Chapter 1 & 3 Intro to Financial Planning & CFP PDF

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Introduction to Financial Planning & CFP Responsibilities and Six Steps of the Financial Planning Process (Chapter 1 & 3) Learning Objectives: - Understand the role of a Financial Planner and the importance of Financial Planning. - Apply the Six Steps of the Financial Planning Process - Explain the Certified Financial Planner (CFP) Code of Ethics - Explain FP Canada’s role as a self-regulatory organization and the programs they provide for both investors and financial planners. The arena of financial planning is a dynamic environment that continues to experience rapid change in both its overall structure and individual elements. Tax codes change each year, new products are introduced, interest rates ebb and flow, and changing customer needs requires that industry professionals continually keep abreast of current trends. Even the role of a financial advisor has, and continues to evolve. No longer can a financial advisor just sell mutual funds and expect to make a satisfactory living. An ageing and more sophisticated customer demands that industry professional be fluent in all areas of financial planning from basic products through to the intricacies of more advanced concepts such as insurance, retirement planning, taxation, and estate planning. Financial literacy should not be solely the domain of the industry professional but rather should be a basic area of study for all Canadians. The daily decisions we make when faced with major financial events will be a determinant of our lifestyles, degree of financial freedom, and even the overall financial stress we experience. A release from Statistics Canada (2018) highlights that the personal savings rate for Canadians has fallen from an average of 13% of annual disposable income in the early 1990s to a low of 1.4% by 2018. During the same time period accumulated debt has risen from 90% of annual income to over 170%. An anaemic personal saving rate combined with record debt loads makes it unlikely that many of these borrowers with high debt levels will be able to save for many of their long-term financial goals. Interest rates have decreased for more than a decade enticing many to utilize credit to obtain consumables immediately rather than purchase those items from savings. The end result is that many of those borrowers will face major difficulties if interest rates increase by a measurable degree. A survey by the Canadian Payroll Association revealed that almost half (44%) of Canadians would find it difficult to meet their financial obligations if their paycheque was delayed by just one week. However, Canadians financial well-being is not all doom and gloom. A combination of a robust economy and some personal financial restraint can quickly improve the personal savings rate. Our southern neighbours in the United States of America have increased their personal savings rate to 6.5% (Statistics Canada) courtesy of a strong economy and a low unemployment rate. Bank of Montreal conducted a survey and found that just over half of eligible Canadians had contributed to a Tax Free Savings Account (TFSA) and 60% contributed to a Registered Retirement Savings Plan (RRSP). As the above reveals, financial advisors now deal with a vast array of customer needs and situations.

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For those looking to enter the field and extol their financial prowess to the public there lies ahead many rewards but along with that benefit comes great responsibility. The advice that financial professionals provide does not only influence money matters but also has a major effect upon the financial hopes, dreams, and aspiration of their clients. The advice we provide can be the difference of a child’s education being successfully funded or woefully inadequate, or a couple having their retirement dreams realized or left to struggle for basic sustenance. As such, the professional has a duty to provide advice to the best of their ability and the best means to accomplish that is a thorough knowledge of the field. Financial advisors are classified into four categories; based upon the way they are compensated. 

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Salaried employees of institutions, working for banks, trust companies and credit unions, provide advice free to the institution’s clients. A computer printout is usually generated based upon information supplied by the client. The aim is to sell products or services provided by that institution. Commission planners make their money from the fees and commissions received from the sellers of product they recommend. They may act as an exclusive agent for an institution or as a general agent representing many institutions (such as mutual funds or insurance companies). They are often unduly influenced to sell their clients products and services that deliver the highest commission levels. An example would be an insurance agent selling a “whole life insurance” policy which provides a much higher commission than a “term life insurance” policy. Fee-only planners, charge a fee based upon an hourly fee or project-based basis and do not take commissions. Fee and commission-based planners receive part of their compensation in the form of a fee and part from commissions of products they sell. These are almost always independent planners and although the incentive to promote products with the best commission is reduced, it is not eliminated.

Studies have shown that almost half of Canadians believe that all financial advisors are regulated however, the fact is that outside of Quebec which demands certification of financial planners, anyone can call themselves a financial planner without meeting any type of standards. FP Canada (former known as the Financial Planning Standards Council of Canada) is a national professional body with a mandate to bring better financial health to Canadians by certifying professional financial planners and leading the advancement of professional financial planning in Canada. Quebec has a separate identity, the “Institut québécois de planification financière (IQPF)” and utilizes almost the same rules as FP Canada. FP Canada had two levels of certification for financial planners. 

Qualified Associate Financial Planner (QAFP), is held by planners with the knowledge, skills, experience, and ethics to provide financial advice for clients with less complicated needs.

