Financial Plan Development

CFP Certification Professional Education Program Capstone Financial Plan Development Carol Craigie, MA, ChFC, CFP 7393

This publication may not be duplicated in any way without the express written consent of the publisher. The information contained herein is for the personal use of the reader and may not be incorporated in any commercial programs, other books, databases, or any kind of software or any kind of electronic media including, but not limited to, any type of digital storage mechanism without written consent of the publisher or authors. Making copies of this material or any portion for any purpose other than your own is a violation of United States copyright laws. CFP, CERTIFIED FINANCIAL PLANNER TM, and CFP (with flame logo) are certification marks owned by the Certified Financial Planner Board of Standards, Inc. The College for Financial Planning does not certify individuals to use the CFP, CERTIFIED FINANCIAL PLANNER TM or CFP (with flame logo) certification marks. CFP certification is granted only by the Certified Financial Planner Board of Standards to those persons who, in addition to completing an education requirement such as this CFP Board-Registered Program, have met its ethics, experience, and examination requirements. At the College s discretion, news, updates, and information regarding changes/updates to courses or programs may be posted to the College s website at www.cffp.edu, or you may call the Student Services Center at 1-800-237-9990.

Table of Contents Preface... i Course Overview... ii The Recommended Learning Process... iii Chapter 1: Financial Planning Process & Ethics... 1 Determining the Scope of Engagement... 1 Meet Your Clients... 2 Gather Data... 3 Statement of Financial Position... 12 Annual Cash Flow Statement... 13 Assumptions... 14 Completed... 17 Analyze... 18 Develop and Present the Plan... 19 Implement and Monitor Plan... 21 Chapter 2: Client Cash Flow, Debt & Risk Management... 22 Cash Flow... 22 Plan Development #1... 23 Debt Analysis... 24 Plan Development #2... 26 Plan Development #3... 28 Plan Development #4... 29 Plan Development #5... 31 Risk Management... 32 Property and Liability Issues... 33 Plan Development #6... 34 Plan Development #7... 36 Plan Development #8... 38

Disability Insurance... 39 Plan Development #9... 46 Plan Development #10... 53 Life Insurance... 54 Plan Development #11... 57 Long-Term Care and Health Insurance... 57 Plan Development #12... 59 Chapter 3: Investment Planning... 60 Portfolio Considerations... 60 Important Portfolio Considerations for Your Clients... 62 Analysis of Current Portfolio... 66 Potential Model Portfolios... 70 Plan Development #13... 73 Tax Consequences of Shifting Portfolios... 74 Plan Development #14... 75 Addressing the Annuity... 75 Plan Development #15... 76 Plan Development #16... 77 Chapter 4: Tax Planning... 78 Tax Projection for This Year... 78 Identifying Opportunities or Concerns... 81 Plan Development #17... 83 Flexible Spending Accounts... 83 Plan Development #18... 84 Appreciated Stock Gifting... 84 Plan Development #19... 85 Chapter 5: Education Planning... 86 Projecting College Funding... 86 Plan Development #20... 89

Chapter 6: Retirement & Social Security Planning... 91 Retirement Assumptions and Facts... 92 Calculating the Retirement Need... 93 Plan Development #21... 97 Social Security... 97 Plan Development #22... 99 Plan Development #23... 102 Goals in Retirement: The Mountain Cabin... 102 Plan Development #24... 102 Recommending a Retirement Savings Program... 103 Plan Development #25... 105 Chapter 7: Estate Planning & Legal Documents... 106 Analyzing the Client s Estate... 106 Plan Development #26... 109 Basic Legal Documents... 109 Plan Development #27... 110 Asset Titling and Beneficiary Designations... 111 Plan Development #28... 111 Acting as Executor or Power of Attorney... 112 Plan Development #29... 113 Plan Development #30... 113 Chapter 8: Economic, Political & Regulatory Impacts... 114 Plan Development #31... 115 Chapter 9: Creating Your Executive Summary... 116 Compiling Your First Draft... 116 After Your First Draft... 117 Chapter 10: Client Communications... 119 Client Communications... 119 Client Confirmation Questions... 121 Behavioral Economics... 122

Preparing for Your Oral Presentation... 125 Summary... 127 Appendix A... 128 Sample Summary... 128 Sample Executive Summary... 140 Sample Cash Flow Changes Tracking... 164 Appendix B: Scoring Guide... 167 Executive Summary Scoring Guide... 167 Oral Presentation Scoring Guide... 167 Appendix C: Templates... 169 Executive Summary Template... 169 Cash Flow Changes Tracking Template... 172 References... 174 About the Author... 175 Index... 176

