B.7 Financial planning process Flashcards
(17 cards)
Jennifer, a recent CFP graduate, has just started her job at a prestigious financial planning firm. On her first day, her manager provides her with a checklist to follow when engaging with a new client. Jennifer reviews the list and notices one of the steps seems out of place. Which of the following is NOT a step in the financial planning process?
A) Establishing the client-advisor relationship
B) Collecting client data
C) Analyzing the client’s financial status
D) Creating a financial plan
E) None of the above
None of the above
Explanation: All the options A through D are recognized steps in the financial planning process. Establishing the relationship sets the tone and terms of the engagement. Collecting client data ensures the advisor has all necessary information to make informed decisions. Analyzing the financial status gives a clear picture of the client’s current situation, and creating a plan is the outcome of the previous steps.
CFP(r) Practice Standards Reference
B.7 Financial planning process
Jonathan is a financial planner who has recently begun working with a new client, Maria. As part of the initial consultation, he wants to gather a comprehensive understanding of Maria’s financial status. In order to achieve a holistic view, he reviews several factors. Which of the following factors would NOT be considered a component of Maria’s financial status?
A) Net worth
B) Cash flow
C) Tax liabilities
D) Emotional intelligence
Emotional intelligence
Explanation: While emotional intelligence is important in many aspects of life, including making financial decisions and building client-advisor relationships, it is not a direct component of a client’s financial status. A client’s financial status typically includes their net worth (A), cash flow (B), and tax liabilities (C), among other financial metrics.
B.7 Financial planning process
Jane, a 45-year-old software engineer, has been discussing her retirement planning with her financial planner. She expresses concerns about various factors that might negatively affect her investments over the next 20 years. The planner starts explaining different types of risks that might impact her portfolio’s growth. Which of the following is NOT a category of risk the planner should mention?
A) Inflation risk
B) Market risk
C) Lifestyle risk
D) Credit risk
Lifestyle Risk
Explanation: While inflation risk (the risk that inflation will erode the purchasing power of an investment), market risk (the risk that the overall market will decline), and credit risk (the risk that a borrower will default on a debt) are well-recognized categories of financial and investment risk, “lifestyle risk” is not a standard risk category in the context of financial planning and investments. Lifestyle considerations are certainly important in comprehensive financial planning, but they don’t represent a category of investment risk in the same way that the other options do.
B.7 Financial planning process
A client is planning for retirement and has the following goals and circumstances:
Wants to retire in 20 years with a $2 million nest egg. Currently has $500,000 saved.
Assumes an annual return of 7% on their investments. How much does the client need to save annually to reach their retirement goal?
A. $10,000
B. $30,000
C. $50,000
D. $70,000
Using the HP 10bII+ financial calculator to solve the problem.
Calculate the Future Value (FV) of the current savings
n = 20 (years)
I/Y = 7 (annual interest rate)
PV = -500,000 (present value; the negative sign indicates outflow of cash, which in this case is your initial investment)
PMT = 0 (no additional payments yet)
FV = ? (this is what we want to compute)
Steps:
Turn on the calculator.
Press 20 N (sets n)
Press 7 I/Y (sets the annual interest rate)
Press 500,000 +/- PV (sets the present value as negative)
Press 0 PMT (sets PMT to 0)
Press FV to compute future value. The result should display the future value of the $500,000 in 20 years at 7%.
Subtract this result from $2,000,000 to find out the additional amount needed.
Compute the annual saving required
n = 20 (years)
I/Y = 7 (annual interest rate)
PV = 0 (starting from zero because we’re calculating new savings)
FV = (amount from step 2) (the additional amount needed in future value terms)
PMT = ? (we want to compute this)
Steps:
Press 20 N
Press 7 I/Y
Press 0 PV
Input the amount you got from step 2 (e.g., 65,165) and then press FV.
Now press PMT to compute the annual saving required.
The result displayed is the annual amount the client needs to save to reach their retirement goal in 20 years, given a 7% annual return.
Keep in mind that you may need to adjust for periodic compounding if the return isn’t compounded annually. In this example, we assume annual compounding.
