The Case Approach to Financial Planning: Bridging the Gap between Theory and Practice, Fourth Edition (Revised)

The Case Approach to Financial Planning

Bridging the Gap between Theory and Practice, Fourth Edition (Revised)

John E. Grable, Ph.D., CFP®

Ronald A. Sages, PH.D., AEP®, CFP®, CTFA

Michelle E. Kruger

National Underwriter Academic Series

ISBN 978-1-949506-39-6

This publication is designed to provide accurate and authoritative information in regard to the subject matter covered. It is sold with the understanding that the publisher is not engaged in rendering legal, accounting or other professional service. If legal advice or other expert assistance is required, the services of a competent professional person should be sought. – From a Declaration of Principles jointly adapted by a Committee of The American Bar Association and a Committee of Publishers and Associations.

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Fourth Edition (Revised)

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ABOUT THE AUTHORS

JOHN E. GRABLE, PH.D., CFP®

Professor and Athletic Association Endowed Professor of Financial Planning at The University of Georgia

Professor John Grable teaches and conducts research in the Certified Financial Planner™ Board of Standards Inc. undergraduate and graduate programs at the University of Georgia where he holds an Athletic Association Endowed Professorship. Prior to entering the academic profession, he worked as a pension/benefits administrator and later as a Registered Investment Adviser in an asset management firm. Dr. Grable has served the financial planning profession as the founding editor of the Journal of Personal Finance and co-founding editor of the Journal of Financial Therapy and Financial Planning Review. He is best known for his work in the areas of financial literacy and education, financial risk-tolerance assessment, behavioral financial planning, and evidence-based financial planning. He has been the recipient of numerous research and publication awards and grants and is active in promoting the link between research and financial planning practice where he has published over 150 refereed papers, co-authored several textbooks, co-authored a financial planning communication book, and co-edited a financial planning and counseling scales book. Since earning his Ph.D., Dr. Grable has served on the Board of Directors of the International Association of Registered Financial Consultants (IARFC), as Treasurer and President for the American Council on Consumer Interests (ACCI), and as Treasurer and board member for the Financial Therapy Association. He has received numerous awards, including the prestigious Cato Award for Distinguished Journalism in the Field of Financial Services, the IARFC Founders Award, the Dawley-Scholer Award for Faculty Excellence in Student Development, and the ACCI Mid-Career Award. He currently writes an economics and investing column for the Journal of Financial Service Professionals and provides research and consulting services through the Financial Planning Performance Lab.

RONALD A. SAGES, PH.D., AEP®, CFP®, CTFA, EA

Adjunct Professor at The University of Georgia

Lecturer in Wealth Management at Columbia University, New York City

Ron Sages is an Adjunct Professor of Personal Financial Planning at the University of Georgia, Athens, Georgia, where he teaches in the CFP® Board Registered Master’s Program. Courses he currently teaches for UGA include Advanced Estate Planning and Practice Management. Dr. Sages also serves as a Lecturer in Wealth Management at Columbia University in New York City. Prior to joining both academic institutions, he was an Assistant Professor of Personal Financial Planning at Kansas State University from 2011 – 2019 where he was a 2016 recipient of the GPIDEA Faculty Excellence Award for his instruction in the Case Studies/Program Development Course. In addition to his responsibilities in academia, Dr. Sages is a Senior Investment Officer and Director of Personal Financial Planning for Eagle Ridge Investment Management, LLC, a wealth management firm, based in Stamford, Connecticut. A former wealth management entrepreneur for twenty-five years, including an additional twenty years of Money Center Bank experience, Ron earned his doctorate in Personal Financial Planning from Kansas State University in 2012 and his MBA in Finance and Taxation from the University of Connecticut in 1979. His research interests are in behavioral finance, risk management and financial literacy. As a financial planning practitioner and researcher, Ron aspires to bring applied research to financial planning practitioners in an effort to provide practical solutions to client-focused challenges. Ron is a member of the Stamford (CT) CFA Society, Estate Planning Council of Lower Fairfield County (CT), the National Association of Estate Planning Councils, Financial Planning Association, and the Financial Therapy Association.

MICHELLE E. KRUGER

The University of Georgia

Michelle Kruger is a Ph.D. candidate with a concentration in Financial Planning at The University of Georgia (UGA). She graduated magna cum laude with a B.B.A. in Finance from the Terry College of Business at UGA in 2015. Michelle teaches classes in computer application in financial planning, as well as advanced financial planning seminar courses. Her research interests include financial planning interventions, risk tolerance assessment, and behaviors associated with building wealth. In addition to her graduate studies, Michelle works as a research assistant at the Financial Planning Performance Lab, the nation’s only applied clinical facility designed to obtain evidence about the effectiveness of the financial planning process. She has worked as a financial planning analyst at Elwood & Goetz Wealth Advisory Group, a fee-only, comprehensive financial planning firm located in Athens, Georgia. She also has served as a financial counselor at the Aspire Clinic, an interdisciplinary teaching and research institution, applying marriage and family therapy theories and techniques to her work with financial clients.

ACKNOWLEDGMENTS

Creating a book of this magnitude is not without challenges. Several individuals have been instrumental in keeping the project on task. First and foremost, we wish to thank our spouses and partners for being patient and supportive during the writing and editing process. As we have all learned, writing a book is a continuous process, and without the support of our families, the process would have stopped long ago. We are also indebted to our editor at The National Underwriter Company—Jason Gilbert. Jason has shown unwavering confidence in this book. Without his editorial leadership this new revised edition of the book would never have come to fruition. Jason’s encouragement, patience, and editing skills made this revision come together. Thanks also go to Jay Caslow for fully supporting this book from revision to publication. The anonymous reviewers who spent countless hours evaluating chapters prior to publication and those who have helped improve the book’s content also deserve sincere thanks, particularly Sherman Hanna, Luke Dean, David Nanigian, Carolynn Tomin, and Joanne Snider. We are also grateful for the early work Dr. Ruth Lytton and Derek Klock provided on this project.

As a team, we are also thankful for the opportunity to have worked with undergraduate, graduate, and certificate financial planning students over the past decade. The idea of this case book was formulated through this daily work with students. We are immensely thankful for what each student has taught us about what works in and outside the classroom. The writing of this book has reminded us that to teach is to learn again. Each student we have had in class has challenged us to strive to find better ways to explain and teach financial planning concepts. Additionally, we are very grateful to our colleagues around the country (and world) who have adopted this book and helped make this revision possible. We are honored to be a part of your professional development and learning experience. We certainly hope that you find the material in this book a benefit to your career.

