What Is Financial Planning?

Chapter 1
What is Financial Planning?

The Process of Financial Planning:
Developing a Financial Plan
Lytton, Grable & Klock
2012, 2nd Ed.
2012 All Rights Reserved
Building Blocks: Financial

Planning Pyramid
On-going
Planner-Client
Relationship
Financial Plan
Systematic Financial Planning
Process
Communication
Decision Making
Ethics/Laws/Regulations/Practice Standards
The Profession of Financial Planning
History
1969:
Meeting of 13 that changed the

face of financial services
From sales to service

From discrete product sales to a
comprehensive plan
From commissions to more stable income,
with a business to sell at retirement
1971:
College for Financial Planning

History (contd)
1973:
Designation of the first 42 CFP

certificants
1985: College for Financial Planning +
CFP Board of Standards, Inc.
1987: 20 universities approved with
registered programs
1992: 10-hour comprehensive exam
replaced the modular exam
History (contd)
2000:
2004:
2007:
2008:
2010:
IAFP and ICFP merge into FPA

Financial Planning Standards
Board, Ltd.
BS, required prerequisite to sit for
CFP exam
Coalition for Financial Planning
Financial Therapy Association
History (contd)
2012
FPA, the heart of financial planning, 25,000
members
NAPFA, fee-only financial planning, 1,500
members
The Coalition for Financial Planning,
FPA, NAPFA and the CFP Board of
Standards, Inc. join to have one voice
History (contd)
2013
CFP exam changes from a 10-hour, 2-day, 285
question exam down to only 170 question, 6

hour exam
Computer-Based Testing (CBT) available in
250 cities, not jus the current 50
November 2014 exam available over a 5 day
window, not just F/S
Preliminary results available immediately
Membership & Certification

Organizations
Membership
organizations promote
research to enhance the body of knowledge

professional development of best practices
networking among product and service
professionals
See Table 1.1
FINRA,
100+ certifications and

designations see Table 1.2
Delivering Value to Clients Lives

Expensive
service: time, money, personal

vulnerability
Trust:
Planners should expertly guide

their clients through the best and worst
life and economic events
Help
clients define and achieve lifefulfilling financial goals

10 Most Important Factors

When Choosing a Planner
Top
of the list:
Trustworthiness
Listening skills
Client needs over product sales
Proven performance and expertise
Others:
professionalism; allowing clients to choose the

degree of control over decisions; reasonable
costs; technological competence; and
professional accreditation
For Potential Planners

Do
you have
Important client-identified traits?

Commitment to professional development and
lifelong learning?
Commitment to ethical practice and
continuing education?
Salesmanship built on trust, problemresolution and listening?
What is Financial Planning?
Financial planning denotes the process of

determining whether and how an individual
can meet life goals through the proper
management of financial resources.
CFP Board of Standards
6-step process that grounds the CFP Board

professional practice standards across 7
areas of a clients financial life
6-Step CFP Board Process

1.
Establishing and defining the clientplanner relationship;
2.
Gathering client data, including goals;
3.
Analyzing and evaluating the clients

financial status;
6-Step CFP Board Process
(contd)
4.
Developing and presenting financial

planning recommendations and/or
alternatives;
5.
Implementing the financial planning

recommendations; and
6.
Monitoring the financial planning

recommendations.
7 Broad Areas Considered

Current financial position
Income taxes
Risk management
Retirement
Investments
Estate management
Education planning or other special needs
Providing Financial Planning?

CFP
Board determinants:
What was the clients understanding and intent
with the engagement?

Are multiple planning areas involved?
How comprehensive was the data gathering?
What is the breadth and depth of
recommendations?
Provided over time or as distinct steps?
Provided a plan or a written plan?
Comprehensive Financial
Planning Text Definition
process of helping clients achieve multiple
financial goals and objectives through the
application and integration of synergistic
personal finance strategies
Goal: global statement of a clients personal or

financial purpose
Objective: definitive financial target that supports a

goal
What is Life Planning?

attitudes toward life and money
emotional, experiential, and spiritual
concerns influencing life choices and money
uses
significance or legacy of the individual that
supersedes net worth or assets
what is meaningful to the client
Planners Say Clients

