Lesson 5 of Fundamentals: Internal Analysis Flashcards
Internal Environment
Defines the way people work, spend, save and think.
The focus is on the client’s…
Strengths and Weaknesses
Examples of Strengths:
- Age
- Income
- Amount of emergency funds
- Amount of savings, or savings rate
Examples of Weaknesses:
- Deficiencies in insurance coverage
- Too low emergency funds
- Poor asset allocation
- No estate plan
Internal Data
Impacts a client’s goals and behaviors.
INCLUDES:
- Life cycle position
- Attitudes and Beliefs
- Special Needs
- Financial Positions
- Client’s perception of financial position.
Life Cycle Position
Age
Marital Status
Dependents
Income and Net Worth
Age
- Age is the most important element in financial planning.
Age impacts:
- goals,
- priorities,
- risk, and
- timing.
EXAMPLE:
- A 30-year-old man may have goals of retiring by age 59, saving for a house, paying for a child’s education, life insurance for any dependents, and disability insurance for income replacement.
- Whereas a 62-year-old man will have different goals such as generating retirement income, transferring assets to heirs, minimizing estate taxes, and may not have a need for life insurance or disability insurance.
Marital Status
- Create the need or desire to provide for a spouse.
- Marital status may establish mutual goals for a new house, life insurance to meet goals in the event of an untimely death, disability insurance for income replacement, and liability insurance.
Dependents
- Can be children or elderly parents.
- The number of children impacts education funding decisions and life insurance needs.
Income and Net Worth
A client’s level of income and net worth create the need for tax minimization and asset protection.
Attitudes and Beliefs
- Client’s risk tolerance levels
- Savings and consumption habits
- Attitudes and Beliefs
All impact a client’s goals and behavior.
Clients Risk Tolerance Levels
A planner needs to distinguish between a client’s perception versus reality regarding the client’s risk tolerance levels. Perception versus reality is important.
EXAMPLE:
- Consider the typical technology investor in the 1990s versus today.
- Most technology investors from the 1990s could not take on enough risk. Today technology investors seem to have a much more realistic view of their risk tolerance.
Saving and Consumption Habits
Does the client have a propensity to consume today rather than save for tomorrow?
Their Attitudes and Beliefs
A planner should gather data on
- A client’s views about employment and retirement. (Does the client enjoy working or does she look forward to an early retirement)
- A client’s attitude regarding taxation. (Does the client feel he pays his fair share or would he prefer to pay more).
Crisis events with severe consequences
- Are not predictable, but individuals are likely to experience one or more during their lives that could impact their day-to-day, or future life, in many ways.
- Many times clients will have emotional reactions to events often making it difficult to make accurate, rational decisions at times.
- Depending on the type and severity of the crisis, the entire planning procedure may need to be revised and revised to adapt.
- Will best severe the client by being empathetic to the client’s situation and by demonstrating reliability and competency. This concludes knowing when to refer a client (even when the referral is to a mental health professional. Unpredicted crisis events (such as 2020) remind us to put a heavier emphasis on emergency fund planning.
- Planning steps that could alleviate some of the financial burden of a future crisis event.
Crisis Events
- Planner needs to show empathy
- Planned needs to demonstrate reliability and competency.
Comprehensive Planning with Emphasis on:
- Insurance
- Investments
- Emergency Funds
- Estate Planning
Best Practices for Crisis Events
- Checklists
- Timelines
Insurance
Discuss transferring risk to an insurance company,
- disability,
- liability,
- auto,
- home, and
- long-term care.
Investments (includes retirement holdings)
- Diversify portfolio holdings, and set measurable parameters for unexpected and unusual market volatility.
- Review clients investment policy statement (IPS) annually.
- Market flunctations often concern clients, their IPS will help them remember their overall goals and can help them navigate market corrections.
- Crisis events may lead client to changing asset allocation and or risk tolerance.
Emergency Funds
3-6 months of expenditures to ensure
- some time to transition from a crisis event such as loss of job, or medical event before disability policy pays.
- Ensure emergency fund are “ear marked” as such and not part of their daily use checking or savings account.
Estate planning
Ensure clients update/review their
- will,
- power of attorney,
- health care proxy and
- living will annually.
Financial Issues
Budgeting, investing, and saving
- Bank brokerage, retirement statements
- All debt obligations: car, house, student loan, credit cards, boat
- Insurance policies: life, health, disability, property
- Income: salaries, businesses, property
- Tax returns
Legal Issues
Estate planning, guardianship, and other arrangements such as trust.
- Wills, trusts, legal documents
- Does the client have a former spouse?
- If so, it may create an alimony spouse.
- Does the client have children from a prior marriage?
- If so, it may create a child support issue.
Job loss check list
- Determine what benefits to continue (COBRA) 60 days to elect COBRA
- File for unemployment
- Begin looking for work
- Which benefits can rollover to individual plans (life insurance, retirement plans)
- 60 days to roll over a 401K, some companies may allow the assets to remain part of the company plan.
- Typically 90 days to exercise options or restricted stock.
Know timings of these plans.
Check list for caregivers
List of government assistance available
- Social Security Disability [SSDI]
- Supplemental Social Security Income [SSI])
- Medicaid
notions of legal documents to secure
- Living Wills
- Special Needs Trust
- Letter of Intent
This may inclide include contacts in your area.
Special Needs
At each stage during the life a dependent with special needs will need comprehensive advice and strategies to address each of the following.
- Government benefits (MAINTAIN ELIGIBILITY of Government Benefits)
- Family and support factors
- Emotional Factors
- Financial issues
- Legal issues