Preface W elcome to the Financial Plan Development course. This course is very different from the other courses in the CFP Certification Professional Education Program. You will not be studying for an exam, but instead will be building a detailed, comprehensive, financial plan. Our goal for this course is twofold: one is to complete the CFP Board requirements that you demonstrate that you can deliver a comprehensive detailed plan and second that we help you prepare for the CFP Certification Examination by reviewing some of the major components covered in the exam. This course is designed to simulate parts of the financial planning process and reinforce your learning from the prior courses in the CFP Program. In this course you will synthesize and apply the knowledge you have learned in a real-life situation where things can get messy. There are no multiple-choice questions, and in many cases there won t be just one right answer to the questions you are asked. Many answers to client problems will fall within acceptable planning guidelines and the fiduciary standard. The ultimate objective of this course is for you to deliver a comprehensive, detailed executive summary and oral presentation that demonstrate your understanding of the financial planning process, client issues, and potential solutions. Our hope is that when you finish this course, you will be confident that you can prepare and deliver a comprehensive plan. We will not be using financial planning software in this course. There are two reasons for this. The first is that entering information into software is just part of a plan in some ways, it is the easiest part. The problem is that it doesn t fully take the client through the process of understanding the issues in their plan and consequences for not addressing these issues. It doesn t tell them exactly what they need to do to solve the problems nor how to make a decision when comparing alternative solutions. Software doesn t address issues such as inadequate liability protection or what to do if you are uninsurable and can t buy your way out of the problem. Using software isn t creating a plan; it is just one of the tools a planner uses to do the analysis. i

The second reason is that learning a new software takes considerable time and we would prefer you spend your time learning how to complete the rest of the plan. If you used software you were familiar with, it would be impossible for graders to know whether you are accurate. For these reasons, we are giving you the results of analysis from software for several components of the plan. You will be expected to interpret the results of the analysis and build your recommendations from there. In other cases, you will need to do calculations that software doesn t typically do, such as calculating mortgage refinancing or potential tax consequences for shifting a portfolio. Some calculations are included because the Board may test on them and we want you to have the practice. To support you in your quest as you work your way through the materials, there are mentor classes and recordings, and you may also contact the course instructor to help answer any questions you may have. You are on your final step to completing the education requirements for CFP certification, and we are proud that we can help you achieve your goal. If you have any questions as you re working your way through this course, you may contact your course instructor or Carol Craigie, the author of these materials, at Carol.Craigie@cffp.edu. Course Overview Upon completing this course, you will be able to: Apply CFP Board s Financial Planning Practice Standards to the financial planning process. Collect all necessary and relevant qualitative and quantitative information required to develop a financial plan. Evaluate the impact of economic, political, and regulatory issues with regard to the financial plan. Analyze personal financial situations, evaluating client objectives, needs, and values to develop an appropriate strategy within the financial plan. ii

Demonstrate logic and reasoning to identify the strengths and weaknesses of various approaches to a specific problem. Demonstrate a comprehensive understanding of the content found within the financial planning curriculum and effectively apply and integrate this information in the formulation of a financial plan. Effectively communicate the financial plan, both orally and in writing, including information based on research, peer, colleague or simulated client interaction and/or results emanating from synthesis of material. The Recommended Learning Process This course module contains 10 sections through which you will progress, whether you are working in a self-study, online, or classroom setting. The activities in each lesson are organized to support your development of the comprehensive financial plan through specific steps. Embedded throughout the materials are gray shaded Plan Development boxes containing exercises that will lead to the completion of your executive summary. YOU SHOULD COMPLETE THE BOXES AS YOU READ THE MATERIAL. If you read the entire course and then go back to work through these exercises, you will find it takes much longer. The numbers and statistics in these boxes are the results of current research and calculations from various sources. It is impossible to put all the calculations and underlying information into the text. MoneyGuidePro software was used to create many of the charts and graphs. You can find a copy of the base plan referred to as the Dowler MoneyGuidePro report in the student portal. This plan will be helpful in understanding some of the analysis that has been completed for this course. The material is designed to lead you through the following steps: 1. Analyze the clients data so that you understand their issues and are able to succinctly describe them to the client along with the consequences of not addressing the issues. 2. Evaluate alternatives to solving problems, thus identifying the important characteristics for the solutions that can frame the decision for the clients through the use of advantages, disadvantages, and alternatives. iii

3. Select the first and second best alternatives that are in the clients best interest, fit within their budget, and work in conjunction with their other goals. 4. Write your recommendations in client-friendly language in a format that provides clients the critical information they need in order to make a decision. 5. Track the impact of your recommendations by using the Cash Flow Changes Tracking Page. One of the largest obstacles to implementing recommendations is that many clients don t have a great sense of their own cash flow. Understanding how your recommendations will impact cash flow becomes an impediment. You can remove this impediment to implementation by showing the clients that you are paying attention to changes to their cash flow and are not going outside of what was agreed upon. By showing your clients the cash flow changes tracking, they can follow the impact of multiple recommendations so costs become less of an issue and the trust in you builds. Advisers who give clients recommendations that they cannot afford breaks the trust clients have in them. Clients lose faith that you understand them and are vested in their well-being. This is why it s important to estimate the costs of changes and track them so you can build a plan that is within the clients resources. The end result of completing the work in the Plan Development boxes will be the formulation of an issue with recommendations, advantages, and disadvantages that will form your executive summary to the client. You are writing this executive summary to the client, not to an instructor or other financial professional. The appendices contain material that you may find useful to review prior to beginning the Plan Development boxes. Sample Case with Sample Executive Summary & Sample Cash Flow Changes Tracking. This case and the sample executive summary will give you a sense of what your final project should be. Executive Plan Template. When you write your recommendations, you will want to write them or copy them into this template in the order they are iv