John Grable

Ron Sages

Michelle Kruger

DEDICATION

To Emily, with love, John

To Betsy, Laurie, Patti & Lindsay, with all my love and devotion, Ron

To Joey, with love for you and gratitude for the coffee, Michelle

PREFACE

HOW TO USE THIS BOOK

Since the first edition of this book was published, the demand for more comprehensive and realistic cases has increased dramatically. A Case Approach to Financial Planning: Bridging the Gap between Theory and Practice, Fourth Edition has been written to meet this demand. Because of its unique focus, it is very important that readers fully understand the core assumptions imbedded in the book before reading chapters or completing case assignments. The following points comprise the book’s underlying assumptions:

•This book is a companion to Writing a Financial Planning: A Seven Step Process written by John Grable, Michelle Kruger, and Megan Ford. In fact, some of the material—particularly descriptions of analytical processes—matches what is presented in Writing a Financial Planning: A Seven Step Process.

•This book assumes that readers already have a foundation in understanding and applying the process of financial planning or are currently reading Writing a Financial Planning: A Seven Step Process; thus, the chapters in this book focus primarily on the analysis of a client’s current situation and the development of strategies to help a client reach his or her goals.

•This book is intended for use in mid-level or capstone courses in financial planning programs at colleges, universities, and certificate programs. It is appropriate for use at the undergraduate, graduate, and certificate levels. When used at the undergraduate level, it is assumed that the book will be used in the final course of a student’s last year of study, in conjunction with Writing a Financial Planning: A Seven Step Process or a similar textbook. Although a review of key financial planning assumptions is provided in each core content chapter, this book is not—nor should it be considered—a replacement for a content specific (e.g., investments, retirement, etc.) financial planning textbook.

•To successfully complete case assignments and questions, students are assumed to have already completed or be enrolled in classes in the six core areas of financial planning: Financial Situation Analysis, Tax Planning, Insurance (Risk Management) Planning, Investment Planning, Retirement Planning, and Estate Planning. This book offers a review of important concepts and strategies, but in no way are the core content chapters intended to provide a comprehensive overview of each financial planning topic.

•This book is not intended for use solely as a CFP® examination study guide. The comprehensive cases, the end-of-chapter materials, and the mini-cases were designed to help faculty and students assess minimum financial planning competencies. The cases can certainly help those who wish to sit for a national financial planning certification examination; however, the material is not intended for that purpose exclusively.

•A Case Approach to Financial Planning: Bridging the Gap between Theory and Practice, Fourth Edition is intended to present timely and accurate information; however, the strategies, tools, and techniques presented are designed for educational purposes only. Although the authors and outside reviewers have reviewed the information, data analysis methods, recommendations, strategies, and other material, some material presented in the text could be affected by changes in tax law, court findings, or future interpretations of rules and regulations. Therefore, the accuracy and completeness of the information, data, and opinions in the book are in no way guaranteed. The authors specifically disclaim any personal, joint, or corporate (profit and nonprofit) liability for loss or risk incurred as a consequence of the content of the book.

FEATURES OF THE BOOK

Underlying the development of this text and the various student learning experiences presented throughout the book is Bloom’s taxonomy of cognitive skills.¹ For example, knowledge and comprehension are covered through the traditional presentation and testing of financial planning concepts. Application and analysis are fostered through discussions of planning strategies, where students are challenged to evaluate the advantages and disadvantages of each, relative to the needs of the individual client situation. The book is designed to help readers build synthesis and evaluation skills. Designing an integrated, actionable plan matched to a client’s needs, capacities, and desires requires competency across Bloom’s taxonomy of cognitive skills.

OVERVIEW OF CHAPTERS

One of the purposes of a financial planning case course is to provide a forum for students to develop and critique financial planning strategies matched to a client’s needs. For many students, the capstone course is the only place in a college or university curriculum where all core content planning areas are reviewed and integrated in the context of a specific client situation. This book provides a variety of commonly used financial planning strategies matched to each core content planning area for in-class and out-of-class review and discussion. In addition, an assortment of computational examples and end-of-chapter problems are presented in each chapter.

Each chapter lists a set of learning objectives relevant to the chapter. This is followed by a listing of CFP® Board principal knowledge topics. These topics correspond to financial planning learning outcomes that underlie the CFP® national certification examination. Keep in mind that the content within the chapters may not match the order in which the topics are listed. Important equations, relevant to conducting a financial planning analysis, are then listed. Financial planning strategies make up the core of each chapter. Each chapter concludes with an opportunity to apply calculation and strategic planning skills through quantitative/analytical mini-case problems. The elements of the book include:

Part I: Review of the Financial Planning Process and Computational Skills for Developing a Financial Plan

1.The Financial Planning Process. This chapter describes the general financial planning process and outline of the book.

2.Computations for Financial Planning. This chapter provides a comprehensive review of key concepts related to time value of money and general personal finance calculations.

Part II: Analyzing and Evaluating a Client’s Financial Status to Plan for Client Earnings

3.Cash Flow and Net Worth Planning. This chapter examines the process of analyzing and evaluating a client’s current financial situation. The chapter offers conventional strategies that financial planners regularly use to improve a client’s cash flow and net worth position.

4.Income Tax Planning. The purpose of this chapter is to review the basic steps involved in analyzing and evaluating a client’s current tax planning situation. In addition, the chapter provides a review of several widely used tax planning strategies.

Part III—Analyzing and Evaluating a Client’s Financial Status to Plan for Client Risk Protection

5.Life Insurance Planning. This chapter reviews the basic steps involved in a financial planner’s analysis and evaluation of a client’s current life insurance situation. The chapter also presents popular life insurance planning strategies.

6.Health Insurance Planning. This chapter reviews the fundamental steps associated with a financial planner’s analysis of a client’s current health insurance situation. Common health insurance strategies are presented.

7.Disability Insurance Planning. This chapter reviews the steps involved in conducting a disability insurance planning analysis. The chapter includes several disability insurance planning strategies that can be adapted to meet client needs.

8.Long-Term Care Insurance Planning. This chapter examines the process underlying a financial planner’s analysis and evaluation of a client’s long-term care insurance situation. The chapter also presents common product and procedural strategies.

9.Property and Liability Insurance Planning. This chapter considers issues related to maximizing a client’s plan for protecting property and minimizing liability exposures. The chapter reviews the fundamental steps in the analysis and evaluation of a client’s current property and liability situation and presents examples of popular strategies used to protect client assets.

Part IV—Analyzing and Evaluating a Client’s Financial Status to Plan for the Growth and Distribution of Assets

10.Investment Planning. In this chapter, important issues surrounding the analysis of a client’s investment situation are explored. The investment planning process is reviewed and examples of how to develop strategies to meet client needs are provided. How investment strategies can influence a client’s financial goals is explained.

11.Education Planning. The steps typically followed when analyzing and eval-uating a client’s current educational funding situation are reviewed. A selection of education funding strategies demonstrating how some financial planners strategize when planning for a client’s education situation is presented.

12.Retirement Planning. This chapter describes the analysis and evaluation of a client’s current situation and reviews common retirement planning strategies that can be used to meet retirement objectives. Strategies to develop recommendations for retirement planning across the life cycle are also provided.

13.Estate Planning. Essential steps for conducting an estate planning analysis are reviewed. A brief outline of how financial planners estimate a client’s gross and taxable estate is provided. Other important issues are presented, such as transferring assets, providing for survivors or other legacy needs, and planning for incapacitation and other end-of-life decisions. The chapter ends with a review of how certain estate planning strategies can be used in the financial planning process.

