The Case Approach to Financial Planning: Bridging the Gap between Theory and Practice, Fifth Edition

The Case Approach to Financial Planning

Bridging the Gap between

Theory and Practice, Fifth Edition

John E. Grable, Ph.D., CFP®

Ronald A. Sages, Ph.D., AEP®, CFP®, CTFA, EA

Michelle E. Kruger, Ph.D., CFP®

National Underwriter Academic Series

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DEDICATION

To Emily, with love, John

To Betsy, Laurie, Patti & Lindsay, with all my love and devotion, Ron

To Joey, with love for you and gratitude for the coffee, Michelle

ABOUT THE AUTHORS

JOHN E. GRABLE, PH.D., CFP®

Professor and Athletic Association Endowed Professor of Financial Planning, University of Georgia

Professor John Grable teaches and conducts research in the Certified Financial Planner™ Board of Standards Inc. undergraduate and graduate programs at the University of Georgia where he holds an Athletic Association Endowed Professorship. Prior to entering the academic profession, he worked as a pension/benefits administrator and later as a Registered Investment Adviser in an asset management firm. Dr. Grable has served the financial planning profession as the founding editor of the Journal of Personal Finance and co-founding editor of the Journal of Financial Therapy and Financial Planning Review. He is best known for his work in the areas of financial literacy and education, financial risk-tolerance assessment, behavioral financial planning, and evidence-based financial planning. He has been the recipient of numerous research and publication awards and grants and is active in promoting the link between research and financial planning practice where he has published over 150 refereed papers, co-authored several textbooks, co-authored a financial planning communication book, and co-edited a financial planning and counseling scales book and a graduate-level personal finance book. Since earning his Ph.D., Dr. Grable has served on the Board of Directors of the International Association of Registered Financial Consultants (IARFC), as Treasurer and President for the American Council on Consumer Interests (ACCI), and as Treasurer and board member for the Financial Therapy Association. He has received numerous awards, including the prestigious Cato Award for Distinguished Journalism in the Field of Financial Services, the IARFC Founders Award, the Dawley-Scholer Award for Faculty Excellence in Student Development, and the ACCI Mid-Career Award. He currently writes an economics and investing column for the Journal of Financial Service Professionals and provides research and consulting services through the Financial Planning Performance Lab.

RONALD A. SAGES, PH.D., AEP®, CFP®, CTFA, EA

Adjunct Professor at The University of Georgia

Ron Sages is an Adjunct Professor of Personal Financial Planning at the University of Georgia, Athens, Georgia, where he teaches in the CFP® Board Registered Master’s Program. Courses he currently teaches for UGA include Advanced Estate Planning and Practice Management. Dr. Sages also served as an inaugural Lecturer in Wealth Management at Columbia University in New York City from 2021-22. Prior to joining both academic institutions, he was an Assistant Professor of Personal Financial Planning at Kansas State University from 2011 – 2019 where he was a 2016 recipient of the GPIDEA Faculty Excellence Award for his instruction in the Case Studies/Program Development Course. In addition to his responsibilities in academia, Dr. Sages is a Senior Investment Officer and Director of Personal Financial Planning for Eagle Ridge Investment Management, LLC, a wealth management firm, based in Stamford, Connecticut. A former wealth management entrepreneur for twenty-five years, including an additional twenty years of Money Center Bank experience, Ron earned his doctorate in Personal Financial Planning from Kansas State University in 2012 and his MBA in Finance and Taxation from the University of Connecticut in 1979. His research interests are in behavioral finance, risk management and financial literacy. As a financial planning practitioner and researcher, Ron aspires to bring applied research to financial planning practitioners in an effort to provide practical solutions to client-focused challenges. Ron is a member of the Stamford (CT) CFA Society, Estate Planning Council of Lower Fairfield County (CT), the National Association of Estate Planning Councils, Financial Planning Association, and the Financial Therapy Association.

MICHELLE E. KRUGER, PH.D., CFP®

Private Practice, Athens Georgia

Michelle Kruger earned her Ph.D. in Financial Planning at the University of Georgia (UGA). She graduated magna cum laude with a B.B.A. in Finance from the Terry College of Business at UGA. After serving as an Assistant Professor of Finance at Loras College, Michelle pivoted to an industry role. She is currently a Senior Financial Planner at Elwood & Goetz Wealth Advisory Group, a fee-only, comprehensive financial planning firm located in Athens, Georgia. Michelle has taught classes in computer applications in financial planning, as well as advanced financial planning seminar courses. Her research interests include financial planning interventions, risk tolerance assessment, and behaviors associated with building wealth. Dr. Kruger also conducts research through the Financial Planning Performance Lab, the nation’s only applied clinical facility designed to obtain evidence about the effectiveness of the financial planning process. She also has served as a financial counselor at the Aspire Clinic, an interdisciplinary teaching and research institution, applying marriage and family therapy theories and techniques to her work with financial clients.

PREFACE

HOW TO USE THIS BOOK

Since the first edition of this book was published, the demand for more comprehensive and realistic financial planning analytical practice problems and cases has increased noticeably. This fifth edition of A Case Approach to Financial Planning: Bridging the Gap between Theory and Practice has been comprehensively updated to meet this demand, with several new cases added in chapter fourteen. Unlike other financial planning textbooks and case study manuals, this book offers a unique perspective to solving problems and cases. As such, it is very important that readers fully understand the core assumptions embedded in the development of the materials included in the book before reading chapters or completing case assignments. The following points comprise the book’s underlying assumptions:

This book is a companion to The Fundamentals of Writing a Financial Plan written by John Grable, Michelle Kruger, and Megan Ford. Some of the material in The Fundamentals of Writing a Financial Plan (e.g., the review of communication and counseling theories, the presentation of financial planning practice standards, and general analytical process discussions) can be used to answer case questions in this book.

This book assumes that readers already have a foundation in understanding and applying the process of financial planning or are currently reading Writing a Financial Planning: A Seven Step Process; thus, the chapters in this book focus primarily on the analysis of a client’s current situation and the development of basic strategies to help a client reach their financial goals.

