The Fundamentals of Writing a Financial Plan, First Edition (Revised)

By John E. Grable, Michelle E Kruger and Megan R Ford

The Fundamentals of Writing a Financial Plan provides a unique approach to helping aspiring financial planners write a comprehensive financial plan. The book outlines how the CFP Board of Standards, Inc. newly-revised 7-step systematic financial planning process can be applied when writing a comprehensive financial plan for an individual or family and demonstrates how to analyze and create a plan for key financial planning scenarios.

The book not only highlights various elements involved in comprehensive financial planning, including estate, tax, cash flow, education planning, and much more – but also introduces important behavioral perspectives and communication techniques. As a way to synthesize these pieces and learn how the plan writing process unfolds, students follow a running case—the Hubble family.

This book features:

• A thorough review of the new 7-step systematic financial planning process.
• A description of the regulatory environment in which every financial planner operates.
• An in-depth discussion of client communication and counseling techniques.
• Financial planning strategies that can be applied to a variety of clients and client circumstances.
• A chapter-by-chapter focus on analytical tools and techniques that can be used to evaluate client data.
• An example of a complete written financial plan with explanations about how analyses lead to the recommendations.
• Chapter-based learning aids, including access to a fully integrated Financial Planning Analysis Excel™ package and other online support materials, including video examples of client communication and counseling strategies.
• Instructions on how to do calculations essential to creating a financial plan.
• Numerous self-test questions to test comprehension of material.

New in the revised 1st Edition:

• Newly updated materials that reflect current financial planning trends
• Updated information regarding recent tax changes, including the SECURE Act

Topics Covered:

• Writing a Financial Plan
• Laws, Regulations, and Ethics: Standards Guiding the Financial Planning Process
• Fundamentals of Communication and Counseling in Financial Planning
• Cash Flow and Net Worth Planning
• Tax Planning
• Life Insurance Planning
• Health Insurance Planning
• Disability Insurance Planning
• And more! See the “Table of Contents” section for a full list of topics

A note for instructors:

This book serves as a capstone book for students in financial planning programs by allowing instructors to combine all of the relevant financial planning sub-disciplines (budgeting, tax, estate, and insurance planning) into a single plan-writing exercise.

• Language: English
• Publisher: The National Underwriter Company
• Release date: Oct 23, 2020
• ISBN: 9781949506402

Book preview

The Fundamentals of Writing a Financial Plan

First Edition (Revised)

John E. Grable, Ph.D., CFP®

Michelle E. Kruger, Ph.D.

Megan R. Ford, M.S., LMFT

National Underwriter Academic Series

ISBN 978-1-949506-40-2

This publication is designed to provide accurate and authoritative information in regard to the subject matter covered. It is sold with the understanding that the publisher is not engaged in rendering legal, accounting or other professional service. If legal advice or other expert assistance is required, the services of a competent professional person should be sought. – From a Declaration of Principles jointly adapted by a Committee of The American Bar Association and a Committee of Publishers and Associations.

THE NATIONAL UNDERWRITER COMPANY

Copyright © 2018, 2020

The National Underwriter Company

a division of ALM Media, LLC

5081 Olympic Blvd.

Erlanger, KY 41018

First Edition (Revised)

All rights reserved.

No part of this publication may be reproduced, stored in a retrieval system, or transmitted, in any form or by any means, electronic, mechanical, photocopying, recording, or otherwise, without prior written permission of the publisher.

Printed in the United States of America

ABOUT THE AUTHORS

JOHN E. GRABLE, PH.D., CFP®

Professor and Athletic Association Endowed Professor of Financial Planning, University of Georgia

Dr. John Grable teaches and conducts research in the Certified Financial Plannerä Board of Standards Inc. undergraduate and graduate programs at the University of Georgia where he holds an Athletic Association Endowed Professorship. He is a Certified Financial Planner professional. Prior to earning his doctorate at Virginia Tech, he worked as a pension/benefits administrator and later as a Registered Investment Adviser in an asset management firm. Dr. Grable has served the financial planning profession as the founding editor of the Journal of Personal Finance and co-founding editor of the Journal of Financial Therapy and Financial Planning Review. He is best known for his work in the areas of behavioral financial planning, financial risk-tolerance assessment, psychophysiological economics, and evidence-based financial planning. He has been the recipient of numerous research and publication awards and grants and is active in promoting the link between research and financial planning practice where he has published over 150-refereed papers, co-authored several textbooks, co-authored a financial planning communication book, and co-edited a financial planning and counseling scales book. Since earning his Ph.D., Dr. Grable has served on the Board of Directors of the International Association of Registered Financial Consultants (IARFC), as Treasurer and President for the American Council on Consumer Interests (ACCI), and as Treasurer and board member for the Financial Therapy Association. He has received numerous research and service awards, including the prestigious Cato Award for Distinguished Journalism in the Field of Financial Services, the IARFC Founders Award, the Dawley-Scholer Award for Faculty Excellence in Student Development, and the ACCI Mid-Career Award. He currently writes an economics and investing column for the Journal of Financial Service Professionals and provides research and consulting services through the Financial Planning Performance Lab.

MICHELLE E. KRUGER

The University of Georgia

Dr. Michelle Kruger is an Assistant Professor of Finance at Loras College. Prior to earning her doctorate at the University of Georgia, Dr. Kruger graduated magna cum laude with a B.B.A. in finance from the Terry College of Business at the University of Georgia. Michelle has taught a range of courses including investments, computer applications in financial planning, advanced financial planning seminar courses, and introductory finance courses. Her research interests include financial planning interventions, financial planning for couples, risk tolerance assessment, and behaviors associated with building wealth. Michelle has worked as a research assistant at the Financial Planning Performance Lab, the nation’s only applied clinical facility designed to obtain evidence about the effectiveness of the financial planning process. She has worked as a financial planning analyst at Elwood & Goetz Wealth Advisory Group, a fee-only, comprehensive financial planning firm located in Athens, Georgia. She also has served as a financial counselor at the ASPIRE Clinic, an interdisciplinary teaching and research clinic, applying marriage and family therapy theories and techniques to her work with financial clients.

MEGAN R. FORD, M.S., LMFT

ASPIRE Clinic, University of Georgia

Megan Ford has served as the Clinic Coordinator of the University of Georgia’s ASPIRE Clinic since 2011. The ASPIRE Clinic, a unit of the College of Family and Consumer Sciences (FACS), is a first-of-its-kind interprofessional training clinic that joins together the collaborative service areas of therapy, financial planning, nutrition, and law. Megan leads an unparalleled experiential opportunity at the ASPIRE Clinic for both graduate and undergraduate students in FACS through direct service learning, helping both the Athens community as well as the UGA community access low- or no-cost services. For her work and leadership, Megan was named one of FACS’s 100 Centennial Honorees to acknowledge her commitment to the ideals of the college and for being instrumental in serving students. In addition to her full-time work at ASPIRE, Megan is completing a doctorate in Financial Planning, Housing and Consumer Economics at the University of Georgia. Before coming to the UGA, she earned a Master’s degree in Family Studies and Human Services with an emphasis in Marriage and Family Therapy from Kansas State University and a Bachelor’s degree in Psychology from the University of South Dakota. With a unique blend of education and practice experience in both therapy and financial planning, Megan has become a leader in the emerging field of financial therapy. Megan served as president of the Financial Therapy Association (FTA) from 2016-2018 and is the former copy editor for The Journal of Financial Therapy. Remaining active with the Association, she also serves on the FTA Certification Committee and has been integral in the development of the FTA’s financial therapy designation program. She is the author of the blog, Finding Harmoney, which explores the dynamics of money and relationships, and her thoughts have been featured nationally and internationally in the New York Times, Consumer Reports, CNN Money, Time Money, BBC, Financial Advisors Magazine, and more.

