FPSC Financial Planning Practice Standards Guidance for CFP Professionals and FPSC Level 1 Certificants in Financial Planning. Purpose of Guidance

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1 FPSC Financial Planning Practice Standards Guidance for CFP Professionals and FPSC Level 1 Certificants in Financial Planning Purpose of Guidance The purpose of the Guidance to the FPSC Financial Planning Practice Standards is to clarify the expectations of CFP professionals and FPSC Level 1 Certificants in Financial Planning ( FPSC Level 1 certificants ) in providing financial planning services to clients. By better defining each standard and detailing the expected practice of CFP professionals and FPSC Level 1 certificants, our aim is to support their implementation by demonstrating the application of the standards with clients. To this end, the Guidance provides an explanation of each of the Practice Standards and exemplifies the expected level of practice of CFP professionals and FPSC Level 1 certificants through the use of client scenarios. For each standard, the expected level of technical knowledge, ability to integrate across financial planning areas and professional skills are highlighted. Background CFP professionals and FPSC Level 1 certificants study from the same body of financial planning knowledge and have demonstrated proficiency in financial planning by meeting strict standards of competence. CFP professionals study for a longer period of time than FPSC Level 1 certificants, allowing for higher technical knowledge, greater proficiency in integrated financial planning and deeper professional skills. In addition, CFP professionals are required to have completed three years of qualifying financial planning work experience to further develop their professional competence and refine their technical knowledge. It is the complexity of the client situation that influences the depth of technical knowledge, level of integrated financial planning and degree of professional skills required. More specifically, client situations may range from those that are more straightforward to those that are complex and involved, requiring deeper technical knowledge across all financial planning areas and extensive integration skills. The knowledge expectations of CFP professionals and FPSC Level 1 certificants may be commensurate in the areas of cash, investment and retirement planning. However, in the areas of insurance and risk management, tax and estate planning, the technical knowledge expectations of a CFP professional may be expected to be higher and, therefore, the understanding of the interrelationships and interdependencies with and among those areas may also be expected to be higher.

2 A CFP professional is a financial planner who possesses the knowledge and abilities to capably provide financial planning advice at the highest level of complexity required by the profession. A CFP professional has well-developed professional skills and judgment, meaning that s/he may help clients articulate goals that may not be well-defined, evaluate solutions where a number of appropriate solutions may exist and explain the benefits, risks and costs of recommendations that may not be clear-cut. An FPSC Level 1 certificant is an individual who possesses the knowledge and abilities to capably provide financial planning advice in client situations that have been identified as less complex. Professional skills and judgment, though appropriate to effectively address clients needs, may be less well-developed as compared with a CFP professional. The more complex the financial planning requirements, the greater the need to consult with a CFP professional or for the CFP professional to directly provide financial planning advice to the client. This is analogous to the nursing profession, as an example. Registered Nurses (RNs) and Registered Practical Nurses (RPNs) study from the same body of nursing knowledge. RNs study longer, allowing for greater foundational knowledge in clinical practice, decision making, critical thinking and leadership. The complexity of a patient s condition influences the nursing knowledge required to provide the level of care the patient needs. Like RNs and RPNs, CFP professionals and FPSC Level 1 certificants show accountability by taking responsibility for their decisions and actions, taking appropriate action when needed and ensuring that practice is consistent with the required competencies, standards of practice and a code of ethics that includes an obligation to practice within their sphere of competence and always put their clients interests first. Professional Skills Professional skills fall into two categories Communication and Cognitive Abilities and Judgment. They are inherent in the fulfillment of each and every financial planning function and competency with each and every client. Communications At the outset of any financial planning engagement, the CFP professional and FPSC Level 1 certificant must gain a strong understanding of the client s quantitative and qualitative information related to their goals, needs and priorities. This information can best be obtained through an interview process that encourages discussion, demonstrates interest and attention, and puts the client at ease. This requires active listening skills