Part V—Financial Planning Case Studies

14.Financial Planning Cases. A variety of multiple-choice cases appear in this chapter. The cases in this section of the book have been designed to help students develop assessment, evaluation, and decision choice competencies. Student success is derived by utilizing correct data inputs to optimize question choices. Many of the case questions require a mathematical analysis and other calculations, most of which can be made using a time value of money calculator. A financial planning ethics case is also presented in the unique format of a dialogue. The ethic’s case is designed to test students’ knowledge of securities rules and financial planning practice standards.

Case Studies and Quantitative/Analytical Mini-Case Problems

Although successfully developing a financial plan for a client situation is rewarding, the downside to conducting a case analysis is that the process can sometimes seem far removed from reality. This book attempts to bridge the gap between theory and practice by providing short cases and computational problems at the end of chapters 3 through 13. These chapter case studies illustrate how financial planning strategies can be developed and shaped into tools and matched to a client’s situation.

End-of-chapter quantitative and analytical mini-cases were written to challenge students to practice calculations and critical thinking. These skills are essential to the application, synthesis, and evaluation competencies needed to artfully analyze a client’s situation, identify and match workable strategies to a client’s situation, and to integrate these strategies into actionable recommendations for implementation.

This icon represents a unique feature of the book. When this icon accompanies a quantitative and analytical mini-case, the question can be answered using the Financial Planning Analysis Excel™ package included with this book.

All of the cases were designed to remind students that despite the focus on analytical skills and detailed factual knowledge, clients—real people—and their financial goals and dreams are truly the reason for financial planning. As noted earlier, financial planners help clients, people with whom financial planners may develop relationships that span decades and often even generations, plan for a better financial future. In this sense, A Case Approach to Financial Planning: Bridging the Gap between Theory and Practice, Fourth Edition is focused on helping the next generation of financial planners truly practice financial planning as a humanistic science.

Words of Advice

The case study methodology presented in this book was developed and tested by the instructors at several universities over the past two decades. The outcomes associated with these methods have been successful. During an eighteen-year period, teams of undergraduate students that have used this book, and the tools and techniques presented here, have competed in and won numerous national collegiate financial planning championships. Many students who have applied the concepts presented in this book have gone on to pursue successful careers in the field of financial planning.

Four aspects of student success are tied directly to how well students do when working on the development of financial planning strategies when solving cases:

•First, successful students tend to have a strong proficiency in the use of personal finance calculators.

•Second, the best students have an interest in working with computer spreadsheets and confirming calculations obtained on their calculator with spreadsheets.

•Third, successful students do extremely well at applying critical thinking skills. Exploring issues, looking for the integration of concepts, and willingness to research and use reference materials are all indicators of success for those engaged in the case study method.

•Finally, the most successful students understand that developing a plan in response to a case situation—especially a comprehensive case—takes time. A commitment to taking the time to analyze a situation, develop strategies, craft workable client-centered recommendations, and work on ways to implement and monitor recommendations is critical to plan writing success.

Our sincere hope is that you find the materials, quantitative/analytical mini-case problems, and mini cases helpful as you improve your financial planning skills. We are always interested in feedback about the book. Please feel free to reach out with comments and suggestions.

John Grable

Ron Sages

Endnote

1.Bloom, B.S. Taxonomy of Educational Objectives, Handbook I: The Cognitive Domain (New York: David McKay, 1956).

ABBREVIATIONS COMMONLY USED IN FINANCIAL PLANNING

Alternative Minimum Tax—AMT

Assets Under Management—AUM

Accredited Investment Fiduciary®— AIF®

Certificate of Deposit—CD

Certified Financial Planner Board of Standards, Inc.—CFP Board

Certified Financial Planner® Certification Examination—CFP® exam

Certified Investment Management Analyst—CIMA

Certified Investment Management Consultant— CIMC (No longer awarded)

Certified Life Underwriter—CLU

Charitable Remainder Annuity Trust—CRAT

Charitable Remainder Unitrust—CRUT

Chartered Financial Analyst—CFA

Chartered Financial Consultant—ChFC

Chartered Investment Counselor—CIC

Chartered Life Underwriter—CLU

Consolidated Omnibus Budget Reconciliation Act of 1986—COBRA

Coverdell Education Savings Account—Coverdell ESA or CESA

Discretionary Cash Flow—DCF

Employee Retirement Income Security Act of 1974—ERISA

Enrolled Agent—EA

Errors and Omissions— E&O

Exchange Traded Fund—ETF

Financial Industry Regulatory Authority—FINRA

Financial Planning Association—FPA

Flexible Spending Account—FSA

Grantor Retained Annuity Trust—GRAT

Grantor Retained Unitrust—GRUT

Guaranteed Auto Protection Insurance—GAP Insurance

Health Insurance Portability and Accountability Act of 1996—HIPAA

Health Savings Account—HSA

High Deductible Health Plan—HDHP

Homeowners Policy—HO Policy

Incentive Stock Option—ISO

Individual Retirement Arrangement—IRA

Investment Advisor Representative—IAR

Investment Advisor Registration Depository —IARD

Investment Policy Statement—IPS

Internal Revenue Code—IRC

Internal Revenue Code Section 529—529 Plan

Internal Revenue Service—IRS

Irrevocable Life Insurance Trust—ILIT

Joint Tenancy with the Right of Survivorship—JTWROS

Long Term Care—LTC

Million Dollar Round Table—MDRT

National Association of Insurance Commissioners— NAIC

National Association of Personal Financial Advisors—NAPFA

North American Securities Administrators Association—NASAA

Payable on Death—POD

Personal Automobile Policy—PAP

Personal Financial Specialist—PFS

Qualified Personal Residence Trust— QPRT

Qualified Terminable Interest Property Trust—QTIP Trust

Real Estate Investment Trust—REIT

Registered Investment Advisor—RIA

Securities Investor Protection Corporation—SIPC

Self-Regulatory Organization—SRO

Transferable on Death—TOD

Uniform Gift to Minors Act Account—UGMA Account

Uniform Prudent Investor Act—UPIA

Uniform Transfers to Minors Act Account—UTMA Account

U.S. Securities and Exchange Commission—SEC

Variable Universal Life—VUL

SUMMARY TABLE OF CONTENTS

About the Authors

Acknowledgments

Dedication

Preface

Abbreviations

Part I: Review of the Process and Computational Skills for Developing a Financial Plan

Chapter 1: A Review of the Financial Process

Chapter 2: Computations for Financial Planning

Part II: Analyzing and Evaluating a Client’s Financial Status to Plan for Client Earnings

Chapter 3: Cash Flow and Net Worth Planning

Chapter 4: Income Tax Planning

Part III: Analyzing and Evaluating a Client’s Financial Status to Plan for Client Risk Protection