This book is intended for use in mid-level or capstone courses in financial planning programs at colleges, universities, and certificate programs. It is appropriate for use at the undergraduate, graduate, and certificate levels. When used at the undergraduate level, it is assumed that the book will be used in the final course of a student’s last year of study, in conjunction with The Fundamentals of Writing a Financial Plan or a similar textbook. Although a review of key financial planning assumptions is provided in each core content chapter, this book is not—nor should it be considered—a replacement for a content specific (e.g., investments, retirement, etc.) financial planning textbook.

To successfully complete case assignments and questions, students are assumed to have already completed or be enrolled in classes in the six core areas of financial planning: Financial Situation Analysis, Tax Planning, Insurance (Risk Management) Planning, Investment Planning, Retirement Planning, and Estate Planning. This book offers a review of important concepts and strategies, but in no way are the core content chapters intended to provide a comprehensive overview of each financial planning topic.

This book is not intended for use solely as a CFP® examination study guide. The mini-cases, the comprehensive cases, and the end-of-chapter materials were written to help faculty and students assess minimum financial planning competencies. The cases can certainly help those who wish to sit for a national financial planning certification examination; however, the material is not intended for that purpose exclusively.

A Case Approach to Financial Planning: Bridging the Gap between Theory and Practice, Fifth Edition is intended to present timely and accurate information; however, the strategies, tools, and techniques presented are designed for educational purposes only. Although the authors and outside reviewers have reviewed the information, data analysis methods, recommendations, strategies, and other material, some material presented in the text could be affected by changes in tax law, court findings, or future interpretations of rules and regulations. Therefore, the accuracy and completeness of the information, data, and opinions in the book are in no way guaranteed. The authors specifically disclaim any personal, joint, or corporate (profit and nonprofit) liability for loss or risk incurred as a consequence of the content of the book.

The ultimate goal in writing A Case Approach to Financial Planning: Bridging the Gap between Theory and Practice, Fifth Edition was to help students of financial planning gauge their competency level before entering the profession. No one can know every aspect of financial planning, let alone every single strategy that might be appropriate to meet a client’s needs; however, a competent financial planner should possess the skill needed to create financial statements, supervise a tax analysis, conduct insurance needs analyses, estimate retirement needs and recommend appropriate recommendations, evaluate a client’s investment situation, create an educational funding and/or special needs plan, and organize an estate planning review. The end-of-chapter questions, mini-cases, and comprehensive cases presented in this book can help a financial planner identify skill strengths and weaknesses, thus creating a foundation for competency improvement.

FEATURES OF THE BOOK

Underlying the development of this text and the various student learning experiences presented throughout the book is Bloom’s taxonomy of cognitive skills.¹ Knowledge and comprehension are covered through the traditional presentation and testing of financial planning concepts presented in each chapter. Application and analysis are fostered through a review of financial planning strategies, where students are challenged to evaluate the advantages and disadvantages of each, relative to the needs of a client’s unique situation. Ultimately, the material in this book provides a pathway to help students build synthesis and evaluation skills. Designing an integrated, actionable plan matched to a client’s needs, capacities, and desires requires competency across Bloom’s taxonomy of cognitive skills. One way to develop these financial planning skills is to practice applying concepts in a structured manner. A student who systematically completes each chapter’s assignments and the case material presented in chapter fourteen will be in a much stronger position to exhibit core financial planning competencies.

OVERVIEW OF CHAPTERS

One of the purposes of a financial planning case or program capstone course is to provide a forum for students to develop and critique financial planning strategies matched to a client’s needs. For many students, the capstone course is the only place in a college or university curriculum where all core content financial planning areas are reviewed and integrated in the context of a specific client situation. This book provides an overview of a variety of commonly used financial planning tools, techniques, and strategies matched to each core content planning area for in-class and out-of-class review and discussion. In addition, an assortment of computational examples and end-of-chapter problems are presented in each chapter. The elements of the book include:

Part I—Review of the Financial Planning Process and Computational Skills for Developing a Financial Plan

The Financial Planning Process. This chapter describes the general financial planning process, while providing a foundation for the application of concepts presented in other book chapters.

Computations for Financial Planning. This chapter provides a comprehensive review of key concepts related to time value of money and general personal finance calculations.

Part II—Analyzing and Evaluating a Client’s Financial Status to Plan for Client Earnings

3. Cash Flow and Net Worth Planning. This chapter examines the process of analyzing and evaluating a client’s current financial situation. The chapter offers conventional strategies that financial planners regularly use to improve a client’s cash flow and net worth position.

4. Income Tax Planning. The purpose of this chapter is to review the basic steps involved in analyzing and evaluating a client’s current tax planning situation. In addition, the chapter provides a review of several widely used tax planning strategies.

Part III—Analyzing and Evaluating a Client’s Financial Status to Plan for Client Risk Protection

5. Life Insurance Planning. This chapter reviews the basic steps involved in a financial planner’s analysis and evaluation of a client’s current life insurance situation. The chapter also presents a foundational review of life insurance products and planning strategies.

6. Health Insurance Planning. This chapter reviews the fundamental steps associated with a financial planner’s analysis of a client’s current health insurance situation. Common health insurance products and strategies are presented.

7. Disability Insurance Planning. This chapter reviews the steps involved in conducting a disability insurance planning analysis. The chapter includes a review of widely used disability insurance products and disability planning strategies that can be adapted to meet client needs.

8. Long-Term Care Insurance Planning. This chapter examines the process underlying a financial planner’s analysis and evaluation of a client’s long-term care insurance situation. The chapter presents commonly used product and procedural strategies.

9. Property and Liability Insurance Planning. This chapter considers issues related to maximizing a client’s plan for protecting property and minimizing liability exposures. The chapter provides a review of the fundamental steps in the analysis and evaluation of a client’s current property and liability situation and presents examples of products and strategies used to protect client assets.

Part IV—Analyzing and Evaluating a Client’s Financial Status to Plan for the Growth and Distribution of Assets

10. Investment Planning. This chapter reviews important issues surrounding the analysis of a client’s investment situation. The investment planning process is reviewed and examples showing ways investment products, tools, techniques, and strategies can be used to meet client needs are provided.

11. Education Planning. This chapter provides a step-by-step overview of the steps typically followed when analyzing and evaluating a client’s current educational funding situation. A selection of education funding strategies demonstrating how financial planners often strategize when planning for a client’s education situation are presented.

