Chapter 1 Dalton, M. A, Dalton, J. F., & Oakley, K. F.

Chapter 1

Dalton, M. A, Dalton, J. F., & Oakley, K. F. (2019). Cases in financial planning: Analysis and presentation (4th ed.). Money Education.

textbook is a valuable resource for financial planning students and practitioners, including those with either limited or substantial experience, and those who are interested in improving their financial planning skills. The broad knowledge base required of a financial planner is covered in an introductory manner throughout this textbook, including the financial planning process from the initial contact with a client to the presentation of the plan itself. Case studies are included in the textbook that cover a range of scenarios from basic to more complex. Varied financial planning approaches are provided to ensure that the financial planner has the appropriate planning methodologies necessary to arrive at logical and substantiated planning recommendations. This textbook should remain an important reference tool for the financial planner seeking knowledge and assistance in the preparation of professional comprehensive personal financial plans action to Case Analysis and Presentation
Personal financial planning (financial planning) is the process of formulating, implementing, and monitoring financial decisions into an integrated plan that guides an individual or a family to achieve their financial goals.
CFP Board’s Code of Ethics and Standards of Conduct (Code and Standards) defines financial planning as “a collaborative process that helps maximize a Client’s potential for meeting life goals through Financial Advice that integrates relevant elements of the Client’s personal and financial circumstances.” The CFP Board outlines the process of financial planning in seven steps in Section C of the Standards of Conduct.
• Step 1: Understanding the Client’s Personal and Financial Circumstances. In this step, the adviser needs to obtain qualitative and quantitative information for the client. The client information must be analyzed to obtain an understanding of the client’s personal and financial circumstances. This information will help the adviser and the client with step 2.
• Step 2: Identifying and Selecting Goals. In this step, the adviser will work with the client to help identify potential goals, especially as it relates to goals that are mutually exclusive. For example, a client may be able to accumulate enough savings for a beach house or a house in
the mountains, but not both without delaying retirement for several years. Once the potential goals are discussed and contemplated, the client must select and prioritize the goals with the help of the adviser.
• Step 3: Analyzing the Client’s Current Course of Action and Potential Alternative Course(s) of Action. In this step, the adviser considers the advantages and disadvantages of the client’s current financial situation in light of the goals of the client. In addition, alternative courses of action are considered.
• Step 4: Developing the Financial Planning Recommendation(s). This step is for determin-ing the recommended course(s) of action that will maximize the potential to achieve the goals of the client.
• Step 5: Presenting the Financial Planning Recommendation(s). In this step, the adviser presents his or her recommendations to the client.
• Step 6: Implementing the Financial Planning Recommendation(s). The person who is responsible for implementing the plan must be determined. The client or the adviser might have this responsibility depending on the engagement. If the adviser is responsible, then the adviser must identify and analyze actions, products, and services designed to implement the recommendations. The adviser and the client must discuss the basis for actions, products, or service, as well as the timing for implementation. Finally, the adviser must help the client select and implement the actions, products, or services.
• Step 7: Monitoring Progress and Updating. Financial plans will need to change over time, especially as assumptions underlying the plan change. The responsibility for monitoring the financial plan must be established with the client. If the adviser has responsibility, then he or she must analyze, at appropriate intervals, the progress toward achieving the client’s goals. Working with the client, the adviser would then make recommendations to modify the plan as needed and assist with implementing those recommendations.

Contents of the Financial Plan A financial plan is a written document that generally sets out a list of recommendations to achieve a set of goals and objectives based on an understanding of a client’s current financial and personal situation. A financial plan is the work product and results from the application of several financial planning concepts to a client’s current and prospective financial situation. The application of the concepts (listed below) considers the client’s financial goals and values (internal data) and the external environment (external data). The external environment includes current and expected future income, gift and estate taxes, investment returns, inflation and interest rates.
Financial planning concepts applied include:

• an evaluation of the client’s risk management portfolio (includes risks retained and risks transferred through the use of insurance contracts)
• financial statement preparation and analysis including cash flow analysis and budgeting

• emergency fund and debt management (short-term goals)

• long-term goal planning including:
achieving financial security (retirement planning)
education planning for children’s or grandchildren’s college or private secondary education

planning for lump-sum purchases (major expenditures)

legacy planning (estate planning)
• income tax planning is integrated throughout all aspects of a financial plan