Chapter 5: Life Insurance Planning

Chapter 6: Health Insurance Planning

Chapter 7: Disability Insurance Planning

Chapter 8: Long-term Care Insurance Planning

Chapter 9: Property and Liability Insurance Planning

Part IV: Analyzing and Evaluating a Client’s Financial Status to Plan for the Growth and Distribution of Assets

Chapter 10: Investment Planning

Chapter 10 Appendix: Modern Portfolio Statistics – Mean-variance Analysis

Chapter 11: Education Planning

Chapter 12: Retirement Planning

Chapter 13: Estate Planning

Part V: Financial Planning Case Studies

Chapter 14: Financial Planning Cases

Case 1: The Zimmer Case

Case 2: The Ande Case

Case 3: The Roth Case

Case 4: The Shim Case

Case 5: The Butterfield Case

Case 6: The Little Case

Case 7: The Cantrell Case

Case 8: The Alpha Case

Case 9: The Edwards Case

Case 10: The Mayfield Case

Case 11: The Dion Case

Case 12: The Graham Case

Case 13: The Tun Case

Case 14: The Menjivar Case

Case 15: The Case of the Good Gone Bad

Case 16: The Maria and Sancho Ruiz Case

Index

DETAILED TABLE OF CONTENTS

About the Authors

Acknowledgments

Dedication

Preface

Abbreviations

Part I: Review of the Process and Computational Skills for Developing a Financial Plan

Chapter 1: The Financial Planning Process

The Case Study Approach

Financial Planning Defined

The Financial Planning Process

The Role of Financial Planners

Financial Planning Practice Standards and Ethics

The Role of Fiduciaries

Financial Planning as a Career

Why Case Studies?

Chapter 2: Computations for Financial Planning

Financial Planning Computational Strategies

Planning Strategy 1: Understand How Investors Earn a Rate of Return

Planning Strategy 2: Calculate Holding-Period Returns

Planning Strategy 3: Calculate an Average Annual Return

Planning Strategy 4: Calculate a Weighted Average Return

Planning Strategy 5: Describe and Calculate Different Types and Forms of Interest Rates

Planning Strategy 6: Describe Common Risk and Return Factors

Planning Strategy 7: Make Time Value of Money Calculations

Planning Strategy 8: Estimate a Solution to a Fluctuating Payment Problem

Planning Strategy 9: Calculate an Internal Rate of Return

Planning Strategy 10: Develop and Use a Loan Amortization Schedule

Part II: Analyzing and Evaluating a Client’s Financial Status to Plan for Client Earnings

Chapter 3: Cash Flow and Net Worth Planning

Cash Flow and Net Worth Planning Strategies

Planning Strategy 1: Develop a Cash Flow Statement

Planning Strategy 2: Develop a Balance Sheet

Planning Strategy 3: Use Financial Ratios to Assess a Client’s Financial Situation

Planning Strategy 4: Refinance Mortgage with a Fixed Rate, Fixed-Term Loan

Planning Strategy 5: Obtain, or Refinance with, an Adjustable Rate Mortgage (ARM)

Planning Strategy 6: Use an Interest-Only Mortgage

Planning Strategy 7: Consolidate Debts with a Home Equity Loan

Planning Strategy 8: Establish a Home Equity Line of Credit as a Source of Emergency Funds

Planning Strategy 9: Pay off Unsecured Debt with Assets Earning Lower Rates of Return

Planning Strategy 10: Identify Client Expenses That Can Be Reduced

Planning Strategy 11: Use the Cash Value of Life Insurance as an Emergency Source of Income

Planning Strategy 12: Use Financial Assets to De-Lever Mortgage Debt

Planning Strategy 13: Implement an Income Shifting Strategy When Appropriate

Chapter 4: Income Tax Planning

Tax Planning Strategies

Planning Strategy 1: Apply the Tax Cuts and Jobs Act of 2017

Planning Strategy 2: Estimate a Client’s Tax Liability

Planning Strategy 3: Convert Taxable Interest to Tax-Exempt Interest

Planning Strategy 4: Consider Investing in a Roth rather than a Traditional IRA

Planning Strategy 5: Compare 529 Plans, UGMAs, and UTMAs to Save Taxes and Pay for College

Planning Strategy 6: Match Withholdings to a Client’s Tax Liability

Planning Strategy 7: Maximize Deductions for Adjusted Gross Income

Planning Strategy 8: Increase Tax Credit Items

Planning Strategy 9: Maximize Pre-tax Retirement Plan and Benefit Contributions

Planning Strategy 10: Maximize Qualified Dividends while Reducing Interest Received

Planning Strategy 11: Consider Long-term versus Short-term Capital Gains

Planning Strategy 12: Donate Appreciated Investments to Charity

Planning Strategy 13: Shift Medical Expenses to a Lower Income Year

Planning Strategy 14: Recommend that a Client Establish a Business

Planning Strategy 15: Use Like-Kind Exchange Strategies Appropriately

Planning Strategy 16: Describe the Difference between Realized and Unrealized Gains

Planning Strategy 17: Calculate the Exclusion Ratio to Reduce the Tax on Annuity Distributions

Planning Strategy 18: Compare Taxable and Tax-free Interest on a Taxable Equivalent Yield Basis

Planning Strategy 19: Understand When a Client Should Itemize Deductions

Planning Strategy 20: Review Cost Basis Rules when Advising Clients about Gifts

Planning Strategy 21: Consider Roth IRA Conversion Options

Planning Strategy 22: Understand Passive Activity Rules

Planning Strategy 23: Apply a Systematic Approach when Developing Tax Planning Recommendations

Planning Strategy 24: Incorporate Elements of the CARES Act into Work with Clients

Part III: Analyzing and Evaluating a Client’s Financial Status to Plan for Client Risk Protection

Chapter 5: Life Insurance Planning

Life Insurance Planning Strategies

Planning Strategy 1: Estimate a Client’s Life Insurance Need Using a Consistent Methodology

Planning Strategy 2: Recommend a Whole Life Policy

Planning Strategy 3: Recommend a Universal Life Policy

Planning Strategy 4: Recommend a Variable Life Policy

Planning Strategy 5: Recommend a Variable Universal Life (VUL) Policy

Planning Strategy 6: Recommend a Single-Premium Variable Universal Life Policy

Planning Strategy 7: Recommend a One-Year Term Policy

Planning Strategy 8: Recommend a Multiyear Term Policy

Planning Strategy 9: Recommend a Return-of-Premium Term Policy

Planning Strategy 10: Utilize Insurance through a Group Term Policy

Planning Strategy 11: Combine a Group Term Policy with a Low-Cost Private or Individual Policy

Planning Strategy 12: Combine a Base Cash Value Policy with Group or Private Term Policies

Planning Strategy 13: Include Conversion and Renewability Features in Term Policies

Planning Strategy 14: Include a Disability Waiver Provision when Purchasing a Policy

Planning Strategy 15: Beware of Modified Endowment Contracts

Planning Strategy 16: Determine the Cost Per Thousand Paid for a Cash Value Policy

Planning Strategy 17: Use Nonforfeiture Options in Cash Value Policies Effectively

