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«Fall 12-14-2013 A Practicum in Financial Planning Erika L. Klosterman Western Kentucky University, Erika.klosterman255 Follow this and ...»

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Western Kentucky University

TopSCHOLAR®

Honors College Capstone Experience/Thesis

Honors College at WKU

Projects

Fall 12-14-2013

A Practicum in Financial Planning

Erika L. Klosterman

Western Kentucky University, Erika.klosterman255@topper.wku.edu

Follow this and additional works at: http://digitalcommons.wku.edu/stu_hon_theses

Recommended Citation

Klosterman, Erika L., "A Practicum in Financial Planning" (2013). Honors College Capstone Experience/Thesis Projects. Paper 432.

http://digitalcommons.wku.edu/stu_hon_theses/432 This Thesis is brought to you for free and open access by TopSCHOLAR®. It has been accepted for inclusion in Honors College Capstone Experience/ Thesis Projects by an authorized administrator of TopSCHOLAR®. For more information, please contact connie.foster@wku.edu.

A PRACTICUM IN FINANCIAL PLANNING

A Capstone Experience/Thesis Project Presented in Partial Fulfillment of the Requirements for the Degree Bachelor of Science with Honors College Graduate Distinction at Western Kentucky University By Erika L. Klosterman ****** Western Kentucky University 2014

CE/T Committee:

Andrew Head, Advisor Approved by Executive-in-Residence Dr. Michelle Trawick __________________________

Advisor Dr. Lisa Duffin Department of Finance Copyright by Erika L. Klosterman 2014

ABSTRACT

A Practicum in Financial Planning explains the six stage process of creating a comprehensive financial plan, and in doing so provides an example of a financial plan for the Jackson family to clarify the process. The six stage process consists of: establishing and defining the client-planner relationship, gathering client data, analyzing and evaluating the client’s current financial status, developing and presenting recommendations and/or alternatives, implementing the recommendations, and monitoring the recommendations. The importance of a financial plan for all individuals is also discussed.

Keywords: Financial, Planning, Plans, Finance, CFP, Capstone ii Dedicated to my Family, Friends, and Gordon Ford College of Business Faculty iii

ACKNOWLEDGEMENTS

This project would not have been possible without the help, expertise, and support of multiple people. I am appreciative of my Capstone Experience and Thesis Advisor, Andrew Head, for his continuing support, knowledgeable impact on my work, and his ability and willingness to give so much time to challenge me as a scholar. Thank you to the members of my committee – Dr. Michelle Trawick and Dr. Lisa Duffin - for their time and insight.

I would also like to the take the time to thank my family and friends for their constant support and encouragement. With their presence, I acquired the confidence and strength to complete a project like this.

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July 28, 1992………………………………………………. Born Louisville, Kentucky 2010………………………………………………………...Nelson County High School, Bardstown, Kentucky

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Abstract………………………………………………………………………………………….... ii Dedication ………………………………………………………………………………................iii Acknowledgements ………………………………………………………………………………..iv Vita ……………………………………………………………………………………….………...v List of Figures …………………………………………………………………….………………vii

Chapters:

1. Introduction... ……………………………………………………………………………...1

2. Establishing and Defining the Client-Planner Relationship.. …………………………….4

3. Gathering Client Data...……………………………………………………………….…..9

4. Analyzing and Evaluating the Client’s Current Financial Status. ……………………....20

5. Developing and Presenting Recommendations and/or Alternatives. …………………....25

6. Implementing the Recommendations …………………………………………………...31

7. Monitoring the Recommendations.……………………………………………………....33

8. Why are Financial Plans Important?…………………………………………………..…35 Bibliography ……………………………………………………………………………………...37

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2.1 Sample Engagement Letter

3.1 Budget Summary

3.2 Net Worth

3.3 Liabilities

3.4 Other Assets

3.5 Loss Tolerance Assessment

3.6 Goals

3.7 Social Security

3.8 Investments

3.9 Investment Assets

3.10 Current Allocation

3.11Target Band

3.12 Insurance Policies

4.1 Current Scenario

4.2 Life Insurance Needs Analysis





5.1 Current Scenario Compared to What if Scenario

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Financial planning is a long-term process that is needed throughout life in order to manage finances in an intelligent manner. The purpose of managing finances wisely is to achieve all short and long term goals, while also being prepared to confront any complications that are unavoidable.

The basis for successful financial planning is the creation of a financial plan; therefore, the construction of a financial plan will be the main focus of this document. This process includes six stages to be covered in detail and with a continuous example in the successive chapters. These stages are as follows: establishing and defining the client-Planner relationship, gathering client data, analyzing and evaluating the client’s current financial status, developing and presenting recommendations and/or alternatives, implementing the recommendations, and monitoring the recommendations1. Practice standards are a part of every stage and are intended to assure that there is a base of established norms of practice that Certified Financial Planner™ (CFP®) professionals are following. Practice standards also enhance the professionalism in financial planning, and are meant to increase the value of the financial planning process.

With improved knowledge of the process comes the realization that financial planning is a very beneficial and important topic that would positively impact an immense amount of people if convinced to take advantage of it; support for this will be provided in the last chapter.