listed. You can find the basic Word document to use to craft your plan on the student portal with the rest of the course materials. Cash Flow Changes Tracking Template. Similar to the executive plan template, this will be where you track the changes to the client s cash flow as a result of your recommendations. Note that you are not tracking cash flow, but the CHANGES to their cash flow so the client can see that you are staying within the cash flow constraints given. You may wish to put this into an Excel or Google spreadsheet for your convenience so that it automatically calculates, or download the basic Excel file from the student portal. The Dowler MoneyGuidePro Financial Plan report is posted on your student portal. As mentioned previously, software is good at doing the longterm projections such as retirement or life insurance needs, but it is not a substitute for a complete plan. We are providing the basic calculations in this report that you will be using to create your executive summary. You may take screenshots of this or reference sections of it in the executive summary. It does not include any recommendations for shifting vehicles or saving more money, but does provide the basis of the analysis. You are writing your executive summary and the cash flow changes tracking sheet in the same order as the Plan Development boxes. Imagine that your clients will have both the executive summary and the cash flow changes tracking in front of them as you lead them through your analysis and recommendations. By showing them the cash flow, you are building trust that you will stay within the constraints you were given. You are also removing one of the biggest obstacles to implementation for clients: not knowing how costs fit into their budget. The criteria used to grade your executive summary and oral presentation can be found in Appendix B of this module and on the student learning portal. Once you have received a passing grade on your executive summary, you will be invited to make an oral presentation to demonstrate your communication skills along with your planning knowledge. There will be more helpful hints and suggestions in chapters 9 and 10 concerning finalizing your plan. Once you have reviewed the documents mentioned above, it s time to get started! v

vi

Chapter 1: Financial Planning Process & Ethics Determining the Scope of Engagement The first step in the financial planning process is determining the scope of engagement. This is a requirement independent of whether you are providing a financial plan or engaging in non-financial planning work when you are a CFP professional. The CFP Board provides a compliance checklist at www.cfp.net/for-cfpprofessionals/professional-standards-enforcement/complianceresources/compliance-checklist to document that you are meeting the Board s Standards of Professional Conduct. The first element is related to establishing and defining the client-planner relationship. During your initial meeting with the client, you must have enough of a dialogue to understand what the client is looking for, determine what services and products you may offer, and determine a scope of engagements. You must also Chapter 1: Financial Planning Process & Ethics 1

determine what information you wish to collect. If additional information is needed as the analysis occurs, the client must be notified. Remember that during the process, your relationship may change from a nonfinancial planning engagement to a financial planning engagement, which requires a change in the type of documentation. For example, the amount and type of information collected could change your engagement into one that, from the client s and CFP Board s perspective, is a financial planning engagement. Clients anticipate that you actually do something with data you collect, so if you collect tax returns, investment returns, and wills, they are assuming you are examining the documents and will be providing advice in those areas. This could lead you into having a financial planning engagement, even if you were just trying to determine a beneficiary designation for their annuity! At this point, you would need to modify your scope of engagement, make additional disclosures in writing, and document the process. Meet Your Clients Jim and Anne Dowler Client Health Age Occupation Jim Dowler Excellent 42 Manager Anne Dowler Excellent 42 Administrator Dependent: (no other children planned) Matt Excellent 5 Jim and Anne Dowler have requested that a CFP professional evaluate their personal financial situation. In the first meeting you determine that they want to engage you to provide a comprehensive financial plan. A preliminary scope of engagement is defined and signed. All appropriate disclosures for both you and your company were made in that meeting so you have completed the primary requirements of disclosure. 2 Financial Plan Development

Gather Data During the first meeting you identified and clarified the financial goals and questions that you will be addressing through your plan. You provided them with a list of documents and information you needed to collect. Notice the requirement in the CFP Board checklist that you document the following three items: Goals and objectives Discussion of any unrealistic goals and unattainable objectives Data gathered and gaps in data Documenting these three areas is not only a CFP Board requirement, but is also a good business practice. When clients confirm the basic goals and information, you will find that more clients understand the issues and information with less time spent reviewing basic information in client meetings. Additionally, by having the clients sign off on a summary of questions and goals, you will also prevent wasting time by entering or analyzing incorrect information. While the CFP Board does not require you to document assumptions in this phase, it is required in a later step. It makes sense, then, to review and confirm this assumption information with the client in this first phase. Documenting your actions and sending this documentation to the client for confirmation eliminates potential time-consuming errors and builds client trust. At this point, the client has already received disclosures and a copy of the signed engagement agreement. As an example, the following document incorporates Chapter 1: Financial Planning Process & Ethics 3