3 to build a good rapport and a trusting relationship with the client. Recommendations and strategies must be presented in a clear and logical manner with any objections and concerns managed in a positive and productive manner. Cognitive Abilities and Judgment The process of providing financial planning recommendations requires that the CFP professional and FPSC Level 1 certificant have the capacity to apply judgment in identifying client information to gather, in assessing the appropriate type and level of analysis and in integrating information from a variety of sources. They must also be able to apply sound mathematical methods, logic and reasoning to identify and assess the strengths and weaknesses of potential strategies and the ability to adapt to change in the face of new information, including changes in the client s situation. CFP professionals and FPSC Level 1 certificants must practice in accordance with applicable professional standards and must employ sound professional reasoning to decide not only the technically best solution, but also the one that is ethically and morally right. They must also recognize the limits of their competency, and seek the counsel of other professionals when appropriate. Clients place the CFP professional and FPSC Level 1 certificant in a position of trust. There is a professional obligation to maintain and foster that trust, and to always place the interests of the client ahead of all others. Both CFP professionals and FPSC Level 1 certificants are expected to have an appropriate level of communication skills to effectively engage with clients, gather relevant information about their goals, needs and priorities and present recommendations in a way that is meaningful and understandable. CFP professionals are expected to have deeper and more refined communications skills given the complexity of the situations they may be called upon to address, including such sensitivities as separation or divorce, children with disabilities, business succession or employee severances. In addition to skills gained through education and demonstrated on examinations, FPSC s work experience requirement provides assurance that CFP professionals have applied financial planning-related knowledge in a business setting to develop additional professional competence and refine their communication skills. The level of cognitive abilities and judgment required of CFP professionals will be commensurate with the level of client situations they may face. No doubt, a CFP professional with the proficiency to weigh complex income splitting strategies for small business owners, insurance strategies for individuals with significant estate planning goals or ownership structures for clients assets will require higher cognitive abilities and judgment than FPSC Level 1 certificants with the proficiency to address the more fundamental aspects of insurance, tax and estate planning. CFP professionals

4 may also typically face situations where they must assess the interrelationships and integration between up to six financial planning areas. This calls for a high ability to assimilate information from a variety of sources to arrive at solutions and critical thinking to evaluate the most effective solutions based on the interrelationships that may exist. By comparison, an FPSC Level 1 certificant would more typically address client situations requiring the substantive consideration of up to two to three financial planning areas. Therefore, the analysis of the interrelationships and integration among financial planning areas may be expected to be relatively less. Complexity Continuum The Complexity Continuum is provided as a general guide to what is meant by complexity. Taken together, the factors on the left may be identified with a less complex client situation that could be capably addressed by an FPSC Level 1 certificant. Taken together, the factors on the right may be identified with a more complex client situation that could be capably addressed by a CFP professional. In between, depending on the degree of complexity, the client situation may be addressed by an FPSC Level 1 certificant autonomously or with consultation by or referral to a CFP professional, or appropriate specialists. In all cases, both CFP professionals and FPSC Level 1 certificants have an obligation to refer to or call upon appropriate expertise where the complexity of the client situation is beyond their level of competence. Increasing need for CFP professional to consult or to fully provide financial planning to client Less Complex (FPSC Level 1 certificant practice) Financial planning goals or needs are well-defined and established Financial planning goals or needs are typical and straightforward (i.e., buying a home, retirement in 10 years, child education in 15 years, paying down debt) Appropriate solution is clear Limited integration skills required More Complex (CFP professional practice) Financial planning goals or needs are not well-defined or established or are in transition Financial planning goals or needs are less typical, intricate or multi-faceted (i.e., buying a home in the U.S., forced retirement, saving for the needs of a special needs child) May be a number of suitable solutions to meet client needs; appropriate solutions are less clear Deep understanding of the interrelationships among financial planning

5 (focused on financial management, investment and retirement planning) Assets held individually Client is an individual Risk of negative outcome is low areas and significant integration skills required Assets held in trust or in a corporation Client is a business owner Risk of negative outcome is high FPSC Financial Planning Practice Standards The FPSC Financial Planning Practice Standards 1 ( Practice Standards ) establish the level of practice expected of CFP professionals and FPSC Level 1 certificants when engaged in the delivery of financial planning to clients. The Practice Standards outline the process that must be followed in any client engagement where financial planning services are being offered. These standards are obligatory in any type of financial planning engagement, not just when a CFP professional delivers a comprehensive financial plan. For purposes of the guidance, two client scenarios are provided the first is more complex and may be capably addressed by a CFP professional; the second is less complex and may be capably addressed by an FPSC Level 1 certificant. The guidance provides the expected implementation of the Practice Standards by the CFP professional and FPSC Level 1 certificant, including the depth of technical knowledge required and the level of professional skills expected to satisfy clients needs. Client Scenario 1: Mark and Nancy, both in their late forties, want to meet with an advisor to review their RRSPs and plan for this year s RRSP contributions. Mark is saving 4% of his salary through his employer-sponsored defined contribution pension plan (DCPP); the company matches up to 6% of employee contributions. He has amassed $120,000 in his DCPP and $30,000 in his RRSP. Nancy contributes 5% of her higher salary to a Group RRSP and 1 The order in which the Practice Standards appear is not prescriptive but rather is for purposes of guidance; financial planning is an iterative process. Although there is often a logical sequence to these functions, (first collect data, then analyze the data and evaluate strategies, and finally make appropriate recommendations), in practice the financial planner will move back and forth between functions during any client engagement. For example, certain analysis may point to the need for more data collection.

