FAQ Part 1: misc.invest.financial-plan
Ed Zollars
PART ONE
LAST UPDATED 7/01
TABLE OF CONTENTS
Section 1: Introduction and Disclaimer
Section 2: Future Topics
Section 3: General Financial Planning Questions
Q3.1. Why is a financial plan needed?
Q3.2. What are the typical financial uncertainties?
Q3.3. What does a financial planner do?
Q3.4. What does the typical financial plan consist of?
Q3.5. Do I need a financial planner?
Q3.6. How do I choose a financial planner?
Q3.7. What are the institutions that provide financial planning
designations?
Q3.8. Could I get referrals from professional organizations?
Q3.9. How do I choose the other members of my
"financial planning team"?
Q3.10. How much will a financial plan cost?
Q3.11. What are the pros and cons of dealing with a fee-only planner
versus a planner who earns commissions?
Q3.12. Where are some financial planning web sites?
Q3.13. What financial planning books are recommended by newsgroup
readers?
Section 4: General Investing Questions
Q4.1. What is the "Rule of 72" and the "Rule of 115"?
Q4.2. What is the Investment Pyramid?
Q4.3. What are the different types of mutual funds?
Section 5: General Tax Questions
Q5.1. What is the tax treatment for capital gains and losses?
Q5.2. What are passive income and losses and how are they treated?
Q5.3. What is tax basis?
Section 6: Insurance Questions
Q6.1. What are the purposes of life insurance?
Q6.2. What are the different types of life insurance?
Q6.3. What are the tax implications of group health insurance?
Section 7: Real Estate Questions
Q7.1. What are the different types of mortgages?
SECTION 1. INTRODUCTION & DISCLAIMER
This is the FAQ for misc.invest.financial-plan and is posted
to the group bi-weekly. It is also available on the World
Wide Web at: http://stump.algebra.com/~mifp
This FAQ is maintained by Susan Wasserman and other volunteers.
Contributions of articles are more than welcome. Authors will
receive credit/publicity on this FAQ for each article accepted.
Section 2 has ideas for future articles.
Comments and contributions should go to [cybe...@prodigy.net].
DISCLAIMER:
This FAQ is presented as general information only. It is not intended
to provide financial advice. Any mention is this document to any
Internet site or link is for reference purposes only and does not
imply agreement or endorsement by the author with any information
or product the site or link may contain.
No responsibility can be assumed for any changes in sites or links.
This FAQ is provided as is without any express or implied warranties.
While effort has been taken to ensure the accuracy of the information
contained in this article, the author/maintainer/contributors assume(s)
no responsibility for errors or omissions, or for damages resulting
from the use of the information contained herein.
Please contact your financial advisor to discuss your specific financial
situation and questions.
SECTION 2. FUTURE TOPICS
Below is a list of topics that could be added to the FAQ:
[Section 3]
List of financial planning software
[Section 6]
Disability Benefits
[Section 7]
Types of Ownership
[Future Section 8. Retirement Planning Questions]
Long-term care
Pension alternatives
Social Security Retirement Benefits
IRAs
Qualified Retirement Plans
Retirement "nest egg" alternatives
[Future Section 9. Business Planning Questions]
Types of business organizations
[Future Section 10. Estate Planning Questions]
The need for estate planning
Estate Taxes
Basic Estate Planning
Types of Trusts
Living Wills
Uniform Gift to Minors Act
SECTION 3. GENERAL FINANCIAL PLANNING QUESTIONS
Q3.1. WHY IS A FINANCIAL PLAN NEEDED?
A financial plan is needed in order to better handle the financial
uncertainties that occur in everyday life. Having a plan
for the future helps insure the quality of life for yourself
and your family.
Q3.2. WHAT ARE THE TYPICAL FINANCIAL UNCERTAINTIES?
Over ones lifetime, the following problems may occur:
1. Cash Flow: This includes budgeting problems, credit overload,
as well as paying too much in taxes.
2. Savings Goals: Savings are needed for education and the purchase of a
home or property.
3. Risk Management: Insurance helps to buffer life's catastrophes.
Life and disability insurance protects a family from the loss of a
life or loss of a family member's ability to earn a living.
Property and casualty insurance can protect against perils such as
hurricanes, flood, fire, or theft.
