it either. Each client is an individual, and has individual needs, wants, background, knowledge, risk profile, timeframes, and their own biases. Developing and attempting to apply a pre-packaged solution for all types of clients does a disservice. It’s better to approach each client as the individual they are and apply your knowledge and understanding to develop solutions based on them, rather than presenting a pre- packaged solution. In addition to what has already been said, it’s important to recognize that financial planners also have biases about investments, insurance, markets, financial management schemes and other areas. Once again, having a bias is not necessarily a problem, especially if it is based on prior research and is recognized as being a bias. For example, you may have researched potential investments for many clients and determined that individual bonds are a better choice than a bond fund. While this sometimes may be true, be assured that it is not always true. The problem does not arise in having the bias. The problem arises when you automatically apply that bias to every client situation. What is Critical Thinking? We have been exploring critical thinking. At this point it is reasonable to describe what it is. For a person to carry out critical thinking, three things are needed (Wilson, 2017): • To be able to reason and engage in active learning, as opposed to waiting to receive information as you remain passive • To be prepared to question ideas as well as assumptions in a rigorous manner instead of just accepting them at face value. As a critical thinker, you are expected to make efforts to establish if the ideas and arguments before you, and any related findings as well, are representative of the whole picture. As you do this, it is important that you be open to finding out what you did not expect as well as what you did expect. • To be in a position to identify and analyze problems, all in a systematic way. In short, in critical thinking, you do not base your decisions on mere intuition or opinion. You do not rely solely on your instincts to make judgment. CFP Final Level: Financial Planning Process, Principles and Practice: Module 1 Page 89

Here is something interesting about the recommended process. Authors suggest five steps in the critical thinking process (Guffey, 1998). They may seem somewhat familiar. 1. Identify and clarify the problem 2. Gather information 3. Evaluate the evidence 4. Consider alternatives and implications 5. Choose and implement the best alternative In case you are wondering why the preceding steps seem familiar, let us review the steps in the financial planning process: 1. Establish and define the relationship with the client 2. Collect the client’s information 3. Analyze and assess the client’s financial situation 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 Note the similarity. If we were to change a few words, the two processes would be identical (with the addition of Step 6 in the Financial Planning Process). To follow the steps in the financial planning process is to embrace the critical thinking process. Although critical thinking is a much larger subject than our current exploration, we can safely say that one of the keys for a financial planner who wants to embrace critical thinking is to follow the steps and intent of the financial planning process. Doing so will help practitioners step away from automatic biases, evaluate each situation, and develop individual strategies to help each unique client achieve life goals and dreams. The philosophy department of the University of Hong Kong summarizes critical thinking this way, all of which relates to the financial planning process: Critical thinking is the ability to think clearly and rationally about what to do or what to believe. It includes the ability to engage in reflective and independent thinking. Someone with critical thinking skills is able to do the following (Lau, 2017): • Understand the logical connections between ideas • Identify, construct and evaluate arguments • Detect inconsistencies and common mistakes in reasoning • Solve problems systematically • Identify the relevance and importance of ideas • Reflect on the justification of one's own beliefs and values CFP Final Level: Financial Planning Process, Principles and Practice: Module 1 Page 90

What skills will help the financial planner develop critical thinking ability? We can identify six skills that will help you grow in your critical thinking ability (Tilus, 2012): 1. Interpretation • Understand the information with which you are being presented • Communicate the meaning of that information to others 2. Analysis • Connect pieces of information together to determine what the intended meaning of the information was meant to represent • This allows you to read between the lines and help you understand how the information can be applied and how it will impact your strategy 3. Inference • Understand and recognize what elements you will need in order to determine an accurate conclusion or hypothesis from the information you have at your disposal 4. Evaluation • Evaluate the credibility of statements or descriptions of a person’s experience, judgment or opinion • Measure the validity of the information being presented 5. Explanation • Be able to restate information so you can add clarity and perspective • Help those with whom you share the information understand it 6. Self-Regulation • Be aware of your own thinking abilities and the elements you use to find results • Know when you would benefit from making a referral, doing more research, or getting help To this list we can add observation, which represents your initial approach to a topic or situation and reflection, which points to taking the time to think deeply and carefully about what’s going on. Finally, you should be able to make more informed, reasoned decisions as a result of working through the critical thinking process. This chapter has presented critical thinking almost as if it is simply a series of skills you can learn and apply. This is not so. The skills and guidelines presented in this section will most certainly support critical thinking. However, critical thinking is an overall approach to life and learning. Learning the skills CFP Final Level: Financial Planning Process, Principles and Practice: Module 1 Page 91