• the investment planning portfolio is used to fund many of the client’s short-and long-term goals

In order to apply each of these concepts to a client’s current and prospective financial status, the financial planner uses tools such as financial statement preparation and analysis, cash flow analysis, and budgeting. This chapter introduces the preliminary step of establishing the client-planner relationship and the first two steps of the financial planning process: (1) understanding the client’s personal and financial circumstances and (2) identifying and selecting goals. The chapter also provides information regarding the financial planning profession.
Establish and Define the Client Relationship
Communication with Client The role of the financial planner is to educate the client, gather relevant information, analyze that information, and assist the client in preparing and implementing a financial plan that will achieve the client’s financial goals within the desired time frame.
Task Key Concepts
1. Define the steps in the financial planning process.
2. Explain the difference between internal and external data collected as part of the financial planning process.
3. Identify financial planning concepts that are applied to a client’s financial plan considering the client’s profile, financial goals, and values.
4. Know what the financial planner should attempt to accomplish during the client introductory meeting.
In order to educate the client and gather relevant information, the financial planner must be able to communicate effectively with the client. The planner must respect the client and establish a relationship of trust. The planner must be empathetic and assess the attitudes and values of the client as well as the client’s risk tolerance and views regarding savings, spending, taxation, and financial discipline. Issues such as the importance of work versus leisure time, job security, community service, attitudes regarding children from previous marriages, former spouses, and the client’s extended family all are important in understanding and assisting the client to achieve his or her goals.
How does a planner effectively communicate with a client? From the onset, the financial planner should address the client formally (Mr., Mrs., Dr., etc.) using the appropriate salutation. This formality can be relaxed later in the relationship if the client is more comfortable with first names. The planner should actively listen to the client and especially to the verbs the client uses. This often indicates the client’s learning style. Use of phrases such as “see what I mean,” “imagine that,” and any other words that imply that the client is a visual learner suggests that the planner should use examples including charts, graphs, and other visual aids to make the client more comfortable. If the client appears to pay attention to every spoken word or is asking for an explanation of words, the client’s learning style is likely that of a verbal learner and graphics may be supplemented with carefully selected words. There is some data that suggest that up to 65 percent of people are visual learners. A generous use of pictures, graphs, and charts is always helpful in the communication process.
As a matter of professional courtesy, the financial planner should respect the client’s time. This means being punctual, starting on time, ending on time, and telling the client how long each meeting will last. In order to establish a trusting relationship, the planner can generally share prior experiences. However, the planner must ensure that the client knows that client information is confidential by not identifying details about other clients.
The planner can show empathy by use of nonverbal pacing and showing a genuine interest in the hobbies, activities, vacations, and children of the client. To make communication effective, the financialplanner can use restatement, paraphrasing, summarizing, open ended questions, and questions that show interest. These techniques can assure minimal miscommunication allowing the planner to reach the pertinent details.
Introductory Meeting If there has been little communication before the first meeting, the financial planner should at least provide the client with a list of documents and information that the client needs to bring to the first meeting (e.g., get to know each other, collect some data, answer questions, clarify goals, reduce fears). At the first meeting, the financial planner should assist the client with establishing defined goals and discuss how the client’s values fit into those goals. There will also be a general discussion of the client’s personal data and family data. Typically the planner will meet with either one, or preferably both spouses to get an overview of the family and extended family (e.g., ages, marital status, children, grandchildren, net
Task Key Concepts
1. List the elements of the financial planning engagement letter.
2. Describe the purpose of a financial planning client questionnaire.
3. Summarize the types of necessary quantitative and qualitative data that is collected from the client.
worth, income, self
employment). From this basic information the planner will make a preliminary assessment of the general risks and goals of the client.
4. Provide examples of external environment data that a financial planner needs to know in order to properly analyze, evaluate, and make recommendations related to a comprehensive financial plan.
The financial planner and client should mutually agree as to how they will communicate (e.g., email, office telephone, cell phone) and how often they will meet (e.g., 2 hours per week for 10 weeks). The client should be given a time frame over which the plan will be completed (e.g., 3 months). The financial planner should discuss the planning process and fees, provide relevant and required disclosures, and answer questions that the client is likely to have. The planner should effectively manage the client’s expectations and have a remedy for instances when the client is dissatisfied. At the end of the introductory meeting the planner should prepare an engagement letter and send it to the client for approval.
Engagement Letter An engagement letter is a legal agreement (a contract) between a professional organization (the planner) and a client that defines their business relationship. The engagement letter should define the parties to the agreement, the specific services to be provided, the duration of the agreement, the methods of communication (email, meetings), and the expected frequency of contact. The letter should also specify the conditions under which the agreement can be terminated.