Planning Skill 18: Use a Section 1035 Exchange Option as a Way to Obtain Different Coverage

Planning Strategy 19: Know the Different Options to Access Policy Benefits and Avoid Income Taxes

Planning Strategy 20: Structure a Life Insurance Contract to Avoid Future Problems

Chapter 6: Health Insurance Planning

Health Insurance Planning Strategies

Planning Strategy 1: Define the Terminology of Health Insurance

Planning Strategy 2: Determine the Impact of the Patient Protection and Affordable Care Act (PPACA) of 2010 on a Client’s Health Plan

Planning Strategy 3: Describe the Key Differences Between and Among Common Health Insurance Plans

Planning Strategy 4: Establish an HSA in Conjunction with a Qualified HDHP (For clients aged 64 or younger and not a dependent of another individual)

Planning Strategy 5: Maximize the Benefits of a Section 125 Plan (for Employed Clients)

Planning Strategy 6: Recommend a Medigap Policy to Supplement Medicare Coverage (for Clients Age Sixty-five or Older)

Planning Strategy 7: Establish an HSA in Conjunction with a Qualified HDHP (for Young Adult Clients)

Planning Strategy 8: Use Supplemental Health Policies Cautiously

Planning Strategy 9: Monitor Health Insurance Coverage and Encourage Clients to Do the Same

Planning Strategy 10: Use COBRA to Bridge Employment Termination or Continue Group Health Coverage for Dependents

Planning Strategy 11: Maximize the Benefits of HIPAA to Extend COBRA Coverage

Chapter 7: Disability Insurance Planning

Disability Insurance Planning Strategies

Planning Strategy 1: Estimate a Client’s Disability Insurance Need Using a Consistent Methodology

Planning Strategy 2: Recommend an Own-occupation Policy

Planning Strategy 3: Recommend a Modified Own-occupation Policy

Planning Strategy 4: Recommend a Split-definition Policy

Planning Strategy 5: Recommend an Employer- or Group-provided Policy

Planning Strategy 6: Consider a Mortgage Disability Insurance Policy

Planning Strategy 7: Recommend a Policy with a Social Security Rider

Planning Strategy 8: Ensure Continuation of Coverage by Including Appropriate Provisions

Planning Strategy 9: Recommend a Policy with a Recurrent Disability Provision

Planning Strategy 10: Recommend a Policy with Partial or Residual Benefit Provisions

Planning Strategy 11: Reduce Premium Costs by Relying on Social Security Benefits

Planning Strategy 12: Coordinate Noninsurance Strategies with Short-term Disability Coverage

Planning Strategy 13: Pursue Other Sources of Disability Benefits, When Available

Planning Strategy 14: Increase the Waiting Period and Increase Emergency Savings Fund

Planning Strategy 15: Reduce the Wage Replacement Ratio

Chapter 8: Long-Term Care Insurance Planning

Long-Term Care Planning Strategies

Planning Strategy 1: Estimate a Client’s Long-Term Care Insurance Need Using a Consistent Methodology

Planning Strategy 2: Match the Appropriate LTC Product to Each Client’s Needs

Planning Strategy 3: Understand the Role of IRC Section 1035 in Relation to LTC Insurance

Planning Strategy 4: Consider Hybrid Life Insurance/LTC Products

Planning Strategy 5: Consider Hybrid Annuity/LTC Products

Planning Strategy 6: Understand the Role of Medicaid in LTC Insurance Planning

Planning Strategy 7: Utilize a Policy with a Lifetime Benefit Period and a 180-day Elimination Period

Planning Strategy 8: Utilize a LTC Policy with a Four-year Benefit Period and a Ninety-day Elimination Period

Planning Strategy 9: Utilize a Fixed-premium, Restricted-coverage LTC Policy with a Four-year Combined Benefit Period and a Ninety-day Elimination Period

Planning Strategy 10: Utilize a Fixed-premium LTC Policy with a Two-year Benefit Period and a 180-day Elimination Period

Planning Strategy 11: Self-Insure the LTC Need

Planning Strategy 12: Self-Insure with a Life Insurance Backup

Planning Strategy 13: Self-Insure with a Medicaid Backup

Planning Strategy 14: Take Advantage of Available Policy Discounts

Planning Strategy 15: Use Caution When Recommending a LTC Policy to Young Clients

Planning Strategy 16: Recommend a Joint Policy

Planning Strategy 17: Recommend Linked, or Shared-Care, Policy Riders

Planning Strategy 18: Increase the Coverage Period but Decrease the Daily Benefit

Planning Strategy 19: Inform Clients that LTC Costs Are Generally Not Covered by Medicare

Planning Strategy 20: Recommend Appropriate LTC Policy Provisions

Planning Strategy 21: Use Tax-advantaged Methods to Purchase LTC Coverage

Planning Strategy 22: Consider Group LTC Coverage

Chapter 9: Property and Casualty Insurance Planning

Property and Liability Insurance Planning Strategies

Planning Strategy 1: Describe the Types of HO Policies Available

Planning Strategy 2: Recommend an HO-3 Policy with at Least $300,000 in Liability Coverage

Planning Strategy 3: Use the 80 Percent Rule to Determine Adequacy of Insurance Coverage

Planning Strategy 4: Maximize HO Coverage with Endorsements

Planning Strategy 5: Recommend Excess Liability Coverage through an Umbrella Liability Policy

Planning Strategy 6: Review the Possibility of Dropping Collision Coverage on Autos Six to Eight Years of Age or Older

Planning Strategy 7: Choose the Highest Deductible a Client Can Afford

Planning Strategy 8: Increase Liability Limits

Planning Strategy 9: Reduce Premiums with Discounts

Planning Strategy 10: Review Insurance Rates before Purchasing a New Car

Planning Strategy 11: Bundle HO and PAP Coverages to Reduce Annual Premiums

Planning Strategy 12: Use an Appropriate Business Structure to Help a Client Limit Liability

Planning Strategy 13: Account for Special Client Situations when Completing a Property Insurance Analysis

Planning Strategy 14: Understand the Needs of Cohabitating Couples, Housemates, or Partners

Part IV: Analyzing and Evaluating a Client’s Financial Status to Plan for the Growth and Distribution of Assets

Chapter 10: Investment Planning

Investment Planning Strategies

Planning Strategy 1: Match a Client’s Investment Profile to Portfolio Alternatives

Planning Strategy 2: Use Financial Market Benchmarks to Document an Investment Need

Planning Strategy 3: Use a Goals-Based Approach to Determine a Client’s Required Rate of Return

Planning Strategy 4: Identify Appropriate Portfolio Components

Planning Strategy 5: Determine the Riskiness and Potential Returns of Different Financial Assets

Planning Strategy 6: Understand the Role of External Factors in Shaping Portfolio Decisions

Planning Strategy 7: Identify External Factors that Influence Asset Choices

Planning Strategy 8: Relate Risk with Returns When Developing Asset Allocation Strategies

Planning Strategy 9: Determine the Appropriate Use of Strategic and Tactical Asset Allocation Models

