1 THE FINANCIAL PLANNING PROCESS 1

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1 1 THE FINANCIAL PLANNING PROCESS 1 Learning Objectives An understanding of the material in this chapter should enable the student to 1. Explain financial planning and define eight financial planning domains. 2. Describe three different approaches to financial planning, and identify several areas of specialization in which advisors concentrate their activities. 3. Identify the subjects that should be included in a comprehensive financial plan. 4. Describe what is meant by a person's financial life cycle, and explain how it relates to life-cycle financial planning. 5. Explain how a financial plan can be developed around the steps in the financial planning process. 6. Explain how a financial plan can be developed using the financial planning pyramid. 7. Explain the trends that are creating opportunities in the financial planning marketplace. 8. Identify the principal financial goals/concerns of most consumers, and describe three major obstacles that prevent them from achieving these goals. The primary goal of this chapter is to introduce the eight financial planning domains. This process is the foundation on which the financial planning profession is built; it provides a framework around which financial planning practitioners develop comprehensive plans for their clients. The ten chapters that follow this one explore the basic tools and techniques used in financial planning as well as the environment in which financial planning practitioners operate. 1.1

2 1.2 Financial Planning: Process and Environment WHAT IS FINANCIAL PLANNING? financial planning One factor that has hampered the development of financial planning as a discipline and as a profession is the fact that there has been very little agreement among advisors as to what exactly financial planning is. Indeed, there are as many definitions of financial planning as there are people who believe they are engaged in it. This debate, which continues among financial advisors even now, 1 is not merely an exercise in semantics. The discussion becomes intensely practical when questions are raised about such issues as who shall regulate those advisors engaged in financial planning, who shall set standards for the financial planning profession and how those advisors should be regulated and compensated. The SEC defines financial planning by outcome: Financial planning can help assess every aspect of your financial life including saving, investments, insurance, taxes, retirement, and estate planning. 2 The Financial Planning Association (FPA), one of financial planning s largest member and advocate groups, defines financial planning as the long-term process of wisely managing your finances so you can achieve your goals and dreams. 3 Definitions of financial planning vary across the industry, yet common themes emerge. Financial planning is a process performed by professionals with training and expertise. Financial planners span compensation models (some are fee-based, some paid on the sale of products), backgrounds (traditional college track or a career-changing professional), and specializations. Financial Planning Is a Process Despite conversations about compensation and business model preferences, financial planning can be defined conceptually as a process that accomplishes both of the following: ascertaining the client's financial goals and objectives developing a plan for achieving the client's goals and objectives 1. "Shelley A. Lee, "What Is Financial Planning, Anyway?" Journal of Financial Planning, December 2001, pp " Financial Planning Association What is Financial Planning? taken from

3 The Financial Planning Process 1.3 financial planning Whether a single financial problem is being addressed or process a comprehensive financial plan is being developed, the financial planning process has eight distinct steps, also referred to as domains. Historically the planning process contained six steps. As planning has evolved into a profession, the six step process did not accurately reflect the challenges in communicating recommendations to a client or working in today s advanced legal frameworks. Using eight domains better captures the sophisticated nature of planning, and those domains are derived from the CFP board s job analysis survey, completed in The planning domains are outlined and summarized on the following chart. Advisors who primarily sell financial products generally view the financial planning process as a selling/planning process that has ten steps, that is, the eight domains of the financial planning process identified above preceded by two additional steps: (1) identify the prospect, and (2) approach the prospect. Table 1-1 Domains of Financial Planning; The Eight-Step Planning Process Domains of Financial Planning Establishing and Defining the Client-Planner Relationship Gathering Information Necessary to Fulfill the Engagement Analyzing and Evaluating the Client s Current Financial Status Description The financial planner should outline what are the responsibilities of the planner and what are the responsibilities of the client. The planner should disclose the length and scope of the relationship as well as the method and magnitude of planner compensation. Establishing the relationship helps guide the decision making process. The financial planner should gather client data, including broad and specific goals and objectives. Ask the client about risk tolerance measures. Documents such as tax returns, wills, trusts, account statements and pay stubs may need to be collected to truly establish constructive outcomes. Data gathered in the second step must be analyzed and synthesized within the context of meeting goals. This step of the planning process accounts for significant variations among planners. Planners without expertise in a specific planning area may find a benefit in including a technical staff or teammates when analyzing and evaluating client goals.