Elements of an engagement letter: • define the parties to the agreement • a description of the mutually agreed upon services (the scope of work) • the time horizon for the work to be completed • a description of the fees and costs • the obligation and responsibilities of each party (planner/client) regarding: defining goals, needs, and objectives gathering data
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projecting the result of no action formulating alternative possibilities selecting from those alternatives
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establishing who is expected to implement which elements of the plan (this can be subject to revision at the implementation phase of the process) defining who has monitoring responsibilities
delineating services that are not provided, such as legal documents or income, gift, or estate tax return preparation
In addition to the above, there should be a mutual understanding regarding the use of proprietary products and/or other professionals or entities in meeting any of the service obligations in the engagement agreement.
Financial planners, and especially CFP® professionals, should seek to avoid conflicts of interest. Any conflicts of interest that remain should be disclosed by the planner to the client. Conflicts of interest arise when the interests of one party (the planner) are adverse to the interests of the other party (the client). This situation can occur, for example, when a planner has an economic incentive to recommend one financial product over other financial products. Ideally, these situations are to be avoided, or at the very least continued only with the client’s informed consent.
The Scope of the Engagement A financial planning engagement can be very narrow or fully comprehensive. Activities that are
comprehensive plan include: • Preparation and analysis of
• A review of all risk management policies (including life, health, disability, long-term care, property and liability insurance) and what to do about any uncovered areas of risk.
• An evaluation of short-term financial goals including the emergency fund and debt management.
• The establishment of long-term goals including retirement,
education funding, lump-sum (major) expenditures, and legacy planning including documents.
• An evaluation of the current investment portfolio with the objective of creating a new investment approach that helps to achieve the client’s goals within the risk tolerance of the client.
• An examination and recommendation regarding any special needs situation of the client (divorce, elderly parent, child with special needs).
Understanding the Client’s Personal and Financial Circumstances (Gather Client Data)
typically part of a personal financial
Edit Quick Quiz 1.1
1. Personal financial planning is the comprehensive process of formulating, implementing, and monitoring financial decisions that guide the client to achieve financial goals. a. True b. False
2. Long-term goal planning includes emergency funding, financial security planning, education planning, lump-sum purchase planning, and legacy planning. a. True b. False
3. At the introductory meeting, the financial planner will collect data, come to understand the client’s values and goals, establish the scope of the engagement, and discuss fees. a. True b. False
The Internal Data Collection Process The planner must obtain sufficient information (both quantitative and qualitative) from the client in order to assess and analyze the client’s financial situation. Quantitative information is measurable and includes the client’s age, income, number of children, death benefit of life insurance policies, and much more. Qualitative information is how the client feels about something, or their attitude or belief, including working versus retiring and spending versus saving. The information includes client-provided documents and may be obtained by the planner through the use of questionnaires and/ or interviews. See Exhibit 1.4 | Sample Financial Planning Questionnaire for a basic sample of a client questionnaire. The planner will need to explore and evaluate the client’s values, attitudes, expectations, and time horizons as they affect client goals, needs, and priorities.
Quantitative information collected must be complete, accurate, verifiable, and free from bias. The information to be collected will include: • The family – list of members, their age, health, education, income, financial competence, and any special situations (e.g., child with special needs, aging parents who are or may become dependents).
• The insurance portfolio – collect all insurance policies and a detailed description of any employer-provided or sponsored insurance. Make sure to identify the premiums paid by the client (life, health, disability, long-term care, property including homeowners, flood, auto, boat, etc., and whether the client has a personal or professional liability policy).
• Banking and investment information – collect current statements on all bank accounts and investment accounts including qualified plans (IRAs, SEPs, SIMPLEs, 403(b)s, 457s). Obtain from the client detailed information about other investments such as rental or business property, including information such as the valuation, amount of debts, and cash flows.
• Taxes – all income, gift and trust tax returns for the last five years if available. • Retirement and Employee Benefits – all retirement information including Social Security statements or benefits (Form SSA 7004 can be used), employer-sponsored retirement plans, and employee benefits (get a copy of the booklets and summary description of plan).
• Estate Planning – all wills, durable powers of attorney for health care decisions, all advance medical directives and any trust documents.
