Chapter 1

Introduction to
Financial Planning
 The Financial Planning Process
• basically a series of decisions on how
much money we require at some future
time in order to meet our goals
• the goals we have in financial
management are financial ones, though
they are simply means to towards non-
financial ends
 Goals
Goals must have two basic components:
• expressed in monetary terms
– e.g. I will save $75,000 to have enough
of a down payment for a house
• have dates associated with them
– e.g. I will save $100,000 in the next 7
years
 Financial Goals - Math
The following equation describes what it will take,
Financial goal at time n =
(ES) + (Inv Inc on ES for n years) + (AS for n
years) + (Inv Inc on the AS for n years)
where, ES = Existing savings,
AS = Annual savings
= Earnings – Consumption each year,
Inv Inc = Investment income
 Choosing a Financial Advisor
• must help you “develop a plan”, not just “sell”
products
• technical competence
• thoroughness
• service oriented
• client educator (to the extent necessary)
• honesty
• client-centric, not company-centric
 Teamwork to Design a Plan
Depending on the complexity of the situation, a financial
plan could be designed by one person, or it may require
any number of professionals, each being an expert in
their own field, such as:
• financial planner (co-leader with client)
• accountant
• lawyer (wills, POA)
• banker
• insurance agent
• investment advisor (stock/options broker)
 Implementing a Plan
• no transaction should take place until a plan is in place
• use experts for advice and to execute most of the
transactions necessary to implement your plan, unless
you have expertise in specific areas
– trading stocks and mutual funds
– preparing a will
– buying insurance
– buying a house
– obtaining a mortgage
– do your own homework in advance
 Compensation for Financial Planners
Ask prospective planners how they are compensated.
Four main categories of compensation for planners:
• salaried employees of institutions
– bank employees, some (if any) financial incentives, volume
mainly leads to career advancement
• commission planners
– receive commissions and/or fees from companies that provide
the financial products being sold, sometimes proprietary
– incentive to sell products that generate the highest payout
(immediate and/or trailers)
 Compensation (Continued)
• fee-based planners
– fees partly paid by client, but also partly paid by
product provider
– conflict of interest remains, though slightly less
than commission only
• fee-only or fee-for-service
– entire income earned by way of clients paying
hourly fee
 Regulations Governing
Financial Planners
In Canada, financial planners are governed by
the same statutes and common law that apply
to anyone selling financial services.
Financial planners must always:
• use due care
• avoid misrepresenting any aspect of their
work
• avoid misrepresenting their qualifications
 Regulation (Continued)
Within provincial jurisdiction.
Anyone can call themselves a “financial
planner”.
The advising and the executing of
transactions with respect to certain
financial products (e.g. insurance, stocks,
mutual funds, options) is strictly regulated.
Financial Planners Standards Council (FPSC)

Since 1995, has provided a uniform set of

educational and practice standards for
personal financial planning.
Grants CFP designation
TM

– licensed in many countries

– course of study plus exam
– approves organizations offering courses
– licencees abide by a Code of Ethics and complete
continuing professional education each year
 FPSC Members
Member organizations:
• Financial Advisors Association of Canada (Advocis)
• Canadian Institute of Financial Planning (CIFP)
• Canadian Institute of Chartered Accountants (CICA)
• Society of Management Accountants of Canada
• Certified General Accountants Association of Canada
• Credit Union Institute of Canada
 Financial Planning Software
User friendly financial planning software that
runs on Windows are available, including:
• PlanPlus Pro
• Asset Architect
• Quicken
• Microsoft Money
• Banks have proprietary software
• Insurance companies have proprietary software
 Family Considerations
A proper financial plan requires planning for the
accumulation of assets over a range of time
periods:
• short term (purchase a house)
• medium term (children’s education)
• lifetime (retirement)
 Important Issues
We’ll cover most of these issues:
• Goal setting
• Time value of money
• Budgeting
• Risk management
• Income tax
• Insurance
• Debt management
• Investment and retirement planning