6 benefits from the maximum employer matching. Her plan is currently valued at $200,000. Based on their risk tolerance and time horizon, each of their investor profiles has been determined as Balanced. The couple has a $350,000 mortgage at 3.5% annual interest which they are on track to pay off in 18 years. Other debts include an unsecured line of credit with an outstanding balance of $30,000 at an annual interest rate of 6% and a car loan in each of their names for $35,000 at an annual interest rate of 4.5%. Mark and Nancy have two children, Tyler, age 15, who has been diagnosed with a learning and speech-related disability, and Sam, age 10. They are particularly concerned about Tyler s future. These last few years, the couple stopped contributing to their personal RRSPs and aggressively paying down their mortgage and started to contribute $5,000/year to an RESP, figuring they will have enough time to save for retirement once the children s educations are secured. The RESP is valued at $20,000. As they have been focussing on education savings, they have left themselves at risk in the event of emergencies, premature death, long-term disability or illness, all of which keeps Nancy up at night since her family has a history of illness. The couple has insurance through their employers, but are uncertain of the coverage. They also feel stressed that their bank account has been shrinking each month over the last few years. With monthly expenses for Sam s and Tyler s hockey, soccer, art and swimming at $500 and lifestyle expenses at $2,000, they are feeling strained. In particular, Mark and Nancy are feeling overwhelmed by the cost of the boys activities. They do not know whether they will have the $6,000 needed for the annual vacations they have planned. They have discussed selling the cottage, valued at $300,000, which was bequeathed to Nancy when her parents passed away, but Nancy has always pictured herself leaving it to Sam when she passes away since he loves spending time there. Explain the Role of the Financial Planner and Value of the Financial Planning Process Ensure the client understands the role of a financial planner and the value of the process of financial planning in identifying and meeting the client s personal goals, needs and priorities. This practice standard is intended to educate clients around what to expect of financial planning and the value proposition of the financial planner, and to help engage clients in the multi-step financial planning process, which is equally dependent on the knowledge and skills of the financial planner and the candour of the client in fully disclosing his/her personal and financial situation. I understand that your priority is planning for this year s RRSP contributions. However, you also noted other goals, including the education of your children, the protection of your family in the event of death or disability and providing for your son, Tyler. In order for me to best advise you on your RRSP contributions, it will be important for me to understand more about your retirement goals, including when you expect to retire, your

7 retirement plans, and about your other priorities. As you mentioned, cash is limited, which means that choices may need to be made around where to focus attention while still ensuring your family s protection, your children s educations and the appropriate long-term care for Tyler. Without understanding the full picture, we run the risk of assigning more cash to your retirement goal than is appropriate at the moment and leaving your other goals at risk. As a financial planner, the value I bring is in looking at the big picture and gaining a full understanding of your needs and goals before making any specific RRSP or other recommendations. The early stages of the financial planning process will therefore involve a good number of questions about you and your family, the things that are pressing on your mind and your current situation. These are not meant to be invasive rather, to help ensure that any recommendations I make are most fitting for you. Financial planning is not unlike other professions, like medicine, where a doctor requires a full understanding of his patient s family history and current health situation before assessing possible health solutions and making recommendations to ensure the patient s physical well-being. Define the Terms of the Engagement Work with the client to define and agree on the scope of the financial planning engagement, whether an initial or review engagement. This practice standard outlines the requirement to define the terms of the engagement by setting out the services that the financial planner will provide, as agreed to by the planner and the client. Best practice is to detail the terms of the engagement in a written Letter of Engagement signed by both parties to help ensure a mutual understanding and agreement between the planner and client about the services to be provided. The terms of the engagement must include how the planner is compensated, any potential conflicts of interest and a commitment to protect client confidentiality. The Letter of Engagement may be a formal letter developed at the corporate level for use by all individuals doing financial planning. Where such a formal letter is not in place, an reflecting the understanding of the planner and client about the services to be provided and appropriate disclosures would be of value. Professional skills - A letter of engagement is important to ensure that you re in agreement with the scope of financial planning services that I m proposing. It lays out what you can expect of me as your financial planner. Based on our preliminary discussion and my understanding of your situation, I ve prepared a letter of engagement that I d like to review with you this morning.

