1.  Case Studies Chapters 1 - 3

2.  Chapter 1: The Financial Planning Process o Major Steps Engagement (Scope of Financial Plan) Gather Client Information (data and goals) Date Analysis Recommendations (Goal Matching and starting points) Actions (lay out path to success) Follow up (future engagement) o See Major Case Requirements o Why lay out the planning process (have a check list)?

3.  Engagement Letter (Page 8 – 9) o Scope of the financial planning Objectives/Goals Final product – recommendations o Activities Client requirements / planner’s contribution Process and methods o Fees o Termination options

4.  Financial Data Questionnaire (pages 12 -13) o Basic Information about clients and family o Financial Accounts Banking Investments Retirement Accounts o Insurance Products o Assets (Property owned and how titled) o Liabilities (Mortgages, Loans, Credit Cards, etc.) o Estate Issues and Legal Documents

5.  Chapter 2: Analytical Methods o Life Cycle Approach o Pie Chart Approach o Financial Statements and Ratio Analysis Approach o Two Step – Three Panel Approach o Present Value of Goals Approach o Metrics Approach o Cash Flow Approach o Strategic Approach  The analytical methods are not exclusive – rather a combination is usually needed for each client

6.  Analytic Methods – Continued  Base selected portfolio of approaches on clients learning styles – ultimate decision is clients and clients need to understand why their decisions are appropriate for them  Life Cycle o Information is presented with snapshots at different points in life o Three major stages – wealth accumulation, shifting risk profile (conservation), and estate distribution o See Exhibit 2.2 page 19 and Exhibit 2.3 page 21 o Holistic view of the client’s life

7.  Analytic Methods – Continued  Pie Chart Approach o Not so much a process but a presentation style o Visual Illustration of key financial components Income Statement converted to visual portions Annual Cash Flow converted to visual portions Balance Sheet converted to visual portions Benchmarks or standards compared to client pie charts. o Coupled with Life Cycle Can show shifts in accounts and spending overtime Helps align necessary actions with long-term goals

8.  Analytic Methods – Continued  Financial Statement and Ratio Analysis o Used for all clients o Objective analysis and measurement of financial status o Financial Statements Income Statement Balance Sheet (Net Worth) Cash Flow Statement o Financial Ratios Liquidity Debt Performance  Review these as we work through the mini-cases

9.  Analytic Methods – Continued  Two Step – Three Panel Approach o Examines Potential Risk against Savings and Investments o Three Panels Risk assessment – panel one Short term coverage of debt via savings and investments – panel two Long term coverage of debt and goals – panel three Major acquisitions (home, vacation home, business, etc.) Retirement goals Education goals Estate goals o Utilizes some financial ratios and metrics (benchmarks over life cycle, see Exhibit 2.16 on page 52)

10.  Analytic Methods – Continued  Metrics Approach o Benchmarks used for evaluating strengths and weaknesses o Time sensitive (move with life cycle) o Combines with Two Step – Three Panel Approach to match risk and allocation of assets o Need financial statements to calculate key ratios to compare to benchmarks  Risk tolerance key component o General trends of “population” used as benchmark o See illustration on page 56 – portfolio allocations by age

11.  Analytic Methods – Continued  Present Value of Goals Approach o Calculate the future dollar value of a specific goal Retirement funds needed at retirement (example on page 57) Home purchase Education funds for children o Find present value of these goals o Determine the annuity needed to meet these goals o Analyze potential shortfalls with savings/investment ability below required annuity o Adjust goals to meet ability  Major shortcoming here is timing of cash out and ability to change annuity over time.

12.  Analytic Methods – Continued  Cash Flow Approach – Where is cash coming from and going o Text is inadequate for this approach o Determine “operating income” of clients (wages and investments) o Determine the “uses” of the cash income Living expenses Capital acquisition o Determine the additional sources of cash Debt borrowing – credit cards, mortgage, car loan used in period o Determine cash invested o Can this pattern be sustained and meet financial goals?

13.  Analytic Methods – Continued  The Strategic Approach o Centers on the mission of clients Long term goals Short term objectives o Focus on a specific goal or objective Reduce short-term debt, pay-off credit cards Increase contributions to retirement account o Can be used with Present Value Approach to monitor progress in meeting goal or objective  Don’t get lost in mechanics – keep eye on the prize

14.  Chapter 3: Financial Statements – The Balance Sheet o Asset Categories Current -- Cash and Cash Equivalents (list on page 73) Long-Term Investment Accounts Personal Asset Accounts (Property designed for personal consumption) o Liabilities Current -- List on page 76 (exclude insurance as it is prepaid) Long-Term – Current loans over one year and tax liabilities Text misses long-term liability for taxes on tax deferred accounts o Net Worth (Assets – Liabilities)

15.  Financial Statements – Income Statements o The income and expenses (because most clients are cash accounting individuals looks like a modified cash flow statement) o Breaking down the income Usually salary, business income and passive investment income (for cash flow not part of “operating income”) Passive income includes interest on accounts, dividends, but usually not capital gains unless realized o Breaking down the expenses Living expenses, debt payments, insurance payments, taxes, but not savings (it is not an expense)

16.  Financial Statements – Income Statements  Net Income of the Income Statement o Cash left over for investing, savings, reducing debt, or increased expenses (new car loan, travel, etc.) o Discretionary expenses can be “pulled” out for additional examination Are discretionary expenses recurring Are discretionary expenses seasonal Are discretionary expenses one-time  Projecting Income Statements – Future Statements o What type of growth is probably within income category o What types of growth are there across expenses

17.  Financial Statements – Cash Flow Statements o Modified Sources and Uses Statement for Individual Earned Income Sources (the recurring income stream) Subtract Recurring Non-Discretionary Costs for Lifestyle Living Expenses Insurance Expenses (even though prepaid) Taxes Find Cash from Living (Operations) Find Acquisitions, Investing and Savings Contributions New capital acquisitions (home, car, boat, etc.) Investment in retirement accounts, portfolio, or business

18.  Financial Statements – Cash Flow Statement o Debt (Sources and Uses) Funds acquired through borrowing (source) Funds used to retire debt o Net Change in Debt o Sum to Change in Cash Account (Cash and Cash Equivalents) for the period  What does the Cash Flow Statement tell you about your client o Are they needing to borrow to “make ends meet”? o Are they able to increase investing activities? o In general, are their prospects looking up or are they facing bankruptcy?

19.  Financial Statement Analysis o Once you have the data… Pro Forma Statements (Categories as a percent of income or assets) Time series analysis (trends in spending, savings, investing, etc.) Financial Ratios – balance of accounts against benchmarks  Financial Ratios o Liquidity – Short term perspective on handling expenses and debts Emergency Fund (page 102) – Very important for many young couples Current Ratio – relationship between current assets and current liabilities (page 105) o Long-term Solvency or Debt Ratios Housing Ratios 1 and 2 (page 106 and 107) Total Debt Ratio (page 109)

20. Case Studies  Financial Ratios – continued o Financial Security Savings Rate (page 112) Gross Investments to Pay (page 114) See Table on page 114 Growth requirement as clients age o Performance Return on Investments (page 115) Return on Assets (page 116) Return on Net Worth – the annual growth rate (page 117)  Overview of Financial Ratios – Pages 118 and 119