a summary of the questions and goals they would like to have addressed in this plan, with any of your potential concerns about possible unrealistic goals indicated; a statement of financial position; a cash flow statement; assumptions; and any additional information the client needs to provide. Client Letter Dear Jim and Anne, I enjoyed meeting you yesterday and look forward to working with you on developing a realistic financial plan with practical recommendations that will improve your financial life. The first step is making sure that I clearly understand your issues and we are both on the same page as I develop your plan. I am sending several documents for both of you to review and return with any changes before I build your plan. After you return these to me, my assistant will schedule an appointment for approximately two weeks out. At that appointment, I will review the results of my analysis and recommendations. Here are the documents that I need you to carefully review, initial, and return with changes or questions. Summary of Goals and Issues. This is my summary of the goals and issues we discussed. It is important that I capture exactly what you want your money and this analysis to do for you. Please take the time to read it carefully and provide any changes or additions. This document will drive my work and recommendations, and ensures I address what is important to you. The only way for me to be sure I am on target is for you to confirm its accuracy. Please respond by the agreed upon deadline. Statement of Financial Position. If this statement is incorrect, your financial plan will be incorrect. It is easy to miss an asset or liability or simply turn two numbers around, so please review this carefully. 4 Financial Plan Development

Annual Cash Flow Statement. I will be utilizing this cash flow sheet to determine whether solutions we explore will fit within your cash flow. If I find a way to solve all your financial issues but you won t be able to pay your mortgage after funding them, I won t have helped you. This document identifies basic inflows and outflows and identifies funds that are available to direct toward achieving your goals. Assumptions. Projecting into the future means making assumptions. This document outlines the assumptions we are making and takes your general goals and turns them into very specific, measurable objectives. Please review and get back to me with any questions, concerns, or potential changes. These will change every year based on market conditions, inflation, taxes, and what is happening in your life, so it s critical we evaluate and agree on these each year. Documents and information needed. The good news is that you were able to give me all the documents I needed, so at this point, there is no additional information I need. I may discover some as I continue your analysis, at which point I will contact you again. Thanks for doing such a great job in getting me what I needed. This will make our process much smoother! I look forward to hearing back from you on changes, additions, or questions about the information in these documents. I will phone you on Thursday, January 6 at 2:00 p.m. to walk through your comments and changes. Sincerely, Your adviser The first document for client review and approval meets the requirement to document goals and raise any issues of unrealistic goals. This letter will also provide you important information that you will need in developing your executive summary. These are the issues that you are committing to address for the client. Chapter 1: Financial Planning Process & Ethics 5

Summary of Goals and Issues to be Addressed in Plan Cash Flow We discussed that you both are comfortable with your current lifestyle and are currently saving $9,900 in after-tax investments, in addition to your 401(k) contributions with employer matches. You are also reinvesting all dividends and interest and paying capital gains taxes from your income so that all your money continues to work for you. Combined savings represents close to 16% of your income. Additionally, once your credit cards are paid off, the $6,000 going toward those are available to accomplish your goals. We agreed that, currently, our plan should not include any reduction in your lifestyle. You are willing to redirect any tax refunds or additional funds uncovered through such items as restructuring your mortgage toward achieving your goals. You also have a $5,500 distribution coming from Anne s grandmother s estate that is being disbursed in February, and are willing to put this toward achieving your goals and would like recommendations on the best way to use this money. My commitment is that the recommendations to improve your financial health and achieve goals will stay within these budget constraints. If it turns out you cannot achieve your goals, you will be presented with the information on your alternatives such as reducing lifestyle to free up money or postponing or changing a goal. Consumer Debt Balances on credit cards are not being added to, and you have been paying them off through a combination of monthly payments and tax refunds. You do not anticipate building credit cards up again after these have been paid off. Once they are paid off, you are willing to redirect these payments to achieve other goals. You do intend to continue buying cars and assume you will always have car payments. We will not be addressing car financing in this plan. You replace cars about every seven years. Mortgage You think you would benefit from refinancing your mortgage and have provided information about alternate rates. You plan on remaining in this house in Colorado through retirement. You would like a recommendation concerning 6 Financial Plan Development