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Certified Financial Planner (CFP), professionals have demonstrated the knowledge, skills, experience, and ethics to examine their clients’ entire financial picture at the highest level of complexity required of the profession.

Both of these designations require the applicant to pass a rigorous examination after successfully passing courses related to a large body of knowledge referred to as the “competency profile” and contains the subject matter as listed below:             

Financial planning profession and industry regulation Financial Analysis Credit and Debt Registered Retirement Plans Government Pension Plans Registered Education and Disability Plans Economics Investments Taxation Law Insurance Human Behavior Introduction to Professional Ethics (course offered by FP Canada)

Most of this body of knowledge (except for the ethics course) is embedded in the financial planning program at George Brown College and upon successful completion, graduates can apply to challenge the QAFP and/or CFP exam as it applies. Upon successfully passing the exam a QAFP designation is awarded and after completion of three years of work in the industry and successful completion of another examination, one can apply for their CFP certification. Financial planners are cognizant of the integrated nature of financial planning where each specific section has interaction with other sections. As an example, the type investments chosen can have varying tax implications depending upon the type of investment account used; retirement planning issues can have an impact upon estate planning to be implemented at a later date. The purpose of financial planning is to utilize your financial resources to meet current needs and achieve future financial goals. A Certified Financial Planner (CFP) as described by FP Canada, is an individual capable of providing financial planning advice at the highest level of complexity required by the profession. A financial plan is a written document designed to help an individual achieve their personal goals, needs, and priorities. All areas of financial planning are addressed and the interrelationships among them. The areas of a financial plan include financial management, insurance and risk management, investment planning, retirement planning, tax planning, estate planning and legal aspects.

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Each section looks at the clients’ current position and provides an analysis to identify potential threats and opportunities, and provides an evaluation of strategies and recommendations to help the individual meet their goals, needs and priorities. The plan contains the personal information and assumptions upon which it was developed and will ultimately provide a list of action items, including what needs to be done, by whom, and when to be completed. FP Canada has published a detailed paper referred to as the “Standards of Professional Responsibility” for its CFP and QAFP designation holders. The main documents contained within are listed below:    

Code of Ethics Rules of Conduct Fitness Standards Financial Planning Practice Standards FP Canada “Code of Ethics”

The Code of Ethics represents the moral mandate that governs the conduct of financial planners. It consists of eight principles reflecting the standard of ethical conduct that professionals must demand of themselves and their peers. This provides the public with a guarantee concerning the quality of professional services offered by financial planners in Canada. The eight principles of the Code of Ethics is as below: Client First Placing the interest of the client ahead of his/her own interests and ahead of all other interests. Integrity Rigorous adherence to moral rules and duties imposed by honesty and justice. Acting in both the letter of the law and the spirit of the Code. Objectivity Requires intellectual honesty and impartiality and the exercise of sound judgment. Understanding the situation from the client’s perspective. Competence Competence requires attaining and maintaining a high level of knowledge. Requires continuing education each and every year. Fairness All professional relationships must be conducted in a fair and open manner and any conflicts of interest must be disclosed to the client. Confidentiality All client information must be secured, protected, and maintained in a manner that allows access only to authorized individuals. In essence, all client information of any sort is to be kept private.

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Diligence Diligence requires fulfilling professional commitments in a timely and thorough manner. Professionalism Acting in a manner that reflects positively upon the profession. FP Canada “Rules of Conduct” The Rules of Conduct contains 35 specific rules that provide specific guidance on expected practices and is a supporting guideline for adherence to the Code of Ethics. Behaviour that contravenes the Rules of Conduct is subject to disciplinary action by FP Canada. The association investigates all complaints and evaluates them directly against the Rules of Conduct. The rules explain the manner in which a professional should conduct their interaction with clients, the expectations of what is considered reputable behaviour, rules governing the handling of monetary funds, and the interaction of the professional with the association. To help Financial Planners/Advisors make appropriate estimations and claims about possible investment returns, which are often used to estimated items such as retirement needs, insurance needs, education funding needs etc., FP Canada has developed a guide called the “Projection Assumption Guidelines”. The guidelines provide recommend rates for projected future items such as inflation, wage increases, nominal investment returns by asset class, equity risk premiums, mutual fund management fees, borrowing rates, and life expectancies. The use of rates as stated in the guideline serves the purpose of proving projections that are prudent and avoid over-stating of possibilities.

FP Canada “Fitness Standards” To attain, renew, and continually use any FP Canada certifications (CFP or QAFP), each certificate holder must complete a New Applicant or Certification Renewal Form. The questions contained in these applications are quite specific and are designed to allow only individuals of the highest character to use these certifications. Barriers to attaining or renewing certification are referred to as “Bars to Certification” and include the following situations:      

Currently in bankruptcy proceedings. Business bankruptcy filed with the last five years. Revocation or suspension of one year or longer of a professional license credential such as; lawyer, real estate agent, accountant, insurance agent, investment advisor, or a financial services license. Pleading guilty or found guilty of a criminal offence. Breaching an educator’s Code of Ethics or Code of Conduct and/or have engaged in academic dishonesty. Example: cheating on an exam or plagiarism. Being found in breach of a court order. Example: not paying child support as per a court order.