8 Letter of Engagement Thank you for taking the time to meet with me to discuss your financial affairs. This Letter of Engagement outlines the services I will provide to you in my capacity as a CFP professional: Development of a summary of your current situation, including current net worth and cash flow statements Analysis of your current retirement plans and any gaps that may exist Analysis of your current education, investment, risk management and insurance, tax and estate plans and any gaps that may exist Analysis of Tyler s future support needs Development of financial planning recommendations Implementation of the financial planning recommendations Review and monitoring of the financial plan (annually at minimum) In order for me to effectively provide financial planning services, I will need you to provide full and accurate disclosure of all relevant information and documents in a timely manner. In this regard, I have provided you with a checklist of required material. My compensation is based on any investment solutions I may implement for your accounts. If, as a result of the analysis, you choose to implement the recommended investment solutions, full disclosure of all compensation will be made around the specific products purchased. During the course of the financial planning engagement, there may be a need to make referrals to other professionals (i.e., tax adviser, insurance adviser, legal adviser) to assist with the implementation of the financial planning recommendations. Please be advised that I do not receive fees in any form from professionals to whom you may be referred. However, such professionals may charge a fee for their services which will be negotiated with them and charged directly to you. All financial information will be kept strictly confidential and personal information will not be divulged without your express consent, unless directed by law. During the engagement, there may be occasions where a conflict of interest may arise. Any such conflicts of interest or potential conflicts of interest will be disclosed in writing. Either party to this agreement may terminate this agreement at any time by giving at least 30 days written notice. I look forward to working with you.

9 Professional skills - Do you have any questions or is there something you might like to have clarified? If you re satisfied with the terms of the engagement, I would propose setting up a follow-up meeting to discuss your goals, needs and current situation in more detail. This is a critical part of the financial planning process to ensure that I have a clear and accurate understanding of your finances and personal circumstances. I wonder if you might have an opportunity this week to either drop off or copies of your most recent Notices of Assessment, pension, RRSP, group RRSP and group insurance statements, as well as your mortgage and loan statements. This would allow me to review the relevant documentation in advance of and in preparation for our discussion. Thank you. Identify the Client s Goals, Needs and Priorities Discuss the client s personal goals, needs and priorities before identifying possible strategies or making recommendations. After the terms of the engagement are agreed to, it will be important to probe into the client s goals, needs and priorities as part of a discovery process prior to making any recommendations. The planner should describe the discovery process and its importance in effectively understanding the details of the client s goals and circumstances before any advice is given. The planner should help the client determine specific goals including dollar amounts and timelines. A client may present his/her retirement goal as wanting to retire comfortably or wanting to maintain my current standard of living. Given this non-specific goal, the financial planner would be left guessing about the client s precise expectations. Professional skills - Thank you for leaving your most recent Notices of Assessment and your RRSP and pension statements with my assistant last week. This will be very helpful in assessing your current retirement savings. Based on our initial discussion, you indicated that you wanted to contribute to your RRSPs. You also alluded to three other goals: educating your children, providing for your son in the future and protecting your family. In order to provide the appropriate retirement planning advice, I d like to understand more about each of your goals. Would you mind if I ask you a series of questions? Retirement Planning Professional skills To start, I d like to ask you about your retirement goal. These are important questions to assess the amount of retirement savings that may be appropriate considering when and how you may like to retire. When do you expect to retire?

10 When you think about retirement, what emotions does it conjure up for you? What kind of lifestyle are you contemplating in retirement? How might it differ from your lifestyle today? How important is it that you be debt-free in retirement? Financial Management Professional skills I wonder if you can tell me a little about your aspirations for your children? My experience as a parent tells me that with children comes worry what do you worry most about as it relates to your children? You mentioned a desire to support Tyler s financial future. Can you tell me what you re thinking of in terms of the type and level of support you re envisioning? Do you expect your children to pursue post-secondary education? How important is it for you to fully fund your children s educations? Understanding that it s still early days, where might you expect your children to attend school? How much have you estimated for future education costs? Over what period? Professional skills - These are important questions as we estimate the cost of education funding. Perspectives on these questions tend to differ with some clients wishing to fund 100% of their children s education and others a portion; some favour sending their children to a local school and having their children living at home while others think in terms of a potentially more costly foreign school and a situation where children will live away from home. Of course, these decisions all have cost implications. Generally, we estimate Canadian post-secondary tuition fees to be $7,500/year. As well, it s important to note that the cost of education has been rising quite dramatically. We generally apply an annual rate of inflation of 7% to the cost of education. Are you comfortable with these assumptions?