which mortgage to choose and whether to pay the closing costs from cash reserves or roll it into the mortgage. You would prefer not to have a mortgage in retirement, but are open to options. Your current mortgage ends in 19.7 years, which is right before retirement. Any savings are to be used for accomplishing other goals. Your current interest rate is 6.87%. Current fixed rates (no ARM) are: 20-year: 5.68% 15-year: 4.25% Emergency Funds You would like to have four months of expenses in your reserves. You believe this is adequate given the stability of your jobs, good health, and other financial and family resources. You would like confirmation of how much you should accumulate and recommendations on where to have those funds invested. You currently have $25,000, as some of the cash in your liquid reserves is for paying current bills. Education Providing significant support for Matt s education is an important goal for both of you. You would like to finance $20,000 per year in today s dollars for four years for his education. You are willing to work longer and retire on less if that is what it takes to accomplish this goal. You are willing to accept 4.5% inflation on college expenses and would like to have this goal achieved by the time he starts college since you may need to contribute additional money from current income during his college years. One of your municipal bond accounts has $22,000 and you consider that to be allocated toward education. In addition, Jim s parents have just established a 529 plan for Matt and are contributing $100 per month into the account that will go toward the $20,000 target. Jim s parents have expressed they will continue contributing to the account until he goes to college. Property and Liability You would like a second opinion and some advice on your property and liability coverage. You would like to understand more about what the critical components of coverage are before you meet with an agent. You are especially interested in knowing if there are any gaps in your current plans. You accept that we are not Chapter 1: Financial Planning Process & Ethics 7

specialists nor licensed in this area, so we will be providing some understanding, guidelines, and estimated quotes received from an outside agency. You are under no obligation to utilize or even talk with the agent who is providing this information based on our understanding of your current coverage. We do not receive any compensation from this agent. It is simply a service in an area of expertise that we do not have and does not replace meeting with a qualified agent. Disability In case of a disability, you don t really know what would happen or how it would impact your lifestyle or retirement. Anne s cousin was permanently disabled and you are watching the family struggle with current expenses and worries about the children s education and their own retirement. You would like to know what steps you should take and what is realistic to expect in case of a disability so you aren t faced with the same issues as your cousin. Long-Term Care You want to know if you should be concerned about purchasing long-term care insurance now. You have also heard that long-term care insurance is not worth it and don t know what to think. We agreed that inflation for those expenses and premiums should be assumed at 5%. You would like the spouse to be able to remain in your own home and not experience a reduction in lifestyle. You would like advice on the optimal age to address this issue, if now is not the time. Survivor Needs You think that in case of the death of either one of you, $80,000 per year reducing to $70,000 in retirement would be adequate. You would like the mortgage paid off, college funded, and the same lifestyle provided for the survivor now and in retirement. You would like for us to determine how much life insurance and what type of coverage would provide for this goal. Additionally, you would like an initial lump sum available for final expenses and miscellaneous expenses in the first year, and think $60,000 should be adequate. You would rather err on the side of a little too much insurance rather than risk problems for the survivor. You both have clearly stated that you want the 8 Financial Plan Development

surviving spouse and Matt to maintain the same lifestyle that they have today and pre-fund retirement and education objectives. You both would like to see the family cabin purchased even if the other is no longer around. You also both want the surviving spouse to be able to retire at age 62 if you can financially afford this along with your other goals. You are willing to accept the Social Security projections provided and 2.5% inflation. You have agreed that 5.5% long-term return is an acceptable rate to use. Investments You are willing to reallocate contributions or funds if it will help achieve your goals, including the $200 per month going into the annuity. You would like our analysis of the annuity and whether you should keep and continue funding it or utilize the funds elsewhere. Jim is more aggressive than Anne, but neither of you really feel that you understand risk. The last downturn has made you nervous, but you are not sure what actions you should be taking. You are willing to take average risk before retirement, which was confirmed by multiple risk tolerance assessments. You would like us to make recommendations on both asset allocation and investment selection. We discussed that this will be a multi-step process. This initial step will be the selection of a model portfolio and calculation of the taxable gains. After agreement upon this stage, we will create an investment policy statement and finally evaluate the individual investments. You are willing to accept the proxies for returns and average risk return assumptions embedded in our software from our portfolio management team, and understand that these are only representative of an asset class, not the individual investments. Tax Planning Advice Your accountant has provided you with a projection showing you are on target to get another refund this year of around $5,600, and the projection for next year is showing another $5,542 refund. This has been consistent for the last several years. You have been using the refunds to pay down debt or invest. Going forward, you are willing to redirect all of those funds to help accomplish your goals. Your intention this year was to again put this refund toward debt, but you are open to other suggestions. Because we are not sure of tax law changes or how Chapter 1: Financial Planning Process & Ethics 9

other strategies may impact your goals, we are only going to utilize around 90% of the projected refund your accountant has calculated in our analysis, which we rounded down to $5,000 in order to make sure you do not end up owing taxes. You are also interested in hearing recommendations that would reduce your taxes now and in the future, but accomplishing your goals comes before tax benefits. If we can find strategies that create a tax advantage, we have permission to use any freed-up funds to help accomplish your goals as well. Retirement You would ideally be prepared to retire on $90,000 annual income at age 62 and assume life expectancy of 95. A survivor could live on $80,000 if alone in retirement. However, as we discussed, you may need to readjust your goals. You have identified a willingness to work until age 67 if that is what it takes to create a secure retirement with a minimum income of $80,000. When it comes to prioritizing retirement solutions, you would prefer to drop the income requirement to $85,000 first, and then drop age down to age 62 if your first goal cannot be achieved within your budget constraints. We will adjust your retirement goal so that you continue working until you have the security of reaching the minimum income goal of $80,000. You would also like to buy out Anne s cousin from his half of the family cabin in the mountains at age 62, if possible. It is estimated that the costs would be $100,000 in today s dollars. You can either purchase it outright or carry a 10- year note at 6.5%. We will not know whether these goals are realistic until I complete your analysis. In addition to the retirement parameters identified above, you would also be willing to defer or carry a longer note on the cabin if it can fit within your retirement budget. Estate Planning You want to leave an estate for the benefit of Matt. Anne s inheritance from her parents was what helped you to accumulate your current resources. Jim is an only child and will inherit everything from his parents. They are in their late sixties and in good health, so he does not anticipate receiving an inheritance soon. Jim is also the executor and has power of attorney for his parents. Help in having 10 Financial Plan Development