4 1.4 Financial Planning: Process and Environment Domains of Financial Planning Developing the Recommendations Communicating the Recommendation(s) Implementing the Recommendation(s) Monitoring the Recommendation (s) Practicing within Professional and Regulatory Standards Description The financial planner develops recommendations based on evaluation (step three) of data collected (step two). Planners present recommendations and alternatives that address client goals and concerns. Presenting more than one recommendation to a client provides alternative courses of action, and may result in additional fact finding and discovery on the part of the planner. After making recommendations, the client may provide or revise their goals (step two) which will require additional analysis (step three). The financial planner ensures recommendations are communicated and understood by the client. The client gives acceptance of recommendations, and the planner and client both are cognizant of direct and indirect consequences of actions taken. When presenting recommendations to a client, planners often need to revisit previous steps in the planning process. Communications may be live, virtual, or over the phone, and multiple communication sessions are likely to occur before the planning process moves to implementation. Financial professionals should take particular care when working with vulnerable populations to ensure they understand the communications. After agreement is reached between the client and planner on a course of action, the planner outlines how implementation will occur. If implementation results in additional planner compensation, the form and magnitude of compensation needs to be disclosed to the client. Depending on the business model of the planner, the client may implement his or her own recommendations or the planner may implement recommendations on behalf of the client. Any conflict of interest of the planner through the implementation of a product should be disclosed to the client. This step of the planning process is limited by the first. The client and planner need to agree on monitoring responsibilities when establishing the relationship. Planners who entered into a long term relationship with their clients have an obligation of following up and updating the plan. Monitoring may occur on a time weighted basis, such as monthly or annually, or monitoring may occur on a strategic basis, such as when asset allocations become misaligned. Financial planners, insurance agents, stock brokers and other financial service professionals must be constantly vigilant of their dynamic regulatory environments. Today s regulatory environment changes quickly; standards of care due to clients require exploration and are undergoing regulatory challenges.

5 The Financial Planning Process 1.5 Steps in the Financial Planning Process; The Eight Financial Planning Domains For advisors, this process for helping clients achieve their financial goals can be applied to the full range of client goals on a comprehensive basis. The process can also be applied on a narrower basis to only a subset of those goals or even to only a single financial goal of a client. It is not the range of client goals addressed that determines whether an advisor is engaged in financial planning. Rather, it is the process used by the advisor in addressing client goals that is the determining factor. The following pages present a brief discussion of the eight domains involved in the financial planning process. Financial Planning Domains 1. Establishing and Defining the Client-Planner Relationship 2. Gathering Information Necessary to Fulfill the Engagement 3. Analyzing and Evaluating the Client s Current Financial Status 4. Developing the Recommendation(s) 5. Communicating the Recommendation(s) 6. Implementing the Recommendation(s) 7. Monitoring the Recommendation(s) 8. Practicing within Professional and Regulatory Standards Domain 1: Establishing and Defining the Client-Planner Relationship The first step in the financial planning process is to establish and define the advisor-client relationship. This normally begins at the first client meeting, although it can start prior to this meeting through telephone interactions and/or disclosure documents sent to the client. In any event, the first client meeting is essential for establishing the framework for a successful advisor-client relationship. This meeting is where the advisor begins building trust with the client, ensuring client satisfaction, and creating a relationship with the client that it is hoped will span the client's entire financial life. Establishing the advisor-client relationship when the client is a couple is a more complex challenge because the advisor needs to build trust and rapport with both parties. Covering the goals of both parties in one financial plan requires the advisor to be aware of the goals that both have in common and

6 1.6 Financial Planning: Process and Environment how their needs may differ. Couples may have different goals, priorities, risk tolerance or different planning objectives altogether. Planners must learn how to help couples negotiate through the planning process as a team, and in some situations refer couples with different interests to outside specialists. In any kind of planned and purposeful communication setting, the first element that needs attention is structuring. Structuring serves to determine both the format and the subject matter of the interaction that is to follow. The financial advisor's task in structuring is to make the purpose of the initial meeting and those that follow clear to the client at the outset. This would include the inevitable introductions, an explanation of the financial planning process, a discussion of forms that are used (for example, a fact-finder form, risk tolerance questionnaire and a disclosure form) and the amount of time that will be required to complete them, a discussion of the confidential nature of the relationship, and some prediction of what kinds of outcomes the client might reasonably expect. This structuring need not be lengthy and cumbersome; in fact, it is far better to structure communication in a clear, straightforward, and succinct fashion. More specifically, structuring for the financial planning process requires the advisor to explain how he or she works and the types of products and/or services that he or she is able to provide. It requires the advisor to explain the financial planning process and how that process is used to develop financial plans for clients. It may even require the advisor to give examples of how some of his or her products and/or services can be utilized to help clients meet their financial goals and objectives. At the first meeting, the financial advisor also needs to disclose his or her background, philosophy, and method of compensation, whether that be fee-only, commission, or a fee and commission. The financial planning process does not vary by compensation type. The Certified Financial Planner Board of Standards Code of Ethics and Professional Responsibility requires CFP professionals to provide written disclosure to clients (prior to the engagement) of the method and source of their compensation, as well as information on their educational background, experience, conflicts of interest, and practice philosophy. Appendix B is a sample of the type of disclosure document that can be given to clients at the beginning of the initial meeting (or sent to them prior to the meeting) to satisfy this requirement. This domain may better be described with the following activities, taken from the CFP Certification Examination Job Task Domains: 1. Identify the client (e.g., individual, family, business, organization)

