Chapter 1 Flashcards
The following six items must be considered when determining a client’s goals and objectives:
- Time Horizon
- Liquidity Needs
- Income vs. Growth
- Goal Achievement
- Canada Revenue Agency
- Primary and Secondary Objectives
The first and possibly most important question to ask a client is about his or her…..
time horizon
The discussion of almost every other issue related to the financial plan, particularly risk, will be colored by the client’s …
time horizon
To provide a cushion in the event of a financial emergency. A rough guideline is that a client should have the equivalent of how many months of expenses saved in an emergency fund?
Three to Six months
The overwhelming concern for many clients is….
Will I have enough?
Clients evaluate their portfolios frequently and will act on the short-term gains or losses experienced during the evaluation period, rather than focusing on the longer-term investment horizon. This attitude is known as…
myopic loss aversion
The two factors that influence a client’s risk tolerance are the client’s….
demographic and the stability of their income.
Demographers predict behavior by classifying clients by…
age, wealth, marital status, gender, income, and occupation
Stability of income makes clients more
tolerant to risk; clients with stable incomes are more open to
investing in volatile securities
Clients who are uncertain about their income or employment prefer to invest in
more conservative investment products, such as cashable GICs, that offer high liquidity but a lower return
The four stages of the life cycle approach to financial planning are as follows:
- Accumulation
- Consolidation
- Financial Independence
- Gifting
In which of the four stages of the life cycle approach is described?
The individual has just entered the workforce, has relatively few assets, and is facing
significant debts, such as a mortgage or the repayment of student loans. The major asset
is usually the equity in a home. Income is relatively low, and priorities include meeting
the expenses of daily living. Often, that income is reduced during child bearing and
rearing and while paying off the mortgage debt. However, since the individual has a very
long-term horizon, he or she may invest in assets that could provide maximum growth.
Accumulation
In which of the four stages of the life cycle approach is described?
This occurs when income comfortably exceeds expenses, either because income has increased (as a career becomes well-established) or expenses have decreased (as the mortgage has been repaid, the children have become independent and the individual has bought almost everything he or she wants). A significant portfolio has been built and, even if retirement is many years away, a more balanced portfolio with a slightly heavier portion of fixed-income securities is adopted.
Consolidation.
In which of the four stages of the life cycle approach is described?
In this phase, an individual’s living expenses are financed mainly through investment and pension income. The individual is no longer in the workforce and is, therefore, unable to make up for any significant losses in capital. Day-to-day income may depend entirely on the income generated by the portfolio, and any decline in income could mean sacrifices in lifestyle. However, the individual’s time horizon may still be 20 years or more. During this stage, the portfolio is invested in blue-chip securities, with emphasis on current income and protection of purchasing power.
Financial independence
In which of the four stages of the life cycle approach is described?
As the individual realizes that his or her financial assets exceed his or her needs, he or she might decide to share the wealth with family or charitable organizations. In this case, the time horizon becomes not the individual’s personal needs, but the time horizon of the individual or institution to which he or she wishes to gift the money. For example, assets to be gifted to one’s children might be used to pay down the mortgage on a home or remain invested for the retirement of the children themselves.
Gifting