• All personal financial statements if available including any recently used to obtain debt (balance sheet and income statement) – a list of debts with the original amount, date of inception, interest rate, term of repayment and current balance. Most clients will not have financial statements and either the planner or a CPA will have to prepare them.
The financial planner also needs to collect qualitative information from the client. Qualitative information includes the client’s attitude and beliefs regarding: • Education goals • Retirement goals • Employment goals • Savings goals • Risk tolerance • Charitable goals • General attitude towards spending
The financial planner will request that the client bring all of the above information to the first meeting. Frequently, the client will not have all the quantitative information (such as insurance policies and employee benefits brochures) and rarely do clients have properly prepared personal financial statements. The engagement letter may be modified to include an addendum of missing information needed for later meetings.
The External Data Collection Process It is important that the planner is cognizant of the current external environmental data including the economic, legal, political, sociological, taxation and technological environment. This general knowledge may be obtained by taking various university courses, attending professional conferences, and reading professional and news related journals.
The financial planner should identify and document the following external information at the inception of the engagement: • Interest rates
the current and prospective outlook including savings rates and mortgage rates • Housing market – housing is a major asset but markets are local what is the stock of available housing is it a buyer’s or seller’s market
■ ■ ■ • Job market ■ • Investment market ■ • Business cycle ■ ■
what is the unemployment rate current and prospective outlook peak, contraction, trough, expansion
where are we now • Local insurance costs ■ housing, auto, liability
• Local cost of living • Expected inflation rate, both short and long term • Expected rate of increase in the prices of education and medical care • Legislation that may impact certain industry sectors (e.g., healthcare) • Current and expected income, gift, and estate tax rates
Identifying and Selecting Goals Identifying Goals
Prior to moving on to the analysis stage, the planner and client must collaborate to identify and clearly define the client’s goals, using reasonable assumptions, and discuss how each goal may impact other goals.
In practice, a client may need help in setting specific objectives. For example, a client may indicate “I want a comfortable retirement.” A planner will have to explain to the client that they cannot plan together effectively with that generic and nebulous statement. The planner will need to help the client to express the objective in terms that are specific, measurable, achievable, and realistic. For example, “I want to retire at age 66 with income equal to 80 percent of my after-tax pre-retirement income during a 30-year time horizon, inflation-adjusted at three percent per year, from all sources combined.” Each goal must then be examined with regard to the client’s resources and limitations or constraints.
Selecting Goals Most clients will have multiple financial planning and life goals at any point in time, and these goals must be prioritized. As resources are finite, clients may be constrained to accept various compromises in their long-term planning. The challenge often is to negotiate the rearrangement of priorities and strategies to optimize the satisfaction of multiple objectives.
Examples of common risks and goals throughout a client’s financial life cycle are discussed in . A study of these life cycle goals will reveal a dynamic, rather than constant, set of goals. As clients progress from one life cycle stage to another, initial goals may be achieved and new goals arise. Ultimately, the planner must understand that each client will have her own set of values that determine the goals of greatest importance during each stage of life. Assessing the client’s life cycle stage provides a guideline for what the planner may expect, but each client, with the assistance of the planner, will ultimately determine which goals should be explored and developed, revised, or rejected.
Analyzing, Developing, Presenting, Implementing and Monitoring
Analyzing the Client’s Current Course of Action and Potential Alternative Courses of Action Once the planner has collected internal and external data and mutually established the goals, needs, and priorities of the client, the planner will begin the analysis phase. This textbook goes into great detail using many financial planning approaches to analyze, evaluate, and make recommendations to the client. Specifically, covers additional steps of the financial planning process including the analysis of the client’s financial situation and the development and presentation of recommendations.
Developing the Financial Plan Recommendations While developing and presenting the plan is discussed to some extent in , it is worth mentioning that this phase is one of the most critical steps in the financial planning process. This step comes after the analysis phase and the recommendations. Suggestions made by the financial planner must be based on: • The scope of the engagement as set forth in the engagement letter • The goals and objectives of the client • The information gathered from the client by the planner • An analysis of the economic environment, including the current and projected tax law environment
• The alternatives available to accomplish the client’s goals