7 The Financial Planning Process Discuss financial planning needs and expectations of the client 3. Discuss the financial planning process with the client 4. Explain scope of services offered by the CFP professional and his/her firm 5. Assess and communicate the CFP professional s ability to meet the client s needs and expectations 6. Identify and resolve apparent and potential conflicts of interest in client relationships 7. Discuss the client s responsibilities and those of the CFP professional 8. Define and document the scope of the engagement with the client 9. Provide client disclosures a. Regulatory disclosure b. Compensation arrangements and associated potential conflicts of interest Approximately 8% of the 2012 and 2013 Certified Financial Planner exam is comprised of questions from this domain. Domain 2: Gathering Information Necessary to Fulfill the Engagement Once having established and defined the advisor-client relationship, the advisor is ready to move on to the second domain in the financial planning process. This step can begin during as early as the initial meeting or in a unique meeting later in the planning process. Occasionally the planner may interview the client remotely (over the phone and Internet), or through a series of correspondences to gather client data and discuss goals. While it is true that few people begin a vacation without a specific destination in mind, it is also true that millions of people make significant financial decisions without a specific financial destination in mind. Determining a specific financial destination, that is, goal setting, is critical to creating a successful financial plan. Few people actually set clearly defined goals. By leading the client through the goal-setting exercise, the financial advisor helps establish reasonable, achievable goals, and also sets the tone for the entire financial planning engagement. Clients typically express concern about a whole host of topics including retirement income, education funding, premature death, disability, taxation, and qualified plan distribution. Sometimes clients enumerate specific,

8 1.8 Financial Planning: Process and Environment prioritized goals, but they are more likely to present a vague list of worries that suggest anxiety and frustration rather than direction. The advisor's responsibility is to help the client transform these feelings into goals. Advisors should question clients to learn what they are trying to accomplish. Usually the response is couched in general terms such as, "Well, we want to have a comfortable standard of living when we retire." At first glance this seems to be a reasonable goal, but a closer evaluation reveals that it is far too vague. When do they want to retire? What is meant by "comfortable"? How should inflation be addressed? Do they want to retire on "interest only" or draw down their accumulated portfolio over their expected lives? Skillful and thoughtful questioning may reveal a more precise goal such as, "We want to retire in 20 years with an after-tax income of $60,000 per year in current dollars inflating at 3 percent annually and we want the income to continue as long as we live without depleting the principal." Helping the client quantify specific goals is one of the most valuable services a financial advisor can provide. Another important service the advisor provides is goal prioritization. Clients usually mention competing goals such as saving for retirement and saving for education. Advisors help clients rank these competing goals. Quite often clients have multiple important goals, such as college savings, retirement planning and asset acquisition. A competent financial planner must be able to help their client sort through their goals and develop a greater sense of priority. After the client and advisor discuss goals, objectives, and concerns, the advisor must then gather all the information about the client that is relevant to the problem(s) to be solved and/or the type of plan to be prepared. The more complex the client's situation and the more varied the number of goals, the greater the information-gathering task. Two broad types of information will need to be gathered: objective and subjective. A few examples of objective (factual) information that might be needed from the client include a list of securities holdings, inventory of assets and liabilities, a description of the present arrangement for distribution of the client's (and spouse's) assets at death, a list of annual income and