4. Retirement Planning: There is no guarantee that social security will
support us during our retirement years. Since life spans are increasing,
it is important to put aside additional funds as soon as possible.
5. Estate Planning: Planning for the transfer of assets to one's heirs,
with as little tax and financial burden as possible.
Q3.3. WHAT DOES A FINANCIAL PLANNER DO?
Basically, financial planning encompasses an evaluation of one's current
financial situation, an identification of one's financial goals, and the
presentation of a integrated plan in order to achieve those goals.
Planners do not substitute for tax preparers, accountants, or estate
attorneys. Instead, the planner formulates a plan with a specified goal
or goals, and, if needed, coordinates with others so that everyone is
working toward the same goals. This is called assembling a financial
planning team. A team may consist of professionals such as your financial
planner, CPA, life insurance agent, investment broker, and attorney.
In most cases, financial planners double as CPAs, insurance agents,
investment brokers, or attorneys.
Q3.4. WHAT DOES THE TYPICAL FINANCIAL PLAN CONSIST OF?
A typical financial plan will include the following:
1. A balance sheet and analysis: An overall financial picture of one's
assets, liabilities, net worth, income, insurance, taxes, business
interests,
wills, etc.
Also included in this analysis will be an asset allocation breakdown
that relates to the risk preferences and needs of the individual.
2. Income tax projection
3.Cash flow projection
4.Long-term accumulation plans: This includes education planning,
retirement planning, and a statement of the individual's goals.
5.Insurance analysis
6.Estate and tax planning
Also, the plan should identify weaknesses in the individual's
financial picture, such as inadequate cash flow, unnecessary tax
liability, and inadequate or incorrect insurance or investments.
Methods of improvement should be recommended for these weaknesses.
Lastly, the plan should include recommendations for implementing
the individual's and/or family's goals.
Q3.5. DO I NEED A FINANCIAL PLANNER?
According to the International Association for Financial Planning,
there are a number of reasons why one would seek the services of
a financial planner:
1.A lack of knowledge even in relatively basic areas of finance.
2.A specific problem has cropped up and they are not sure of
the overall ramifications; an example would be a lump-sum distribution
from a pension or profit sharing plan.
3.A complex financial picture with the need of a single,
objective source to sort it out.
4.A lack of time or desire to do it themselves.
5.A need for a third party observer to objectively review a person's
own plan and help determine if the assumptions and goals are reasonable.
Q3.6. HOW DO I CHOOSE A FINANCIAL PLANNER?
The checklist below is mentioned in most guides to choosing a financial
planner. Most of this is common sense.
1.Write to the various associations for lists of planners in your area;
in some instances, the planners must meet certain requirements to be listed
(these associations are listed below).
2.Find out the planner's background and credentials: education,
professional
experience, and other qualifications.
Experts recommend at least a four year college degree in a financially
related field (accounting, economics, business administration or finance);
and a financial planning designation (listed in the next question below).
3.Get references, including clients whose situations are similar to yours
and professionals such as bankers and lawyers with whom the planner
has worked.Find out in which areas he or she is knowledgeable.
This should include knowledge of investments, insurance and tax strategies.
However, the planner should also be working with other professionals,
including accountants and tax attorneys.
4.Ask to see a sample financial plan-one that would be similar to your own.
5.Find out who does the work-the planner should not rely on a uniform plan
applied to everyone.
6.Find out if the person you are talking to is the one who will be
actually doing the work for you-and if not, who will?
7.Find out how investment solutions are researched-is it independent
analysis or does the planner depend on some other company?
8.Find out how a planner charges, and discuss fees during your first visit.
Financial planners will charge clients one of three ways:
on a fee-only basis, a fee and commission basis, or on a commission basis.
Fee-only financial planners are thought to be the most objective,
as his or her income is not dependent on the sale of financial products.
Q3.7. WHAT ARE THE INSTITUTIONS THAT PROVIDE FINANCIAL PLANNING
DESIGNATIONS?
The American Institute of Certified Public Accountants
1211 Avenue of the Americas
New York, NY 10036-8775
Phone (212) 596-6200
Fax (212) 596-6213
Offers a Personal Financial Specialist (PFS) designation to CPAs with
considerable professional experience in financial planning.