ACKNOWLEDGMENTS

The idea for this book came about during a financial planning academic conference. During an informal meeting at the conference, several financial planning students were joined by faculty members from a number of colleges and universities and a few practitioners. The group met to discuss what resources are needed to help financial planning grow as a profession. An almost unanimous conclusion vocalized by the group was the need for a book showing how a student can write a financial plan. We looked at each other and said, We can do that.

As a team, we have a unique perspective in terms of plan writing. One of us is a long-time financial planning teacher and researcher. Another is a practitioner-scholar who blends experience from practice with an intimate knowledge of the needs and concerns of those learning about the financial planning process. The third team member is a counseling and communication expert who understands how intimidating the writing process can be. Together, our writing process tends to be eclectic, yet applied. Our objective when writing has been singularly focused on helping readers understand the essential steps needed to write a comprehensive financial plan. The process that is described in this book is based on the Certified Financial Planner Board of Standards, Inc. seven-step financial planning process. Our experience indicates that the process, while very useful, is often thought of as being too conceptual. We wrote this book with the hope of showing how the seven-step financial planning process can be so much more. In fact, as illustrated throughout this book, the process can be used as a guide when writing a comprehensive financial plan.

Moving from a discussion at a conference to a finished product has been a challenging process. Numerous individuals have been instrumental in keeping us on track. First and foremost, we wish to thank our spouses and partners for being patient and supportive during the writing and editing process. We are also grateful for the work and support of our editor at The National Underwriter Company—Jason Gilbert. Jason has been nothing but encouraging and confident, even during periods when we had our doubts. Without his editorial leadership, this book would still be just a collaborative hope. Gratitude also goes to Jay Caslow for encouraging us to write this book. We want to acknowledge and extend thanks to all of the anonymous reviewers who spent countless hours evaluating chapters prior to publication. We are particularly grateful to Sherman Hanna, Michael Halvorsen, David Nanigian, Carolynn Tomin, Joanne Snider, Luke Dean, Ann Woodyard, Kenneth White, Sarah Fallaw, Sarah Asebedo, Stu Heckman, Wookjae Heo, Ruth Lytton, Abed Rabbani, Jorge Ruiz-Menjivar, Joseph Goetz, Amy Hubble, Jerry Gale, Lance Palmer, Swarn Chatterjee, Jamie Lynn Byram, and Kristy Archuleta for their support over the past several years.

Additionally, we are very grateful to our colleagues around the country (and world) who have adopted this book and helped make this project possible. Also, we are very appreciative for all the help Ed Morrow of Financial Planning Consultants in Middletown, Ohio has provided over the years, particularly for allowing us to include some PracticeBuilder™ forms and client letters in this book. Similarly, we are indebted to the CFP Board of Standards, Inc. for allowing us to include excerpts from the Code of Ethics and Professional Standards.

We are honored to be a part of your learning experience. We sincerely hope that you find the material in this book a benefit to your academic and professional career.

John Grable

Michelle Kruger

Megan Ford

DEDICATION

To Emily, with love, John

To Joey, with love for you and gratitude for the coffee, Michelle

To Craig & my family, for all the support, encouragement, and sacrifice. All my love, Megan

PREFACE

The likely reason you are reading this book is because you are enrolled in a financial planning program that is registered with the Certified Financial Planner Board of Standards, Inc. (CFP Board). You may be an undergraduate student, a student studying advanced financial planning concepts in a graduate program, a career changer enrolled in a certificate program, or a currently practicing financial planner who wants to advance professionally by obtaining a nationally recognized certification. You may also be reading this book to learn more about how to write a financial plan to meet the requirements of another organization or to gain skills to write your own financial plan. Regardless of your reason for using this book, our hope is that you learn more about applying the financial planning process in your life and the lives of others. Ultimately, our goal is to help you write a financial plan.

The Fundamentals of Writing a Financial Plan came about for two reasons. First, a few years ago the Certified Financial Planner Board of Standards, Inc. made a significant change to the educational requirements needed to become a Certified Financial Planner® certificant. CFP Board introduced what is now known as the Financial Plan Development Course requirement. This requirement mandates that anyone wishing to sit for the national CFP® examination must demonstrate the ability to integrate and apply their knowledge of financial planning topics, as received through the curricula taught by CFP Board-Registered Programs.¹ This led to the requirement that all CFP® candidates complete a Financial Plan Development Course—sometimes called a capstone class. This course, found in all CFB Board registered academic and certificate programs, is designed to be competency-based, which means that instruction and experiences consist of a body of related skills and knowledge that affect a significant portion of one’s performance in a given profession. Through the use of competency-based learning objectives, learner achievement can be quantified against universally accepted performance standards.² According to CFP Board,³

The Board’s adoption of this new course requirement is recognition of the increasing importance for the educational requirements for CFP® certification to prepare students not only with technical financial planning knowledge, but also the skills to integrate, apply and communicate this knowledge to their clients. Through this course requirement, future CFP® professionals will have proven their ability to apply the financial planning process to real-life situations, as well as their ability to communicate their planning recommendations to a client.

The second reason that prompted us to write this book is that over the course of our academic careers, whenever we have asked a student to write a financial plan the typical response has been one of anxiety. Few students have ever seen a financial plan, let alone drafted one using Word™ and Excel™. So, imagine how students (and those who teach financial planning) often feel when they must write a plan in order to sit for a certification examination, to meet the requirements of a professional organization, or to graduate from college. The situation is even worse for those who are trying to draft a financial plan for their own use or to begin writing financial plans within the context of providing professional financial planning services.

Given the importance of writing financial plans, one would assume that numerous books and manuals exist to help guide a student through the writing process. This assumption is not correct. There are, in fact, few resources someone can turn to that can be used as a guide to writing a financial plan. The purpose of this book is to help readers apply the seven-step financial planning process when writing a comprehensive financial plan.

This book has been designed to specifically meet the following learning outcomes that are associated with CFP Board’s Financial Plan Development Course requirements:⁴

1.Demonstrate a comprehensive understanding of the content found within the Financial Planning curriculum and effectively apply and integrate this information in the formulation of a financial plan.

2.Effectively communicate the financial plan, both orally and in writing, including information based on research, peer, colleague or simulated client interaction and/or results emanating from synthesis of material.

3.Collect all necessary and relevant qualitative and quantitative information required to develop a financial plan.

4.Analyze personal financial situations, evaluating clients’ objectives, needs, and values to develop an appropriate strategy within the financial plan.

5.Demonstrate logic and reasoning to identify the strengths and weaknesses of various approaches to a specific problem.

6.Evaluate the impact of economic, political, and regulatory issues with regard to the financial plan.

7.Apply the CFP Board Financial Planning Practice Standards to the financial planning process.

As noted in the title to the book—The Fundamentals of Writing a Financial Plan—each chapter provides a step-by-step guide showing how the financial planning process can be used to draft a financial plan. As will be discussed in more detail later in the book, CFP Board describes the financial planning process as follows:

1.Understanding the client’s personal and financial circumstances;

2.Identifying and selecting goals;

3.Analyzing the client’s current course of action and potential alternate course(s) of action;

4.Developing the financial planning recommendations(s);

5.Presenting the financial planning recommendations;

6.Implementing the financial planning recommendations; and

7.Monitoring progress and updating.

The chapters in this book are built around this process. This means that every core content area in the book⁵ presents the seven-step process by example. Each example is then followed by an illustration of the way a client case can be analyzed, evaluated, and assessed with the goal of writing a financial plan. Each of the core chapters follows the same outline:

•Learning Objectives: Student learning outcomes for the chapter.

•CFP® Principal Knowledge Topics: Student learning outcomes matched to CFP Board’s educational requirements.

•Chapter Equations: Formulas that one should be familiar given the chapter topic.