9 The Financial Planning Process 1.9 expenditures, and a summary of present insurance coverages. Objective goals are typically quantitative in nature. Of at least equal importance is the subjective information about the client. The financial advisor often will need to gather information about the hopes, fears, values, preferences, attitudes, and nonfinancial goals of the client (and the client's spouse). financial risk One piece of information worthy of special attention tolerance is the client's financial risk tolerance. Advisors must determine the client's (and spouse's) attitude toward risk before making recommendations, preferably with the help of a scientific risk tolerance questionnaire developed by a third party. The American College's Survey of Financial Risk Tolerance is just such a questionnaire. It provides the type of analysis that helps the advisor suggest financial strategies and investment alternatives that are truly appropriate for the client. Such information offers the additional benefit of helping avoid (or at least defend) lawsuits from a dissatisfied client. Before the financial advisor begins the information-gathering process, he or she should discuss a couple of concerns with the client. First, the client should be made aware that he or she will have to invest time, perhaps a significant amount of time, in the information-gathering stage of financial planning. Even though part of the financial advisor's responsibility is to avoid consuming the client's time unnecessarily, this commitment of the client's time is essential. The magnitude of the needed time commitment will depend on the scope and complexity of the client's goals and circumstances, but the proper development of even a narrowly focused and fairly uncomplicated plan requires information that only the client can furnish. fact-finder form Second, the client should be made aware that he or she probably will have to provide the advisor with some information that is highly confidential, perhaps even sensitive or painful, for the client to reveal. Again, the scope and complexity of the client's goals will influence this matter. The creation of even straightforward plans, however, may require clients to disclose such things as their income and spending patterns, their attitudes toward other family members, or their opinions as to the extent of their own financial responsibilities to others. Another prerequisite for the effective gathering of client information is a systematic approach to the task. Although there are many possible ways to systematize the gathering of information, one way that has proven helpful is using a structured fact-finder form. Some fact finders are only a few pages long and ask for basic information, while others are thick booklets that seek very

10 1.10 Financial Planning: Process and Environment detailed data on each asset and amount. Most fact finders are designed for specific financial planning software to simplify data entry. For many client situations, a formal fact finder elicits considerably more information than needed. The sections that should be completed depend on the particular areas of concern to be addressed in each client's financial plan. Obviously, information gathering is far more than asking the client a series of questions during an interview in order to fill out a fact-finder form. Certainly that is required, but usually information gathering also requires examination and analysis of documents such as wills, tax returns, employee benefit plan coverage, and insurance policies supplied by the client or the client's other financial advisors. It also requires counseling, advising, and listening during face-to-face meetings with the client (and spouse). These skills are especially important because the advisor needs to help the client (and spouse) identify and articulate clearly what he or she really wants to accomplish and what risks he or she is willing to take in order to do so. Moreover, no matter how the information is gathered, it must be accurate, complete, up-to-date, relevant to the client's goals, and well organized. Otherwise, financial plans based on the information will be deficient perhaps erroneous, inappropriate, and inconsistent with the client's other goals, or even dangerous to the client's financial well-being. Financial planning is targeted to the unique goals and preferences of clients. Gathering data provides the necessary context for planning to take place. Client goals are moving targets, and gathering data gives financial advisors a way to aim. This domain can be expanded, specifically addressing what types of information advisers should seek out, using the CFP Board Job Task Domains: Identify the client s values and attitudes: 1. Explore with the client their personal and financial needs, priorities and goals. 2. Explore the client s time horizon for each goal. 3. Assess the client s level of knowledge and experience with financial matters. 4. Assess the client s risk exposures and tolerances (longevity, investment, liability and health care). Gather data:

11 The Financial Planning Process Summary of assets (e.g., cost basis information, beneficiary designations and titling) 2. Summary of liabilities (e.g., balances, terms, interest rates). Summary of abilities (e.g., balances, terms, interest rates) 3. Summary of income and expenses 4. Estate planning documents 5. Education plan and resources 6. Retirement plan information 7. Employee benefits 8. Government benefits (e.g., Social Security, Medicare) 9. Special circumstances (e.g., legal documents and agreements, family situations) 10. Tax documents 11. Investment statements 12. Insurance policies and documents (e.g., life, health, disability, liability) 13. Closely held business documents (e.g., shareholder agreements) 14. Inheritances, windfalls, and other Recognize the need for additional information. Approximately 9% of the 2012 and 2013 Certified Financial Planner exam is comprised of questions from this domain. Domain 3: Analyzing and Evaluating the Client s Current Financial Status Once the client's goals have been determined and data has been gathered, organized, and checked for accuracy, consistency, and completeness, the financial advisor's next task is to analyze and evaluate the data in order to determine the client's present financial status. Thorough analysis may reveal certain strengths in the client's present position relative to those goals. For example, the client may be living well within his or her means, and resources are available with which to meet some wealth accumulation goals within a reasonable time period. Maybe the client has a liberal set of health and disability insurance coverages through his or her employer, thereby adequately covering the risks associated with serious disability. Perhaps the client's will has been reviewed recently by his or her attorney and brought up-to-date to reflect the client's desired estate plan.