will help, but without a mind set on the process of consideration, reflection, evaluation and analysis of information, there will be no real critical thinking. As such, critical thinking represents a way of being. This applies to the discussion of engaging clients and when necessary, working with them so they move from adversaries to allies. The thoughts in that section all revolve around the critical thinking process, although this was not mentioned. The only way to engage clients appropriately is to open your mind, clamp down on your biases, and listen, not to respond, but to learn and understand. This is critical thinking. Even determining how to apply and follow the financial planning process benefits from critical thinking. Ask yourself, “How was the process developed?” “Why are the steps included, while other steps are not included?” “In this particular client situation, is there a reason to modify the process, and if so, what is the reason and how should I proceed?” The financial planning process has been developed and standardized over more than 40 years, by a large number of academics and practitioners. However, this, on its own, does not give you sufficient reason to accept the process without carefully considering it and its application. As you approach financial planning and each client engagement, as you apply the knowledge, skills and abilities you have gained, employ a healthy dose of critical thinking. The more you do this, the more you will approach your professional practice and development with wisdom, gaining insight and understanding with each interaction. In many ways, this is the heart of being a financial planning professional. Chapter 6: Regulatory Environment of Financial Planning - India CFP Final Level: Financial Planning Process, Principles and Practice: Module 1 Page 92

Learning Objectives  Understand the legal and professional requirement of advice  Describe the regulatory environment of financial planning related to advice and Differentiate between FPSB’s financial planning process and its scope under Investment Advisers Regulations.  Understand SEBI (Investment Advisers) Regulations, 2013  Understand the eligibility criteria for Investment Advisers – qualification, certification, experience  Describe other mandated requirements and procedures for Investment Advisers  Analyze the implications of holding out as advisers – individual and non-individual  Understand and analyze general obligations and responsibilities of Investment Advisers  Describe the Code of Conduct of Investment Advisers  Describe other Procedures and Compliances to be observed by Investment Advisers  Understand SEBI’s role in adjudicating contraventions of the SEBI (Investment Advisers) Regulations, 2013 Knowledge Items  Legal and Professional Requirement of advice Advice for different products under respective regulations  SEBI (Investment Advisers) Regulations, 2013  Definitions of Investment Advice, Investment Adviser, Financial Planning, etc.  Investment Advisers Regulations and FPSB’s Financial Planning Process  Requirement to register and exemptions from registration  Eligibility criteria for Investment Advisers – qualification, certification, experience, etc.  Investment Advisers – individual and non-individual  Other mandated requirements and procedures for Investment Advisers  Segregation of advice and execution services, and other disclosures  Managing conflicts of interest: General obligations and responsibilities of Investment Advisers  Code of Conduct for Investment Advisers – Fiduciary relationship  Broad Powers of SEBI to adjudicate and impose penalty  Other Procedures and Compliances required of Investment Advisers  Other Regulations relevant to Compliance and Practice CFP Final Level: Financial Planning Process, Principles and Practice: Module 1 Page 93

 SEBI ( Prohibition of Fraudulent and Unfair Trade Practices relatingto the Securities Market) Regulations, 2003  SEBI(Prohibition of Insider Trading) Regulations, 2015 Introduction Financial planning comprises the whole range of financial services related to personal finance and includes analysis of client situation, financial goal setting and recommendation of financial strategies. Various financial services, such as, insurance, investment, and retirement along with associated financial products continue to be under sector-specific regulators who govern respective product manufacturers and dispensing entities through regulatory frameworks. The relevant Indian regulators from this perspective are: 1. The Reserve Bank of India (RBI), which controls India’s monetary policy, foreign exchange management, functioning of banks in India; 2. The Securities and Exchange Board of India (SEBI) regulates and controls all services related to stocks/bonds, stock broking, portfolio management, collective investment schemes, and mutual funds, futures, and options on stocks/index; 3. The Insurance Regulatory and Development Authority of India (IRDAI), which regulates all insurance products, life, non-life, and health, and their issuer insurance companies and intermediaries of such products; and, 4. The Pension Fund Regulatory and Development Authority (PFRDA), which manages the National Pension System (NPS), a defined contribution plan mandated for all who joined government services after January 1, 2004. NPS is available to the organized sector, private sector employees, and the general public. Various other deposit schemes and provident funds are directly supervised by the Government of India through post offices and various ministries. Chartered Accountants are usually employed by individuals, especially the upper-middle class and HNWI to manage tax and compliance requirements, whereas estate planning through trusts and other structures are managed by legal professionals. Financial Planners must have adequate knowledge to supplement both these professionals and advise the client prior to engaging chartered accountants or lawyers. Legal and Professional Requirement of advice CFP Final Level: Financial Planning Process, Principles and Practice: Module 1 Page 94