a general understanding of an executor or power of attorney would be appreciated. He is concerned about handling that role and not sure what it entails. Jim s parents currently have investments worth around $3.5 million and their estate is continuing to grow slightly, but they are concerned about inflation and potential long-term care and/or medical costs. You both think you would rather this money go to Matt but do not want to count on it and aren t sure if it is a good idea to do so. You want us to help you prepare for working with an estate planning attorney by understanding what documents you should acquire. The only documents you have are the do-it-yourself wills you put together shortly before leaving on a vacation just after Matt was born. In your current will, everything goes to each other and then to Matt in case of both deaths. We have scheduled a phone conversation to explore secondary estate goals and beneficiaries for next week. Chapter 1: Financial Planning Process & Ethics 11

Statement of Financial Position The third document for client review is the Statement of Financial Position. By having clients confirm this is correct, you can eliminate errors and lengthy conversations on resources at the plan presentation. ASSETS 1 LIABILITIES 1, 3 Cash/Cash Equivalents Checking Account $3,623 Credit Cards $6,158 Money Market $25,000 Mortgage $178,392 $28,623 Auto loans $17,447 Invested Assets 2 TOTAL LIABILITIES: $201,997 Jim's whole life cash value $7,466 Joint after-tax investments $134,898 Total: $142,364 Tax-Advantaged Assets Jim's IRA $32,888 Anne's IRAs $83,924 NET WORTH: $784,384 Anne's Deferred annuity $19,524 Jim's 401(k) $183,412 Anne s 401(k) $30,146 $349,894 Use Assets Residence $450,000 Personal property $85,000 Autos $30,500 Total: $465,500 TOTAL LIABILITIES TOTAL ASSETS: $1,086,381 AND NET WORTH: $1,086,381 1 All assets and liabilities are owned jointly, unless indicated otherwise. 2 Details about investment holdings may be found in the Investment section. 3 Details about liabilities may be found in Debt Analysis section. 12 Financial Plan Development

Annual Cash Flow Statement The fourth document for client review and sign off for acceptance is the annual cash flow statement. CASH INFLOWS Jim's gross wages $ 98,595 Anne's gross wages $ 53,601 Investment income $ 5,595 Total $157,791 CASH OUTFLOWS Savings and Investments After-tax savings contributions $9,900 Reinvested investment income $5,595 Qualified plan contributions 1 $10,283 $25,778 Fixed Expenses Mortgage (P&I) $16,556 Property taxes $2,352 Homeowners insurance $1,223 Insurance (other insurance) $3,308 Credit card payments $6,000 Car payment $5,412 Total Fixed Expenses $34,851 Variable Expenses Charitable contributions $4,396 Health care out-of-pocket expenses $1,300 Maintenance/ home services/misc. $7,450 Food and supplies $8,020 Utilities/Internet/cable/phone $9,040 Transportation (gas, oil, repairs) $4,750 Personal care and clothing $4,900 Chapter 1: Financial Planning Process & Ethics 13

Travel and entertainment $12,500 Total Variable Expenses $52,356 Total Living Expenses $87,207 Employee benefit deductions 2, 3 $4,171 State and local income tax (flat 4.3%) $5,227 Federal income tax 4 $24,032 FICA $11,329 Taxes and Pretax deductions $44,759 Total Expenditures $157,744 Available Cash Flow $47 Net Income (take home pay) $97,353 Gross Wages $152,196 You have given us permission to redirect after-tax investments, tax refunds, and any savings identified in the process toward your goals, including the money paying off credit cards once those are paid off. We are not looking at any changes to lifestyle expenses other than these. 1 Jim contributes 5% and Anne 10% into 401(k)s 2 Employee benefits include Sec. 79 benefit costs plus pre-tax medical and disability payments 3 To replace health insurance benefits in case of lost job would require approximately $10,000 per year. Emergency fund requirement based on total expenses plus cost of replacing health insurance benefit for total of $99,407 annual expenses. Four months reserves are rounded to $33,000 target goal. 4 Clients are in the 25% federal marginal tax bracket. State taxes are 4.63%. Assumptions The fifth and final document for client review and acceptance is a summary of all the assumptions, including goals. This allows us to reinforce goal ranges, expectations, and uncover any objections to assumptions prior to creating the plan. We are also meeting the CFP Board requirement to document assumptions. 14 Financial Plan Development