This designation is issued after the completion of six requirements,
including a comprehensive technical exam, and 250 hours of experience
per year for three years. CPAs who have earned the PFS designation must
also complete 75 hours of continuing education in financial planning
subjects over three years.
Certified Financial Planning Board of Standards Inc.
1600 Lincoln Street Suite 3050
Denver, CO 80264-3001
Phone (303) 830-7543
A certified financial planner (CFP) must pass a tough 2 day, 10 hour exam
that covers most aspects of personal financial planning. Once certified,
licensees must complete 30 hours of continuing education every two years.
The American College
270 Bryn Mawr Ave.
Bryn Mawr, PA 19010
(215) 896-4500
Offers the Chartered Financial Consultant program that leads to the
ChFC designation. ChFC candidates must master a ten course financial
planning curriculum and pass a two hour exam for each course.
The continuing education requirement is the same as the CFP.
The American College also offers the program leading to the Chartered Life
Underwriter (CLU) designation, programs leading to masters degrees in
financial services and management; and continuing education.
Q3.8. COULD I GET REFERRALS FROM PROFESSIONAL ORGANIZATIONS?
Yes. Below are best known financial planning organizations:
1.National Association of Personal Financial Advisors (fee-only planners)
Phone: (888) 333-6659 or http://www.napfa.org
2.International Association of Financial Planning
Phone: (800) 930-4511 or http://www.planningpaysoff.org
3.The Institute of Certified Financial Planners
Phone: (800) 282-7526 or http://www.icfp.org/cfpsearch/
4.Society of Financial Services Professionals (Formerly American Society
of CLU and ChFCs)
Phone: (888) 243-2258 or http://www.financialpro.org
5. American Institute of Certified Public Accountants
Phone: (888) 999-9256 or http://www.cpapfs.org
Q3.9. HOW DO I CHOOSE THE OTHER MEMBERS OF MY "FINANCIAL PLANNING TEAM"?
Money Magazine had a good article called "Financial Advice You Can
Trust". In that article were some very good checklists on how to
choose professionals such as your broker, insurance or real estate agent,
and accountant. These checklists are below:
Stockbroker:
Credentials: His or her firm must be registered with the SEC, and
the broker must personally be registered with the National Association
of Securities Dealers.
Checkpoints: For information on past disciplinary actions, start by
contacting your state securities commission (you can get the number
by calling the North American Securities Administrators Association
hotline at (800-942-9022). Follow that up with a letter to the NASD
Public Disclosure Program (P.O. Box 9401, Gaithersburg, MD 20898),
which will provide a report on the individual or firm for $20.00.
Finally, write to the Securities and Exchange Commission's freedom
of information branch (450 5th St. N.W., Mail Stop 2-6,
Washington,D.C. 20549) for any federal records of complaints.
Good Sign: He or she asks, "Are you investing this money for a rainy day,
or do you need it for your children's education?"
Bad Sign: He or she says, "Let's put everything you've got into municipal
bonds."
Money Manager:
Credentials: Investment advisors with assets under management of less
than 25 Million are required to be registered with the state(s)
in which they are conducting business. Those with over 25 Million
must be registered with the SEC.
Checkpoints: Contact the SEC Freedom of Information Branch (address above)
or your state securities commission. If he is now or has ever been a
broker-dealer, also contact the NASD (address above).
Good Sign: He or she shows you a written trading history to substantiate
the claims of solid past performance.
Bad Sign: He does not deduct his management fees or trading commissions
from total return on that statement, thus inflating his success.
Insurance Agent:
Credentials: The abbreviations CLU (meaning Chartered Life Underwriter)
or CPCU (Chartered Property/Casualty Underwriter) indicate a solid working
knowledge of insurance.
Checkpoints: Contact the state insurance commission (see state listings
in your phone book) for records of any disbarment. But note:
disbarred agents can start fresh in another state.
Good Sign: He or she asks what medical, life and casualty insurance
your company already provides, in order not to duplicate that coverage.
Bad Sign: He or she tries to shame you into buying more life insurance
than you need by implying that you are shirking your responsibilities
as a parent or spouse.
Accountant:
Credentials: He or she should be a certified public accountant (CPA),
licensed by the state.