12. Retirement Planning. This chapter describes the analysis and evaluation of a client’s pre- and post-retirement situation. Material in the chapter also provides an overview of common retirement planning products and strategies that can be used to meet retirement asset accumulation and distribution objectives. Additionally, strategies to develop recommendations for retirement planning across the life cycle are also provided.

13. Estate Planning. The steps need to conduct an estate planning analysis are reviewed in this chapter. A brief outline of how financial planners estimate a client’s gross and taxable estate is provided. Other important issues are discussed, such as transferring assets, providing for survivors or other legacy needs, and planning for incapacitation and other end-of-life decisions. The chapter ends with a review of how certain estate planning strategies can be used in the financial planning process.

Part V—Financial Planning Case Studies

14. Financial Planning Cases. Twenty multiple-choice and open-end question cases appear in this chapter. The cases in this section of the book were written to help students evaluate their assessment, evaluation, and decision-choice competencies. As highlighted in this section of the book, student success can be maximized by utilizing correct data inputs to optimize the analysis of case issues, which can then be used to correctly answer questions. It is important to note that many of the case questions require a mathematical analysis and other estimations, most of which can be made using a time value of money calculator. In additional to financial planning topic cases, two financial planning practice standards and ethics cases are also included in this chapter. These cases were written to test a financial planner’s knowledge of securities rules and financial planning practice standards.

Case Studies and Quantitative/Analytical Mini-Case Problems

Although successfully developing a financial plan for a client situation is rewarding, the downside to conducting a case analysis is that the process can sometimes seem far removed from reality. This book attempts to bridge the gap between theory and practice by providing short cases and computational problems at the end of chapters 3 through 13. These chapter case studies and practice problems illustrate how financial planning strategies can be developed and shaped into tools that can be matched to a client’s unique situation.

This book’s end-of-chapter quantitative and analytical mini-cases were written to challenge students to practice calculations and engage in critical thinking. These skills are essential to the application, synthesis, and evaluation competencies needed to artfully analyze a client’s situation, identify and match workable strategies to a client’s situation, and to integrate these strategies into actionable recommendations for implementation. While each end-of-chapter question can be answered using a calculator and/or formulas, some students will also find the Financial Planning Analysis Excel™ package included with this book to be helpful.

All of the case material in this book was written to remind students that despite what is commonly a focus on analytical skills and detailed factual knowledge in college and certificate programs, clients—real people—and their financial goals and dreams, are truly the reason financial planning exists as a profession. Financial planners help clients over extended periods of time. Relationships can span decades and often even generations. While analytical acumen is critical to the success of any financial planning endeavor, relationship factors must never be forgotten. In this sense, A Case Approach to Financial Planning: Bridging the Gap between Theory and Practice, Fifth Edition was written to help the next generation of financial planners sincerely practice financial planning as a humanistic science.

Words of Advice

The case study methodology presented in this book has been refined and tested over two decades. The tools, techniques, and strategies presented in this book have been used by thousands of financial planning students with great success. One example of this success is the achievement of teams of undergraduate students who have used this book, in combination with Writing a Financial Planning: A Seven Step Process, when preparing for national financial planning competitions. Numerous student teams have competed in and won national collegiate financial planning championships using materials presented in the chapters of this book. More importantly, thousands of students who have applied the concepts presented in this book have gone on to pursue successful careers in the field of financial planning.

Four aspects of student success are tied directly to how someone approaches the completion of case work. Each point of success is described below:

First, successful students tend to exhibit a strong proficiency in the use of personal finance calculators.

Second, the most motivated students have an interest in working with computer spreadsheets and confirming calculations with their calculator.

Third, successful students do extremely well at applying critical thinking skills. Exploring issues, looking for the integration of concepts, and exhibiting a willingness to research and use reference materials are all indicators of success for those engaged in the case study method.

Finally, the most successful students understand that developing a plan in response to a case situation—especially a comprehensive case—takes time. A commitment to taking the time to analyze a situation, developing strategies, crafting workable client-centered recommendations, and searching for ways to implement and monitor recommendations is critical to mastering the case study methodology.

Our sincere hope is that you find the materials, quantitative/analytical mini-case problems, and chapter fourteen cases helpful as you strive to develop your financial planning competencies and skills. We are always interested in feedback about the book. Please feel free to reach out with comments and suggestions.

John Grable

Ron Sages

Michelle Kruger

Endnote

¹ Bloom, B.S. Taxonomy of Educational Objectives, Handbook I: The Cognitive Domain (New York: David McKay, 1956).

ACKNOWLEDGMENTS

Creating a book of this magnitude is not without challenges. Several individuals have been instrumental in keeping the project on task. First and foremost, we wish to thank our spouses and partners for being patient and supportive during the writing and editing process. As we have all learned, writing a book is a continuous process, and without the support of our families, the process would have stopped long ago. We are also indebted to our editor at The National Underwriter Company—Susan Gruesser (as well as our former editor, Jason Gilbert). Susan has shown unwavering confidence in this book and spearheaded a complete copy editing process. Without this editorial approach this new revised edition of the book would never have come to fruition. Susan’s encouragement, patience, and editing skills will be apparent to anyone who compares this edition to earlier editions of the book. Thanks also go to Jay Caslow for fully supporting this revision. The anonymous reviewers who spent countless hours evaluating chapters prior to publication and those who have helped improve the book’s content also deserve sincere thanks, particularly Sherman Hanna, Luke Dean, David Nanigian, Carolynn Tomin, Megan Ford, Joe Goetz, Aman Sunder, and Joanne Snider. We are also grateful for the early work Dr. Ruth Lytton and Derek Klock provided on this project.

Additionally, we are very grateful to our colleagues and their students around the country (and world) who have adopted this book and helped make the use of case studies an important aspect of financial planning academic programs, including those at: Angelo State University, Ball State University, Bentley College, Biola University, Boston University, California Lutheran University, Columbia University, Creighton University, Davenport University, Fairleigh Dickinson University, Florida Atlantic University, Florida State University, Fort Hays University, Franklin University, George Fox University, Golden Gate University, Illinois State University, Immaculata University, Indiana University, Indiana State University, Iowa State University, Kansas State University, Liberty University, Loras College, Metro College, Michigan State University, Montana State University, University of Nebraska, Nevada State College, Nichols College, Old Dominion University, Olivet College, Robert Morris University, San Diego State University, Shepherd University, Suffolk University, Texas Tech University, Transylvania University, University of California Los Angeles, University of Akron, University of Alabama, University of Central Oklahoma, University of Cincinnati, University of Colorado, University of Georgia, University of Houston, University of Missouri, University of North Florida, University of Redlands, University of South Florida, University of Kentucky, University of Wisconsin, University of Minnesota, Duluth, University of North Florida, University of the Incarnate Word, Vancouver University, Virginia Tech, and Western Kentucky University.