General Assumptions Used In Your Plan Base inflation 2.5% Jim s salary inflation 2.5% Anne s salary inflation 2.5% Emergency reserve goal 4 mo. $33,000 Assumed Rate of Return 5.5% Retirement Anne Jim Desired retirement age 62 62 Latest acceptable retirement age 67 67 If spouse retires, how much of other's earned income can be used to meet retirement income goal 90% 90% Desired retirement income goal $90,000 $90,000 Minimum acceptable retirement income (both retired) Amount to reduce income goal for a survivor in retirement $80,000 $80,000 $5,000 $5,000 Plan life expectancy 95 95 Social Security inflation 2.5% 2.5% Education Matt Education inflation 4.5% Child starts college at age 18 Maximum number of years to fund college 4 Minimum amount of expense willing to pay per year for college (even if you have to extend your retirement age) Maximum amount of expense you are willing to pay per year for college (Your child knows they will have to pick up any balance no exceptions) Outside funding sources included (assets not owned by you or included in your net worth that will be available) (scholarships, student loans, student employment, annual gifts, own current income, etc.) $20,000 $20,000 $100 per month by grandparents just started and continuing until college Chapter 1: Financial Planning Process & Ethics 15

Survivor Planning what do you want to plan to fund? If Anne is survivor If Jim is survivor Debts to pay immediately other than residence $23,605 $23,605 Amount of residence debt being paid off $178,392 $178,392 Final expenses & other immediate needs $60,000 $60,000 Other goals funded? Cabin yes yes College funded? yes yes Maximum age to which survivor will work 67 67 Changes to spouse's income assumptions prior to retirement None None Estimated Income need for survivor prior to retirement Estimated Income need for survivor during retirement $80,000 $80,000 $70,000 $70,000 Disability Planning If Anne is disabled If Jim is disabled Estimated Income need for family prior to retirement (pretax) $123,204 $129,719 Contingency plan for reducing expenses in case of permanent disability not in place not in place Changes in working partner income prior to retirement work until 67 work until 67 Long-Term Care Planning Annual cost in today's dollars of long-term care $82,000 $82,000 Inflation for long-term care expenses 5% 5% Number of years to assume long-term care facility or home support utilized Year at which we assume long-term care facility or home support needed How much will other expenses be able to be reduced for remaining partner 5 5 80 80 $10,000 $10,000 16 Financial Plan Development

Property & Casualty Protection Liability protection minimum will equal or exceed this net worth Liability protection minimum will equal or exceed annual income times this number $1,000,000 $1,000,000 7 7 Legal Documents & Estate Planning Anne Jim Projected inheritance you may receive 0 $5,000,000 0 Specific bequests Administration fees fixed amount 1% 1% Administration fees % of probate 2% 2% Estimated funeral expenses $15,000 $15,000 Prior gifts you have made 0 0 Income Tax Assumptions Combined Federal & State Marginal Income Tax Rate (25% federal, 4.63% state) 29.63% Combined federal and state effective tax rate 16.58% When the client confirms this information with you, you have completed the first two steps in the planning process plus you have confirmed assumptions, which is also a requirement under the next phase. Completed Establish Relationship Explain services provided, the process, and required documents. Clarify client and planner s responsibilities (define the scope of engagement). Gather Data Obtain quantitative and qualitative information through use of interview/questionnaire. Determine client s goals, needs, and priorities. Assess client s values, attitudes, and expectations. Determine client s time horizons and risk tolerance level. Chapter 1: Financial Planning Process & Ethics 17

Collect all applicable records and documents. Analyze You are ready to start analyzing the Dowlers financial situation. It may seem that compiling the information above is analysis, but you have just been organizing and understanding the information. Practice Standard 300-1 of the CFP Board compliance checklist requires that you now analyze this data. Now examine the information in detail and ask these questions: What are the strengths and weaknesses of their current situation? Which life challenges could they face successfully and which challenges would cause financial hardship and disaster? What questions were not raised that the clients should ask to be addressed? Are there any unrealistic goals or assumptions that need to be discussed with the clients? Are there techniques you can suggest that will improve the efficiency of their plan? Are there challenges they may face that cannot be addressed by purchasing products but must be addressed by planning or changing lifestyle? In this phase, you are to accomplish the following tasks: 1. Analyzing and evaluating the client s financial status a. Current financial status (e.g., assets, liabilities, cash flow, debt management, risk exposure, capital needs) b. Special needs (e.g., divorce/remarriage, charitable planning, dependent needs, education needs, terminal illness planning, small business planning) 18 Financial Plan Development

c. Risk management adequacy (e.g., life, disability, health care, long-term care, homeowners, auto, other liability insurance, commercial insurance issues, if any.) d. Investments current investments, strategies, and policies e. Taxation current returns, strategies, and tax compliance f. Retirement current plan, tax exposures, and Social Security strategies g. Employee benefits utilization h. Estate planning documents, strategies, and tax exposures Once you identify an issue or potential areas for improvement, you need to take the next step of developing and presenting recommendations. In your executive summary you will be following the format of describing the problem, making a recommendation, identifying advantages and disadvantages of your recommendation and providing an alternative. Additionally, you are tracking the costs of recommendations to make sure they fit within the client s financial ability. This will be the documentation that you have followed the planning process. Read the requirements below so you can see how this model meets your obligations. Develop and Present the Plan Chapter 1: Financial Planning Process & Ethics 19