12 1.12 Financial Planning: Process and Environment The analysis of a client's financial position will disclose a number of weaknesses or conditions that are hindering achievement of the client's goals. For example, the client may be paying unnecessarily high federal income taxes or using debt unwisely. The client's portfolio of investments may be inconsistent with his or her financial risk tolerance. Maybe the client's business interest is not being used efficiently to achieve his or her personal insurance protection goals, or important loss-causing possibilities have been overlooked, such as the client's exposure to huge lawsuits arising out of the possible negligent use of an automobile by someone other than the client. One conclusion from the advisor's analysis may be that the client cannot attain the goals established in step 2. For example, the client's resources and investment returns may preclude reaching a specified retirement income goal. Considering an unfunded retirement, the planner can help coach the client and show what changes the client must make to achieve the goal. Postponing retirement, saving more money, seeking higher returns, and deciding to deplete principal during retirement are four ways to help achieve the goal. Presented with alternatives, the client can restate the original goal by either lowering it or revising restrictive criteria to make it achievable. Additional clarification of the expectations in this domain can be found in the 2011 CFP Board Job Task Force report: 1. Evaluate and document the strengths and vulnerabilities of the client s current financial situation. Financial status Statement of financial position/balance sheet Cash flow statement Budget Capital needs analysis (e.g., insurance, retirement, major purchases) 2. Risk management and insurance evaluation Insurance coverage Retained risks Asset protection (e.g., titling, trusts, business form) Client liquidity (e.g., emergency fund) 3. Benefits evaluation Government benefits (e.g., Social Security, Medicare) Employee benefits

13 The Financial Planning Process Investment evaluation 5. Tax evaluation Asset allocation Investment strategies Investment types Current, deferred and future tax liabilities Income types Special situations (e.g., stock options, international tax issues) 6. Retirement evaluation Retirement plans and strategies (e.g., pension options, annuitization) Accumulation planning Distribution planning 7. Estate planning evaluation Estate documents Estate tax liabilities Ownership of assets Beneficiary designations Gifting strategies 8. Business ownership Business form Employer benefits Succession planning and exit strategy Risk management 9. Education planning evaluation Sources of financing Tax considerations 10. Other considerations Special circumstances (e.g., divorce, disabilities, family dynamics) Inheritances, windfalls, and other large lump sums Charitable planning Eldercare (e.g., CCRCs, LTC, nursing home)

14 1.14 Financial Planning: Process and Environment 11. Identify and use appropriate tools and techniques to conduct analyses (e.g., financial calculators, financial planning software, simulators, research services) Approximately 25% of the 2012 and 2013 Certified Financial Planner exam is comprised of questions from this domain. Domain 4: Developing the Recommendation(s) financial plan After the information about the client has been analyzed and, if necessary, the goals to be achieved have been refined, the advisor's next job is to devise a realistic financial plan for bringing the client from his or her present financial position to the attainment of those goals. Since no two clients are alike, a well-drawn financial plan must be tailored to the individual with all the advisor's recommended strategies designed for each particular client's concerns, abilities, and goals. The plan must address the needs of the client, and not be colored by advisor compensation model, product offerings, or bias. It is unlikely that any individual advisor can maintain an up-to-date familiarity with all the strategies that might be appropriate for his or her clients. Based on his or her education and professional specialization, the advisor is likely to rely on a limited number of "tried and true" strategies for treating the most frequently encountered planning problems. When additional expertise is needed, the advisor should always consult with a specialist in the field in question to help him or her design the client's overall plan. Also there is usually more than one way for a client's financial goals to be achieved. When this is the case, the advisor should present alternative strategies for the client to consider and should explain the advantages and disadvantages of each strategy. Strategies that will help achieve multiple goals should be highlighted. The financial plan that is developed should be specific. It should detail exactly who is to do what (the adviser, the client, other professionals or family members), when, and with what resources. Financial plans are only worthwhile if they are implemented by a client. Without specific implementation schedules, the best of plans are likely to go unheeded. Implicit in plan development is the importance of obtaining client approval. It follows that the plan must not only be reasonable, it must also be acceptable to the client. Usually interaction between advisor and client continues during

