The Financial Planning Process

Question 1

When Must the Process Be Followed?

Answer 1

1. When the CFP® Professional agrees to provide, or provide financial planning, under a written client engagement agreement.
2. When, to act in the Client’s best interests, the CFP® Professional agrees to provide, or actually provides financial advice based on a given client’s personal or financial circumstances.
3. When a client reasonably believes that the CFP® Professional will provide, or have provided, financial planning.

Question 2

The 7 Steps

Answer 2

1. Understanding the Client’s Personal and Financial Circumstances
2. Identifying and Selecting Goals
3. Analyzing the Client’s Current Course of Action and Potential Alternative Courses of Action
4. Developing the Financial Planning Recommendation(s)
5. Presenting the Financial Planning Recommendation(s)
6. Implementing the Financial Planning Recommendation(s)
7. Monitoring Progress and Updating

Question 3

Step 1

Answer 3

Understanding the Client’s Personal and Financial Situation

Question 4

Step 1 – Understanding the Client’s Personal and Financial Situation

Answer 4

A. Identify the client (e.g., individual, family, business, organization)
B. Discuss financial planning needs and expectations of the client
C. Discuss the financial planning process with the client
D. Explain scope of services offered by the CFP® professional and his/her firm
E. Assess and communicate the CFP® professional’s ability to meet the client’s needs and expectations
F. Identify and resolve apparent and potential conflicts of interest in client relationships
G. Discuss the client’s responsibilities and those of the CFP® professional
H. Define and document the scope of the engagement with the client
I. Provide client disclosures
1. Regulatory disclosure
2. Compensation arrangements and material conflicts of interest

Question 5

Step 1 - (continued) Gathering Information Necessary to Fulfill the Engagement

Answer 5

A. Identify the client’s values and attitudes
1. Explore with the client personal and financial needs
2. Assess the client’s level of knowledge and experience concerning financial matters
3. Assess the client’s risk exposures (e.g., longevity, economic, liability, healthcare)
4. Assess the client’s risk tolerances (e.g., investment, economic, liability, healthcare)
B. Gather Data
1. Summary of assets (including cost basis information, beneficiary designations and titling)
2. Summary of liabilities (e.g., balances, terms, interest rates).
3. Summary of income and expenses
4. Estate planning documents
5. Education plans and resources
6. Retirement plan information (employer and individual)
7. Employee benefits information
8. Government benefits (e.g., Social Security, Medicare, Veteran’s Benefits)
9. Special circumstances (e.g., legal documents and agreements, family situations)
10. Tax returns and other documents
11. Investment account statements
12. Insurance policies (e.g., life, health, disability, liability)
13. Closely held business documents (e.g., shareholder agreements)
14. Information regarding inheritances, windfalls, and other large lump sums
C. Recognize need for additional information

Question 6

Step 2

Answer 6

Identify and Select Goals

Question 7

Step 2 – Identify and Select Goals

Answer 7

The CFP® Professional should assist the client(s) to
1. Identify goals that are mutually agreeable to the client(s) and to the planner
2. Prioritize goals
3. Quantify goals in terms of time horizon and dollars
4. Educate the client(s) relative to unrealistic goals and expectations

Question 8

Step 3

Answer 8

Analyzing the Client’s Current Course of Action and Potential
Alternative Courses of Action

Question 9

Step 3 - Analyzing the Client’s Current Course of Action and Potential Alternative Courses of Action

Answer 9

A. Evaluate and document the strengths and weaknesses of the client’s current financial situation
1. Financial status:
A. Statement of financial position/balance sheet
B. Cash flow statement
C. Budget if necessary
D. Capital needs analysis (e.g., insurance, retirement, major purchases)
2. Risk management and insurance:
D. Adequacy of insurance coverage
E. Retained risks
F. Asset protection (e.g., titling, trusts, business form)
G. Cash liquidity (e.g., emergency fund)
3. Benefits:
A. Government benefits (e.g., Social Security, Medicare)
B. Employee benefits
C. Association benefits
4. Investments:
A. Asset allocation suitability relative to stated goals, risk tolerance and risk capacity
B. Investment strategies and policies
C. Investment types
5. Taxes:
A. Current, deferred and potential tax liabilities
B. Types of income
C. Unique situations (e.g., stock options, international tax issues)
D. Maximizing tax minimization strategies
6. Retirement:
A. Retirement plans and strategies
B. Accumulation planning for retirement income
C. Distribution planning
7. Estate planning:
A. The client’s objectives
B. Estate documents
C. Estate tax liabilities current and future
D. Current ownership of assets
E. Beneficiary designations (e.g., retirement plans, insurance, trusts and wills)
F. Gifting strategies
8. Business ownership:
A. Business form
B. Employer provided benefits
C. Succession planning and exit strategy
D. Risk management
9. Education planning:
A. Expected cash needs
B. Sources of financing
C. Tax considerations
10. Other considerations:
A. Special circumstances (e.g., divorce, disabilities, family dynamics)
B. Inheritances, windfalls, and other large lump sums
C. Charitable gift planning
D. Eldercare (e.g., CCRCs, LTC, Nursing Home)
B. Identify appropriate tools to conduct analyses (e.g., financial planning software, research services)

