Financial Planning Competency Handbook

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3 Financial Planning Competency Handbook

4 Founded in 1807, John Wiley & Sons is the oldest independent publishing company in the United States. With offices in North America, Europe, Australia, and Asia, Wiley is globally committed to developing and marketing print and electronic products and services for our customers professional and personal knowledge and understanding. The Wiley Finance series contains books written specifically for finance and investment professionals as well as sophisticated individual investors and their financial advisors. Book topics range from portfolio management to e-commerce, risk management, financial engineering, valuation, and financial instrument analysis, as well as much more. For a list of available titles, visit our Web site at

5 Financial Planning Competency Handbook Certified Financial Planner Board of Standards, Inc. CHARLES R. CHAFFIN, EdD Editor

6 Cover design: John Wiley & Sons, Inc. Copyright 2013 by Certified Financial Planner Board of Standards, Inc. All rights reserved. Published by John Wiley & Sons, Inc., Hoboken, New Jersey. Published simultaneously in Canada. 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, scanning, or otherwise, except as permitted under Section 107 or 108 of the 1976 United States Copyright Act, without either the prior written permission of the Publisher, or authorization through payment of the appropriate per-copy fee to the Copyright Clearance Center, Inc., 222 Rosewood Drive, Danvers, MA 01923, (978) , fax (978) , or on the Web at Requests to the Publisher for permission should be addressed to the Permissions Department, John Wiley & Sons, Inc., 111 River Street, Hoboken, NJ 07030, (201) , fax (201) , or online at Limit of Liability/Disclaimer of Warranty: While the publisher and author have used their best efforts in preparing this book, they make no representations or warranties with respect to the accuracy or completeness of the contents of this book and specifically disclaim any implied warranties of merchantability or fitness for a particular purpose. No warranty may be created or extended by sales representatives or written sales materials. The advice and strategies contained herein may not be suitable for your situation. You should consult with a professional where appropriate. Neither the publisher nor author shall be liable for any loss of profit or any other commercial damages, including but not limited to special, incidental, consequential, or other damages. For general information on our other products and services or for technical support, please contact our Customer Care Department within the United States at (800) , outside the United States at (317) or fax (317) Wiley publishes in a variety of print and electronic formats and by print-on-demand. Some material included with standard print versions of this book may not be included in e-books or in print-ondemand. If this book refers to media such as a CD or DVD that is not included in the version you purchased, you may download this material at For more information about Wiley products, visit The financial planning competency handbook / The CFP Board. pages cm. (Wiley finance series) Includes index. ISBN (cloth); (ebk); (ebk); (ebk) 1. Financial planners. 2. Investment advisors. 3. Finance, Personal. 4. Financial planning industry. I. Certified Financial Planner Board of Standards. HG179.5.F dc Printed in the United States of America

7 Contents Acknowledgments About the Book Preface Charles R. Chaffi n, EdD, CFP Board About the Practice Questions About the Contributors xiii xv xvii xxiii xxv PART ONE 1 Theory and Practice 3 Charles R. Chaffi n, EdD, CFP Board 2 Financial Planning Process 13 Ronald A. Sages, PhD, MBA, CFP, Kansas State University 3 Financial Statements 25 4 Cash Flow Management 35 Martie Gillen, PhD, University of Florida Michael Gutter, PhD, University of Florida 5 Financing Strategies 43 Kenneth Wynn, University of Florida Martie Gillen, PhD, University of Florida Michael Gutter, PhD, University of Florida Jorge Ruiz-Menjivar, University of Florida 6 Function, Purpose, and Regulation of Financial Institutions 49 Sonya L. Britt, PhD, CFP, Kansas State University 7 Education Planning 59 Michael Gutter, PhD, University of Florida Martie Gillen, PhD, University of Florida v

8 vi CONTENTS 8 Financial Planning for Special Circumstances 65 9 Economic Concepts Time Value of Money 79 Jorge Ruiz-Menjivar, University of Florida Martie Gillen, PhD, University of Florida Michael Gutter, PhD, University of Florida Kenneth Wynn, University of Florida 11 Financial Services Regulations and Requirements 87 Sonya L. Britt, PhD, CFP, Kansas State University 12 Business Law 97 Don L. Harrington, LLB 13 Consumer Protection Laws 107 Sonya L. Britt, PhD, CFP, Kansas State University 14 Principles of Risk and Insurance Analysis and Evaluation of Risk Exposures Health Insurance and Health Care Cost Management Disability Income Insurance (Individual) Long-Term Care Insurance Life Insurance (Individual) Income Taxation of Life Insurance 163 Martin C. Seay, PhD, Kansas State University 21 Business Uses of Life Insurance 169 John Gilliam, PhD, CFP, Texas Tech University 22 Insurance Needs Analysis 185