Planning Strategy 10: Measure and Monitor Portfolio Risk

Planning Strategy 11: Adjust the Duration of a Bind Portfolio if Changes in Interest Rates are Anticipated

Planning Strategy 12: Use Zero-Coupon Bonds if Interest Rates are Expected to Decline

Planning Strategy 13: Understand the Role of Bond Convexity

Planning Strategy 14: Increase Client Income by Investing in Real Estate Investment Trusts (REITs)

Planning Strategy 15: Increase Portfolio Income by Reducing Bond Quality Mix in a Portfolio

Planning Strategy 16: Reduce Tax Costs by Investing in Dividend Paying Stocks

Planning Strategy 17: Decrease Tax Liability by Investing in Municipal Securities

Planning Strategy 18: Use a Variable Annuity to Reduce Current Taxes

Planning Strategy 19: Hedge Inflation in a Fixed-Income Portfolio with Treasury Inflation-Indexed Securities

Planning Strategy 20: Hedge a Portfolio against Inflation with Hard Assets and Precious Metals

Planning Strategy 21: Protect a Client against Interest Rate Risks by Creating a Laddered Fixed-Income Portfolio

Planning Strategy 22: Utilize Rental Real Estate to Reduce Taxes and Generate Cash Flow

Planning Strategy 23: Understand the Purpose of Call and Put Options

Planning Strategy 24: Write (Sell) Covered Calls to Increase Portfolio Income

Planning Strategy 25: Balance Long- and Short-Term Tax Gain and Loss Selling to Maximum Tax Savings

Planning Strategy 26: Consider Mutual Fund Investments in a Client’s Portfolio

Planning Strategy 27: Consider Adding Exchange-Traded Funds to Client Portfolios

Planning Strategy 28: Use the Discounted Dividend Valuation Model to Value Shares of Stock

Planning Strategy 29: Calculate Key Financial Statement Ratios as a Stock Valuation Technique

Planning Strategy 30: Understand What Causes Variance of Returns

Chapter 10 Appendix: Modern Portfolio Statistics—Mean-variance Analysis

Asset Mean Average

Expected Return

Expected Return (Using Probabilities)

Asset Variance

Asset Standard Deviation

Asset Coefficient of Variation

Correlation and Covariance of Two Assets

Standard Deviation of a Two-Asset Portfolio

Standard Deviation and Confidence Levels

Log-Normal Distributions

Asset Semi-variance

Downside Risk (DR)

The Sortino Ratio

CAPM as Expected Return

Beta

Chapter 11: Education Planning

Education Planning Strategies

Planning Strategy 1: Estimate a Client’s Education Funding Need Using a Consistent Methodology

Planning Strategy 2: Recommend Saving for College Using a Section 529 plan

Planning Strategy 3: Know the Options Available with Unspent Section 529 Plan Assets

Planning Strategy 4: Recommend Savings for College Using a Coverdell Education Savings Account

Planning Strategy 5: Recommend Saving for College Using a Roth IRA

Planning Strategy 6: Utilize Variable Universal Life (VUL) Insurance to Save for College

Planning Strategy 7: Recommend Saving for College Using Series EE and Series I Bonds

Planning Strategy 8: Utilize Retirement Accounts Rather than Education Savings Products to Save for College Expenses

Planning Strategy 9: Recommend Appropriate Student Financial Aid Alternatives to Meet Client Funding Needs

Planning Strategy 10: Evaluate the Use of Alternative Educational Loans and Grants

Planning Strategy 11: Pre-Plan for FASFA Requirements

Planning Strategy 12: Utilize a 2503(c) Minor’s Trust before a Client’s Child Reaches Age Twenty-one

Planning Strategy 13: Utilize a Crummey Trust to Transfer Educational Funds to a Child

Planning Strategy 14: Recommend Shifting UGMA/UTMA Assets Two Years Before the Child Turns Age Eighteen

Planning Strategy 15: Recommend Using EE Savings Bonds to Fund a Section 529 plan

Planning Strategy 16: Recommend Increasing Annual Savings Dedicated to Goal Achievement in a Funding Analysis

Planning Strategy 17: Recommend Decreasing the Cost of College Assumption in a Funding Analysis

Planning Strategy 18: Recommend Increasing Risk/Return Trade-off Assumptions in a Funding Analysis

Planning Strategy 19: Recommend a Lower Assumed College Inflation Rate in a Funding Analysis

Planning Strategy 20: Use Educational Tax Credits and Deductions Appropriately

Planning Strategy 21: Prioritize Strategies to Help Clients Meet their Education Funding Goals

Chapter 12: Retirement Planning

Retirement Planning Strategies

Planning Strategy 1: Estimate a Client’s Retirement Capital Need Using a Consistent Methodology

Planning Strategy 2: Begin a Retirement Needs Analysis Using the Capital Depletion Method

Planning Strategy 3: Identify Sources of Retirement Income

Planning Strategy 4: Adjust Retirement Planning Assumptions to Help a Client Meet His or Her Retirement Planning Need

Planning Strategy 5: Incorporate Social Security Claiming Strategies into the Retirement Planning Process

Planning Strategy 6: Differentiate Between Normal, Early, and Delayed Social Security Claiming Strategies

Planning Strategy 7: Evaluate Social Security Spousal Rules

Planning Strategy 8: Increase Contributions to Retirement Plans and IRAs to Maximize Asset Accumulation

Planning Strategy 9: Fully Fund an Individual Retirement Agreement/Arrangement to Maximize Asset Accumulation

Planning Strategy 10: Recommend a Pension Maximization Strategy to Maximize Retirement Income

Planning Strategy 11: Use a Reverse Mortgage to Increase Retirement Income

Planning Strategy 12: Use Variable Universal Life as a Retirement Planning Tool

Planning Strategy 13: Use Glide Path Portfolios That Match a Client’s Investment Time Horizon

Planning Strategy 14: Incorporate Deferred Income Annuity Strategies into a Client’s Retirement Plan

Planning Strategy 15: Recommend Early Retirement When Appropriate

Planning Strategy 16: Use Qualified Employee Plans Appropriately

Planning Strategy 17: Use Non-Qualified Employer Provided Plans Within the Funding Mix

Planning Strategy 18: Use Personal Savings Within the Funding Mix

Planning Strategy 19: Apply Inherited IRA Rules Correctly

Planning Strategy 20: Apply IRA Transfer, Rollover, and Conversion Rules

Planning Strategy 21: Understand Social Security Eligibility for Divorced Clients

Planning Strategy 22: Understand Qualified Plan Coverage Rules

Planning Strategy 23: Understand Who May Be Excluded from a Qualified Retirement Plan

Planning Strategy 24: Understand how State of Residence Can Impact a Client’s Retirement Saving and Spending Options

Planning Strategy 25: Understand the Role Played by the Pension Benefit Guaranty Corporation in Retirement Planning

Planning Strategy 26: Determine Which Assets to Tap First for Retirement Income Needs

Planning Strategy 27: Understand Retirement Plan Alternatives Available to Clients Who Separate Service