11 Emergency Fund Professional skills - Life can deal unexpected expenses. An integral part of any plan is the ability to ensure that such unexpected events won t derail our future well-being. What provisions do you have in place in the event of emergencies? A good rule of thumb is generally to maintain liquid assets in the amount of three to six months of expenses in the event of emergencies. Insurance and Risk Management Professional skills Discussions around insurance are sometimes difficult to have since it means considering risks that many find difficult to contemplate, like the possibility of disability, illness and premature death. As well, some place a high priority on insurance to protect their families by purchasing individual property, life, disability, critical illness and long-term care insurance in addition to group insurance. Others may place somewhat less importance on purchasing insurance, choosing instead to balance the purchase of insurance with self-insuring their future needs. As well, for some, leaving an estate is very important while for others it is less so, which may also impact their views of insurance. What are your views of insurance? Do you have plans to leave an estate for your children? Others? How might you envision your expenses being impacted in the event of the premature death of either one of you? As an example, might you need to hire extra help in the house? Or, might you expect your expenses to decrease somewhat? You described that you have some history of ill health in the family. Can you tell me a little more? What level of care would you feel comfortable with in the event you are no longer able to care for yourself? Professional skills In the event you wish to be cared for in a specific way, you may want to consider critical illness insurance and long-term care insurance. In the event of serious illness, the proceeds of critical illness insurance may be used in whatever way you wish, such as to provide alternative private treatment; purchase specialized equipment; hire a nurse or child care provider; or pay down your mortgage. Long-term care insurance is available to help fund what tend to be relatively significant costs of home or facility care where you are unable to care for yourself. Like other forms of insurance, critical illness and long-term care insurance provide peace of mind in the event of unforeseen expenses. We can discuss the cost of critical illness and long-term care insurance for you at your age and given your health histories. Where cost is an issue and other priorities

12 may be put at risk, we may contemplate critical illness insurance given that you have two young children and one who may have higher dependency requirements, to ensure funds continue to be sufficient to provide care for him. Long-term care insurance can perhaps form part of a longer term retirement plan. Gather the Client s Information Gather sufficient quantitative and qualitative information relative to the engagement before identifying possible strategies or making recommendations. In addition to effectively gathering information about the client s goals, needs and priorities, the planner must gather and record current, accurate and complete information about the client s situation. This information will be both quantitative and qualitative. Quantitative information includes, but is not limited to, documents and other records of the client s assets, liabilities, income and expenses. Qualitative information includes, but is not limited to, the client s family situation, values, attitudes, biases, expectations and risk tolerance. Professional Skills - Given our discussion so far, I have a much better sense of your goals. To put your goals into context, it will be helpful to get an understanding of your current situation, including your family and work situation, your values and attitudes, your experience with financial planning and your current financial position. This will be our starting point for planning purposes. You may find that I m asking quite a few questions. Again, my intent is not to be invasive; rather, it s important to get an understanding of your family in order to ensure that the advice I m providing will be most fitting. Fundamental Financial Planning Practices Family Tell me a little about your children. What activities are they involved in? Can you tell me a little about your son s special needs? How do your son s special needs impact the family finances? Do you currently have responsibilities to care for others, such as your parents? What might those be? What role do your parents play with your children? What do you value most as a family?

13 What would you say worries you most? Work Tell me about your work. How long have you been with your employers? Are you happy in your work? Do you envision staying with your employers for the long-term? Financial Planning Experience Can you describe your experience with financial planning? Thinking about the financial advisors you have dealt with in the past or are currently dealing with, what have you found to be most beneficial in terms of the advice or services they have provided? Most troubling? What are your expectations of a financial planner? Financial Management (General) Professional Skills The next few questions will be important to give me a sense of your current assets, sources of income and comfort with debt. Since cash is a limited resource, we tend to be faced with what may be difficult choices between spending, paying down debt and saving. Prior to making any recommendations, it s important that I understand some of the trade-offs you may be comfortable making. Net Worth - When did you buy your home? At what price did you buy it? Do you see yourself staying in your home for the foreseeable future? How much is your home currently worth? Do you own any other real estate? Thank you for sharing your mortgage and loan statements. Is there other debt you are carrying at the moment? Are you comfortable carrying debt? How do you decide how much to apply to your debt each month? Do you pay off your credit cards each month or do you carry a balance?