•The Process of Financial Planning: A step-by-step review of the financial planning process as it relates to a chapter topic.

○Understand the client’s personal and financial circumstances—provides a summary of important issues a financial planner should examine at the first step of the financial planning process.

○Identify and select goals—provides guidance on ways a financial planner can assess and help shape a client’s financial goals.

○Analyze the client’s current course of action and potential alternate course(s) of action—reviews essential analytical tools, models, and procedures a financial planner can use when evaluating a client’s current financial situation.

○Develop financial planning recommendations—provides a review of financial planning skills and techniques that can be used when developing client-specific recommendations.

○Present the financial planning recommendations—offers insights into ways recommendations can be communicated to clients, both in writing within a financial plan and orally, when discussing financial planning alternatives with a client. Instructors and students can find videos showing how financial planning recommendations can be presented to clients on the book’s accompanying website.

○Implement the financial planning recommendations—describes at least one way a financial planning recommendation can be implemented. Implementation strategies within each chapter are presented so that the following questions can be answered in relation to implementation: who, what, when, where, why how, how much, and effect on cash flow.

○Monitor program and update—provides guidelines that can be used to help facilitate ongoing monitoring of a client’s financial plan and previously made recommendations.

•Comprehensive Hubble Case: A written section of a comprehensive financial plan related to the chapter topic. This may be the most groundbreaking aspect of this book. The chapter section shows an example from a student written plan.⁶

•Self-Test Answers: Answers to multiple choice questions found throughout each chapter.

•Chapter Resources: Materials that a reader may find useful related to the chapter topic.

Four features make this book unique:

1.A running case that flows through the book and is solved in each chapter.

A significant feature of the book is the inclusion of the Chandler and Rachel Hubble comprehensive case, which was written to show readers how the process of financial planning can be used to draft a comprehensive financial plan. Each core chapter in the book splits the financial planning process into sections.

A discussion of the steps needed to evaluate a client’s current financial situation, review strategies, develop recommendations, and integrate these recommendations into a comprehensive financial plan is first presented. This is then followed by an example of how the steps just discussed can be used in a real-life financial planning situation. In effect, the process of financial planning is applied, across chapters, to solve the Hubble case. An example of how each topic area can be written, in a comprehensive financial plan, is provided at the end of each core chapter.

Two objectives guided the development of the Hubble case narrative. The first was to be as comprehensive as possible, meaning that it is difficult, if not impossible, to develop client alternatives for one section of the case without influencing other case sections. Second, the narrative was developed to support both simple and complex strategies and recommendations. This latter aspect of the case enables instructors to adapt the expectations to challenge students along the spectrum of financial planning knowledge and experience to provide unique client solutions. The solution provided in each chapter represents just one way the case can be solved.

2.Forms and spreadsheets that can be accessed through the book’s accompanying website.

The financial planning process promotes the repeated use of financial planning forms and procedures to guide and document the financial planning process. Some financial planners, instructors, and students find the repeated use of tools and techniques useful for framing a protocol to address client issues and questions. Nearly all the forms presented in the book are available on the book’s accompanying website as fillable forms for students and instructors to download and complete.

In addition, a completely new Financial Planning Analysis Excel™ package is available with the purchase of this book. Examples from the Excel™ package are presented whenever the Hubble case is discussed.

3.Video content.

Numerous videos supplement the book. Practical examples of communication and counseling techniques are available on the book’s accompanying website. Each of the core chapters also contain at least one video showing how financial planning recommendations can be presented to clients.

4.Instructor resources.

A number of resources are available on the book’s companion website for instructors. PowerPoint presentations are provided for each chapter, as are test bank questions.

It is worth noting another exciting aspect of this text. This book is closely aligned to A Case Approach to Financial Planning: Bridging the Gap between Theory and Practice, Fourth Edition (coauthored by John Grable, Ron Sages, and Michelle Kruger). The material presented in this book complements what readers will find in the Case Approach. Readers who wish to test their financial planning skills through the case study approach will find A Case Approach to Financial Planning: Bridging the Gap between Theory and Practice, Fourth Edition to be a valuable resource. Not only does the companion book apply the seven-step financial planning process, the Financial Planning Analysis Excel™ package is fully integrated into each chapter. Both books are published by National Underwriter.

Our wish, as authors, is that you find the material presented in this book to be interesting, stimulating, and useful. We believe that this text provides everything you need to apply the seven-step financial planning process when writing a financial plan.

John Grable

Michelle Kruger

Megan Ford

Endnotes

1.CFP Board: https://www.cfp.net/for-education-partners/college-degree-certificate-programs/resources-for-registered-programs/capstone-course/criteria-for-the-financial-plan-development-course

2.Ibid.

3.Ibid.

4.Even though the book matches CFP Board requirements, the concepts, tools, and techniques work presented throughout the text work equally well for other designations, certifications, and regulatory purposes.

5.Core content areas include cash flow and net worth planning, tax planning, life insurance planning, health insurance planning, disability insurance planning, long-term care insurance planning, property insurance planning, investment planning, education planning, retirement planning, and estate planning.

6.The written sections presented throughout the plan provide an example of how a student can use a case narrative when writing a comprehensive financial plan. Each core chapter highlights the type of information needed to conduct an analysis that leads to the development of client-specific recommendations. It is important to note that the example is not necessarily the solution. Different financial planners, using varied experiences, knowledge, and preferences, could realistically provide the Hubble family with different, yet distinct and accurate, recommendations.

ABBREVIATIONS COMMONLY USED IN FINANCIAL PLANNING

Accredited Investment Fiduciary®— AIF®

Alternative Minimum Tax—AMT

American Institute of Certified Public Accounts—AICPA

Assets under management—AUM

Central Registration Depository— CRD®

Certificate of deposit—CD

Certified Financial Planner Board of Standards, Inc.—CFP Board

Certified Financial Planner® Certification Examination—CFP® exam

Certified Financial Planner—CFP®

Certified investment management analyst—CIMA

Certified investment management consultant— CIMC (No longer awarded)