B.7 Financial planning process
A client wants to buy a house in five years with a budget of $500,000. They currently have $50,000 saved and assume an annual return of 5%. How much does the client need to save annually to reach their goal?
A) $63,125
B) $72,151
C) $81,974
D) $92,865
$72,151
Explanation:To determine how much the client needs to save annually, we need to use the Future Value formula. The formula calculates the future value of an investment with a certain rate of return.
Using the values given, we can solve for the annual savings amount required to reach the $500,000 goal:
FV = $500,000 - $50,000 = $450,000
r = 5% / 1 = 0.05
n = 5 x 1 = 5
PMT = FV / [(1 - (1 + r)^-n) / r]
PMT = $450,000 / [(1 - (1 + 0.05)^-5) / 0.05] = $72,151
Therefore, the correct answer is B) $72,151.
B.7 Financial planning process
Which of the following is not a category of expenses in a personal budget?
A) Fixed expenses
B) Variable expenses
C) Discretionary expenses
D) Opportunity expenses
E) All of the above are categories of expenses in a personal budget
Opportunity expenses
Explanation: Opportunity expenses are not a category of expenses in a personal budget, but they are a concept in economics referring to the cost of an opportunity forgone in choosing one option over another.
B.7 Financial planning process
Which of the following is not a factor to consider when evaluating insurance needs?
A) Income
B) Assets
C) Liabilities
D) Emotional intelligence
Emotional intelligence
Explanation: Emotional intelligence is not a factor to consider when evaluating insurance needs, but it may affect a client’s risk tolerance or decision-making
B.7 Financial planning process
Which of the following is not a type of retirement plan?
A) 401(k) plan
B) Defined benefit plan
C) Roth IRA
D) Health savings account
Health savings account
Explanation: Health savings accounts are not a type of retirement plan, but they are a type of tax-advantaged account for eligible individuals with high-deductible health plans.
B.7 Financial planning process
A client wants to gift $100,000 to their child in five years. Assume an annual return of 6%. How much does the client need to save annually to reach their goal?
A) $14,227
B) $17,740
C) $18,272
D) $21,149
Annuity Payment = (Future Value x r) / ((1 + r)^n - 1)
where:
Future Value = $100,000
r = 6% (the annual rate of return)
n = 5 (the number of years)
So, plugging in the values, we get:
Annuity Payment = ($100,000 x 0.06) / ((1 + 0.06)^5 - 1) = $17,7340 (rounded)
Therefore, the client needs to save $17,7340 (rounded) annually for the next five years to reach their goal of gifting $100,000 to their child.
B.7 Financial planning process
A client wants to save $500,000 for their child’s college education in 18 years. Assume an annual return of 8%. How much does the client need to save annually to reach their goal?
A) $13,351
B) $18,724
C) $21,757
D) $25,179
$13,351
using HP 10bII+
Ensure compounding is set to 1
enter the following:
500,000 FV
18 N
8 I/YR
PMT
B.7 Financial planning process
Which of the following is not a factor to consider when selecting an investment?
A) Risk
B) Return
C) Liquidity
D) Emotional intelligence
Emotional intelligence
Explanation: Emotional intelligence is not a factor to consider when selecting an investment, but it may affect a client’s risk tolerance or decision-making.
B.7 Financial planning process
Which of the following is not a step in the financial planning process?
A) Establishing and defining the client-planner relationship
B) Analyzing the client’s financial status
C) Implementing the financial plan
D) Developing the client’s emotional intelligence
E) Monitoring the financial plan
Developing the client’s emotional intelligence.
Explanation: Developing the client’s emotional intelligence is not a step in the financial planning process, but it may be a goal or outcome of the process.
B.7 Financial planning process
A client plans to retire in 20 years and aims to have an annual retirement income of $100,000 for 30 years after retirement. Assuming a yearly return of 5%, approximately how much does the client need to save annually starting today to meet this goal?
A. $20,000
B. $35,000
C. $46,000
D. $55,000
Approximately $46,000
Explanation: Retirement Phase: Determine the present value of the desired retirement annuities (30 years of $100,000 each at 5% per annum).