Planning Strategy 28: Understand How Annuity Payouts are Taxed

Planning Strategy 29: Estimate Required Minimum Distributions Correctly

Planning Strategy 30: Calculate Early Distribution Penalties Correctly

Planning Strategy 31: Understand How the Bi-Partisan Budget Act of 2015 Changed Social Security Claiming Strategies

Planning Strategy 32: Understand How 2019 SECURE Act Impacts Retirement Planning

Chapter 13: Estate Planning

Estate Planning Strategies

Planning Strategy 1: Estimate a Client’s Estate Tax Situation Using a Consistent Methodology

The Estate Tax Calculation

Planning Strategy 2: Recommend that a Client Prepare or Amend a Will

Planning Strategy 3: Encourage Clients to Draft a Letter of Last Instruction

Planning Strategy 4: Recommend that a Client Utilize a Living Will, Power of Attorney, and Advanced Medical Directive

Planning Strategy 5: Recommend the Use of Trusts for Incapacity Planning

Planning Strategy 6: Understand How Trusts are Taxed

Planning Strategy 7: Use Appropriate Property Titling Techniques

Planning Strategy 8: Recommend the Use of a Qualified Disclaimer to Transfer Property

Planning Strategy 9: Use a Living Trust to Help a Client Avoid Probate

Planning Strategy 10: Recommend an A-B Trust Arrangement for Clients with a High Net Worth

Planning Strategy 11: Decrease Estate Tax Liability and Generate Income Using a CRAT, CRUT, or Pooled Income Fund

Planning Strategy 12: Recommend that a Client Establish a Donor-advised Charitable Fund

Planning Strategy 13: Recommend that a Client Establish a Foundation

Planning Strategy 14: Use a Section 529 Plan to Help Decrease a Client’s Gross Estate

Planning Strategy 15: Recommend Establishing a Qualified Personal Residence Trust (QPRT) or Grantor Retained Annuity Trust (GRAT) to Reduce Estate Liabilities

Planning Strategy 16: Recommend that a Client Establish a Family Limited Partnership

Planning Strategy 17: Recommend the Use an Irrevocable Life Insurance Trust to Reduce a Client’s Gross Estate

Planning Strategy 18: Recommend that a Client Establish a QTIP Trust When Applicable

Planning Strategy 19: Help Clients Reduce Taxes by Recommending the Use of a Charitable Lead Trust

Planning Strategy 20: Suggest the Use of Intra-Family and Other Business Transfer Techniques When Appropriate

Planning Strategy 21: Minimize Taxes Associated with Gifting

Planning Strategy 22: Account for a Possible Generation-Skipping Transfer Tax

Planning Strategy 23: Help a Client Elect the Correct Estate Valuation Date

Planning Strategy 24: Identify Sources of Estate Liquidity

Planning Strategy 25: Recommend that a Client Make Gifts to Custodial Accounts (UGMA/UTMA)

Planning Strategy 26: Make Gifts to § 2503(b) or 2503(c) Trusts for a Minor Child

Planning Strategy 27: Provide Advice about Adding Co-owners to Accounts

Planning Strategy 28: Make Complete and Appropriate Use of Property Transfer Law by Using Appropriate Beneficiary Designations

Planning Strategy 29: Take Care to Accurately Account for Life Insurance in the Gross Estate

Planning Strategy 30: Valuing Art and Collectibles

Planning Strategy 31: Ensure That Each Client Has Appropriate Estate Planning Documents in Place

Planning Strategy 32: Use a Legal Document Checklist to Ensure Proper Estate Planning

Part V: Financial Planning Case Studies

Chapter 14: Financial Planning Cases

Case 1: The Zimmer Case

Case 2: The Ande Case

Case 3: The Roth Case

Case 4: The Shim Case

Case 5: The Butterfield Case

Case 6: The Little Case

Case 7: The Cantrell Case

Case 8: The Alpha Case

Case 9: The Edwards Case

Case 10: The Mayfield Case

Case 11: The Dion Case

Case 12: The Graham Case

Case 13: The Tun Case

Case 14: The Menjivar Case

Case 15: The Case of the Good Gone Bad

Case 16: The Maria and Sancho Ruiz Case

Index

Chapter 1

The Financial Planning Process

Learning Objectives

•Learning Objective 1: Summarize and explain the steps of the financial planning process.

•Learning Objective 2: Describe how the financial planning process, as established by the Certified Financial Planner Board of Standards, Inc. (CFP Board), serves as a framework for guiding financial planners when working with clients.

•Learning Objective 3: Understand the role of case studies when preparing for financial planning certification.

CFP® Principal Knowledge Topics

•CFP Topic: A.1. CFP Board’s Code of Ethics and Professional Responsibility and Rules of Conduct.

•CFP Topic: A.2. CFP Board’s Financial Planning Practice Standards.

•CFP Topic: A.3. CFP Board’s Disciplinary Rules and Procedures.

•CFP Topic: A.7. Fiduciary.

•CFP Topic: B.8. Financial Planning Process.

•CFP Topic: B.14. Client and Planner Attitudes, Values, Biases, and Behavioral Finance.

Chapter Equations

There are no equations in this chapter.

THE CASE STUDY APPROACH

The profession of financial planning has expanded quickly since its inception in 1969. During the 1960s and 1970s, financial planning consisted of little more than a small consortium of financial service professionals interested in offering clients a value-added service, in addition to insurance and mutual fund products. Since its inception, financial planning has grown into a dynamic, growing, and respected profession.

The growth of financial planning, both as a recognized profession and as an important behavioral change force in the lives of individuals and families, has been remarkable. Starting with fewer than fifty Certified Financial Planner (CFP®) professionals in the early 1970s, the number of CFP® certificants has grown to more than eighty thousand today. Worldwide growth in financial planning, particularly among CFP® professionals, is even more stunning. As the profession has expanded in recent years, the number of students studying financial planning has also grown, which has prompted the need for tools students and aspiring financial planners can use to enhance their knowledge, skill set, and confidence. Thus, the purpose of this textbook.

This book has been designed to help students synthesize knowledge obtained in multiple classes into practical techniques that can be used to solve theoretical and practical financial planning case studies. The tools, techniques, and strategies presented here are intended to serve as a manual to help students and aspiring financial planners piece together divergent concepts into strategic recommendations. Before describing each element of the book, it is worthwhile to take a step back and review two important concepts. First, what exactly is meant by the phrase ‘financial planning’? And second, what is the relationship between financial planning and the process of financial planning?