Charitable remainder annuity trust—CRAT

Charitable remainder unitrust—CRUT

Chartered financial analyst—CFA

Chartered financial consultant—ChFC

Chartered investment counselor—CIC

Chartered life underwriter—CLU

Chief compliance officer—CCO

Consolidated Omnibus Budget Reconciliation Act—COBRA

Continuing education—CE

Coverdell education savings account—Coverdell ESA or CESA

Discretionary cash flow—DCF

Employee Retirement Income Security Act of 1974—ERISA

Enrolled agent—EA

Errors and omissions insurance— E&O insurance

Exchange traded fund—ETF

Federal Deposit Insurance Corporation—FDIC

Federal Trade Commission—FTC

Financial Industry Regulatory Authority—FINRA

Financial Planning Association—FPA

Flexible spending account—FSA

Government Accountability Office—GAO

Gramm-Leach-Bliley Act—GLBA

Grantor retained annuity trust—GRAT

Grantor retained unitrust—GRUT

Guaranteed auto protection insurance—GAP insurance

Health Insurance Portability and Accountability Act of 1996—HIPAA

Health savings account—HSA

High-deductible health plan—HDHP

Homeowners policy—HO policy

Incentive stock option—ISO

Individual retirement arrangement—IRA

Investment adviser public disclosure—IAPD

Investment advisor representative—IAR

Investment Advisor Registration Depository —IARD

Investment policy statement—IPS

Internal Revenue Code—IRC

Internal Revenue Code § 529—§ 529 plan

Internal Revenue Service—IRS

Irrevocable life insurance trust—ILIT

Joint tenancy with right of survivorship—JTWROS

Long-term care—LTC

Million Dollar Round Table—MDRT

Minimum required distribution—MRD

Municipal Securities Rulemaking Board—MSRB

National Association of Insurance Commissioners— NAIC

National Association of Personal Financial Advisors—NAPFA

National Association of Securities Dealers—NASD

Nonqualified stock option—NQSO

North American Securities Administrators Association—NASAA

Payable on death—POD

Personal automobile policy—PAP

Personal financial specialist—PFS

Qualified personal residence trust— QPRT

Qualified terminable interest property trust—QTIP trust

Real estate investment trust—REIT

Registered investment advisor—RIA

Required minimum distribution—RMD

Securities and Exchange Commission—SEC

Securities Industry and Financial Markets Association—SIFMA

Securities Investor Protection Corporation—SIPC

Self-regulatory organization—SRO

Spousal lifetime access trust—SLAT

Tenancy/tenants by the entirety—TBE

Tenancy/tenants in common—TIC

Transferable on death—TOD

Uniform Gift to Minors Act account—UGMA account

Uniform Prudent Investor Act—UPIA

Uniform Transfers to Minors Act account—UTMA account

Variable universal life—VUL

SUMMARY TABLE OF CONTENTS

About the Authors

Acknowledgments

Dedication

Preface

Abbreviations

Chapter 1:   A Review of the Financial Planning Process

Appendix 1A: Client Intake Form

Appendix 1B: Assessing Your Financial Risk Tolerance

Chapter 2:   Writing a Financial Plan

Appendix 2A: Sample Letter to Client

Appendix 2B: Sample Client Engagement Letter

Appendix 2C: Sample Privacy Statement

Appendix 2D: Sample Executive Summary

Appendix 2E: Sample Client Acceptance Letter

Appendix 2F: Comprehensive Planning Checklist

Chapter 3:   Laws, Regulations, and Ethics: Standards Guiding the Financial Planning Process

Appendix 3A: Sample Brochure Document

Chapter 4:   Fundamentals of Communication and Counseling in Financial Planning

Chapter 5:   Meet Your Clients

Chapter 6:   Cash Flow and Net Worth Planning

Chapter 7:   Tax Planning

Chapter 8:   Life Insurance Planning

Chapter 9:   Health Insurance Planning

Chapter 10: Disability Insurance Planning

Chapter 11: Long-Term Care Insurance Planning

Chapter 12: Property and Casualty Insurance Planning

Chapter 13: Investment Planning

Appendix 13A: Example Investment Policy Statement

Appendix 13B: Modern Portfolio (Mean-Variance) Review

Chapter 14: Education Planning

Chapter 15: Retirement Planning

Chapter 16: Estate Planning

Index

DETAILED TABLE OF CONTENTS

About the Authors

Acknowledgments

Dedication

Preface

Abbreviations

Chapter 1: A Review of the Financial Planning Process

An Introduction to the Financial Planning Process

Step 1: Understanding the Client’s Personal and Financial Circumstances

Step 2: Identifying and Selecting Goals

Step 3: Analyzing the Client’s Current Course of Action and Potential Alternative Course(s) of Action

Step 4: Developing the Financial Planning Recommendation(s)

Step 5: Presenting the Financial Planning Recommendation(s)

Step 6: Implementing the Financial Planning Recommendation(s)

Step 7: Monitoring Progress and Updating

Practice Standards and Ethics

Financial Planning Skills

Planning Skill 1: Master the Process of Establishing and Defining the Relationship

Planning Skill 2: Master the Process of Gathering Data and Framing Goals and Objectives

Planning Skill 3: Determine What Data Are Collected

Planning Skill 4: Understand Limitations Associated with the Data Collection Data

Planning Skill 5: Develop a Procedure for Collecting Data

Planning Skill 6: Master What It Means to Identify Client Goals and Objectives

Planning Skill 7: Master the Tools and Techniques Involved in Analyzing and Evaluating a Client’s Financial Situation

Planning Skill 8: Refine Your Expertise when Analyzing a Client’s Current Situation

Planning Skill 9: Understand How Economic Concepts Influence the Financial Planning Process

Microeconomic Concepts

Macroeconomic Concepts

Planning Skill 10: Master the Process of Reviewing Prospective Financial Planning Strategies

Planning Skill 11: Master the Process of Developing Client-Centered Recommendations

Planning Skill 12: Develop a Cash Flow TrackingSystem

Summary

Appendix 1A: Sample Client Data Intake Form

Appendix 1B: Financial Risk Tolerance Questionaire

Chapter 2: Writing a Financial Plan

Writing a Comprehensive Financial Plan

Writing Style

Plan Format

Cover Page

Table of Contents

Letter to Client

Client Engagement Letter

Introductory Materials

Executive Summary

Review of Financial Planning Topic Areas

Client Acceptance Letter

Plan Writing Skills

Planning Skill 1: Develop the Skills to Resolve Recommendation Conflicts

Planning Skill 2: Develop Financial Plan Writing Skills

Planning Skill 3: Learn to Identify and Prioritize Recommendations

Planning Skill 4: Formalize the Plan Development Process Using a Comprehensive Planning Checklist

Planning Skill 5: Identify the Consequences of Implementing Proposed Recommendations

Planning Skill 6: Identify the Impact of Recommendations Using a Recommendation Impact Form

Planning Skill 7: Determine if Proposed Recommendations are Affordable and Develop Strategies in Cases Where Tradeoffs Must be Made

Planning Skill 8: Track Cash Flow and Net Worth Before and After Making A Recommendation

Planning Skill 9: Document an Implementation Procedure for Plan Recommendations

Planning Skill 10: Incorporate Disclaimers into the Writing Process

Planning Skill 11: Develop a Method for Presenting Financial Plans to Clients

Planning Skill 12: Provide Referral Guidance to Clients

Planning Skill 13: Focus on the Timing of Plan Implementation

Planning Skill 14: Manage Client Expectations During the Implementation Process

Planning Skill 15: Develop and Use an Ongoing Financial Plan Monitoring Process

Planning Skill 16: Develop Strategies to Deal with Client and Plan Changes

Summary

Appendix 2A: Sample Letter to Client

Appendix 2B: Sample Client Engagement Letter

Appendix 2C: Sample Privacy Statement

Appendix 2D: Sample Executive Summary

Appendix 2E: Sample Client Acceptance Letter

Appendix 2F: Comprehensive Planning Checklist

Chapter 3: Laws, Regulations, and Ethics: Standards Guiding the Financial Planning Process

The Financial Planning Regulatory Environment

Self-Regulatory Organization Rules

Investment Adviser Rules

Certification Boards

State Regulations and Rules

Financial Planner Skills

Planning Skill 1: Understand When Interest and Fiduciary Standards of Care Apply

The Fiduciary Standard

CFP Board of Standards, Inc. Fiduciary Standard

Planning Skill 2: Understand the Process of Registering as an Investment Adviser or Investment Adviser Representative

Planning Skill 3: Describe the Different Ways Financial Planners are Compensated

Planning Skill 4: Understand the Laws that Guide the Practice of Financial Planning

Securities Act of 1933

Securities Exchange Act of 1934

Trust Indenture Act of 1939

Investment Company Act of 1940

Investment Advisers Act of 1940

Sarbanes-Oxley Act of 2002

Dodd-Frank Wall Street Reform and Consumer Protection Act of 2010

Jumpstart Our Business Startups Act of 2012

Planning Skill 5: Implement Appropriate Compliance Procedures

Planning Skill 6: Understand the Elements of Form ADV

Planning Skill 7: Develop and Distribute a Written Disclosure Statement Document

Planning Skill 8: Comply with SEC Advertising Rules and Requirements

Planning Skill 9: Understand SEC Books and Records Requirements

Planning Skill 10: Interpret CFP Board’s Code of Ethics and Standards of Conduct Appropriately