As a team, we are also thankful for the opportunity to have worked with undergraduate, graduate, and certificate financial planning students over the past two decades. The idea for this case book was formulated through our daily work with students. We are immensely thankful for what each student has taught us about what works in and outside the classroom. The writing of this book has reminded us that to teach is to learn again. Each student we have had in class has challenged us to strive to find better ways to explain and teach financial planning concepts. Additionally, we are very grateful to our colleagues around the country (and world) who have adopted this book and helped make this revision possible. We are honored to be a part of your professional development and learning experience. We certainly hope that you find the material in this book a benefit to your career.

John Grable

Ron Sages

Michelle Kruger

LIST OF ABBREVIATIONS COMMONLY USED IN FINANCIAL PLANNING

Alternative Minimum Tax—AMT

Assets Under Management—AUM

Accredited Investment Fiduciary®— AIF®

Certificate of Deposit—CD

Certified Financial Planner Board of Standards, Inc.—CFP Board

Certified Financial Planner® Certification Examination—CFP® exam

Certified Investment Management Analyst—CIMA

Certified Investment Management Consultant— CIMC (No longer awarded)

Certified Life Underwriter—CLU

Charitable Remainder Annuity Trust—CRAT

Charitable Remainder Unitrust—CRUT

Chartered Financial Analyst—CFA

Chartered Financial Consultant—ChFC

Chartered Investment Counselor—CIC

Chartered Life Underwriter—CLU

Consolidated Omnibus Budget Reconciliation Act of 1986—COBRA

Coverdell Education Savings Account—Coverdell ESA or CESA

Discretionary Cash Flow—DCF

Employee Retirement Income Security Act of 1974—ERISA

Enrolled Agent—EA

Errors and Omissions— E&O

Exchange Traded Fund—ETF

Financial Industry Regulatory Authority—FINRA

Financial Planning Association—FPA

Flexible Spending Account—FSA

Grantor Retained Annuity Trust—GRAT

Grantor Retained Unitrust—GRUT

Guaranteed Auto Protection Insurance—GAP Insurance

Health Insurance Portability and Accountability Act of 1996—HIPAA

Health Savings Account—HSA

High Deductible Health Plan—HDHP

Homeowners Policy—HO Policy

Incentive Stock Option—ISO

Chapter 1: The Financial Planning Process

1.1 THE CASE STUDY APPROACH

The profession of financial planning has expanded quickly since its inception in 1969. During the 1960s and 1970s, financial planning consisted of little more than a small consortium of financial service professionals interested in offering clients a value-added service, in addition to insurance and mutual fund products. Since its inception, financial planning has grown into a dynamic, growing, and respected profession.

The growth of financial planning, both as a recognized profession and as an important behavioral change force in the lives of individuals and families, has been remarkable. Starting with fewer than fifty Certified Financial Planner (CFP®) professionals in the early 1970s, the number of CFP® certificants has grown to more than eighty thousand today. Worldwide growth in financial planning, particularly among CFP® professionals, is even more stunning. As the profession has expanded in recent years, the number of students studying financial planning has also grown, which has prompted the need for tools students and aspiring financial planners can use to enhance their knowledge, skill set, and confidence. Thus, the purpose of this book.

This book has been designed to help students synthesize knowledge obtained in multiple classes into practical techniques that can be used to solve theoretical and practical financial planning case studies. The tools, techniques, and strategies presented here are intended to serve as a manual to help students and aspiring financial planners piece together divergent concepts into strategic recommendations. Before describing each element of the book, it is worthwhile to take a step back and review two important concepts. First, what exactly is meant by the term financial planning? And second, what is the relationship between financial planning and the process of financial planning?

1.2 FINANCIAL PLANNING DEFINED

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

Financial planning can be thought of as a humanistic science focused on helping individuals, families, business owners, and occasionally institutions manage and improve their financial situation. The term humanistic, as used here, means that a financial planner focuses on individuals and families and the values, capabilities, and capacities clients bring with them when dealing with complex financial questions and issues. Financial planning is a science because financial planning professionals rely on critical thinking, data, and evidence-based practices, rather than generalized rules or dogmas, when formulating client-centered strategies.³

1.3 THE FINANCIAL PLANNING PROCESS

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 describes the financial planning process as a series of seven interrelated steps:

understanding the client’s personal and financial circumstances;

identifying and selecting goals;

analyzing the client’s current course of action and potential alternative course(s) of action;

developing the financial planning recommendation(s);

presenting the financial planning recommendation(s);

implementing the financial planning recommendation(s); and

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 2018. Figure 1.1 shows the current financial planning process as it is conceptualized today along with some of the important tasks that need to be completed by a financial planner at each step in the process.

Figure 1.1. The Financial Planning Process.

fig1-1.jpg

Figure 1.2 illustrates how the financial planning process is circular in nature, with ongoing monitoring continually informing the type of information a financial planner must obtain to continually ensure that a client is moving toward goal achievement.

Figure 1.2. The Circular Nature of the Financial Planning Process.

fig1-2.jpg

1.4 THE ROLE OF FINANCIAL PLANNER

According to the Bureau of Labor Statistics,⁴ a financial planner is a professional who provides advice on investments, insurance, mortgages, college savings, estate planning, taxes, and retirement to help individuals, families, and sometimes business owners manage their finances. Financial planners tend to look at a client’s financial situation holistically. Unlike a financial advisor who may provide advice and counsel solely on investment or insurance topics, or an accountant who may only prepare a client’s tax return or perform auditing services, a financial planner, by definition, is generally tasked with evaluating a client’s overall financial situation and then using professional judgment to make integrated recommendations with the intent of improving a client’s financial situation. Subject areas typically reviewed by a financial planner 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.

Education planning.