14 Cash flow What are your gross salaries? In addition to your jobs, do you have any other sources of income currently? Do you foresee your income changing in the foreseeable future? Do you foresee your spending changing in the foreseeable future? Can you describe your child care expenses? How might you see those changing over time? How much of your income do you save each month? How are your savings directed at the moment? Have your savings increased or decreased over the last few years? Can you explain? After expenses, do you tend to have cash left over at month end? Do you have funds saved in the event of emergencies? How much? Financial Management (Education) Do you expect that Tyler will pursue post-secondary education? For how long? At what cost? Will there be any need for additional support for Tyler as he pursues post-secondary education? While it s early days for Sam, what are your expectations in so far as his future education? When was your RESP opened? How much have you contributed to date? Professional Skills These are important questions to assess whether you have been fully taking advantage of the Canada Education Savings Grant, which provides 20% of contributions up to a maximum of $2,500 each year for each child and if sufficient carry forward room exists, up to a maximum of $5,000 in contributions each year toward the education of each child. Financial Management (Disability) You indicated concern for Tyler s future. Can you describe your biggest worries? Do you expect Tyler to need your support during his working years or in his retirement? How might you like to support Tyler and to what extent?

15 Is Tyler eligible for the Disability Tax Credit? Do you know about the Registered Disability Savings Plan? Professional Skills The Registered Disability Saving Plan, or RDSP, is a savings plan that is intended to help parents and others save for the longterm financial security of a person who is eligible for the disability tax credit. Contributions to an RDSP are not tax deductible and can be made until the end of the year in which the beneficiary turns 59. Contributions that are withdrawn are not included in income for the beneficiary when they are paid out of an RDSP. Similar to the RESP, the Government of Canada provides matching contributions in the form of grants and bonds which help the account grow more quickly. The government may provide a Canada Disability Savings Grant of $1,500 on the first $500 of contributions and $2,000 on the next $1,000 of contributions. The Canada Disability Savings Bond is money the government will deposit into the RDSP of up to $1,000 a year depending on income. Retirement Planning Professional skills - The original purpose of your visit was to make your RRSP contributions for the year. Before formalizing any recommendations around the type of investments and how much you may wish to contribute to your RRSPs, I would benefit from understanding how you envision your retirement years. You had mentioned earlier that you expect your lifestyle in retirement to be similar to what it is now. Do you expect that part-time work will be part of your retirement plans? In addition to your pensions and RRSPs, would you expect there to be other sources of income in retirement? Do you expect an inheritance of any sort? Do you always contribute the annual maximum to your RRSPs? Can you provide your most recent CPP statement of contributions for an estimate of the CPP benefits you may be eligible to receive? Do you have beneficiaries designated on your retirement or pension plans or insurance policies? What assumptions about life expectancy would you feel comfortable with? Professional Skills - I ask the question about life expectancy since it s an important assumption within a financial plan which dictates how long individuals must plan to sustain their lifestyle. Based on your family health history, personal health and lifestyle, I would recommend assuming a life expectancy of 90 years. Does that sound right to you?

16 Investment Planning Professional Skills In addition to the know-your-client information we have on file, I would like to gauge your experience, expectations and comfort with investing. Can you describe your experience with investing? What returns have you experienced on your investments? What are your return expectations? How comfortable are you with fluctuations in the value of your portfolio? Do you worry or sell securities when your investments drop in value? Are you aware of the fees on your investment accounts? How often do you review your investments? Are there certain types of investments that you specifically avoid? To what extent do you like to be involved in making investment decisions? Professional Skills These are important questions to gauge your attitudes related to and comfort with investing. Based on your responses to the investment questionnaire we completed together, it would seem that your return expectations may be higher than what may reasonably be expected for a Balanced portfolio. Based on past performance, we generally associate a rate of return in the range of 5% for a Balanced portfolio. You have also indicated a preference to leave investment decisions to others. Based on current account values and your preference for professional management, I might suggest continuing to invest in mutual funds. However, I would consider diversifying beyond Canada s borders to minimize the risk associated with market fluctuations. We can discuss this further after I have analyzed your holdings more closely. Insurance and Risk Management Professional Skills As briefly discussed in our initial meeting, attitudes toward insurance differ among individuals, with some preferring to share the risk and some preferring to retain and plan for the risk. It s valuable to understand your attitudes towards risk relative to your current insurance coverage and in evaluating insurance options and making specific recommendations. Thank you for providing your group insurance plan documents. I now better understand the life and disability insurance coverage you have in place. Do you have creditor insurance coverage in place on your mortgage or loans?