Summary

Appendix 3A: Sample Brochure Document

Chapter 4: Fundamentals of Communication and Counseling in Financial Planning

The Importance of Communication and Counseling Competence in Financial Planning

Planning Skill 1: Understand the Many Layers of Communication

Planning Skill 2: Understand Body Language in the Context of Client Communication and Counseling

Planning Skill 3: Understand the Importance of Cultural and Differences in the Communication and Counseling Process

Planning Skill 4: Understand the Importance of Gender Differences in the Communication and Counseling Process

Planning Skill 5: Integrate Communication Insights Using Attending Techniques

Planning Skill 6: Understand the Importance of a Client’s Learning and Information Processing Style

Planning Skill 7: Understand the Role of Experiential Maps, Heuristics, and Money Scripts Play in the Communication and Counseling Process

Planning Skill 8: Employ Listening Skills as a Communication Tool

Planning Skill 9: Employ Clarifying Skills as a Communication Tool

Planning Skill 10: Employ Questioning Skills as a Communication Tool

Planning Skill 11: Employ Silence as a Communication Tool

Planning Skill 12: Understand the Role of Advanced Counseling Techniques in the Financial Planning Process

Planning Skill 13: Understand the Role of Communication and Counseling Techniques in Decreasing Client Resistance

Planning Skill 14: Understand the Role of Financial Therapy in the Financial Planning Process

Planning Skill 15: Understand What a Financial Planner’s Office and Physical Environment Communicate to a Client

Summary

Chapter 5: Meet Your Clients

Introducing the Comprehensive Case: Chandler and Rachel Hubble

Introducing Chandler and Rachel Hubble

The Hubble Family Profile

Overview of Family History

Cash Flow Planning

Income Discussion

Expense Summary

Asset and Liability Summary

Insurance Planning Issues

Health Insurance Policies

Disability Policies

Life Insurance Policies

Automobile Insurance

Homeowner’s Insurance

Investment Planning Issues

Retirement Planning Issues

Estate Planning Issues

Additional Information and Assumptions

Univerasl Assumptions

Specific Goals and Objectives

Cash Reserve Issues

Tax Planning Issues

Disability Insurance Coverage Issues

Long-term Care Issues

Asset Management Issues

Education Issues

Premature Death Issues

Retirement Issues

Estate Planning Issues

The Next Step: Taking Action

Comprehensive Hubble Case

Chapter 6: Cash Flow and Net Worth Planning

The Process of Cash Flow and Net Worth Planning

Step 1: Understand the client’s personal and financial circumstances

Step 2: Identify and Select Goals

Step 3: Analyze the Client’s Current Course of Action and Potential Alternative Course(s) of Action

Developing a Cash Flow Statement

Developing a Net Worth Statement

Step 4: Develop the Financial Planning Recommendation(s)

Planning Skill 1: Engage in Meaningful Income, Expense, and Net Worth Discussions

Planning Skill 2: Use Financial Ratios to Assess a Client’s Financial Situation

Planning Skill 3: Identify the Elements of an Emergency Savings Fund

Planning Skill 4: Help Clients Restructure Unsecured and Secured Consumer Debt

Planning Skill 5: Understand How Mortgage Debt and a Home Equity Line of Credit (HELOC) Influence Borrowing Decisions

Planning Skill 6: Use Adjustable Rate Mortgages Prudently

Planning Skill 7: Determine When Renting May be Appropriate as a Cash Flow Management Tool

Planning Skill 8: Master the Intricacies of Buying Down a Mortgage Interest Rate

Planning Skill 9: Develop a Mortgage Refinancing Methodology

Planning Skill 10: Implement an Income Shifting Strategy When Appropriate

Planning Skill 11: Understand the Needs of Recent Widows and Widowers

Planning Skill 12: Understand the Cash Management Needs of the Suddenly Wealthy

Step 5: Present the Financial Planning Recommendation(s)

Step 6: Implement the Financial Planning Recommendation(s)

Step 7: Monitor Progress and Update

Comprehensive Hubble Case

Chapter 7: Tax Planning

The Process of Tax Planning

Step 1: Understand the Client’s Personal and Financial Circumstances

Step 2: Identify and Select Goals

Step 3: Analyze the Client’s Current Course of Action and Potential Alternative Course(s) of Action

Determine a Client’s Income Tax Liability

Apply the Appropriate Tax Bracket

Deductions and Credits

Capital Gain Tax Rates

Other Tax Cuts and Jobs Act Changes

Corporate Tax Rates

Step 4: Develop the Financial Planning Recommendation(s)

Planning Skill 1: Identify Sources of Income

Planning Skill 2: Correctly Calculate the Cost Basis of an Investment

Planning Skill 3: Incorporate Alternative Minimum Tax Estimates in Tax Plans

Planning Skill 4: Understand the Interplay between Tax and Retirement Planning

Planning Skill 5: Understand the Filing Requirements for Trusts and Estates

Planning Skill 6: Develop a Basic Understanding of How to Challenge an IRS Decision

Planning Skill 7: Calculate the Exclusion Ratio to Reduce the Tax on Annuity Distributions

Planning Skill 8: Compare Taxable and Tax-free Interest on a Taxable Equivalent Yield Basis

Planning Skill 9: Understand the Complexities of Tax Planning for Families with Children

Planning Skill 10: Differentiate between Like-Kind Exchange Strategies

Planning Skill 11: Utilize Qualified Charitable Distributions to Reduce a Retiree’s Tax Liability

Planning Skill 12: Apply Tax Planning for Business Owners

Planning Skill 13: Understand Issues that Impact Tax Planning for Executives

Step 5: Present the Financial Planning Recommendation(s)

Step 6: Implement the Financial Planning Recommendation(s)

Step 7: Monitor Progress and Update

Comprehensive Hubble Case

Chapter 8: Life Insurance Planning

The Process of Life Insurance Planning

Step 1: Understand the Client’s Personal and Financial Circumstances

Step 2: Identify and Select Goals

Step 3: Analyze the Client’s Current Course of Action and Potential Alternative Course(s) of Action

Needs-Based Analysis Approach

Income Multiplier Approach

Human Life Value Approach

Capital Retention Approach

Income Retention Approach

Common Adjustments to the Annuity Calculations

Determining the Additional Amount of Insurance a Client Should Purchase

Step 4: Develop the Financial Planning Recommendation(s)

Planning Skill 1: Understand the Investment and Tax Implications Associated with a Life Insurance Payout

Planning Skill 2: Understand and Differentiate Among Common Types of Insurance Products

Planning Skill 3: Know Policy Characteristics When Choosing Between Cash Value and Term Policies

Planning Skill 4: Understand Common Life Insurance Terms and Definitions

Planning Skill 5: Recognize Approaches to Transferring Policy Ownership

Planning Skill 6: Develop Skills to Know How to Evaluate an Existing Policy

Planning Skill 7: Use Policy Nonforfeiture Options to a Client’s Advantage

Planning Skill 8: Use a Section 1035 Exchange Option as a Way to Obtain Different Coverage

Planning Skill 9: Use Accelerated Death Benefits or Viatical Settlements to Assist Clients with Health Issues

Planning Skill 10: Use a Life Settlement to Assist Elderly Clients

Planning Skill 11: Identify the Role of Annuities in the Insurance Planning Process

Planning Skill 12: Recommend Appropriate Life Insurance Strategies for Small Business Owners

Planning Skill 13: Understand Life Insurance Considerations for Divorcing Couples

Step 5: Present the Financial Planning Recommendation(s)

Step 6: Implement the Financial Planning Recommendation(s)

Step 7: Monitor Progress and Update

Comprehensive Hubble Case

Chapter 9: Health Insurance Planning

The Process of Health Insurance Planning

Step 1: Understand the client’s Personal and Financial Circumstances

Step 2: Identify and Select Goals

Step 3: Analyze the Client’s Current Course of Action and Potential Alternative Course(s) of Action