15 The Financial Planning Process 1.15 plan development, providing constant feedback to increase the likelihood that the client will approve the plan. Additional clarification of the expectations in this domain can be found in the 2011 CFP board job task force report: 1. Synthesize findings from analysis of the client s financial status. 2. Consider alternatives to meet the client s goals and objectives. Conduct scenario analysis (changing lifestyle variables). Conduct sensitivity analysis (change assumptions such as interest rate, rates of return, and time horizon). 3. Consult with other professionals on technical issues outside of the planner s expertise. 4. Develop recommendations. Considering client attitudes, values and beliefs Considering behavioral finance issues (e.g., anchoring, overconfidence, recency) Consider interrelationships among financial planning recommendations 5. Document recommendations. Approximately 25% of the 2012 and 2013 Certified Financial Planner exam is comprised of questions from this domain. Domain 5: Communicating the Recommendation(s) communicating Normally, the report containing the plan should be in recommendations writing (although plans developed for achieving single goals are often not expressed in a formal written report) although recently more financial planners have begun presenting plans using online and multimedia presentations. Since the objective of the financial planning report is to communicate, its format should be such that the client can easily understand and evaluate what is being proposed. Some financial advisors take pride in the length of their reports, although lengthy reports are often made up primarily of standardized or "boilerplate" passages. In general, the simpler the report, the easier it will be for the client to understand and possibly adopt. Careful use of graphs, diagrams, and other visual aids in the report can also help in this regard. After the plan has been presented and reviewed with the client, the moment of truth arrives. At this time, the advisor must ask the client to approve

16 1.16 Financial Planning: Process and Environment the plan and alternative recommendations (or some variation thereof). As part of this request, the advisor must ensure cash flow is available for the plan's implementation. The advisor and client must agree on their next steps together. Effective communication requires financial professionals to ensure clients understand what actions should be taken, what the cost (in both capital and time) those actions will take, and the consequences of inaction. Communication must be tailored to the communication style of the client. Additional clarification of the expectations in this domain can be found in the 2011 CFP board job task force report: 1. Present financial plan to the client and provide education. Client goals review Assumptions Observations and findings Alternatives Recommendations 2. Obtain feedback from the client and revise the recommendations as appropriate. 3. Provide documentation of plan recommendations and any applicable product disclosures to the client. 4. Verify client acceptance of recommendations. Approximately 9% of the 2012 and 2013 Certified Financial Planner exam is comprised of questions from this domain. Domain 6: Implementing the Recommendation(s) The mere giving of financial advice, no matter how solid the foundation on which it is based, does not constitute financial planning. A financial plan is useful to the client only if it is put into action. Therefore, part of the advisor's responsibility is to see that plan implementation is carried out properly according to the schedule agreed on with the client. Financial plans that are of limited scope and limited complexity may be implemented for the client entirely by the advisor. For other plans, however, additional specialized professional expertise will be needed. For example, such legal instruments as wills and trust documents may have to be drawn up, insurance policies may have to be purchased, or investment securities

17 The Financial Planning Process 1.17 may have to be acquired. Part of the advisor's responsibility is to motivate and assist the client in completing each of the steps necessary for full plan implementation. Implementation requires the delineation of duties between the advisor and the client. Duties will vary based on business model. Some advisors offering fee-only consulting will outsource product acquisition decisions; advisors working in a commission environment will typically provide products to clients directly. Additional clarification of the expectations in this domain can be found in the 2011 CFP board job task force report: 1. Create a prioritized implementation plan with timeline. 2. Assign responsibilities (e.g., professional, client or other family member duties). 3. Support the client directly or indirectly with implementation of the recommendations. 4. Coordinate and share information, after being granted authorization, with others. 5. Define monitoring responsibilities with the client. Approximately 9% of the 2012 and 2013 Certified Financial Planner exam is comprised of questions from this domain. Domain 7: Monitoring the Recommendation(s) The relationship between the financial advisor and the client should be an ongoing one that hopefully will span the client's entire financial life, and through all the stages of the lifecycle process. Therefore, the sixth and final step in the financial planning process is to monitor the client's plan. Normally the advisor meets with the client at least once each year (more frequently if changing circumstances warrant it) to review the plan. The frequency of meetings is determined during the implementation stage. The first part of this review process should involve measuring the performance of the implementation vehicles. Second, updates should be obtained concerning changes in the client's personal and financial situation. Third, changes that have occurred in the economic, tax, or financial environment should be reviewed with the client. In dynamic and changing times, clients need to hear from their advisors more frequently. Phone calls, informal visits, and structured meetings are all pieces of the monitoring process. Planners should contact their clients