17 You have expressed some concerns related to your family health history. Have you considered purchasing individual insurance to complement your group coverage? Would you like to leave an inheritance for your children? Others? Professional Skills As discussed, where cost is an issue and other priorities may be put at risk, we can perhaps think in terms of self-insurance for any potential long-term care needs. These may be appropriate trade-offs in your case. We can discuss more after I ve had an opportunity to analyze your situation more fully. Assess the Client s Current Situation Identify and evaluate the strengths and weaknesses in the client s financial situation, perform required calculations, develop needed projections, and analyze and integrate the resulting information relative to the client s personal goals, needs and priorities. The planner will analyze and evaluate the strengths and weaknesses of the client s current financial situation, and consider them relative to the client s goals, needs and priorities. Based on projections, the planner will be able to assess the client s progress toward achieving their goals and identify any issues and opportunities, in order to formulate relevant strategies for consideration. Step 1: Develop a Net Worth Statement. Step 2: Project the value of the clients net worth over the planning period by considering current asset values, growth rates/interest rates/rates of return, expected savings or withdrawals and debt values. Step 3: Consider if the clients current net worth is positive or negative o A negative net worth may suggest that liabilities are increasing at a faster rate than assets. o A positive net worth may suggest that the clients are well positioned to achieve their goals. Step 4: Consider the degree of positive or negative net worth in relation to life stage - o A negative net worth for a student or recent graduate may be reasonable considering the high potential future value of their human capital. o A small positive net worth for clients in mid-life (like Mark and Nancy) or nearing retirement may suggest a lack of adequate savings and may affect the clients ability to meet their desired goals.

18 Step 5: Develop a Cash Flow Statement, including projected inflows and outflows over the clients working and retirement years. Step 6: Through an analysis of cash flow projections, determine if there is a shortfall or surplus in the amount of cash needed to achieve their goals. In this case, the clients are expressing concern balancing multiple priorities. Where there are shortfalls: o Consider possible contributing factors, such as high discretionary expenses, high interest costs or unrealistic retirement age. o Assess the reasonableness of assumed expenses: Do the clients typically have cash (after expenses) in their bank account at month end? o Assess opportunities to reduce expenses: Are the majority of monthly expenses for other than necessities? Are there opportunities to refinance debt at a lower cost or convert non tax-deductible debt to tax-deductible debt? Are there opportunities to reduce the costs associated with the clients cars or home? Are there more effective ways of saving for education or for their son s disability? Step 7: Review the provisions of the group insurance policies provided through their employers to identify issues of concern or gaps, such as limited benefits, high premiums, vulnerability to cancellation, inadequate benefit periods and portability restrictions. Step 8: Develop projections in the event of premature death or permanent disability; determine if a cash flow shortfall or surplus may be expected based on their current insurance coverage; assess the need for individual life and disability insurance. Step 9: Review the adequacy of the couple s emergency funds by assessing their ability to cover a minimum of three months of expenses. Step 10: Based on cash flow projections, assess the clients ability to meet their education goal; determine if they are currently maximizing the annual government grants and other benefits they are eligible to receive. Step 11: Based on cash flow projections and current savings for their son with special needs, assess the clients ability to supplement their son s income in the future; determine if the clients are currently maximizing the annual government grants and other benefits they are eligible to receive; determine if their son qualifies for the Disability Tax Credit. Step 12: Based on cash flow projections, assess the clients ability to meet their retirement goals. Identify and Evaluate Appropriate Financial Planning Strategies Identify and assess the possible financial planning strategies to achieve the client s personal goals, needs and priorities. The planner will identify and evaluate possible financial planning strategies to achieve the client s stated goals, needs and priorities. A planner will identify possible alternative financial planning strategies and ensure each one has the ability to satisfy the client s goals, needs, priorities, values, expectations, opportunities and constraints. All relevant advantages and disadvantages should be considered. The end

19 result may be a recommendation to adopt a single strategy, multiple strategies or to maintain the existing situation. Where possible, the CFP professional should quantify the relative merits of the various strategies under evaluation. Financial Management (General) Mark and Nancy have retirement assets valued at $350,000 and a home worth $700,000, secured by a $350,000 mortgage. Nancy also owns a cottage valued at $300,000. They have a family RESP worth $20,000 and $7,600 in their bank account. They owe $30,000 on an unsecured line of credit, which they used to renovate their kitchen last year. They also owe approximately $35,000 on each of their car loans. Mark and Nancy have a net worth of $627,600 (not including the cottage). While this may seem high, their home accounts for 65% of their assets. The home and cottage are relatively illiquid and the retirement assets, if liquidated to meet the couple s needs, could result in a substantial tax liability. Therefore, rather than rely on existing assets to fund their needs, the recommendation is for the couple to reduce their monthly cash outflows and put in place appropriate savings to meet their goals. Currently, the GDSR and TDSR exceed 53% and 63% respectively and, based on the couple s current situation, cash flow deficits can be expected to grow over the next 13 years. Mark and Nancy are worried that they are not currently on track to meet their goals, especially as they try to save for Tyler s two-year college program and Sam s four-year undergraduate degree. They may consider consolidating their car loans and line of credit into their mortgage. Financial Management (Debt) Debt consolidation Factors to consider: Impact on cash flow to meet other goals Interest savings Associated costs, in particular where the mortgage is not open or up for renewal Opportunity to avoid a cycle of increasing debt Simplification associated with making a single debt payment