Step 4: Develop the Financial Planning Recommendation(s)

Planning Skill 1: Understand the Terminology of Health Insurance

Planning Skill 2: Appreciate How the Patient Protection and Affordable Care Act (PPACA) of 2010 Changed the Health Insurance Marketplace

Planning Skill 3: Understand the Characteristics of Health Savings and Flexible Spending Accounts and Other Plans

Planning Skill 4: Understand the Complexity of Medicare Planning and Eligibility

Step 5: Present the Financial Planning Recommendation(s)

Step 6: Implement the Financial Planning Recommendation(s)

Step 7: Monitor progress and update

Comprehensive Hubble Case

Chapter 10: Disability Insurance Planning

The Process of Disability Insurance Planning

Step 1: Understand the Client’s Personal and Financial Circumstances

Step 2: Identify and Select Goals

Step 3: Analyze the Client’s Current Course of Action and Potential Alternative Course(s) of Action

Step 4: Develop the Financial Planning Recommendation(s)

Planning Skill 1: Know the Probabilities Associated with Disability

Planning Skill 2: Master the Key Terms of Disability Insurance Coverage

Planning Skill 3: Understand the Appropriate Use of Disability Policy Riders

Planning Skill 4: Understand the Tax Implications Associated with Disability Benefits

Planning Skill 5: Identify Appropriate Insurance Company Selection Criteria

Planning Skill 6: Estimate Average Premiums for an Individual Disability Policy

Planning Skill 7: Know When to Use a Liability Release Form

Planning Skill 8: Understand the Important Factors Associated with Recommending Disability Insurance for High-Income Earners

Planning Skill 9: Understand Planning Challenges for Families with Disabled Children

Planning Skill 10: Understand Transgender Disability Insurance Planning Issues

Step 5: Present the Financial Planning Recommendation(s)

Step 6: Implement the Financial Planning Recommendation(s)

Step 7: Monitor Progress and Update

Comprehensive Hubble Case

Chapter 11: Long-Term Care Insurance Planning

The Process of Long-Term Care Insurance Planning

Step 1: Understand the client’s personal and financial circumstances

Step 2: Identify and Select Goals

Step 3: Analyze the Client’s Current Course of Action and Potential Alternative Course(s) of Action

Step 4: Develop the Financial Planning Recommendation(s)

Planning Skill 1: Identify Activities of Daily Living

Planning Skill 2: Use Tax-Qualified Policies when Appropriate

Planning Skill 3: Understand the Triggers Associated with Long-Term Care Needs

Planning Skill 4: Develop a Long-Term Care Insurance Purchase Strategy for Each Client

Planning Skill 5: Quantify a Long-Term Care Insurance Purchase Strategy for Each Client

Planning Skill 6: Consider the Use of Hybrid Policies

Planning Skill 7: Understand the Role of Continuing Care Retirement Communities

Planning Skill 8: Understand Long-Term Care Insurance Issues for Women

Step 5: Present the Financial Planning Recommendation(s)

Step 6: Implement the Financial Planning Recommendation(s)

Step 7: Monitor Progress and Update

Comprehensive Hubble Case

Chapter 12: Property and Casualty Insurance Planning

The Process of Property and Liability Insurance Planning

Step 1: Understand the Client’s Personal and Financial Circumstances

Step 2: Identify and Select Goals

Step 3: Analyze the Client’s Current Course of Action and Potential Alternative Course(s) of Action

Calculating the 80 Percent Rule

Step 4: Develop the Financial Planning Recommendation(s)

Planning Skill 1: Describe the Importance of Insurance Scores

Planning Skill 2: Understand the Factors That Influence HO Premiums

Planning Skill 3: Understand the Types of HO Policies Available

Planning Skill 4: Recommend Coverage for Overlooked Personal Property

Planning Skill 5: Identify Other HO Insurance Exclusions

Planning Skill 6: Make Sure Clients Protect Property from Mother Nature

Planning Skill 7: Understand How Driver Characteristics Influence PAP Premiums

Planning Skill 8: Recognize the Need for Liability Coverage and How Split-Limit Requirements Are Generally Too Low for Most Clients

Planning Skill 9: Identify Other Auto Policy Considerations

Planning Skill 10: Explore the Need for Excess Liability (Umbrella) Coverage

Planning Skill 11: Use a Homestead Exemption for Additional Liability Protection

Step 5: Present the Financial Planning Recommendation(s)

Step 6: Implement the Financial Planning Recommendation(s)

Step 7: Monitor Progress and Update

Comprehensive Hubble Case

Chapter 13: Investment Planning

The Process of Investment Planning

Step 1: Understand the Client’s Personal and Financial Circumstances

Step 2: Identify and Select Goals

Step 3: Analyze the Client’s Current Course of Action and Potential Alternative Course(s) of Action

Determining a Client’s Investment Profile

Matching a Client’s Investment Profile to Portfolio Alternatives

Using Financial Market Benchmarks to Document a Client’s Investment Situation

Step 4: Develop the Financial Planning Recommendation(s)

Planning Skill 1: Use Reverse Engineering to Determine a Client’s Required Rate of Return

Planning Skill 2: Identify Appropriate Portfolio Components

Planning Skill 3: Determine the Riskiness and Potential Returns of Different Financial Assets

Planning Skill 4: Identify Environmental Factors that Influence Asset Choices

Planning Skill 5: Master the Concept of Risk When Developing Asset Allocation Strategies

Planning Skill 6: Determine the Appropriate Use of Strategic and Tactical Asset Allocation Models

Planning Skill 7: Master the Application of Comparative Risk Statistics

Planning Skill 8: Master the Application of Comparative Portfolio Statistics

Sharpe Ratio

Modigliani Measure

Treynor Index

Jensen’s Alpha

Information Ratio

Planning Skill 9: Understand the Complications of Investment Planning for the Suddenly Wealthy

Planning Skill 10: Understand the Unique Needs of Diverse Investors

Planning Skill 11: Understand the Role of Alternative Investments in a Portfolio

Step 5: Present the Financial Planning Recommendation(s)

Step 6: Implement the Financial Planning Recommendation(s)

Step 7: Monitor Progress and Update

Comprehensive Hubble Case

Appendix 13A: Example Investment Policy Statement

Appendix 13B: Modern Portfolio (Mean-Variance) Review

Chapter 14: Education Planning

The Process of Education Planning

Step 1: Understand the Client’s Personal and Financial Circumstances

Step 2: Identify and Select Goals

Step 3: Analyze the Client’s Current Course of Action and Potential Alternative Course(s) of Action

Step One

Step Two

Step Three

Step Four

Step Five

Step 4: Develop the Financial Planning Recommendation(s)

Planning Skill 1: Be Creative When Developing College Funding Recommendations

Planning Skill 2: Evaluate and Recommend Appropriate College Funding Alternatives

Planning Skill 3: Understand the Role of a CESA in the Education Funding Mix

Planning Skill 4: Utilize Series EE and Series I Bonds as an Educational Funding Tool

Planning Skill 5: Recommend Appropriate Student Financial Aid Alternatives to Meet Client Funding Needs

Planning Skill 6: Understand How the Blending of Savings Bonds into a Section 529 Plan

Planning Skill 7: Understand the Elements Need to Complete a FASFA Form

Planning Skill 8: Evaluate the Impact Asset Ownership Can Have on an Educational Plan and Financial Aid

Planning Skill 9: Understand College Education Funding Challenges for Divorced Families

Planning Skill 10: Develop Strategies for Parents with Negative Credit Issues

Planning Skill 11: Know the Options Available with Unspent 529 Plan Assets

Step 5: Present the Financial Planning Recommendation(s)

Step 6: Implement the Financial Planning Recommendation(s)