The detailed steps under developing and presenting financial planning recommendations and/or alternatives include: Prepare and present a financial plan (with client input), tailored to the client that includes analysis of the client s: 1. Financial position (current and projected statements) 2. Cash flow (projections and recommendations) 3. Estate tax (projections and recommendations) 4. Capital needs at retirement (projections and recommendations) 5. Capital needs projection for death (projections and recommendations) 6. Capital needs disability (projections and recommendations) 7. Capital needs for special needs (projections and recommendations) a. Income tax (projections, recommendations, and strategies) b. Employee benefits c. Asset allocation (statement, recommendations, and strategy) 8. Investments (recommendations, policy statement, and policy recommendations) 9. Risks and potential liabilities (assessment and recommendations) 10. Priority list of action items a. List the priority of each area of planning interest. b. Work with the client to ensure that the plan meets the identified goals and objectives. c. Modify the plan as necessary. 20 Financial Plan Development

Implement and Monitor Plan The final steps are ones that you will not be addressing in this module, but it is a good idea to review them now as they will be tested on the CFP Certification Examination. It is also suggested that you examine the Code of Ethics and Practice Standards on the CFP Board s website at www.cfp.net/about-cfpboard/ethics-enforcement/standards-of-professional-conduct. Responsibilities under implementing the financial planning recommendations include: a. Assist the client with implementation of the plan. b. Coordinate with other professionals as necessary. Responsibilities under monitoring the financial planning recommendations include: a. Regularly monitor and evaluate the progress of the plan. b. Review changes in laws that affect the plan. (1) Update client information regularly. (2) Recommend changes to the plan as required. This completes the review of the Financial Planning Process. You are now ready to analyze and evaluate the client data. Chapter 1: Financial Planning Process & Ethics 21

Chapter 2: Client Cash Flow, Debt & Risk Management One of the first steps in analyzing a client s situation is to become familiar with their cash flow and gain an understanding of savings, debt patterns, and available cash flow that will impact their ability to accomplish their goals. Take a few minutes to explore the Dowlers basic information presented in Chapter 1, and then look for opportunities that could create efficiencies that free up money to help them accomplish their goals. The Plan Development boxes below are designed to focus your analysis in areas where you may find opportunities or that should be addressed in your final financial plan. Cash Flow The Dowlers have given you permission to redirect the following cash flow resources to accomplish their goals. You may uncover additional options as you work through this case: Annual current available after-tax savings: $9,900 Annual tax refund/or changed withholding available to reallocate to meet goals: $5,600 refund for this this year and going forward, we are assuming $5,000. (By increasing withholding, this will result in $11,600 available in the first year and $5,000 going forward.) Inheritance lump sum first year only: $5,500 Funds going toward credit cards once those are paid off Emergency Funds Whether you look at emergency funds as cash flow or risk management, everyone agrees this is one of the first goals that needs to be established and one of the most difficult for clients and advisers to accomplish. Research regarding how people make decisions gives us some of the reasons for this difficulty. Optimism bias, immediacy bias, and a whole host of other biases make us 22 Financial Plan Development

believe that emergencies won t happen to us in the near future that is, unless we have experienced one recently. Advisers are also reluctant to have money just doing nothing! Planners may have the same biases as clients in believing that nothing bad will happen soon. Jim and Anne have already accumulated a significant portion of their emergency funds with their $25,000. The target for reserves was set and confirmed in the summary of goals and issues. The target included the cost of purchasing unsubsidized health insurance if Jim lost his job. The target is $33,000. You will have to balance meeting other goals from their cash flow with their need for emergency funds. At a minimum, they need to have $30,000 in reserves by the end of this year and the full $33,000 by end of year two. You may fully fund it in year one or shift $3,000 to the second year. Plan Development #1 is a sample recommendation to get you started and provide a model recommendation. Feel free to customize this recommendation for your executive plan. Plan Development #1 This is a sample recommendation to get you started. Please feel free to change it or leave as is. Issue. While you have a good start on accumulating sufficient emergency reserves, your current amount would last 3.4 months without covering any additional out-of-pocket expenses for medical insurance in case of a job loss or medical expenses in case of an illness. Recommendation. Increase emergency reserves this year to at least four months of reserves, including coverage for medical insurance, which requires an additional $8,000 deposited this year. Move the funds from the taxable money market to the Colorado municipal money market, which has a better after-tax return. Chapter 2: Client Cash Flow, Debt & Risk Management 23