Retirement planning.

Estate Planning.

Special Needs Planning.

A financial planner is expected to use the financial planning process to guide their client generally and specifically within—and across—each subject area when conducting and presenting a financial planning review.

1.5 FINANCIAL PLANNING PRACTICE STANDARDS AND ETHICS

Financial planning professionals who are CFP® certificants must follow practice standards developed and promulgated by CFP Board. These standards are described in CFP Board’s Standards of Professional Conduct. The standards have evolved within the profession to guide professional actions and benefit consumers. The CFP Board Practice Standards and Code of Ethics are intended to:

assure that the practice of financial planning by CFP® professionals is based on established norms of practice;

advance professionalism in financial planning; and

enhance the value of the financial planning process.⁵

All CFP® professionals must adhere to the following Code of Ethics:

Act with honesty, integrity, competence, and diligence.

Act in the client’s best interests.

Exercise due care.

Avoid or disclose and manage conflicts of interest.

Maintain the confidentiality and protect the privacy of client information.

Act in a manner that reflects positively on the financial planning profession and CFP® certification.

CFP Board’s Standards of Conduct provide specific guidance to CFP® professionals when working with clients within the scope of the Code of Ethics. There are fifteen actions that comprise a financial planner’s duties when conducting financial planning:⁶

Fiduciary duty.

Competence.

Diligence.

Sound and objective professional judgment.

Integrity.

Professionalism.

Comply with the law.

Confidentiality and privacy.

Disclose and manage conflicts of interest.

Provide information to a client.

Duties when communicating with a client.

Duties when representing compensation method.

Duties when recommending, engaging, and working with additional persons.

Duties when selecting, recommending, and using technology.

Refrain from borrowing or lending money and commingling financial assets.

CFP Board also provides guidance on ways a CFP professional must act when applying the financial planning process and when dealing directly with CFP Board. Of particular importance is a rule titled Rebuttable Presumption that the Practice Standards Apply, which states:

There is a rebuttable presumption that a CFP® professional providing financial advice is required to integrate relevant elements of the client’s personal and/or financial circumstances in order to act in the client’s best interest, and thus is required to comply with the Practice Standards. Among the factors that CFP Board will weigh are:

the number of relevant elements of the client’s personal and financial circumstances that the financial advice affects;

the portion and amount of the client’s financial assets that the financial advice may affect;

the length of time the client’s personal and financial circumstances may be affected by the financial advice;

the effect of the client’s overall exposure to risk if the client implements the financial advice; and

the barriers to modifying the actions taken to implement the financial advice.

A key takeaway is that a financial planner must act in the best interest of their client at all times while attempting to be holistic in the delivery of financial advice. For the purposes of the Practice Standards, a client is defined as:⁷

Any person, including a natural person, business organization, or legal entity, to whom the CFP® professional renders professional services pursuant to an engagement.

Within this definition, an engagement is defined as:⁸

A written or oral agreement, arrangement, or understanding.

The Practice Standards apply to the delivery of financial advice, which is defined as:⁹

A communication that, based on its content, context, and presentation, would reasonably be viewed as a suggestion that the client take or refrain from taking a particular course of action with respect to:

the development or implementation of a financial plan addressing goals, budgeting, risk, health considerations, educational needs, financial security, wealth, taxes, retirement, philanthropy, estate, legacy, or other relevant elements of a client’s personal or financial circumstances;

the value of or the advisability of investing in, purchasing, holding, or selling financial assets;

investment policies or strategies, portfolio composition, the management of financial assets, or other financial matters;

the selection and retention of other persons to provide financial or professional services to the client; or

the exercise of discretionary authority over the financial assets of a client.

When determining whether financial advice has been provided to someone, CFP Board looks at the level of communication specifically provided to a client. For example, if advice is customized and communicated to an individual client, the advice will likely be considered to be financial advice. On the other hand, general education communications will not be viewed as financial advice.

1.6 THE ROLE OF FIDUCIARIES

While CFP Board practice standards and guidelines can serve as a performance benchmark for anyone who provides financial planning services, it is important to note that only CFP® professionals and certificants are required to adhere to the standards. CFP Board has no governmental or legal standing beyond the power to reprimand a CFP® professional. At a broader level, the practice of financial planning generally falls under the watchful eye of either the Securities and Exchange Commission (SEC) or the Financial Industry Regulatory Authority (FINRA). Although overly simplified, the following guidelines can be used to identify when a financial planner will be subject to SEC or FINRA rules:¹⁰

If a financial planner provides advice or counsel on investments and/or securities for a fee, the financial planner must register as an investment adviser (or investment adviser representative) with the SEC or appropriate state regulator.¹¹

If a financial planner recommends the purchase or sale of investments and/or securities, and earns a commission based on a transaction, the financial planner must be licensed by FINRA. The most common securities license is the Series 7 license.¹²

A SEC registered financial adviser is required, under federal law, to follow a fiduciary standard of care when working with clients. According to the SEC:¹³

The Investment Advisers Act prohibits misstatements or misleading omissions of material facts and other fraudulent acts and practices in connection with the conduct of an investment advisory business. As a fiduciary, an investment adviser owes its clients undivided loyalty, and may not engage in activity that conflicts with a client’s interest without the client’s consent.

A FINRA licensed financial planner needs only to follow what is generally referred to as a best interest standard of care when working with clients. Under this rule, a broker-dealer representative must recommend products that are in a client’s best interest while also disclosing any potential conflicts of interest related to such products.¹⁴

The fiduciary standard of care is growing in importance worldwide. In some European countries, for example, the fiduciary standard has been adopted as the only means of providing financial planning services. There is little consensus in the United States and Canada, however, regarding the adoption of the fiduciary standard, although CFP Board’s financial planning standards require any CFP® professional who is providing financial planning services to follow a fiduciary standard of care. Given global trends and CFP Board’s standards of practice, the tools, techniques, and strategies presented in this book are presented in a way that adheres to the fiduciary standard of care.

1.7 WHY CASE STUDIES?

Financial planning is perennially ranked as one of the top five fastest growing and most prestigious careers. One outcome associated with the growth of the financial planning profession is that the study of financial planning has taken root as an academic discipline on college campuses. As someone reading this book, it is likely that you are:

a student who is nearing completion of a degree in financial planning;

a financial service professional who is studying to enhance your professional competence; or

a career changer looking for a fulfilling occupation that provides daily challenges, rewards, and high compensation.