18 1.18 Financial Planning: Process and Environment at least as frequently as the client's other professional relationships. If this periodic review of the plan indicates satisfactory performance in light of the client's current financial goals and circumstances, no action needs to be taken. However, if performance is not acceptable or if there is a significant change in the client's personal or financial circumstances or goals or in the economic, tax, or financial environment, the advisor and client should revise the plan to fit the new situation. This revision process should follow the same six steps used to develop the original plan, though the time and effort needed to complete many of the steps (for example, step 1) will probably be less than in the original process. The monitoring domain will likely involve revisiting other financial planning domains. As a client grows older, their needs will change and even the most comprehensive and detailed financial plan will eventually require changes. Any significant changes will result in making new recommendations (domain four) and communicating those recommendations to the client (domain five), potentially using different communication techniques than in prior years. Additional clarification of the expectations in this domain can be found in the 2011 CFP board job task force report: 1. Discuss and evaluate changes in the client s personal circumstances (aging issues, matriculating through the lifecycle process). 2. Review the performance and progress of the plan with the client. 3. Review and evaluate changes in the legal, tax and economic environments. 4. Make recommendations to accommodate changed circumstances. 5. Review scope of work and redefine the engagement as appropriate. 6. Provide client ongoing support as needed. Approximately 5% of the 2012 and 2013 Certified Financial Planner exam is comprised of questions from this domain. Domain 8: Practicing within Professional and Regulatory Standards Financial service professionals from all walks of life (insurance, brokerage or registered investment advisers) are required to follow federal and state rules and regulations applicable to their industry. Specific rules for the financial service industry are available on numerous government websites such as:

19 The Financial Planning Process Financial plans must be implemented in a correct legal framework, and the legal framework of financial planning is constantly in flux. Comprehensive financial planners must contend with securities law, investment advisory laws, insurance regulation, banking and consumer advocacy provisions. As the financial services environment becomes more complicated, the need for effective compliance leadership becomes imperative. Financial advisers who hold professional designations are responsible for maintaining the rules, ethical codes and standards attached to their respective designations. Additional clarification of the expectations in this domain can be found in the 2011 CFP board job task force report; the following standards only apply to financial service professionals who hold the CFP mark. 1. Adhere to CFP Board s Code of Ethics and Professional Responsibility and Rules of Conduct. 2. Understand CFP Board s Disciplinary Rules and Procedures. 3. Work within CFP Board s Financial Planning Practice Standards. 4. Manage practice risk and compliance considerations. 5. Maintain awareness of and comply with regulatory and legal guidelines. Approximately 10% of the 2012 and 2013 Certified Financial Planner exam is comprised of questions from this domain. HOW IS FINANCIAL PLANNING CONDUCTED? The ongoing debate over what financial planning is and, thus, who is engaged in financial planning has often centered on the breadth of services provided to clients. Some have contended that the financial advisor who focuses on solving a single type of financial problem with a single financial product or service is engaged in financial planning. Others have argued that true financial planning involves consideration of all of the client's financial goals and all the products and services available to achieve these goals. What if the advisor's focus is somewhere between these two extremes?

20 1.20 Financial Planning: Process and Environment Once financial planning is recognized as being a process, the traditional debate is relatively easy to resolve. Regardless of the breadth of services provided or specific activities engaged in, an advisor is engaged in financial planning if he or she uses the six-step financial planning process in working with a client to develop a plan for achieving that client's financial goals. Thus, true financial planning can involve a single-purpose, multiple-purpose, or comprehensive approach to meeting a client's financial goals as long as the six-step financial planning process is utilized in doing so Single-Purpose Approach Some advisors take the position that the simple selling of a single financial product constitutes financial planning. Clearly, these advisors would be incorrect if the financial planning process was not used to determine whether the problem their product solves is, in fact, the specific client's financial problem and if so, whether the products they are selling are the most appropriate for solving that client's problem. In this case, the advisor would be involved in product sales, not financial planning. single-purpose However, if an advisor sells the client a product to approach implement the recommendations of a plan developed according to the financial planning process and approved by the client, the service provided by the advisor constitutes financial planning. According to this specialist or single-purpose approach, all the following individuals would be engaged in financial planning as long as they use the financial planning process in working with their clients: a single-purpose planner who provides recommendations in only one financial planning topic area a stockbroker who advises a customer to buy shares of common stock of a particular company a salesperson who sells shares in a real estate limited partnership to a client a preparer of income tax returns who suggests that a client establish an IRA a banker who opens a trust account for the benefit of a customer's handicapped child a life insurance agent who sells key person life insurance to the owner of a small business a personal finance counselor who shows a client how to set up and live within a budget