Step 7: Monitor Progress and Update

Comprehensive Hubble Case

Chapter 15: Retirement Planning

The Process of Retirement Planning

Step 1: Document the Client’s Personal and Financial Circumstances

Step 2: Identify and Select Goals

Step 3: Analyze the Client’s Current Course of Action and Potential Alternative Course(s) of Action

Calculating a Retirement Need

Retirement Distribution Calculations

Step 4: Develop the Financial Planning Recommendation(s)

Planning Skill 1: Balance Contributions to Tax-Deferred Plans and IRAs

Planning Skill 2: Understand the Role of Insurance Company Products in Retirement Planning

Planning Skill 3: Use a Systematic Approach When Analyzing a Client’s Current Retirement Planning Situation

Planning Skill 4: Differentiate Between Normal, Early, and Delayed Social Security Claiming Strategies

Planning Skill 5: Use Qualified Employee Plans Appropriately

Planning Skill 6: Understand Current Year IRA Limits

Planning Skill 7: Consider Strategies for Near-Retirement Households

Planning Skill 8: Understand the Issues Related to Retirement Planning for Young Adults

Planning Skill 9: Appreciate the Issues Associated with Retirement Planning for Divorcing Couples

Planning Skill 10: Understand How 2019 SECURE ACT Impacts Retirement Planning

Step 5: Present the Financial Planning Recommendation(s)

Step 6: Implement the Financial Planning Recommendation(s)

Step 7: Monitor Progress and Update

Comprehensive Hubble Case

Chapter 16: Estate Planning

The Process of Estate Planning

Step 1: Understand the Client’s Personal and Financial Circumstances

Step 2: Identify and Select Goals

Step 3: Analyze the Client’s Current Course of Action and Potential Alternative Course(s) of Action

The Estate Tax Calculation

Step 4: Develop the Financial Planning Recommendation(s)

Planning Skill 1: Understand Trust Terminology

Planning Skill 2: Ensure that Stakeholders are Informed when Appointing Others in an Estate Plan

Planning Skill 3: Use Aspects of The Tax Relief Act of 2010 and the 2018 Tax Cuts and Jobs Act When Developing Estate Planning Strategies

Planning Skill 4: Use Appropriate Property Titling Techniques

Planning Skill 5: Ensure That Each Client Has Appropriate Estate Planning Documents in Place

Planning Skill 6: Use a Legal Document Checklist

Planning Skill 7: Use Annual Gifts to Reduce a Client’s Gross Estate

Planning Skill 8: Understand the Concerns of Clients with Special Needs Dependents

Planning Skill 9: Estate Planning for Domestic Partners without Civil Unions

Planning Skill 10: Estate Planning for Newly Separated or Divorced

Step 5: Present the Financial Planning Recommendation(s)

Step 6: Implement the Financial Planning Recommendation(s)

Step 7: Monitor Progress and Update

Comprehensive Hubble Case

Index

Chapter 1

A Review of the Financial Planning Process

Learning Objectives

•Learning Objective 1: Describe how the financial planning process, as established by the Certified Financial Planner Board of Standards, Inc. (CFP Board), serves as a framework for guiding financial planners when working with clients.

•Learning Objective 2: Describe the benefits of utilizing a consistent financial planning process when writing comprehensive financial plans.

•Learning Objective 3: Summarize and explain the steps of the financial planning process.

•Learning Objective 4: Identify what client data are needed to provide financial planning services and explain how the data are collected.

CFP® Principal Knowledge Topics

•CFP Topic: A.1. CFP Board’s Code of Ethics and Professional Responsibility and Rules of Conduct.

•CFP Topic: A.2. CFP Board’s Financial Planning Practice Standards.

•CFP Topic: A.3. CFP Board’s Disciplinary Rules and Procedures.

•CFP Topic: A.7. Fiduciary.

•CFP Topic: B.8. Financial Planning Process.

•CFP Topic: B.12 Economic Concepts.

•CFP Topic: B.14. Client and Planner Attitudes, Values, Biases, and Behavioral Finance.

Chapter Equations

There are no equations in this chapter.

AN INTRODUCTION TO THE FINANCIAL PLANNING PROCESS

Financial planning has become a recognized profession and an important force for change in the lives of individuals and families. Starting with fewer than fifty Certified Financial Planner (CFP®) professionals in the early 1970s, the number of CFP® certificants in the U.S. has grown to over eighty thousand in 2020. Worldwide growth continues to expand as well. As the profession has evolved, the number of students studying financial planning has also grown.

Professional organizations and leading members of the financial planning community have defined financial planning in a variety of ways. The most recognized definition, offered by the Certified Financial Planner Board of Standards, Inc. (CFP Board), defines financial planning as a process. According to CFP Board,¹ Financial planning denotes:

The collaborative process that helps maximize a client’s potential for meeting life goals through financial advice that integrates relevant elements of the client’s personal and financial circumstances. ²

Traditionally, the practice of financial planning has followed what is generally referred to as the financial planning process. In its Standards of Professional Conduct, CFP Board explains the financial planning process as involving the following steps:

1.Understanding the client’s personal and financial circumstances;

2.Identifying and selecting goals;

3.Analyzing the client’s current course of action and potential alternative course(s) of action;

4.Developing the financial planning recommendation(s);

5.Presenting the financial planning recommendation(s);

6.Implementing the financial planning recommendation(s); and

7.Monitoring progress and updating.

The financial planning process has been revised over the years. The current seven-step financial planning process represents the latest revision (as of October 1, 2019). Prior to the revision, the process consisted of six steps. Figure 1.1 compares the current seven-step financial planning process with the traditional six-step process.

Figure 1.1. The Current Financial Planning Process Compared to the Traditional Process.

Financial planners are encouraged to take a comprehensive approach when working with clients. The major subject areas in a financial plan include, but are not limited to, the following: financial statement preparation and analysis (including cash flow and net worth management and budgeting), insurance planning and risk management, employee benefits planning, investment planning, income tax planning, retirement planning, and estate planning. When working through the financial planning process, financial planners are expected to follow a consistent, well-defined approach when working with clients. The following discussion explores each step in the financial planning process in greater detail.

Step 1: Understanding the Client’s Personal and Financial Circumstances

At this step in the process, a financial planner is obligated to obtain appropriate qualitative and quantitative information from a client. Appropriate data is determined by the scope of the client-financial planner engagement. While there are no best-practice standards regarding the best way to collect data from a client, many financial planners request that their clients provide copies of source documents that the financial planner can then use to evaluate the client’s financial situation. Examples of source documents include current check stubs, savings account statements, prior year tax returns, investment and retirement account statements, life insurance policies, copies of wills, trusts, and other estate planning forms, employee benefit plan booklets, credit card statements, loan information, and insurance policies. Other financial planners ask clients to provide detailed financial information on a form prior to meeting with the financial planner. A sample client data intake form that can be used in this way is shown in Appendix 1A.

Qualitative client data include:

•Health Status

•Family Situation

•Life Expectancy

•Family Values, Expectations, and Attitudes

•Risk Tolerance

•Risk Capacity

•Wishes and Wants

•Goals

•Goal Priorities

Quantitative client data include:

•Age

•Cash Flow Situation

•Value of Assets and Liabilities

•Current and Future Income

•Current and Projected Tax Liability

•Use of Government Benefits

•Sources of Liquidity

•Availability of Financial and Social and Community Resources

•Insurance Coverages

•Estate Planning Documentation

•Education and Special Needs Documentation

•Retirement Plan Documentation

•Current Financial Plan

A financial planner must possess the professional competence to analyze qualitative and quantitative client data, as well as anticipate what additional information will be needed from a client.

Step 2: Identifying and Selecting Goals

Financial planners must possess and utilize refined communication and counseling skills. These skills come into play at this step of the financial planning process. It is through discussions with a client that the data collected at step one of the process come into play in helping a financial planner identify client goals. A financial planner must document explicit and implicit assumptions used in the financial planning process. Factors such as current and expected inflation, rates of return, tax rates, and other environmental estimates, along with professional judgement, shape the adoption of realistic goals by a client.