20 Conclusion Where possible, Mark and Nancy may consider debt consolidation to reduce the interest cost of their debt and free up cash flow to apply to other goals. Ideally, they will want to maintain the amortization of their mortgage to contain debt costs over their lifetimes. Converting revolving debt to fixed term debt may also be beneficial to avoid a cycle of increasing debt and debt refinancing. Financial Management (Emergency Fund) Mark and Nancy keep an average of $7,600 in their chequing account, just short of one month of expenses. At a minimum, they should hold three months of expenses to fund emergencies. There are a number of options they may consider: Apply for a personal line of credit to be available in the event of emergencies -- factors to consider: Access to sufficient ready cash Likelihood of approval Interest cost of debt Potential to use funds for non-intended purposes Potential for persistent cash flow issues Fund emergencies by means of periodic savings factors to consider: Potential for interest/growth on savings Availability of cash for periodic savings Access to sufficient ready cash For maximum tax efficiency and to provide assurance that emergency funds won t be used for day-to-day living expenses, Mark and Nancy may consider opening up and setting aside funds within a TFSA account. While contributions into the account are not deductible for income tax purposes, the investment income earned within the account is not subject to tax and withdrawals from the TFSA are tax-free. Contributions that are withdrawn are added to the following year s contribution limit and unused contribution room can be carried forward indefinitely. Currently, the annual contribution limit is $5,500.

21 Conclusion - Building an emergency fund through monthly savings will be hard work. However, without sufficient cushion, Mark or Nancy may be put in a position of making some unfortunate decisions, such as selling their home, cottage, cars or other items of value in the event of job loss or unexpected expenses. Given current debt levels, the couple may not qualify for a line of credit and additional debt may, in any case, exacerbate current cash flow issues. Financial Management (Education) Mark and Nancy indicated that education funding for their two children is a high priority. They currently save $416 each month within a family RESP. In order to fully fund their children s education, they will need to save more. Three education funding strategies are considered: RESPs factors to consider: Cash flow considerations - RESPs are highly accessible based on minimal contribution requirements. Mark and Nancy may contribute up to a lifetime maximum of $50,000 per child. Government grant The basic CESG provides 20 cents on every dollar they contribute, up to a maximum of $500 on an annual contribution of $2,500. If they cannot make a contribution in any given year, they may be able to catch up in future years. In that case, the government grant provides 20 cents on every dollar they contribute, up to a maximum of $1,000 on an annual contribution of $5,000. Implications of children not pursuing post-secondary education - If they have sufficient RRSP contribution room, they may transfer the capital they contributed to the RESP as well as the accumulated income on a tax-deferred basis. Any grant money remaining in the account will need to be returned to the government. Where RESP funds exceed their RRSP contribution room, they will need to withdraw the funds from the RESP. The capital they contributed will not be taxed, but they will have to pay taxes on the money that they earned in the RESP. Earnings will be taxed at their regular income tax level, plus an additional 20%. Informal Trusts factors to consider:

22 Cash flow considerations Informal trusts are highly accessible based on minimal contribution requirements. Application of the attribution rules Interest and dividend income earned in trust may be subject to the attribution rules. Legal considerations In the event that the informal trust is tainted by the settlor (e.g. parent) who dips into the trust funds, taxes may be payable by the contributor on income earned within the trust. Control considerations: The settlor (e.g. parent) of the trust gives up control of assets gifted to the extent the informal trust is a legal trust and the child is able to withdraw funds at the age of majority. TFSA factors to consider: Cash flow considerations TFSA accounts are highly accessible based on minimal contribution requirements. Tax benefit - Investment income earned within the account is not subject to tax and withdrawals from the TFSA are tax-free. Control benefit - The contributor (e.g. parent) retains full control of assets since the TFSA is in the parent s name. Conclusion RESPs would normally be the preferred saving mechanism at least up to the annual limit that allows for maximum annual government grant (CESG). Since it appears clear that Tyler will pursue a post-secondary education despite some learning difficulties, they may consider increasing their RESP savings. Further, any funds not used by Tyler may be used by Sam or transferred to their RRSPs. Financial Management (Disability) Mark and Nancy have indicated a desire to provide for Tyler, who has special needs. They may benefit from the Registered Disability Savings Plan (RDSP). RDSP - factors to consider: o Cash flow considerations: RDSPs are highly accessible based on minimal contribution requirements.