21 The Financial Planning Process 1.21 Single-purpose financial planning generally leads to multiple-purpose or comprehensive planning. Operating without addressing tangent financial planning issues can be difficult. EXAMPLE Jarred, a CPA, meets with his client to discuss their 2011 federal income tax return. He suggests the client takes an itemized deduction on their federal income tax return. Jarred used the financial planning process to make his recommendation, and has engaged in single-purpose financial planning. However, in reviewing the client s record of stock purchases and sales, he believes the client would greatly benefit from investment recommendations. Jarred is qualified to give investment advice. If the client accepts his offer to make investment recommendations, Jarred will now be practicing multiple-purpose planning. Multiple-Purpose Approach multiple-purpose Client financial concerns and financial products and/or approach services are often seen as falling into one of the major planning areas: insurance planning and risk management, employee benefits planning, investment planning, income tax planning, retirement planning, and estate planning. Rather than taking a single-purpose approach of just solving a single financial problem with a single financial product or service, many financial advisors take a multiple-purpose approach by dealing with at least a large part of one of these planning areas, and perhaps some aspects of a second planning area. According to the multiple-purpose approach, the following individuals would be engaged in financial planning as long as they use the financial planning process in working with their clients: a multiline insurance agent who sells all lines of life, health, and property and liability insurance a tax attorney who assists clients with their income, estate, and gift tax planning an investment advisor who is registered as such with the Securities and Exchange Commission a life insurance agent who also sells a family of mutual funds to meet both the protection and wealth accumulation needs of clients

22 1.22 Financial Planning: Process and Environment EXAMPLE Bill is an insurance agent for BIG insurance company. He meets with a young couple and discusses disability insurance. After following the planning process Bill determines the couple also needs advice with retirement planning and possibly life insurance. Bill is practicing Multiple-Purpose planning. Comprehensive Approach comprehensive Still other advisors take a comprehensive approach to approach providing financial planning services. Comprehensive financial planning considers all aspects of a client's financial position, which includes the client's financial goals and objectives, and utilizes several integrated and coordinated planning strategies for fulfilling those goals and objectives. The two key characteristics of comprehensive financial planning are comprehensive planning encompasses all the personal and financial situations of clients to the extent that these can be uncovered, clarified, and addressed through information gathering and counseling it integrates into its methodology all the techniques and expertise utilized in more narrowly focused approaches to solving client financial problems Because of the wide range of expertise required to engage in comprehensive financial planning, effective performance commonly requires a team of specialists. The tasks of the advisor managing the team are to coordinate the efforts of the team and to contribute expertise in his or her own field of specialization. In its purest form, comprehensive financial planning is a service provided by the managing advisor on an hourly fee-only basis. No part of the managing advisor's compensation comes from the sale of financial products or management of assets, thus helping to ensure complete objectivity in all aspects of the plan. Some team specialists also are compensated through fees, while others might receive commissions from the sale of products, while still others might receive both fees and commissions. In its less pure but often more practical form, comprehensive financial planning provides the managing advisor with compensation consisting of some combination of fees for service and commissions from the sale of some of the financial products. Again, other members of the team might receive fees, commissions, or both.

23 The Financial Planning Process 1.23 Furthermore, in its purest form, comprehensive financial planning is performed for a client all at once, meaning in a single engagement not a single meeting. An engagement may span from a week to a decade. A single planning engagement conducted by the managing advisor and his or her team of specialists creates the one plan that addresses all the client's financial concerns and utilizes several planning strategies. This plan is then updated with the client periodically and modified as appropriate. In its less pure form, comprehensive financial planning is performed incrementally during the course of several engagements with the client. For example, the advisor in one year might prepare a plan to treat some of the client's income tax concerns and estate and insurance planning problems. In another year, the advisor might focus on the client's retirement concerns and investment planning problems and then dovetail the strategies for dealing with them with the previously developed income tax, estate, and insurance strategies. In a third engagement, the advisor might address the remaining issues in the income tax, estate, insurance, retirement, and investment planning areas and coordinate all the recommended strategies and previously developed plans. Again, each incremental part, as well as the overall plan, is reviewed periodically and revised as appropriate. EXAMPLE Ted is a financial planner who specializes in helping small business owners sell their businesses. Ted encounters Linda, the owner of a wildly successful marketing firm. In working with Linda, Ted realizes the needs help with retirement planning, risk management, establishing employee benefits, estate planning and business succession planning. Ted is practicing comprehensive financial planning. FINANCIAL PLANNING AREAS OF SPECIALIZATION Regardless of the breadth of the approach to financial planning single purpose, multiple purpose or comprehensive the following areas are generally considered core topics in the financial planning process. general principles evaluation of financial status risk management and insurance benefits evaluation investment evaluation