Checkpoints: For records of disciplinary or licensing actions,
contact the state board of accountancy, listed in the state
government pages of your phone book.
Good Sign: He or she attempts to find out whether your problem could
be resolved less expensively by a tax practitioner
(such as an enrolled agent) or, say, a financial planner.
Bad Sign: He says: "I always get my clients a refund." Translation:I let
them take risks that might trigger an audit.
Real Estate Broker:
Credentials: He or she must be licensed by the state, either as a broker
or sales agent, and should also be a member of the National Association
of Realtors or the local board of realtors.
Checkpoints: The state real estate commission (in the state government
listings of your phone book) can alert you to any problems.
Good Sign: He produces a list of houses in your area that he has sold
in the last 60 to 90 days, along with the sales prices.
Bad Sign: He says he can represent the seller and the buyer.
Q3.10. HOW MUCH WILL A FINANCIAL PLAN COST?
Financial planners charge one of three ways: on a fee-only basis,
fee plus commission basis and on a commission only basis.
Fee-only planners usually charge either by the hour or on a flat fee basis.
Some fee only planners base their charges on the value of the client's
assets or income. Commission only planners earn their money from the
sale of financial products recommended to the client in order
to implement the financial plan, and the client is usually not charged
for the plan itself. Fee and commission planners use a combination
of the two, with the fee-to-commission ratio varying from planner to
planner.
The actual cost of a financial plan varies as well. The IAFP
estimates custom-developed plans at between $750 and $2000 dollars.
Another financial planning industry official estimates a typical
plan for someone with income from $75,000 to $200,000 and a portfolio
of $250,000 and up, to cost from $2,000 to $5,000.
Q3.11. WHAT ARE THE PROS AND CONS OF DEALING WITH A FEE-ONLY PLANNER
VERSUS A PLANNER WHO EARNS COMMISSIONS?
Planners who are compensated through commissions can charge little or
nothing for the basic financial plan, but the overall bill for the plan
is not necessarily less. For example, fee-only planners tend to recommend
no-load products. In addition, fees from fee-only planners are
tax deductible, whereas commissions are added to the basis of the
financial products purchased, and not deductible until these products
are sold.
And, of course, there is the question of conflict of interest:
Can a planner who earns income through commissions be truly objective
in preparing a financial plan?
Some financial planners have organized to promote fee-only financial
planning as the only way that the industry can be fully professional.
Fee and commission planners argue that they can provide a good lower-cost
service, designed for the middle class, and that the integrity of the
planner matters over the way that a planner is compensated.
The IAFP and ICFP have not taken a position regarding which type of
planner is the best, since both fee-only and commissioned financial
planners are members. However, both organizations believe that
clients should know in advance how the planner is compensated.
Q.3.12. WHERE ARE SOME FINANCIAL PLANNING WEB SITES?
Here are some of the best ones that have been suggested:
http://money.com/
The Money Magazine site includes investment headlines from
their current issue as well as some good guides to investing.
Their retirement savings calculator is very good.
http://kiplingers.com/
A lot of great information. It has a very comprehensive set of
financial calculators which cover everything from mutual funds to
budgeting.
http://www.wallst.com/cnbc/
The CNBC web site features a free stock portfolio manager
and a database of over 500,000 financial reports which can
be sent to you by PDF or fax.
http://www.forbes.com
The Forbes magazine site includes a searchable archive of current and
past issues.
Q3.13. WHAT FINANCIAL PLANNING BOOKS ARE RECOMMENDED BY NEWSGROUP READERS?
1. "The Wealthy Barber" Applies mostly to Canadians. Very entertaining.
Contains the basics of saving and succeeding in our economy.
2. "Bogle on Mutual Funds" by Vanguard Chairman John Bogle.
Good for teaching expected returns. Selection of historical graphs-modeled
after "The Intelligent Investor.
3. "A Random Walk Down Wall Street" covers stocks and derivatives.
An excellent reference.
4. " The Millionaire Next Door" causes some interesting
discussion among newgroup readers, but is recommended often.
5. "Making the Most of Your Money" by Jane Bryant Quinn.
Updated version of the 1991 best seller.
A good reference for common sense advice.
CONTINUED ON PART TWO
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Ed Zollars, CPA (AZ)
http://www.hmtzcpas.com