Seek Help With
1. Paying for health care
2. Retirement funding
3. Tax burden
4. Investment and asset
growth
5. Longevity planning
outliving assets
6. Managing money
7. Amount of personal
debt
8. Estate planning
9. Funding education
costs
10. Planning for job
loss or downsizing
Consumers Say They

Need Help With
1. Generating current
income
2. Providing health
insurance coverage
3. Managing/reducing
debt
4. Building retirement
funds
5. Building an emergency
fund
6. Preparing for future
medical needs (self or
others)
7. Managing retirement
income
8. Providing life
insurance
Comprehensive vs. Targeted or

Modular Plans
Industry
Trends
Continuing demand for investment, college
funding, tax, estate, elder care and insurance

modular plans
Investment plans are most commonly
requested
Demand for comprehensive plans steady,
except for those providing 50 or more plans
annually (4% in 2007 to 10% in 2011)
Why a Financial Planning

Career?
2006, Money and Salary.com ranked it 3rd in

50 best jobs in U.S.
2011, Money/CNN ranked financial advisor

as 3rd on their list of the 10 best jobs in fastgrowth fields
BLS projected 30% growth through 2022 and

potential to earn above national average
Why a Financial Planning

Career? (contd)
High satisfaction, social good, low stress,
flexibility
Helping relationship + good salaries
2008, 50% earned between $46,390 - $119,290

2011, average gross salary of $190,922
Average age of planners 50+, so many

opportunities for succession planning and
leadership
Job security recession proof?
Industry Affiliation, CFP

Certificants
Financial Advisors By Channel
Understanding Employment
Channels
5 primary channels See Table 1.5
Brokerage firms (independent, regional, wirehouse)

Insurance companies
Banks (as financial advisors and as trust officers)
Registered investment advisory firms (alone or with
legal or accounting services ensembles, boutiques)
Family (multi-family or single-family) office firms
Target market (distinct and overlapping)

Financial planning services, products or both
Compensation (commission vs. fees)
Insurance Advice/Product Sales

Insurance
licenses issued by the state

where business is conducted and vary
with the products sold:
Life, health, long term care, property and

casualty, etc.
Investment Advice/Product Sales
advice incidental to the sale then licensed

as a Registered Representative with FINRA
See Table 1.3 and Table 1.4
advice whether or not accompanied by a

product sale, must register with SEC or
equivalent state authority (where clients
reside) as a Registered Investment Adviser
(RIA) with the individual adviser an
Investment Adviser Representative (IAR)
Registered Investment Adviser

(RIA)
If $100 million of AUM or clients in 15 or more

states, register with the SEC; otherwise, the
state where the business is located
MN, WY, and NY are exceptions
State-registered advisers must register with all
states where 5+ clients reside
SEC-registered firms must notice file in states
where 5+ clients reside
Compensation Methods
Commission
Varies with the product (investment or

insurance), but typically provides a
commission at the time of the sale
(referred to as a load) and trailing
commission may continue.
Flat fee, per

plan
Less than $1,000 to $5,000 or more for

preparation and delivery of a financial
plan; less than $500 to $1,500 or more
for a modular plan.
Flat fee,
annual retainer
Flat fee of $1,000 to $5,000 or more

provides year-round access to a
planner and may include plan
preparation.
By the hour
$100 to $300 or more per hour to work
Compensation Methods
(contd)
Assets under
management
(AUM)
Annual fee for assets actively managed

(typically a sliding scale such as less
than 0.50% to 2.49% inversely related
to the amount of assets managed)
Fee-based/
Fee plus
commissions
Plan preparation fee + AUM or other

fee for investment management
services or commissions on product
sales (e.g., investments, insurance)
Fee offset
Fee for a comprehensive plan, but

commissions earned on plan
implementation (e.g., products sold)
offset the planning fee USE CAUTION!
Net worth and
Percentage
fee,
1% of annual AGI and .
2012 All Rights
Reserved
Fee-only
vs.
Hourly, retainer or
AUM fees ONLY
NO commissionbased products sold
No-load products or
referral to others
RIAs and IARs
Fee-based
Fees + commissions
Possible broader
client base
Latitude for payment
options
Dually-registered
advisors
Fiduciary
The professional has entered a relationship built
on trust, confidence and responsibility and will, as
a result of ethical, professional, or legal duty, act
for the benefit of the other party. In the legal
sense. . .responsibility for managing another
persons or entitys financial, business, or property
assets.
Required of an investment adviser IAR affiliated
with an RIA put the clients interests 1st
Suitability
The recommendation of products and services that
appropriately match a clients financial limitations and
investment objectives, based on the clients
investment profile.
The investment product (or annuity) recommended is
suitable, or appropriate, for the clients situation as
defined by the investment profile.
May or may NOT put the clients interests 1st
Conflicts of Interest Abound!