FINANCIAL PLANNING DEFINED

Professional organizations and leading members of the financial planning community have defined financial planning in a variety of ways. The most recognized definition, offered by the Certified Financial Planner Board of Standards, Inc. (CFP Board), defines financial planning as a process. According to CFP Board,¹ financial planning denotes:

The 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.²

Financial planning can be thought of as a humanistic science focused on helping individuals and families manage and improve their financial situation. The term humanistic, as used here, means that a financial planner focuses on individuals and families and the values, capabilities, and capacities clients bring with them when dealing with complex financial questions and issues. Financial planning is a science because financial planning professionals rely on critical thinking, data, and evidence-based practices, rather than generalized rules or dogmas, when formulating client-centered strategies.³

THE FINANCIAL PLANNING PROCESS

Traditionally, the practice of financial planning has followed what is generally referred to as the financial planning process. In its Standards of Professional Conduct, CFP Board describes the financial planning process as the following seven steps:

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 course(s) 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

The financial planning process has been revised over the years. The current seven-step financial planning process represents the latest revision as of 2018. Prior to the revision, the process consisted of six steps. Figure 1.1 compares the current financial planning process with the way nearly all financial planners have traditionally conceptualized the process of financial planning.

Figure 1.1. The Current Financial Planning Process Compared to the Traditional Process

Figure 1.2 illustrates how the financial planning is circular in nature, with ongoing monitoring continually informing the type of information a financial planner must obtain to continually ensure that a client is moving toward goal achievement.

THE ROLE OF FINANCIAL PLANNERS

Figure 1.2. The Circular Nature of the Financial Planning Process

According to the Bureau of Labor Statistics,⁴ a financial planner is a professional who provides advice on investments, insurance, mortgages, college savings, estate planning, taxes, and retirement to help individuals manage their finances. Financial planners tend to look at a client’s financial situation holistically. Unlike a financial advisor who may provide advice and council on investment or insurance topics, or an accountant who may only prepare a client’s tax or perform auditing services, a financial planner, by definition, is generally tasked with evaluating a client’s overall financial situation and then using professional judgment to make integrated recommendations with the intent of improving a client’s financial situation. Subject areas typically reviewed by a financial planner include, but are not limited to, the following:

•Financial statement preparation and analysis (including cash flow and net worth management and budgeting)

•Insurance planning and risk management

•Employee benefits planning

•Investment planning

•Income tax planning

•Education planning

•Retirement planning

•Estate Planning

Essentially, a financial planner is expected to use the financial planning process to guide their client generally and specifically within—and across—each subject area.

Financial Planning Practice Standards and Ethics

Financial planning professionals who are CFP® certificants must also follow practice standards developed and promulgated by CFP Board. These standards are described CFP Board’s Standards of Professional Conduct—all of which have evolved within the profession to guide professional actions and benefit consumers. The CFP Board Practice Standards and Code of Ethics are intended to:

•assure that the practice of financial planning by CFP® professionals is based on established norms of practice;

• advance professionalism in financial planning; and

•enhance the value of the financial planning process.⁵

All CFP® professionals must adhere to the following Code of Ethics:

1.Act with honesty, integrity, competence, and diligence.

2.Act in the client’s best interests.

3.Exercise due care.

4.Avoid or disclose and manage conflicts of interest.

5.Maintain the confidentiality and protect the privacy of client information.

6.Act in a manner that reflects positively on the financial planning profession and CFP® certification.

CFP Board’s Standards of Conduct provide specific guidance to CFP® professionals when working with clients within the scope of the Code of Ethics. There are fifteen actions that comprise a financial planner’s duties when conducting financial planning:⁶

1.Fiduciary duty

2.Competence

3.Diligence

4.Sound and objective professional judgment

5.Integrity

6.Professionalism

7.Comply with the law

8.Confidentiality and privacy

9.Disclose and manage conflicts of interest

10.Provide information to a client

11.Duties when communicating with a client

12.Duties when representing compensation method

13.Duties when recommending, engaging, and working with additional persons

14.Duties when selecting, recommending, and using technology

15.Refrain from borrowing or lending money and commingling financial assets

CFP Board also provides guidance on ways a CFP professional must act when applying the financial planning process and when dealing directly with CFP Board. Of particular importance is a rule titled Rebuttable Presumption that the Practice Standards Apply, which states:

There is a rebuttable presumption that a CFP® professional providing financial advice is required to integrate relevant elements of the client’s personal and/or financial circumstances in order to act in the client’s best interest, and thus is required to comply with the Practice Standards. Among the factors that CFP Board will weigh are:

a.the number of relevant elements of the client’s personal and financial circumstances that the financial advice affects;

b.the portion and amount of the client’s financial assets that the financial advice may affect;

c.the length of time the client’s personal and financial circumstances may be affected by the financial advice;

d.the effect of the client’s overall exposure to risk if the client implements the financial advice; and

e.the barriers to modifying the actions taken to implement the financial advice.

A key takeaway is that a financial planner must act in the best interest of their client at all times while attempting to be holistic in the delivery of financial advice. For the purposes of the Practice Standards, a client is defined as:⁷

Any person, including a natural person, business organization, or legal entity, to whom the CFP® professional renders professional services pursuant to an engagement.

Within this definition, an engagement is defined as:⁸

A written or oral agreement, arrangement, or understanding.

The Practice Standards apply to the delivery of financial advice, which is defined as:⁹

"A communication that, based on its content, context, and presentation, would reasonably be viewed as a suggestion that the client take or refrain from taking a particularly course of action with respect to:

1.the development or implementation of a financial plan addressing goals, budgeting, risk, health considerations, educational needs, financial security, wealth, taxes, retirement, philanthropy, estate, legacy, or other relevant elements of a client’s personal or financial circumstances;

2.the value of or the advisability of investing in, purchasing, holding, or selling financial assets;

3.investment policies or strategies, portfolio composition, the management of financial assets, or other financial matters;

4.the selection and retention of other persons to provide financial or professional services to the client; or

5.the exercise of discretionary authority over the financial assets of a client.

When determining whether financial advice has been provided to someone, CFP Board looks at the level of communication specifically provided to a client. For example, if advice is customized and communicated to an individual client, the advice will likely be considered to be financial advice. On the other hand, general education communications will not be viewed as financial advice.

The Role of Fiduciaries

While CFP Board practice standards and guidelines can serve as a performance benchmark for anyone who provides financial planning services, it is important to note that only CFP® professionals and certificants are required to adhere to the standards. CFP Board has no governmental or legal standing beyond the power to reprimand a CFP® professional. At a broader level, the practice of financial planning generally falls under the watchful eye of either the Securities and Exchange Commission (SEC) or the Financial Industry Regulatory Authority (FINRA). Although overly simplified, the following guidelines can be used to identify when a financial planner will be subject to SEC or FINRA rules:¹⁰

•If a financial planner provides advice or counsel on investments and/or securities for a fee, the financial planner must register as an investment adviser with the SEC or appropriate state regulator.¹¹

•If a financial planner recommends the purchase or sale of investments and/or securities, and earns a commission based on a transaction, the financial planner must be licensed by FINRA. The most common securities license is the Series 7 license.¹²

A SEC registered financial planner is required, under federal law, to follow a fiduciary standard of care when working with clients. According to the SEC:¹³

"The Investment Advisers Act prohibits misstatements or misleading omissions of material facts and other fraudulent acts and practices in connection with the conduct of an investment advisory business. As a fiduciary, an investment adviser owes its clients undivided loyalty,