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Certified Financial Planners have a fiduciary duty to their clients. A “fiduciary” is a person or organization who holds a legal or ethical relationship of trust with another person or group of people and in the case of financial relationships, managing assets of clients. Courts in Canada will look at various factors to determine if a financial advisor has a fiduciary relationship or not. Five factors that the legal system in Canada uses to determine a fiduciary relationship are:     

Vulnerability – The degree of client vulnerability that exists due to a client’s age, lack of language skills, investment knowledge, education, or investment experience. Trust – degree of trust and confidence a client attaches to the advisor and the degree of trust the advisor accepts. Reliance – is there a long history of relying on the advisor’s judgement and advice and whether the advisor claims to have special skills and knowledge upon which the client relies. Discretion – The extent to which the advisor has discretion or power over the client’s account. Profession Rules or Code of Conduct – these documents often contain the duties of the advisor and the standards to which they will be held.

An advisor who accepts an order from a client at a discount brokerage for a buy or sell order is not in a fiduciary position, while an advisor that designs and implements an investment portfolio for a client would be considered a fiduciary. All CFP/QAFP designation holders are expected to adhere to the rules and if a complaint is lodged against an association member and investigation is conducted. The association makes an initial determination of the merits of the complaint. Three options are available at that point: dismissal due to the complaint having no merit; dismiss the matter with a letter of Guidance or Advice, or sent the matter to a Hearing Panel. Once the hearing panel has completed the investigation process a determination is made. The degree of sentencing can vary from a Letter of Admonishment to the loss of the offender’s designation.

FP Canada “Practice Standards” The Practice Standards is a suggested guide to be referred to when engaging with clients in financial planning activities. In the industry, we often refer to this engagement process as “The “Six Steps” of Financial Planning. The Six Steps of the Financial Planning Process The personal financial planning process, often referred to as the money management process is defined in many ways. The commonality is that it is a process for managing your financial resources (savings, expenditures, budgeting, and financial decisions) to achieve your personal financial goals while accounting for financial risks and future events. FP Canada has developed a six-step financial planning process used by Certified Financial Planners (CFP) that is comprehensive and effectively communicates and records the working

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relationship with their clients. It details the manner in which to accomplish goals and handle the ongoing relationship. Review these steps below as you will be tested on the formal financial planning process.

Establish the client/planner engagement The client and financial planner clarify and record the degree and type of working relationship. Specifically: Detail the services that will be rendered Explain any relevant concepts of financial planning and the planning process, and how they affect the client Detail the responsibilities as the financial planner Explain the degree of the financial planners' involvement and any limitations on their activities Explain how the financial advisor is compensated.

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Determine goals and expectations The client and the financial planner exchange information about financial goals, resources, and values.   

Documents regarding financial matters should be shared Interviews and questionnaires can be utilized to determine investor values, risk tolerances, and desired results. Financial goals should be stated, quantified, and prioritized

Clarify your present financial status and identify any problem areas and opportunities The financial planner will then assimilate the information into the appropriate documents. The most important items being a Net Worth and Cash Flow statement.   

The financial advisor compiles necessary statements The statements and information received is analyzed Identify any problems or opportunities such as: o Capital requirements o Risk management and coverage levels o Investments o Taxation o Retirement benefits o Employment benefits o Estate planning o Special needs such as education funds, adult dependency needs etc.)

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Develop and present the financial plan The financial planner develops a working plan and presents it to the client. 

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The financial advisor develops a complete financial plan specifically designed to meet the goals and objectives of the client while taking into consideration their values, risk tolerances and financial needs. The plan will provide future projections and specific recommendations. The plan is presented to the client A review schedule is agreed upon Implementing the financial plan

Most important in the process is the implementation of the financial plan.  

Work with associated stakeholders such as mutual fund companies, lawyers, accountants, etc. Put the plan into action

Monitoring the financial plan The client and the financial planner work together to assure that the financial plan is achieving its original purposes and degree of success.  

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Agree upon who is responsible for monitoring the plan; the client or the financial advisor Set up review dates. These dates can be changed to reflect significant changes such as: o lifestyle events such as a marriage or birth of a child, change in employment status, etc. o changes in the law, taxation, economic conditions etc. Review the performance of the plan on a regular basis to mitigate risks and take advantage of opportunities

The six steps of the financial planning process is a fundamental concept in the industry. It is a process you should know extremely well....