To
whom is the fiduciary responsibility?

Is there a bias of sales commissions and
incentives (e.g., trips, bonuses, etc.)?
But what about decisions that change
the portfolio balance?
Upholding the Standard of Care

Potential
for client litigation, arbitration,

or mediation
Thorough documentation of the situation
protects the advisor
Plans reduce disputes encourages the
planner to be thorough; requires client
approval prior to implementation
Employment Opportunities
Bringing
it all together -- See Table 1.7
Channels, typical employment opportunities
and career paths available

Compensation methods and levels
Required and optional education and
licensing requirements
Summary: Lots of Controversy!

Financial planning: profession, process,
product
Variety of disciplines, designations,
credentials, licensures
CFP Boards Standards of Professional
Conduct
Variety of channels, business models and
compensation
Learning Objectives
1.
Review the historical development of financial

planning as a professional career.
2.
Recognize examples of financial planning

membership and certification organizations as well
as the designations, credentials, and registrations
offered.
3.
Describe the traits of successful financial planners.
4.
Explain the terms financial planning, life planning,

and financial therapy.
Learning Objectives
(contd)
5.
Identify the reasons why consumers seek financial

planning.
6.
Differentiate between a comprehensive and a

targeted, or modular, financial plan.
7.
Identify why someone might consider a career in

financial planning.
8.
Describe the different employment channels and

business models for financial planning products and
services.
Learning Objectives
(contd)
9.
Identify Financial Industry Regulatory Authority

(FINRA) and Securities and Exchange
Commission (SEC) requirements for employment
as a Registered Representative, Registered
Principal, or Registered Investment Adviser (RIA).
10.
Explain the different methods of compensation

commonly used by financial planners.
11.
Describe career options for those with a financial

planning education.

What Is Financial Planning?

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Chapter 1

What is Financial Planning?

2012 All Rights Reserved

Building Blocks: Financial

The Profession of Financial Planning

2012 All Rights Reserved

Meeting of 13 that changed the

From sales to service

College for Financial Planning

Designation of the first 42 CFP

IAFP and ICFP merge into FPA

FPA, the heart of financial planning, 25,000

2012 All Rights Reserved

CFP exam changes from a 10-hour, 2-day, 285

question exam down to only 170 question, 6

Membership & Certification

research to enhance the body of knowledge

100+ certifications and

Delivering Value to Clients Lives

service: time, money, personal

Planners should expertly guide

clients define and achieve lifefulfilling financial goals

10 Most Important Factors

professionalism; allowing clients to choose the

For Potential Planners

Important client-identified traits?

2012 All Rights Reserved

What is Financial Planning?

Financial planning denotes the process of

6-step process that grounds the CFP Board

6-Step CFP Board Process

Establishing and defining the clientplanner relationship;

Gathering client data, including goals;

Analyzing and evaluating the clients

2012 All Rights Reserved

6-Step CFP Board Process

Developing and presenting financial

Implementing the financial planning

Monitoring the financial planning

7 Broad Areas Considered

2012 All Rights Reserved

Providing Financial Planning?

What was the clients understanding and intent

with the engagement?

Goal: global statement of a clients personal or

Objective: definitive financial target that supports a

2012 All Rights Reserved

What is Life Planning?

2012 All Rights Reserved

Planners Say Clients

2012 All Rights Reserved

Consumers Say They

2012 All Rights Reserved

Comprehensive vs. Targeted or

Continuing demand for investment, college

funding, tax, estate, elder care and insurance

Why a Financial Planning

2006, Money and Salary.com ranked it 3rd in

2011, Money/CNN ranked financial advisor

BLS projected 30% growth through 2022 and

2012 All Rights Reserved

Why a Financial Planning