1 CFP Board. (2013). Financial Planning. Retrieved from http://www.cfp.net/for-cfpprofessionals/professional-standards-enforcement/compliance-resources/frequently-askedquestions/financial-planning.

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The financial planning profession is linked with the designation of Certified Financial Planner™ (CFP®). The CFP certification is the culmination of rigorous requirements and is something that must be maintained through practice. The process of receiving certification includes education, examination, experience, and ethics2. All of these aspects distinguish a CFP® professional from the general practitioner that has not received the proper training. With a designation of CFP®, clients can be assured there is a set of standards which ensure all work will be of high quality and the CFP® will be dedicated and ethical. A CFP® is also revered amongst professionals in the industry, providing a great deal of respect and trust to those that have obtained it. The support of one main designation in the industry gives potential clients the confidence they need in order to trust a CFP® to handle sensitive information.

Therefore, for the purposes of this document, along with the financial planning stages from the CFP board, the CFP practice standards will also be used. These standards are backed by the Financial Planning Standards Board Ltd. (FPSB) which “is a nonprofit association that manages, develops and operates certification, education and related programs for financial planning organizations so that they may benefit the global community by establishing, upholding and promoting worldwide professional standards in financial planning3.” In comparison to the stages from the CFP Board, the National Association of Personal Financial Advisors (NAPFA) has different stages for the financial planning process that is used by fee-only financial advisors. This process includes sharing, cultivating a relationship, determining net worth, gathering detailed information, constructing a cash flow statement, analyzing spending habits, gathering and analyzing financial statements, and discussing various 2 Financial Planning Standards Board. (2013). CFP Certification Requirements. Retrieved from https://www.fpsb.org/certificationandstandards/cfpcertification.html.

3 Financial Planning Standards Board. (2013). About FPSB. Retrieved from https://www.fpsb.org/about.html.

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streamlined process broken down into only six stages and are used in connection with the CFP Practice Standards. In order to maintain consistency in ideals and valid support of the information, CFP Board regulations and standards will be used.

4 National Association of Personal Financial Advisors. (2012). Why Financial Planning is Important.

Retrieved from http://www.napfa.org/consumer/WhyFinancialPlanningisImportant.asp.

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ESTABLISHING AND DEFINING THE CLIENT-PLANNER RELATIONSHIP

To begin the process of creating a financial plan with a planner, the client and the planner need to jointly define the scope of the relationship in order to decide what activities may be necessary to progress with the engagement, which is considered to be the first practice standard.

In financial planning engagements, this is accomplished by identifying what service or services are to be provided, disclosing the planner’s material conflicts of interest and compensation arrangements, determining the client’s and the practitioner’s responsibilities, establishing the engagement’s duration, and providing necessary information that could additionally define or limit the scope5.

This stage is beneficial in many aspects to all involved. When done correctly this increases the chances of the client’s expectations being achieved. It also serves as a way to focus both participants in the engagement on the agreed upon tasks which increases the potential that the final results will be positive. This also reflects well on the profession of financial planning in that when expectations are realistic and clear before the services are completed the client is ultimately satisfied.

There are also many expectations that planners must meet which are part of the implied agreement between the client and planner. It is expected that the planner has integrity, as trust is essential to the success of the relationship. The planner needs to give objective advice that is solely based on the needs of the client. There must be an acceptable level of competence on the 5 CFP Board. (2013). Practice Standards 100. Retrieved from http://www.cfp.net/for-cfpprofessionals/professional-standards-enforcement/standards-of-professional-conduct/financial-planningpractice-standards/practice-standards-100.

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should have a clear understanding of all services provided, costs, risks associated with following certain recommendations, and any potential conflicts of interest. Since the topics of discussion amongst a client and planner contain very sensitive information, the planner should maintain the client’s preferred level of privacy. A planner should always be professional and in doing so must only give advice that he is appropriately qualified and licensed to distribute. If he is not in the possession of the required expertise then he should direct the client to the assistance of a qualified professional in the subject. Lastly, all planners should be diligent by being clear in establishing the relationship and realistically investigating all items recommended, as well as supervising all staff working with the client closely.

THE JACKSONS

For an all-inclusive example, supporting and clarifying the use of the six stages of financial planning, the Jackson family will progress through each stage to create a comprehensive financial plan. This is the scope of the engagement between client and planner. This stage would include the drafting of an engagement letter that defines what is expected of all participants and describes what is going to occur in the process. This includes a list of services that are required for the comprehensive financial plan to be completed, and the length of the agreement; this plan is a lifelong engagement for the Jackson family. The cost structure for every service will be outlined in the engagement letter, so that the clients are aware of the burden of services from the planner.

Lastly, the document should assure the clients that the planner will follow all guidelines for conduct as established by the CFP board and that there are no conflicts of interest by accepting the engagement. Figure 2.1 depicts a sample engagement letter provided by the CFP Board.

–  –  –

The second stage of the financial planning process is focused on the collection of all relevant data and determining the client’s goals, both personal and financial, as well as defining their needs and priorities. These goals and objectives need to be mutually defined between the client and the planner with the scope of the engagement in mind before any decisions are made.



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