View
222
Download
1
Tags:
Embed Size (px)
Citation preview
1
© 2007 ME™ - Your Money Education Resource™
Chapter 3: Steps in the Financial Planning Process Chapter 4: Tools in the Financial Planning Process
Financial Planning
2
Financial Planners Steps in the financial planning process…
Establish a relationship Compensation
Commission Fee only Percent of assets Retainer
Gather data and define client goals Goals
Feelings about money Means to accomplish goals???
Risk tolerance/risk capacity
3
Financial Planners Steps in the financial planning process
Analyze and evaluate financial status Savings: three months???
Develop and present financial plan Alternatives
Projected income/expenses Annual through retirement/death
Projected assets/liabilities Annual through retirement/death
4
Financial Planners
Steps in the financial planning process Implement
Responsibility Monitor
How often? Quarterly, annually, life changing events
5
Communication for Financial Professionals
Interviewing Gathering information
Questionnaires Closed ended questions
List life insurance policies Open ended questions
What are your thoughts on the adequacy of your life insurance coverage?
What experience from your childhood had the greatest impact on your perception of financial security?
6
Communication for Financial Professionals
Interviewing Leading questions Why questions Question bombardment
7
Communication for Financial Professionals
Counseling Responsibility for establishing goals and
taking action belongs to client Financial goals and needs are closely
related to personal goals
8
Communication for Financial Professionals
Advising Providing guidance Make sure you first understand client’s
goals and needs.
9
Communication for Financial Professionals
Effective financial professionals Know yourself Be yourself Respect client Accept views that differ from your own
10
Communication for Financial Professionals
“Attending” skills Maintain eye contact Face the other person Be relaxed
Active listening Can put yourself in client’s shoes; see
client’s perspective Can paraphrase client’s statements
11
Risk Tolerance Prior to making investment and risk
management recommendations, planner must determine client’s risk tolerance
Investments Risk tolerance versus risk capacity
Focus on goal and take minimum risk to achieve goals
Look at prior investments to determine risk tolerance
12
Risk tolerance Risk aversion
Most people: loss averse Difficulty accepting losses Potential losses are measure of risk
If we can measure risk tolerance, why do we have investors’ returns in mutual
funds lower than returns of mutual funds??? Average ten-year return:
For fund: 15.05% For investors: -1.46%
13
Irrational behavior Most people are overconfident about their decision
making skills Study: individuals who didn’t know how much they needed
to save for retirement were confident they had enough Most people put too much emphasis on recent events
Expect what just happened to happen again Look for patterns: pigeons versus humans
Flip coin: tails, get corn Availability bias:
Focus on events that personally experienced Focus on events that are publicized
14
Irrational behavior Denial of risk: can’t happen to me Familiarity bias
International stocks Invest in employer’s stock; local companies
Control bias Not in control
Time horizon People can’t plan more than 10-15 years ahead
Planning for retirement Mental accounts
Too much emphasis on lost funds Breaking even Results of friends’ investments
15
Risk Tolerance Individuals who take physical or social risk
may not necessarily take monetary risk Monetary risk takers
Read about investments Confident in their investment abilities
Believe investment results are based on skill; not luck
Clear financial goals Invested as a young person People who earned their wealth
16
Risk Tolerance
Older individuals: tend to have less risk tolerance
Gender: no difference Professionals: higher risk tolerance Married individuals: higher risk
tolerance if both partners work
17
Assessing risk tolerance Quantitative
Questionnaires Norms Leading questions Framing questions Series of questions better than few questions Use more than one questionnaire
Qualitative Individuals tend to overstate their risk tolerance
18
Assessing risk tolerance Investment objectives
May not reflect risk tolerance Current portfolio
Does client understand risk of asset classes? What happens to bond prices when interest
rates increase? Amount of client debt Amount of deductibles Job tenure Type of home mortgage
19
Principles of Financial Planning Before invest, insure Take risk consistent with tolerance,
capacity and goals Education savings risk tolerance
Diversification Make savings automatic
Dollar cost averaging Increase rate of investing instead of
rate of return
20
Principles of Financial Planning It’s not what you make, it’s what you
keep Tax efficient investing
Real estate Roth IRA/401(k) Defer taxes???? Future rates Diversify taxability of investments
Repaying debt can be your best investment
21
Investment Vehicles Mutual funds:
Pool funds from investors to invest in stocks, bonds and/or other types of securities
Each share represents investor’s proportionate interest in portfolio
Priced at the end of trading Advantages
Low minimum investments Automatic investment programs
Diversification Professional management
22
Investment Vehicles Open-end mutual funds
Grow by issuing shares Unless fund is closed if it gets too large
Costs Load
Class A: load but lower 12b-1 and annual expenses Class B: no front-end load but higher annual expenses Class C: lower load than Class A or B
No load Deferred sales charges
Holding of funds Management fees
Equities: 1 – 1.5%; bonds .5%, for example 12b-1 fees: brokers, advertising Portfolio turnover: commissions
23
Investment Vehicles Open-end mutual funds
Distributions of realized capital gains Generally in December Reinvest
Closed-end mutual funds Trade on exchange; no additional shares issued
Traditional open-end mutual funds grow by issuing shares Unit investment trusts:
Portfolio of bonds; not actively managed REITs: own diversified portfolio of real estate Privately/separately managed accounts
Own shares of stock rather than mutual funds Removes layer of fees Control timing of sales; taxable gains/losses
24
Investment Vehicles ETFs
Match performance of index: S&P 500, GSCI Diversification or specific industry Can be traded like stocks: limit order; short
Features not available with traditional mutual funds Hedge funds
Private, unregistered investments pools Not subject to regulations governing mutual funds Short/long; leveraged; principal protected notes High fees Low correlation with equities?