These recommendations should also be based on the expertise of the financial planner and may require input from other experts, such as attorneys, accountants, or actuaries.
This step in the process is generally an iterative one. Often, recommendations will be made and discussed with the client with further questions and investigation before an agreement on final plan recommendations can be made. In addition, there will always be alternative solutions that may work for a particular client and it will be part of the process that the alternative solutions are discussed and prioritized before the implementation of the plan.
The recommendations that are made by the adviser should be based on the criteria listed above and should be made independent of how the adviser is compensated. The adviser should make disclosures about how she is compensated and if there are any conflicts of interest. Disclosures regarding potential conflicts of interest should include sufficient facts to ensure that the client fully understands the conflict and is able to either give their informed consent or to reject them.
Presenting the Financial Planning Recommendations The planner must then present the final recommendations to the client, along with an explanation of the information and process that was used in selecting the recommendations. As discussed previously, the presentation should be adapted to the client’s learning style to ensure that the client is fully engaged in the process and has a clear understanding of the recommendations and whether they are independent or whether a recommendation must be implemented with another recommendation.
In practice, the presentation of the planner’s recommendations may involve more than one meeting depending on the complexity of the client’s situation and whether the client has the desire to actively review all of the detailed analysis that was utilized in selecting the recommendations or prefers to be provided with a big picture summary.
Throughout the course of presenting the plan, a planner should remain cognizant of the client’s body language. Particularly when the plan is both long and complex, clients may reach a point where they simply cannot absorb any additional information. In those circumstances, it is better for the planner to stop and schedule a follow-up meeting to review the rest of the plan. In other cases, the presentation may segue almost seamlessly into the implementation phase.
Implementing Financial Planning Recommendations This phase of the financial planning process begins after the client and planner agree on the recommendations and priorities. The client must agree that the recommendations made by the planner are appropriate and will further the achievement of her goals and objectives before implementation can begin.
Implementing the recommendations is the process of taking action on the recommendations. This is the part of the process where change actually occurs. However, there are several steps that may be necessary, including defining the necessary activities for implementation and determining which activities will be performed by the client and which ones will be performed by the planner.
In most cases, part of the implementation process will require the use of and coordination with other professionals. For example, advisers will generally work with attorneys to implement any estate planning or other necessary legal work (e.g., establishment of a family limited partnership). In the case that another professional is necessary as part of the implementation process, the planner or the client will need to coordinate with that professional.
In many cases, implementation will require the selection of financial services products, such as insurance or investment vehicles. Similarly, this may be accomplished directly with the planner or by working with other professionals.
Implementation is critical because without it the plans does not come alive. There are times when a plan will be created and agreed to by the client that does not get implemented. This outcome is unfortunate since the client
will be unlikely to accomplish the goals that were the basis for the initial
recommendations. However, when clients do follow through with implementation, they are often closer to accomplishing the goals they set out to achieve.
Monitoring Progress and Updating It is not uncommon to think that once the recommendations are implemented, that is the conclusion of the financial planning process and engagement. However, it is really the beginning of the process. Once the plan is implemented, the planner and the client must monitor the actual results of what was implemented relative to what was expected. For example, if a retirement plan was implemented and was based on specific savings amounts and earnings rates of return, it is important to evaluate periodically to ensure that progress is being made as was expected. If the actual results are different from what was anticipated, then adjustments to the plan may be required.
There are other reasons that require monitoring. For example, to the extent that tax laws change, such changes may positively or negatively impact the financial plan.
The following are some additional situations which typically warrant reviewing the client’s financial plan: • birth of a family member • death of a family member • marriage of a family member • divorce of a family member • career change • job loss • inheritance • estate and gift tax law changes • economic recession • economic recovery
It is important as part of the engagement process to define who will be responsible for monitoring the plan and to define the specifics around monitoring if the planner will be responsible for it, including frequency, depth, and how the results of such monitoring will be communicated.
This process continues until such time as further analysis occurs