The Fundamentals of Writing a Financial Plan, First Edition (Revised)

John E. Grable, Michelle E Kruger, Megan R Ford

• Publisher: The National Underwriter Company
• Year: 2020
• ISBN:
  9781949506402
• Edition: 1
• Topic: Law
• Subtopic: Antitrust
• Index: Law

The Fundamentals of Writing a Financial Plan provides a unique approach to helping aspiring financial planners write a comprehensive financial plan. The book outlines how the CFP Board of Standards, Inc. newly-revised 7-step systematic financial planning process can be applied when writing a comprehensive financial plan for an individual or family and demonstrates how to analyze and create a plan for key financial planning scenarios.

The book not only highlights various elements involved in comprehensive financial planning, including estate, tax, cash flow, education planning, and much more – but also introduces important behavioral perspectives and communication techniques. As a way to synthesize these pieces and learn how the plan writing process unfolds, students follow a running case—the Hubble family.

This book features:

• A thorough review of the new 7-step systematic financial planning process.
• A description of the regulatory environment in which every financial planner operates.
• An in-depth discussion of client communication and counseling techniques.
• Financial planning strategies that can be applied to a variety of clients and client circumstances.
• A chapter-by-chapter focus on analytical tools and techniques that can be used to evaluate client data.
• An example of a complete written financial plan with explanations about how analyses lead to the recommendations.
• Chapter-based learning aids, including access to a fully integrated Financial Planning Analysis Excel™ package and other online support materials, including video examples of client communication and counseling strategies.
• Instructions on how to do calculations essential to creating a financial plan.
• Numerous self-test questions to test comprehension of material.

New in the revised 1stEdition:

• Newly updated materials that reflect current financial planning trends
• Updated information regarding recent tax changes, including the SECURE Act

Topics Covered:

• Writing a Financial Plan
• Laws, Regulations, and Ethics: Standards Guiding the Financial Planning Process
• Fundamentals of Communication and Counseling in Financial Planning
• Cash Flow and Net Worth Planning
• Tax Planning
• Life Insurance Planning
• Health Insurance Planning
• Disability Insurance Planning
• And more! See the "Table of Contents" section for a full list of topics

A note for instructors:

This book serves as a capstone book for students in financial planning programs by allowing instructors to combine all of the relevant financial planning sub-disciplines (budgeting, tax, estate, and insurance planning) into a single plan-writing exercise.

Chapter 1

A Review of the Financial Planning Process

Learning Objectives

•Learning Objective 1: 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 2: Describe the benefits of utilizing a consistent financial planning process when writing comprehensive financial plans.

•Learning Objective 3: Summarize and explain the steps of the financial planning process.

•Learning Objective 4: Identify what client data are needed to provide financial planning services and explain how the data are collected.

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.12 Economic Concepts.

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

Chapter Equations

There are no equations in this chapter.

AN INTRODUCTION TO THE FINANCIAL PLANNING PROCESS

Financial planning has become a recognized profession and an important force for change in the lives of individuals and families. Starting with fewer than fifty Certified Financial Planner (CFP^®) professionals in the early 1970s, the number of CFP^® certificants in the U.S. has grown to over eighty thousand in 2020. Worldwide growth continues to expand as well. As the profession has evolved, the number of students studying financial planning has also grown.

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

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 explains the financial planning process as involving the following 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); and

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 October 1, 2019). Prior to the revision, the process consisted of six steps. Figure 1.1 compares the current seven-step financial planning process with the traditional six-step process.

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

Current Process:	Traditional Process:
1.Understand the Client’s Personal and Financial Circumstances •Obtain qualitative and quantitative information •Analyze information •Address incomplete information	1.Gather Data and Determine the Client’s Personal and Financial Goals, Needs, and Priorities
2.Identify and Select Goals •Identify potential goals •Select and prioritize goals	2.Analyze and Evaluate the Client’s Financial Status •Identify and evaluate financial planning alternative(s)
3.Analyze the Client’s Current Course of Action and Potential Alternative Course(s) of Action •Analyze current course of action •Analyze potential alternative courses of action	3.Develop the Financial Planning Recommendation(s)
4.Develop the Financial Planning Recommendation(s)	4.Present the Financial Planning Recommendation(s)
5.Present the Financial Planning Recommendation(s)	5.Agree on Implementation Responsibilities •Select products and services for implementation
6.Implement the Financial Planning Recommendation(s) •Address implementation responsibilities •Identify, analyze, and select actions, product, and services •Recommend actions, products, and services for recommendation •Select and implement actions, products, or services	6.Define Monitoring Responsibilities
7.Monitor Progress and Update •Monitor and update responsibilities •Monitor the client’s progress •Obtain current qualitative and quantitative information •Update goals, recommendations, or implementation decisions

Financial planners are encouraged to take a comprehensive approach when working with clients. The major subject areas in a financial plan 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, retirement planning, and estate planning. When working through the financial planning process, financial planners are expected to follow a consistent, well-defined approach when working with clients. The following discussion explores each step in the financial planning process in greater detail.

Step 1: Understanding the Client’s Personal and Financial Circumstances

At this step in the process, a financial planner is obligated to obtain appropriate qualitative and quantitative information from a client. Appropriate data is determined by the scope of the client-financial planner engagement. While there are no best-practice standards regarding the best way to collect data from a client, many financial planners request that their clients provide copies of source documents that the financial planner can then use to evaluate the client’s financial situation. Examples of source documents include current check stubs, savings account statements, prior year tax returns, investment and retirement account statements, life insurance policies, copies of wills, trusts, and other estate planning forms, employee benefit plan booklets, credit card statements, loan information, and insurance policies. Other financial planners ask clients to provide detailed financial information on a form prior to meeting with the financial planner. A sample client data intake form that can be used in this way is shown in Appendix 1A.

Qualitative client data include:

•Health Status

•Family Situation

•Life Expectancy

•Family Values, Expectations, and Attitudes

•Risk Tolerance

•Risk Capacity

•Wishes and Wants

•Goals

•Goal Priorities

Quantitative client data include:

•Age

•Cash Flow Situation

•Value of Assets and Liabilities

•Current and Future Income

•Current and Projec...