Financial Advisor Series FOUNDATIONS OF FINANCIAL PLANNING

512 Pages·2012·4.93 MB·English

Financial Advisor Series
FOUNDATIONS OF FINANCIAL PLANNING:
AN OVERVIEW
Allen McLellan, Editor
FA262.03.1
Thispublicationisdesignedtoprovideaccurateandauthoritativeinformationaboutthe
subjectcovered. Whileeveryprecautionhasbeentakeninthepreparationofthismaterial,
theauthors,andTheAmericanCollegeassumenoliabilityfordamagesresultingfromthe
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inrenderinglegal,accounting,orotherprofessionaladvice. Iflegalorotherexpertadviceis
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©2012TheAmericanCollegePress
Allrightsreserved
ISBN-10: 1-58293-105-4
ISBN-13:978-1-58293-105-0
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FINANCIAL ADVISOR SERIES
Sales Skills Techniques
Techniques for Exploring Personal Markets
Techniques for Meeting Client Needs
Techniques for Prospecting: Prospect or Perish
Women and Money—Matters of Trust
Product Essentials
Essentials of Annuities
Essentials of Business Insurance
Essentials of Disability Income Insurance
Essentials of Life Insurance Products
Essentials of Long–Term Care Insurance
Essentials of Multiline Insurance Products
Planning Foundations
Foundations of Estate Planning
Foundations of Retirement Planning
Foundations of Financial Planning: An Overview
Foundations of Financial Planning: The Process
Foundations of Investment Planning
iii