9 Contents vii 23 Insurance Policy and Company Selection 193 Andrew Head, MA, CFP, Western Kentucky University 24 Annuities 203 John Gilliam, PhD, CFP, Texas Tech University Andrew Head, MA, CFP, Western Kentucky University 25 Characteristics, Uses, and Taxation of Investment Vehicles 215 Swarn Chatterjee, PhD, University of Georgia 26 Types of Investment Risk Quantitative Investment Concepts Measures of Investment Returns Bond and Stock Valuation Concepts Portfolio Development and Analysis Investment Strategies Asset Allocation and Portfolio Diversifi cation Income Tax Law Fundamentals Tax Compliance Income Tax Fundamentals and Calculations Characteristics and Income Taxation of Business Entities 303 Webster Hewitt, CPA, CFP, University of Georgia 37 Income Taxation of Trusts and Estates 313 Martin C. Seay, PhD, Kansas State University 38 Basis 321

10 viii CONTENTS 39 Tax Consequences of the Disposition of Property 327 Martin C. Seay, PhD, Kansas State University 40 Alternative Minimum Tax (AMT) 333 Webster Hewitt, CPA, CFP, University of Georgia 41 Tax Reduction and Management Techniques Passive Activity and At-Risk Rules Tax Implications of Special Circumstances Charitable Contributions and Deductions 365 Webster Hewitt, CPA, CFP, University of Georgia 45 Retirement Needs Analysis Social Security (Old-Age, Survivors, and Disability Insurance) 379 Thomas Warschauer, PhD, CFP, San Diego State University 47 Types of Retirement Plans Qualified Plan Rules and Options Other Tax-Advantaged Plans Regulatory Considerations Key Factors Affecting Plan Selection for Business Investment Considerations for Retirement Plans Distribution Rules, Alternatives, and Taxation Characteristics and Consequences of Property Titling 435

11 Contents ix 55 Methods of Property Transfer at Death Estate Planning Documents Gifting Strategies Gift Tax Compliance and Tax Calculation Incapacity Planning Estate Tax Compliance and Tax Calculation Sources for Estate Liquidity Powers of Appointment Types, Features, and Taxation of Trusts Qualified Interest Trusts Charitable Transfers Use of Life Insurance in Estate Planning Marital Deduction Deferral and Minimization of Estate Tax Intrafamily and Other Business Transfer Techniques Generation-Skipping Transfer Tax Fiduciaries 553 Martie Gillen, PhD, University of Florida 72 Income in Respect of a Decedent 559

12 x CONTENTS 73 Postmortem Estate Planning Techniques Estate Planning for Nontraditional Relationships Client and Planner Attitudes, Values, Biases, and Behavioral Characteristics and the Impact on Financial Planning Principles of Communication and Counseling 587 Kristy L. Archuleta, PhD, LMFT, Kansas State University 77 Standards of Professional Conduct 599 Jorge Ruiz-Menjivar, University of Florida Martie Gillen, PhD, University of Florida PART TWO 78 Establishing and Defi ning the Client-Planner Relationship Gathering Information Necessary to Fulfi ll the Engagement Analyzing and Evaluating the Client s Current Financial Status 625 Vickie Hampton, PhD, CFP, Texas Tech University Andrew Head, MA, CFP, Western Kentucky University 81 Developing the Financial Planning Recommendations Communicating the Financial Planning Recommendations Implementing the Financial Planning Recommendations 665 Deena Katz, PhD, CFP, Texas Tech University Vickie Hampton, PhD, CFP, Texas Tech University 84 Monitoring the Financial Planning Recommendations 677

13 Contents xi CONCLUSION 85 Moving Forward 685 Vickie Hampton, PhD, CFP, Texas Tech University Charles R. Chaffi n, EdD, CFP Board Index 701

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15 Acknowledgments work of this magnitude could not come to fruition without the commitment of a large number of dedicated, accomplished individuals. First, I A want to thank the 22 contributors and reviewers who shared their scholarship and practice experience for this book. I am grateful for their generosity and collaboration throughout this immense project. I suspect that as you read each chapter, you will witness the dedication of these individuals to both this book as well as the profession as a whole. I want to thank them for allowing me to pester them incessantly regarding deadlines, revisions, and content. They are a respected group of teachers, researchers, and practitioners, and I am lucky to have had the pleasure to work with them throughout this important project. Thank you to Laura Walsh and all of my friends at John Wiley & Sons for their help throughout this process. I went to the New York area with an idea for something totally new, and the people at Wiley listened, nurtured, and supported the construction of this work from beginning to end. I would like to thank the board of directors at CFP Board for their unwavering commitment to this project. I also would like to thank the CFP Board Education and Examinations staff for their years of hard work in helping develop the certification requirements that help serve as the basis for this book. I am grateful to the Professional Standards, Marketing, and Public Relations departments for their generosity in supporting several key components of this project. Also, thank you to Meghan McConaughey and Mychal Cohen for their assistance in providing some vital support to this immense, yearlong endeavor. I am grateful to Kevin Keller, CEO of CFP Board, and Michele Warholic, CFP Board Managing Director Examination, Education, and Talent, for their support and encouragement throughout each stage of the development of this book. CFP Board is a place that cultivates both innovation and creativity for an important, common purpose, and I hope The Financial Planning Handbook is representative of that special environment. In the end, I take responsibility for this seminal work that I hope will contribute to a profession that not only continues to grow in size and stature, but is one that all of us, whether in our first day or in our 30th year, can be very proud. Charles R. Chaffin, EdD xiii