It is also likely that you would like to sit for and pass the national Certified Financial Planner examination. Becoming a financial planner, and eventually obtaining the CFP® marks (or any of the other valuable credentials available in the marketplace¹⁵) is a worthwhile career goal. Consider the following statistics as published by the Bureau of Labor Statistics:¹⁶

Almost 272,000 individuals work as financial planners and financial advisors.

Financial planners and other financial advisors have median earnings of $90,640 annually.

The top 10 percent of financial planners and financial advisors earn more than $208,000 annually.

The lowest 10 percent of financial planners and financial advisors earn nearly $41,000 annually, which is still above the national median for all occupations.

The job outlook for financial planners is high and expected to grow much faster than average.

As many as 40,000 new financial planners and financial advisors are expected to be hired by 2026.

The need for a case study book to help prepare future financial planners has been ongoing since the first financial planning courses were developed. The 2012 requirement that a financial plan development course be included in all CFP® registered financial planning curriculums has cemented this need. With the growing demand for well-educated financial planners, the need for challenging, realistic, and applicable cases today is more crucial than ever. A Case Approach to Financial Planning: Bridging the Gap between Theory and Practice was written to meet this need.

This book was not designed to be just another book of cases, nor was it conceptualized as an advanced financial planning book or a CFP® certification exam preparation book—although some have noted that, to some extent, it is a combination of all three. As a financial planning casebook, this text includes numerous analytical problems and questions, various computational examples, and enough ten- and twenty-question cases to keep a dedicated student engaged for an entire semester. If that were not enough, the book also offers students an opportunity to solve comprehensive cases using an advanced spreadsheet tool.

As an advanced financial planning book, this text provides a review of basic—and in some chapters, more advanced—content, particularly as applied to strategy development. What is presented should be familiar—almost a reminder—to those who are enrolled in a financial planning program. For those studying in a certificate program or on their own, the material and cases can be used to identify areas where further study may be needed, especially in relation to passing one or more national certification examinations.

At its core, this book was written to illustrate how the financial planning process can be used to help clients achieve multiple financial goals and objectives through integrative financial planning. A second purpose of the book was to provide quality case studies to help students, career changers, and those looking to learn more about financial planning gain confidence in identifying, applying, and integrating synergistic personal financial planning strategies into meaningful recommendations. Several objectives have guided the continual development of this book:

Provide readers with a review of the steps necessary to complete a current situation analysis in the core content areas of financial planning.

Present commonly used financial planning product and procedural strategies.

Offer insights into challenging financial planning topics.

Review the unique challenges associated with the evaluation of each core financial planning content area.

Provide students with opportunities to work on challenging cases.

Present computational questions and client-centered case studies that illustrate the use of specific strategies to meet client needs.

1.8 SUMMARY

The financial planning process, as defined by the CFP Board of Standards, Inc., is defined as:

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.

One of the most important aspects of financial planning that sets this professional activity apart from other financial services activities is that financial planners follow an established process when working with clients. The process begins by gaining an understanding of a client’s personal and financial circumstances. The process ends and begins again through the ongoing monitoring of implemented products and procedures. A competent financial planner who is embarking on a career in the profession should possess the following attributes as they relate to defining financial planning and using the financial planning process. First, a financial planner should be able to summarize and explain the steps of the financial planning process. Second, a financial planner should be able to describe how the financial planning process, as established by CFP Board, serves as a framework for guiding financial planners when working with clients. Finally, a financial planner needs to understand how continual practice, through the case study method, can enhance the use of products, procedures, and services while improving professional judgment.

1.9 CHAPTER EQUATIONS

There are no equations in this chapter.

1.10 QUANTITATIVE/ANALYTICAL MIN-CASE PROBLEMS

Brendan Frazier

1. Brendan Frazier is considering a career change. He recently read an online blog that stated the need for financial planning professionals will continue to grow in the future. Brendan is intrigued by the idea of becoming a financial planner. Based on the readings in this chapter, help Brendan answer the following questions:

In what year did financial advisors meet and formalize what is now known as the profession of financial planning?

How does CFP Board define financial planning?

How do the authors of this book define financial planning?

What are the seven steps in the financial planning process?

Frylyn Babcock

2. Frylyn Babcock is studying for a national financial planning examination. She has several questions about who may be called a financial planner, the types of activities a financial planner typically engages in, and what standards a financial planner must adhere to. Help Frylyn answer the following questions:

If Frylyn’s professional practice involves solely doing tax preparation work during the tax season is she a financial planner?

When must Frylyn follow CFP Board’s financial planning practice standards?

If Frylyn becomes certified as a CFP® professional, she must follow CFP Board’s Code of Ethics. What elements comprise the Board’s Code of Ethics?

How does CFP Board define a client?

What is a financial planning engagement?

William Gustafson

3. William Bill Gustafson started his professional career as a stockbroker. While he has built a successful practice, Bill would like to expand his practice by offering investment management advice for a fee, rather than a commission. He believes that he can immediately begin managing $125 million in client assets on a fee basis. Help Bill understand the regulatory environment as it relates to providing investment advice for a fee by answering the following questions:

What agency’s rules and regulations must Bill follow when working as a stockbroker?

If Bill were to become a Registered Investment Adviser (or Investment Adviser representative), what federal agency must he register with?

As a stockbroker, Bill is allowed to provide investment advice based on a best interest standard of care. If he becomes a Registered Investment Adviser (or Investment Adviser representative), what standard of care must he follow?

Which standard of care is more stringent?

1.11 CHAPTER RESOURCES

Anthony, M. Your Clients for Life: The Definitive Guide to Becoming a Successful Financial Planner. Chicago, IL: Dearborn Financial Publishing, 2002.

Assessing a Client’s Financial Risk Tolerance (http://pfp.missouri.edu/research_IRTA.html).

Certified Financial Planner Board of Standards, Inc. (www.cfp.net).

Diliberto, R. T. Financial Planning—The Next Step: A Practical Approach to Merging Your Clients’ Money with Their Lives. Denver, CO: FPA Press, 2006.

Financial Industry Regulatory Authority (FINRA) (www.finra.org).