Question 10

Step 4

Answer 10

Developing the Recommendation(s)

Question 11

Step 4 - Developing the Recommendation(s)

Answer 11

A. Synthesize conclusions from analysis of client’s financial status
B. Consider alternatives to meet the client’s goals and objectives
1. Conduct scenario analysis (e.g., changing lifestyles)
2. Conduct sensitivity analysis (e.g., changing assumptions such as inflation rate, rates of return,
time horizons)
C. Consult as needed with other professionals on technical issues outside of planner’s expertise
D. Develop the recommendations
1. Consider the client’s goals and priorities
2. Consider client attitudes, values and beliefs
3. Consider behavioral finance issues (e.g., anchoring, overconfidence, recency)
4. Consider how certain financial planning recommendations may change others
E. Document the recommendations

Question 12

Step 5

Answer 12

Presenting the Recommendation(s)

Question 13

Step 5 - Presenting the Recommendation(s)

Answer 13

A. Present financial plan to the client and educate the client(s) as needed
1. Review client goals
2. Revisit assumptions
3. Share observations and findings
4. Compare alternatives
5. Explain the reasons for the recommendations
B. Obtain feedback from the client and revise the recommendations as appropriate
C. Provide documentation of plan recommendations and any applicable product disclosures to client
D. Verify client acceptance of recommendations

Question 14

Step 6

Answer 14

Implementing the Recommendation(s)

Question 15

Step 6 - Implementing the Recommendation(s)

Answer 15

A. Create a prioritized implementation plan with timeline (a “to-do” list)
B. Assign responsibilities (e.g., CFP® professional, client, other professional(s))
C. Support the client directly or indirectly with implementation mechanics
D. Coordinate and share information, as authorized, with others
E. Define monitoring responsibilities with the client (e.g., explain what will be monitored, frequency of
monitoring, communication method(s)

Question 16

Step 7

Answer 16

Monitoring the Recommendation(s)

Question 17

Step 7 - Monitoring the Recommendation(s)

Answer 17

A. Discuss and evaluate changes to the client’s personal circumstances (e.g., aging issues, change in
employment)
B. Review the performance and progress of the plan with the client
C. Review and evaluate changes in the legal, tax and economic environments
D. Make recommendations to accommodate changed circumstances
E. Review the scope of work and redefine engagement as appropriate
F. Provide client ongoing support (e.g., counseling, education)

Question 18

Professional and Regulatory Standards

Answer 18

A. Adhere to CFP Board’s Code of Ethics and Professional Responsibility and Rules of Conduct
B. Understand CFP Board’s Disciplinary Rules and Procedures
C. Work within CFP Board’s Financial Planning Practice Standards
D. Manage practice risk (e.g., documentation, monitor client noncompliance with recommendations)
E. Maintain awareness of and comply with regulatory and legal guidelines

Question 19

A financial planner’s responsibilities include the following:

Answer 19

1. To take his or her obligations seriously and place client interest over personal gain
2. To use his or her experience and judgment carefully, considering the client’s situation
3. To demonstrate an appropriate level of knowledge
4. To treat the client in the same way as he or she would like to be treated in a professional relationship
5. To keep financial information in confidence, generally not sharing it with others
6. To avoid providing advice or brokerage services unless he or she is properly qualified and licensed
7. To discuss goals and objectives with each client and explain what each client can expect from the
   relationship

Question 20

A client’s responsibilities include the following:

Answer 20

1. To take an active role in shaping his or her financial future
2. To agree to realistic goals
3. To treat the planner with respect
4. To share relevant personal and financial information with the planner on a regular basis
5. To provide names, addresses, and telephone numbers of other advisors