THE AMERICAN COLLEGE
TheAmericanCollege®isanindependent,nonprofit,accreditedinstitutionfoundedin1927
that offers professional certification and graduate-degree distance education to men and
women seeking career growth in financial services.
TheCenterforFinancialAdvisorEducationatTheAmericanCollegeoffersboththeLUTCF
andtheFinancialServicesSpecialist(FSS)professionaldesignationstointroducestudents
inaclassroomenvironmenttothetechnicalsideoffinancialservices,whileatthesametime
providing them with the requisite sales-training skills.
TheSolomonS.HuebnerSchool®ofTheAmericanCollegeadministerstheCharteredLife
Underwriter(CLU®);theCharteredFinancialConsultant(ChFC®);theCharteredAdvisorfor
SeniorLiving(CASL®);theRegisteredHealthUnderwriter(RHU®);theRegisteredEmployee
Benefits Consultant (REBC®); the Chartered Healthcare Consultant™ and the Chartered
Leadership Fellow® (CLF®) professional designation programs. In addition, the Huebner
SchoolalsoadministersTheCollege'sCFPBoard—registerededucationprogramforthose
individualsinterestedinpursuingCFP®certification,theCFP®CertificationCurriculum.
The Richard D. Irwin Graduate School® of The American College offers the master of
science in financial services (MSFS) degree, the Graduate Financial Planning Track
(anotherCFPBoard-registerededucationprogram),andseveralgraduate-levelcertificates
that concentrate on specific subject areas. It also offers the Chartered Advisor in
Philanthropy(CAP®)andthemasterofscienceinmanagement(MSM),aone-yearprogram
with an emphasis in leadership. The National Association of Estate Planners & Councils
has named The College as the provider of the education required to earn its prestigious
AEP designation.
The American College is accredited by The Middle States Commission on Higher
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Association. TheAmericanCollegehasbeenaccreditedsince1978.
v
vi Foundations of Financial Planning: An Overview
TheAmericanCollegedoesnotdiscriminateonthebasisofrace,religion,sex,handicap,or
nationalandethnicorigininitsadmissionspolicies,educationalprogramsandactivities,or
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TheAmericanCollegeislocatedat270S.BrynMawrAvenue,BrynMawr,PA19010. The
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CertifiedFinancialPlannerBoardofStandards,Inc.,ownsthecertificationmarksCFP®,
CERTIFIEDFINANCIALPLANNER™,andCFP(withflamelogo)®,whichitawardsto
individualswhosuccessfullycompleteinitialandongoingcertificationrequirements.
CONTENTS
Financial Advisor Series..............................................................................iii
The American College.................................................................................v
Table of Contents........................................................................................vii
Acknowledgments.....................................................................................xxi
About the Author......................................................................................xxiii
Special Notes to Advisors.........................................................................xxv
Overview of the Book.............................................................................xxvii
1 The Financial Planning Process........................................................1.1
Emergence of a New Profession.........................................................1.1
What Is Financial Planning?................................................................1.3
Financial Planning Is a Process...............................................1.4
Steps in the Financial Planning Process: The Eight
Financial Planning Domains...............................................1.6
Step 1: Establishing and Defining the Client-Planner
Relationship...................................................................1.6
Step 2: Gathering Information Necessary to Fulfill the
Engagement .................................................................1.9
Step 3: Analyzing and Evaluating the Client’s Current
Financial Status ..........................................................1.13
Step 4: Developing the Recommendation(s) ...................1.16
Step 5: Communicating the Recommendation(s) ............1.18
Step 6: Implementing the Recommendation(s) ...............1.19
Step 7: Monitoring the Recommendation(s) ....................1.20
Step 8: Practicing Within Professional and Regulatory
Standards ...................................................................1.21
How Is Financial Planning Conducted?............................................1.22
Single-Purpose Approach......................................................1.23
Multiple-Purpose Approach....................................................1.23
Comprehensive Approach......................................................1.24
Financial Planning Areas of Specialization.......................................1.25
Content of a Comprehensive Financial Plan.....................................1.26
Life-Cycle Financial Planning.................................................1.28
Format of a Comprehensive Financial Plan...........................1.30
Trends Creating Opportunities for Financial Planning
Advisors.......................................................................................1.33
Consumer Needs for Financial Planning...........................................1.36
Obstacles Confronting Consumers........................................1.39
Role of Financial Planning Advisors.......................................1.40
vii
viii Foundations of Financial Planning: An Overview
Financial Planning Umbrella.............................................................1.40
Chapter Review.................................................................................1.41
Review Questions..................................................................1.41
2 Insurance Planning and Risk Management......................................2.1
Importance of Protection Objectives...................................................2.1
Risk.....................................................................................................2.2
Types of Pure Risks............................................................................2.4
Planning for Pure Risks: Insurance and Other Techniques................2.6
Establishing and Defining the Client-Advisor Relationship
............................................................................................2.8
Gathering Information Necessary to Fulfill the
Engagement........................................................................2.8
Analyzing and Evaluating the Client’s Current Financial
Status ...............................................................................2.12
Risk Measurement............................................................2.12
Property Risks.............................................................2.12
Liability Risks...............................................................2.15
Personal Risks.............................................................2.15
Risk Evaluation.................................................................2.18
Developing the Recommendations .......................................2.18
Alternative Risk Treatment Devices..................................2.19
Risk Avoidance............................................................2.20
Loss Prevention...........................................................2.20
Loss Reduction............................................................2.21
Retention.....................................................................2.21
Insurance.....................................................................2.22
Selecting Techniques for Handling a Client's Pure
Risks............................................................................2.25
A Plan Using the Selected Techniques.............................2.28
Communicating the Recommendations and Implementing
the Recommendations......................................................2.29
Monitoring the Recommendations..........................................2.29
A Survey of Personal Insurance Coverages.....................................2.30
Meeting Personal Risks..........................................................2.30
Life Insurance...................................................................2.30
Term Life Insurance.....................................................2.31
Whole Life Insurance...................................................2.33
Universal Life (UL) Insurance......................................2.36
Annuities...........................................................................2.38
Individual Health Insurance...............................................2.40
Medical Expense Insurance........................................2.41
Foundations of Financial Planning: An Overview ix
Disability Income Insurance.........................................2.41
Long-Term Care Insurance..........................................2.45
Meeting Property and Liability Risks......................................2.52
Homeowners Insurance....................................................2.52
Coverage A Dwelling...................................................2.54
Coverage B Other Structures......................................2.54
Coverage C Personal Property....................................2.55
Coverage D Loss of Use.............................................2.56
Coverage E Personal Liability.....................................2.56
Coverage F Medical Payments to Others....................2.57
Personal Auto Insurance...................................................2.57
Part A Liability Coverage.............................................2.58
Part B Medical Payments Coverage............................2.59
Part C Uninsured Motorists Coverage.........................2.59
Part D Coverage for Damage to Your Auto.................2.60
No-Fault Benefits.........................................................2.60
Umbrella Liability Insurance..............................................2.61
A Concluding Comment.........................................................2.62
Chapter Review.................................................................................2.63
Review Questions..................................................................2.63
3 Employee Benefits Planning..............................................................3.1
Scope and Significance of Employee Benefits....................................3.1
Meaning of Employee Benefits.................................................3.1
Significance of Employee Benefits...........................................3.2
Growth of Employee Benefits...................................................3.3
Industrialization...................................................................3.3
Organized Labor.................................................................3.4
Wage Controls....................................................................3.4
Cost Advantages.................................................................3.5
Inflation...............................................................................3.5
Legislation...........................................................................3.5
Importance of Benefit Planning...........................................................3.5
Benefit-Planning for the Employer............................................3.6
Advisor Awareness of Employee Benefits................................3.7
The Basis of a Financial Plan.............................................3.8
The Purchase of Additional Insurance and Retirement
Benefits..........................................................................3.8
ASourceforNegotiatingaCompensationPackage...........3.9
Eligibility for Benefits...........................................................................3.9
Covered Classifications............................................................3.9
Full-Time Employment...........................................................3.10
x Foundations of Financial Planning: An Overview
Probationary Periods..............................................................3.10
Insurability..............................................................................3.10
Premium Contributions...........................................................3.10
Termination of Coverage........................................................3.10
Types of Employee Benefits..............................................................3.11
Medical Expense Insurance...................................................3.12
Types of Plans..................................................................3.12
HMOs..........................................................................3.15
PPOs...........................................................................3.17
POS Plans...................................................................3.17
A Comparison of Plan Types.......................................3.18
Plan Provisions.................................................................3.19
Eligibility.......................................................................3.19
Covered Expenses......................................................3.19
Coordination of Benefits..............................................3.21
Cost Sharing................................................................3.22
Additional Benefits for Executives.....................................3.23
Taxation.............................................................................3.23
Coverage after Termination of Employment......................3.24
COBRA........................................................................3.24
Conversion..................................................................3.25
Portability.....................................................................3.26
Postretirement Coverage.............................................3.26
Life Insurance.........................................................................3.27
Benefit Schedule...............................................................3.27
Multiple-of-Earnings Schedules...................................3.28
Specified-Dollar-Amount Schedules............................3.28
Reduction in Benefits...................................................3.28
Termination of Coverage...................................................3.28
Conversion..................................................................3.28
Portability of Term Coverage.......................................3.29
Added Coverages.............................................................3.29
Supplemental Life Insurance.......................................3.29
Accidental Death and Dismemberment
Insurance...............................................................3.30
Dependent Life Insurance...........................................3.31
Taxation.............................................................................3.32
General Tax Rules.......................................................3.32
Nondiscrimination Rules..............................................3.33
Taxation of Proceeds...................................................3.34
Treatment of Added Coverages..................................3.34
Group Universal Life Insurance........................................3.35
Coverage Available.....................................................3.35