Step 3: Analyzing the Client’s Current Course of Action and Potential Alternative Course(s) of Action

The third step in the financial planning process involves evaluating a client’s current situation and course of action. The analysis should begin by determining whether a client is on course to meet their financial goal(s) without additional planning.

One way to visualize this step is to imagine that a client has engaged the services of a financial planner by the hour to complete a cash flow and net worth statement. The client may need these documents as evidence for a loan or simply to determine how she or he is making progress towards a particular financial objective. Using this step of the financial planning process as a guide, a financial planner would use client-provided data, without projections of future income, expenses, assets, or liabilities, to complete a cash flow and net worth statement. These documents would then represent the client’s current situation. The analysis could also include documenting how the client’s goals align with the client’s current financial situation, noting any possible threats and opportunities.

Once a client’s current financial situation has been documented, a financial planner should identify strengths and weaknesses associated with the client’s situation. One these have been identified, a financial planner—working at this step of the financial planning process—should begin to consider appropriate potential recommendations. The purpose of preliminarily developing recommendations is to identify strategies that will help the client maximize goal achievement.

Step 4: Developing the Financial Planning Recommendation(s)

The fourth step in the financial planning process involves selecting and formalizing the strategies that will be recommended to a client. A recommendation may be as simple as suggesting that a client continue their current course of action. More often, however, recommendations will involve having a client do something new. Recommendations should include the following elements:

1.A summary of the assumptions and inputs used to arrive at the strategy.

2.How the recommendation will help a client meet their goal(s).

3.How implementation of the recommendation will materially influence a client’s financial and personal circumstances.

4.How the recommendation integrates with other elements of a client’s financial plan.

5.A review of the timing and priority of a recommendation.

6.A description of the way in which the recommendation should be implemented.

Step 5: Presenting the Financial Planning Recommendation(s)

An essential step in the financial planning process involves communicating the advantages and disadvantages of each recommendation to a client. This step in the financial planning process should be focused on describing why one or more recommendations is appropriate in helping a client reach their goal(s). Any conflicts of interest, actual or perceived, should be reviewed with a client at this point.

Step 6: Implementing the Financial Planning Recommendation(s)

Although each step of the financial planning process is important, this sixth step is of primary consequence. Without client engagement and recommendation implementation, each of the previous steps in the planning process are futile. Four elements should accompany an implementation plan:

1.Defining who is responsible for implementation.

2.Identifying and selecting appropriate actions, products, and/or services.

3.Describing the process of implementation in a specific and actionable manner.

4.Describing any real or potential conflicts of interest.

Generally, three implementation options exist. First, a client may be tasked with implementation. Second, a financial planner may be the person to implement a recommendation, or third, an outside party may be called upon to help a client implement a recommendation. Regardless of the method of implementation, a financial plan should not be written in a way that limits recommendation implementation solely to the financial planner or an third party. A client should be able to implement plan recommendations independently.

Step 7: Monitoring Progress and Updating

The last step in the financial planning process focuses on determining who and how implemented recommendations will be monitored and updated. Generally, a financial planner will be responsible for ongoing monitoring unless a client or outside party takes on this responsibility explicitly within the client-financial planner engagement, or unless the monitoring activity is outside a financial planner’s scope of practice. Five factors should be determined, discussed, and agreed upon with a client:

1.Which actions, services, and/or products will be or will not be reviewed by a financial planner.

2.How often ongoing monitoring and updating will occur.

3.The client’s responsibility in informing and updating the financial planner about new qualitative and quantitative data.

4.The financial planner’s legal and professional responsibility to inform the client of necessary information.

How often financial planning recommendations will be updated.

Within the financial planning process, a financial planner is under a professional obligation to search for and evaluate new client-specific data, both qualitative and quantitative, as well as review and anticipate changes in environmental factors, including inflation, rates of return, and tax rates, when conducting ongoing recommendation and plan monitoring. The ultimate objective, at this stage of the planning process, is to ensure that a client is progressing toward goal achievement. If goal achievement appears problematic, appropriate action must be taken.

Figure 1.2 illustrates how the financial planning process is circular in nature, with ongoing monitoring continually informing the type of information a financial planner must obtain to ensure that a client is moving toward goal achievement.

Figure 1.2. The Circular Nature of the Financial Planning Process.

Practice Standards and Ethics

Financial planning professionals who are CFP® certificants must also follow practice standards developed and promulgated by CFP Board. These standards are described in CFP Board’s Standards of Professional Conduct—all of which have evolved within the profession to guide professional actions and benefit consumers. The CFP Board Practice Standards and Code of Ethics are intended to:

•Assure that the practice of financial planning by CFP® professionals is based on established norms of practice;

•Advance professionalism in financial planning; and

•Enhance the value of the financial planning process.³

All CFP® professionals must adhere to the following Code of Ethics:

1.Act with honesty, integrity, competence, and diligence;

2.Act in the client’s best interests;

3.Exercise due care;

4.Avoid or disclose and manage conflicts of interest;

5.Maintain the confidentiality and protect the privacy of client information;

6.Act in a manner that reflects positively on the financial planning profession and CFP® certification.

CFP Board’s Standards of Conduct provide specific guidance to CFP® professionals when working with clients within the scope of the Code of Ethics. There are fifteen actions that comprise a financial planner’s duties when conducting financial planning:⁴

1.Fiduciary duty;

2.Integrity;

3.Competence;

4.Diligence;

5.Disclose and manage conflicts of interest;

6.Sound and objective professional judgement;

7.Professionalism;

8.Comply with the law;

9.Confidentiality and privacy;

10.Provide information to a client;

11.Duties when communicating with a client;

12.Duties when representing compensation method;

13.Duties when recommending, engaging, and working with additional persons;

14.Duties when selecting, recommending, and using technology; and

15.Refrain from borrowing or lending money and commingling financial assets.

CFP Board also provides guidance on ways a CFP® professional must act when applying the financial planning process and when dealing directly with CFP Board. Of particular importance is the following:⁵

"There is a rebuttable presumption that a CFP® professional providing financial advice is required to integrate relevant elements of the client’s personal and/or financial circumstances in order to act in the client’s best interest, and thus is required to comply with the Practice Standards. Among the factors that CFP Board will weigh are:

a.The number of relevant elements of the client’s personal and financial circumstances the financial advice affects;

b.The portion and amount of the client’s financial assets the financial advice may affect;

c.The length of time the client’s personal and financial circumstances may be affected by the financial advice;

d.The effect of the client’s overall exposure to risk if the client implements the financial advice; and

e.The barriers to implementing the financial advice."

A key takeaway is that a financial planner must act in the best interest of their client at all times when delivering financial advice. For the purposes of the Practice Standards, a client is defined as:⁶

Any person, including a natural person, business organization, or legal entity, to whom the CFP® professional renders professional services pursuant to an engagement.

Within this definition, an engagement is defined as:⁷

A written or oral agreement, arrangement, or understanding.

The Practice Standards apply to the delivery of financial advice, which is defined as:⁸

"A communication that, based on its content, context, and presentation, would reasonably be viewed as a suggestion that the client take or refrain from taking a particular course of action with respect to:

1.The development or implementation of a financial plan addressing goals, budgeting, risk, health considerations, educational needs, financial security, wealth, taxes, retirement, philanthropy, estate, legacy, or other relevant elements of a client’s personal or financial circumstances;

2.The value of or the advisability of investing in, purchasing, holding, or selling financial assets;

3.Investment policies or strategies, portfolio composition, the management of financial assets, or other financial matters;

4.The selection and retention of other persons to provide financial or