Savings Phase: Determine the annual savings needed to accumulate the amount from step 1 in 20 years at 5%.
Step 1: Retirement Phase
To determine the present value of the desired retirement annuities, we’ll use the Present Value of Ordinary Annuity formula:
Using the HP 10bII+ calculator for this:
- Turn on the calculator.
- Press [CLEAR ALL] to reset all settings, and ensure the calculator is set to END.
- Enter 30, then press [N] (This sets the number of periods).
- Enter 5, then press [I/Y] (This sets the interest rate).
- Enter 100,000, then press [PMT] (This sets the periodic payment).
- Press [PV] to compute the present value. This gives you the present value needed at the beginning of retirement. (should have approx $1,537,245)
Step 2: Savings Phase
Using the HP 10bII+ calculator:
- Set (FV to 1,537,245 - The present value computed from step 1 is used the future value (since the amount you save now will be used to fund the retirement income).
- Set ( N ) to 20 (for 20 years).
- Set ( I/Y ) to 5 (for the annual return of 5%).
To solve the yearly payment (PMT):
- Enter the value you got from step 1 (1,537,245), then press ([FV].
- Enter 20, then press [N].
- Enter 5, then press [I/Y].
- Press [PMT] to compute the annual savings needed (should be approx 46,460)
B.7 Financial planning process
Which of the following was a primary financial challenge for Millennials during 2007-2009?
A) Booming stock market.
B) Low student loan debt.
C) The Great Recession.
D) Sudden increase in income.
The Great Recession
Explanation: The article identifies the Great Recession as a defining feature of the financial setbacks Millennials faced during 2007-2009.
B.7 Financial planning process
A significant difference between Millennial women and previous generations is:
A) Millennial women prefer to let their spouses manage finances.
B) Millennial women are less likely to earn more than their partners.
C) Millennial women often delegate financial decision-making to financial planners.
D) Millennial women have greater financial independence and agency.
Millennial women have greater financial independence and agency
Explanation: The article notes that younger women, especially Millennial women, often manage their finances and are primary decision-makers in their households.
B.7 Financial planning process
You are a financial planner and have recently completed a discovery meeting with a prospective client to create a comprehensive financial plan. The day after the meeting, the client calls you and informs you that he forgot to mention substantial 401(k) assets held in a previous employer’s plan. The client is currently employed and participating in a new 401(k) plan. The previous employer has given him a 60-day window to decide on one of the following options for the old 401(k) assets:
1) Take a full cash distribution.
2) Direct rollover to a new IRA.
3) Direct transfer to the new employer’s 401(k) plan.
The client seeks your advice on the best course of action for these assets.
The client seeks your advice on the best course of action for these assets. How should you communicate your recommendation to the prospective client?
A) During the phone conversation
B) Secure email through firm servers
C) Certified letter, retaining copies for documentation
D) As part of the client’s comprehensive financial plan
As part of the client’s comprehensive financial plan
Explanation: Communicating such a recommendation should be done within the context of the client’s comprehensive financial plan. This ensures that the recommendation is tailored to the client’s overall financial situation and goals. It also emphasizes the planner’s commitment to holistic planning and integrates the new information with the broader financial strategy. While other options might be quicker or more convenient, they might not allow for the same depth of analysis and integration with the client’s overall financial picture.
B.7 Financial Planning Process
Sophia, a CFP® professional, is reviewing a financial plan with her client, Mrs. Thompson. Despite Mrs. Thompson’s considerable assets, Sophia has identified that some of the client’s aspirations might not be feasible. At which phase of the financial planning process are such unattainable aspirations typically addressed?
A) Introducing the financial planning proposals.
B) Gathering detailed personal and financial data.
C) Determining and choosing objectives.
D) Evaluating the client’s present strategy.
Determining and choosing objectives.
Explanation: During the “Determining and choosing objectives” phase of the financial planning process, the feasibility and realism of the client’s goals are typically assessed. It is at this stage that the CFP® professional will address any goals that may be unrealistic given the client’s current and expected financial situation.
B.7 Financial planning process