Financial Therapy Association (financialtherapyassociation.org).

Investment Adviser Registration Depository (www.iard.com).

Investment Financial Planner Public Disclosure Website: www.adviserinfo.sec.gov/(S(l2wrhvakmfteghqc1qtt0v5m))/IAPD/Content/IapdMain/iapd_SiteMap.aspx.

Kinder, G. Seven Stages of Money Maturity: Understanding the Spirit and Value of Money in your Life. New York: Dell Publishing, 2000.

Kinder, G., and Galvan, S. Lighting the Torch: The Kinder Method™ of Life Planning. Denver, CO: FPA Press, 2006.

Klontz, B., Kahler, R., and Klontz, T. Facilitating Financial Health: Tools for Financial Planners, Coaches, and Therapists, Second Edition. Cincinnati, OH: National Underwriter Company, 2015.

Klontz, B., and Klontz, T. Mind over Money: Overcoming the Money Disorders That Threaten Our Financial Health. New York: Crown Business, 2009.

Lytton, R., Grable, J., and Klock, D. The Process of Financial Planning: Developing a Financial Plan, Second Edition. Erlanger, KY: National Underwriter, 2012.

Money Quotient® Putting Money in the Context of Life™ (moneyquotient.org).

The Kinder Institute of Life Planning (www.kinderinstitute.com/index.html).

U.S. Securities and Exchange Commission (www.sec.gov).

¹ While all financial planners generally agree with CFP Board’s definition, only CFP® practitioners and students enrolled in a CFP Board registered academic program are required to use this definition. Additionally, only CFP® professionals and candidates must abide by the CFP Board Code of Ethics and follow all CFP Board rules and regulations.

² Certified Financial Planner Board of Standards, Inc., CFP Board’s Standards of Professional Conduct. Available at: https://www.cfp.net/for-cfp-professionals/professional-standards-enforcement/standards-of-professional-conduct.

³ Dr. Dave Yeske, a financial planning thought leader, has addressed this issue in numerous articles, including Evidence-Based Financial Planning: To Learn Like a CFP, and Finding the Planning in Financial Planning.

⁴ Bureau of Labor Statistics: https://www.bls.gov/ooh/business-and-financial/personal-financial-advisors.htm.

⁵ CFP Board: https://www.cfp.net/for-cfp-professionals/professional-standards-enforcement/code-and-standards.

⁶ Details about each standard of conduct can be found at: https://www.cfp.net/for-cfp-professionals/professional-standards-enforcement/standards-of-professional-conduct.

⁷ CFP Board: https://www.cfp.net/for-cfp-professionals/professional-standards-enforcement/standards-of-professional-conduct.

⁸ Ibid.

⁹ Ibid.

¹⁰ It is possible for a financial planner to be subject to both SEC and FINRA rules. When dual registration occurs, a financial planner must disclose to their client what type of service is being provided, how the financial planner is being paid, and any conflicts of interest.

¹¹ Financial planners who manage more than $100 million in client assets must register with the SEC. Others generally must register with the state securities regulator in the state(s) in which the financial planner provides services.

¹² Financial planners who sell insurance products must hold a state issued license. An insurance professional who also provides investment advice about variable insurance products may also be required to hold a FINRA license.

¹³ Securities and Exchange Commission: https://www.sec.gov/divisions/investment/iaregulation/memoia.htm.

¹⁴ See: https://www.finra.org/rules-guidance/key-topics/regulation-best-interest.

¹⁵ Other highly sought-after financial planning credentials include the Chartered Financial Consultant (ChFC®), Chartered Life Underwriter (CLU®), and Personal Financial Specialist (PFS®) designations.

¹⁶ Data obtained from: https://www.bls.gov/ooh/business-and-financial/personal-financial-advisors.htm.

Chapter 2: Computations for Financial Planning

2.1 ANALYTICAL APPROACHES USED BY FINANCIAL PLANNERS

Almost all aspects of personal financial planning involve mathematical calculations. The good news is that the math is not extremely complex. Furthermore, sophisticated calculators and software programs are available to do most of the work.

The formulas needed for the majority of calculations used by financial planners on a daily basis are relatively easy to commit to memory. Applying the correct formula and related inputs within a calculation usually causes the most difficulty. More important than the formulas themselves is a fundamental understanding of the logic, or reasoning, required to identify the correct mathematical formula for a particular purpose.

Once the logic has been established, there may be multiple ways to derive the correct solution to a financial planning question. For example, one financial planner may choose to adjust a future value calculation for taxes at the end of period, while another may wish to adjust a savings need at the beginning to account for taxes. Both financial planners should arrive at the same (or similar) answer. This can sometimes be confusing to those who are new to the logic of time value of money computations.

What is important, then, is for financial planners to choose a method that they are comfortable with and practice that method until the process becomes second nature. Then, it is equally important to ensure accuracy—in both the input of the data and the supporting assumptions on which a calculation is based.

The purpose of this chapter is to briefly review some of the most important calculations typically made during the financial planning process. After reading this chapter and practicing concepts in the chapter, readers should understand rates of return and time value of money formulas and how to set up equations for later use in a spreadsheet application or financial calculator. Keep in mind, however, that each of the strategies, techniques, and approaches presented in this chapter represent minimal competencies for a financial planning professional. Other calculation techniques will be presented throughout this book. It is, then, important to combine the material from this chapter with techniques from other chapters to develop a comprehensive understanding of the computational skills that an adept financial planner needs to exhibit on a day-to-day basis.

2.2 INVESTMENT RATES OF RETURN

[A] Calculating a Rate of Return

One of the most elementary of all personal finance calculations is determining the total return earned on an investment. Financial planners use this calculation to determine how much profit has been earned on an investment during a certain period of time. Rate of return describes the relationship between profit or loss relative to the amount saved or invested. For example, assume an investor deposits $1,000 into an account, the account has a stated rate of return of 6 percent, and the investor leaves the deposit in the account for one year. What will be the account balance at the end of the investment period? How much of the account balance is principal and how much is interest? How much will the account be worth in real terms if inflation—the general increase in the price of goods and services over time—averages 4 percent over the same time period? How much money will be available after paying taxes on the earnings? All of these questions are answered by using various rate of return calculations.