An intermediary, individual or an entity, who intends to offer advice or distribute one or more products of personal finance, such as investment, insurance or retirement, is mandated to apply for registration/license from the appropriate regulator. A license enables an intermediary to engage in financial advice/distribution services, and also to affiliate themselves with one and/or several institutions manufacturing such financial products. A registered intermediary is permitted to provide product advice/distribution services as an agent of the manufacturers and generates income in the form of fees or commissions. Before the introduction of SEBI (Investment Advisers) Regulations, 2013 (“IA Regulations”), advising of products seemed embedded in the distribution of products and was inseparable from the execution services provided in respect of the products. The IA Regulations created a division between advice provided in respect of securities including mutual funds and investment portfolios and subsequent execution services that may be provided in respect of the same. Advice for Different Financial Products under Respective Regulations Regulators of the financial sector in India were concerned about the various incidents of mis-selling of investment, insurance and retirement products and absence of regulatory framework for advice on financial planning. They were keen to implement norms to govern “right selling” of products and a mandated code of conduct to be followed by their registered intermediaries. For certain products like insurance, they achieved their objective through IRDAI and for other products such as mutual funds, increased regulation through bodies and associations, such as The Association of Mutual Funds in India (AMFI). PFRDA also notified Retirement Advisor Regulations in 2016 whereby a retirement advisor has evolved responsibilities different from a “Point of Presence” or an “Aggregator”. So, as long as the advice and/or its execution pertains to a specific product under the regulatory ambit of a single regulator, viz. IRDAI and PFRDA, the advisors follow the guidelines on advice issued by these respective regulators. SEBI, after the implementation of IA Regulations mandates that for dispensing investment advice (defined later in this section), only Registered Investment Advisers (RIA) shall be authorized, to provide advice on personal finance products and processes related to insurance, retirement, etc. in a holistic sense of financial planning. No individuals or non-individuals can hold themselves out as investment advisers, wealth advisers, by whatsoever name called unless they register with SEBI as RIAs, thereby making registration mandatory. Financial Planning in India came to be provided from the year 2001 under the CERTIFIED FINANCIAL PLANNER or CFP® Certification. The CFP® Certification aims to integrate all aspects of personal finance CFP Final Level: Financial Planning Process, Principles and Practice: Module 1 Page 95

into a single discipline. It also provides a financial planner an avenue for seeking fees directly from their clients towards engagement in the process of making a financial plan, implementing, and reviewing the same, which is in-line with the IA Regulations. SEBI (Investment Advisers) Regulations, 2013 Financial Planning services were not strictly within the regulatory purview until SEBI introduced the IA Regulations. The term “financial planning” until then was not defined by any regulator and SEBI, through the IA Regulations, defines the terms “investment advice”, “investment adviser” and “financial planning”. Further, the IA Regulations have mandated a registration process and guidelines for the conduct of intermediaries who act as investment advisers and offer such services. Before the IA Regulations, various components of financial planning, by and large, were conducted as stand-alone financial distribution services by way of a registration or licensing provision under respective sector regulators. The codes of conduct mandated by such registering/licensing regulatory bodies were each required to be followed by financial planners. The definition of “Investment Advice” includes “Financial Planning” as per the IA Regulations by SEBI. By the same logic, financial planning is sought to be regulated as investment advice within the precincts of IA Regulations. This changed the landscape of provisions and the degrees of freedom as regards the practice of financial planning in India, and implications for practitioners. Definitions of “Investment Advice”, “Investment Adviser”, “Financial Planning”, etc. SEBI introduced the IA Regulations on 21st January, 2013 whereby they sought to regulate professionals providing advice on investment products and holding themselves out as investment advisers. SEBI defines an “investment adviser” as:“investment adviser” means any person, who for consideration, is engaged in the business of providing investment advice to clients or other persons or group of persons and includes any person who holds out himself as an investment adviser, by whatever name called” And “investment advice\" as:“investment advice” means advice relating to investing in, purchasing, selling or otherwise dealing in securities or investment products, and advice on investment portfolio containing securities or investment products, whether written, oral or through any other means of communication for the benefit of the client and shall include financial planning: Provided that investment advice given through newspaper, magazines, any electronic or broadcasting or telecommunications medium, which is widely available to the public shall not be considered as investment advice for the purpose of these regulations.” CFP Final Level: Financial Planning Process, Principles and Practice: Module 1 Page 96