To calculate that rate of return on an investment, all sources of income must be identified. The two most common sources of return are income and capital gains. In general, income is derived from periodic payments received by an investor, either in cash or as deposits to an account during the investment period. Examples include stock dividends, bond interest payments, mutual fund dividends, and savings account interest payments. Capital gains (or losses), on the other hand, are generally received or realized when an investment period ends and the investment is sold, liquidated, or matures. If the security is sold for more (or less) than the purchase price, the investor will realize a capital gain (or loss).

These two sources of cash inflow serve as the basis for the nominal return on investment. A nominal value, in its simplest form, means an unadjusted value. A nominal value can be thought of as the gross return. The most common adjustment made to a nominal value is an inflation adjustment; however, nominal values can be adjusted for other reasons as well. Later in the chapter, nominal values will be used for adjustments for inflation (real returns), taxes (after-tax returns), compounding frequencies (effective returns), and other factors. When calculating total returns or future values, it is as important to understand the interrelationship between the nominal and adjusted rate as it is to be able to accurately calculate the nominal rate of return.

[B] Holding-Period Return

A simple method of calculating nominal returns involves determining an investor’s holding-period return (HPR). The formula considers a beginning and ending value for the investment, income earned during the holding period, and transaction costs. The income received could be dividends from an equity (or stock) investment, or the income could be coupon interest payments from a debt (or bond) investment. The formula is as follows:

p017.jpg

Example: Bob purchased one share of stock for $45 per share, received two dividend payments of $1 each that were not reinvested, and paid a transaction fee of $5. Bob then sold the stock for $55. What was Bob’s holding-period return?

p017-1.jpg

A common modification to nominal rates of return is an adjustment for taxes paid at the state and federal levels. However, calculating tax-adjusted returns can be complex. First, a financial planner needs to know what type of income was generated as a result of the return. Second, the financial planner must know what tax rate applies to each type of return. For example, interest income, dividends (qualified or nonqualified), and capital gains may be taxed at different rates. The rates may also vary depending on the holding period for the investment (e.g., short-term or long-term capital gains).

To accurately calculate the tax-adjusted rate of return, the HPR must be offset by any tax liability generated as a result of owning the investment. The following adjustment can be used for historical return calculations:

p017-2.jpg

This equation can be used only for historical calculations because the actual amount of tax liability must be determined prior to calculating the return. However, to estimate the after-tax rate of return for projection purposes, where taxation occurs annually, a financial planner can also use the following equation:

p017-3.jpg

Where:

rt = tax-adjusted return

R = nominal return

t = investor’s marginal tax bracket

Example: Expanding on the previous example, assume Bob owned the stock in a non-tax-qualified account and dividends and capital gains are taxed at a short-term tax rate of 15 percent. His after-tax rate of return would be 13.26 percent, as shown below:

p018.jpg

[C] Dollar-Weighted Return

The problem with using a holding-period return is that the formula does not account for the timing of subsequent cash flows into or out of an account. A very basic formula that corrects for the timing of subsequent cash flows is the dollar-weighted return formula, shown below:

p018-1.jpg

Where:

Inc = income

End = ending value

Beg = beginning value

D = deposit amount

W = withdrawal amount

Costs = transaction costs

D t = D × (1 – timing of deposit)

W t = W × (1 – timing of withdrawal)

Example: Altering the preceding example, assume that one year after Bob made his initial one share purchase he bought an additional two shares of stock at $48 per share ($48 × 2 = $96). Further, assume that he sold one share at $45 at the end of the second year and liquidated the account after three years at $50 per share ($50 × 2 = $100). He still received semiannual dividends of $1 per share ($12 total); the total transaction cost was still $5. What was Bob’s dollar-weighted rate of return?

p018-2.jpg

[D] Time-Weighted Return

An alternative to dollar-weighted returns is a time-weighted return. This method of calculation ignores the actual value of the investment during each time period.

Example: Using Bob’s situation, it is known that the stock was initially purchased for $45 per share and was valued as follows:

End-of-year 1: $48

End-of-year 2: $45

End-of-year 3: $50

Using the holding-period return formula results in the following annual rates of return:

p019.jpg

Thus, the average of the three annual returns results in a time-weighted return of 8.2 percent. Note that the dividend was the same for all three periods because the time-weighted return ignores the number of shares (dollar amount) owned in each period.

Which measure is superior? It depends on asset control characteristics. Investors who control their own investments (both the timing and amount of purchases) will want to use the dollar-weighted average. In this case, the more money invested when a stock is performing well, the more money the investor will have in the end. However, someone who does not control the timing and amount of the investment, such as a portfolio manager, would want to measure performance using the time-weighted measure. It would be inappropriate to examine a portfolio manager’s success or failure based on a measure over which the manager does not have complete control.

[E] Average Annual Returns

Average annual returns are some of the most quoted statistics in finance. These returns are easy to calculate, relatively simple to interpret, and —for the most part—intuitive. However, the most common usage for these statistics is to incorporate them into models to predict future investment results. It is important to keep in mind that most calculations of historic returns tend to have a bias or partial perspective when used to project future or terminal values. A downward bias means that the average used to project the future value tends to underestimate the actual outcome. An upward bias results in overestimation. Such bias occurs because an investor’s cumulative return is a nonlinear function of average return.

The following discussion of arithmetic averages and geometric averages not only presents the calculation of the two statistics but also addresses two issues inherent in using either average as a means to project future results: standard deviation and time horizon. Both of these factors play a role in the bias created when projecting terminal values.

2.3 ARITHMETIC AND GEOMETRIC MEANS

[A] Calculation and Deterministic Forecasting

Although holding-period based returns are very simple to use and calculate, most returns are quoted on an average annual basis because annual returns are more intuitive for investors to understand and are often required by regulators. A financial planner can use a number of different methods to measure average rates of return. The simplest method is to calculate the arithmetic mean, which is a linear interpretation of past performance.

p020.jpg

Where:

r = return for period

n = number of periods

Example: Consider a client who makes 8 percent, 2 percent, and –5 percent in each of three years, respectively. The average of these returns is 1.67 percent.

p020-1.jpg

The arithmetic mean, although quick to calculate and easy to explain, is often a poor representation of actual performance due to the variability (measured by standard deviation) of returns. Therefore, it can be said that the higher