Financial Planning II (FPII)

In this chapter, we discuss the history and evolution of financial planning, and we look at the direction it is taking today. We also review the standards of conduct and ethics you must follow as a financial planner. Furthermore, we describe the main steps in the financial planning process, and we provide an example of a typical letter of engagement for clients.

Topics covered in this chapter are:

• The Financial Planning Business Today
• Ethics and Financial Advisors
• Your Responsibility to Your Clients
• Identifying Your Client’s Goals
• Determining Your Client’s Risk Profile
• The Financial Planning Process

Once you have collected all necessary financial and non-financial data, you must use that information to assess your clients’ wealth planning needs. In this chapter, you will learn how to create a budget and savings plan based on the client’s net worth and available cash flow.

Every plan should incorporate savings strategies that suit the individual client. It should also incorporate funding strategies for any emergencies that might arise. Finally, we discuss various forms of credit and the steps taken to evaluate a client’s creditworthiness.

Topics covered in this chapter are:

• Net Worth Planning
• Create a Comprehensive Financial Plan
• Cash Management Planning
• Savings Planning

Consumer credit as a part of debt planning plays an important role in overall financial planning, and debt reduction is a key factor in the financial health of your clients. Sound debt planning makes good use of strategies to manage credit.

You should help clients who borrow to evaluate their reasons for doing so and to make sure their cash flow is adequate to repay the borrowed funds. You can help them manage debt by planning and controlling expenses with a projected cash flow statement. You should impress on them the importance of keeping debt within benchmarks based on their debt service ratios and to immediately reduce debt that rises beyond that level.

When you understand the advantages and disadvantages of credit products, you will be able to recommend strategies to help your clients benefit from credit while avoiding potential pitfalls.

Topics covered in this chapter are:

• The Use of Credit
• Refinance Debt to Meet Goals
• Understand a Lease-Versus-Buy Situation
• Borrow to Invest

In this chapter, we explain the legal considerations related to residential mortgages. We also explain the methods used to reduce interest costs and penalties. Finally, we discuss several other mortgage-related topics, including real estate investing, self-directed mortgages, and the use of funds in registered retirement savings plans to purchase a home.

Topics covered in this chapter are:

• Legal Considerations of Owning Real Estate
• Mortgage Planning

Modern portfolio theory looks at the market as a whole rather than analyzing investments on an individual basis. The theory provides the basis for decision making in planning a diversified portfolio that provides the maximum expected return given an investor’s level of risk tolerance.

Asset allocation in financial planning is based on the principle that a mix of assets will generally produce the most satisfactory solution to meet a long-term set of financial goals. The most appropriate long-term investment strategy is to allocate assets to diverse investments that offer the most suitable risk/return profile for a client’s needs.

The most straightforward way to evaluate portfolio performance is to compare the portfolio’s returns to a those of a benchmark portfolio. This allows an actively managed portfolio to be measured against a realistic, attainable performance standard. To complete a benchmark comparison, a portfolio’s strategic asset allocation is used to construct a benchmark portfolio using the returns of well-known market indexes.

Topics covered in this chapter are:

• Modern Portfolio Theory
• Helping your Clients Choose the Right Investment
• Measuring Portfolio Performance

In this chapter, we discuss various techniques that can be used to minimize taxes. You will learn about strategies such as income deferral and income splitting that can be used to minimize taxes and maximize after-tax income. You will also learn how the different types of business structures are taxed differently and what the advantages are of certain types of structures.

Topics covered in this chapter are:

• Tax Planning Strategies
• Income Splitting
• Tax Shelters
• Other Tax Planning Strategies

In this chapter you will learn about tax planning strategies for parents. You will also learn about tax planning strategies using RESP’s and Informal in-trust accounts. You will conclude your lesson learning about the tax-efficient use of RDSP’s and TFSA’s.

Topics covered in this chapter are:

• Tax Planning and Children
• Tax-Planning Strategies Using Registered Education Savings Plans and Informal In-Trust Accounts
• Registered Disability Savings Plan
• Tax-Free Savings Accounts

In this chapter, we discuss a holistic approach to the retirement planning process that factors in all sources of retirement income. We explain how to determine a client’s retirement income needs and suggest some strategies that can be used to manage an income shortfall. We also discuss the Canada and Quebec Pension Plans (CPP and QPP) and Old Age Security (OAS), which are the main programs set up by the government to provide pension income and other benefits to Canadians during their retirement. Finally, we discuss the impact of registered pension plans on clients’ retirement plans.

Topics covered in this chapter are:

• Retirement Income Needs Analysis
• The Impact of OAS on Retirement Plans
• The Impact of GIS on Retirement Plans
• The Impact of CPP/QPP on Retirement Plans
• The Impact of Registered Pension Plans on Your Retirement Plans
• Deferred Profit Sharing Plans
• Individual Pension Plans
• Supplemental Executive Retirement Plans
• Salary Deferral Arrangements

In this chapter, we discuss all aspects of registered retirement savings plans that are set up as savings vehicles for retirement. We also discuss several annuity-based products that are designed to provide an income stream for clients in their retirement years. Finally, we explain how the various types of annuities work, including products that have annuity-type features and benefits.

Topics covered in this chapter are:

• Planning Your RRSP Contributions
• Selecting the Right Investments for Your RRSP
• Locked-In RRSPs and Group RRSPs
• Registered Retirement Income Funds
• Life Income Funds
• Annuities

In  this chapter, we explain how to conduct a needs analysis to determine the appropriate amount of life insurance for a particular client. We also discuss the business and personal uses of life insurance in specific situations. Finally, we explain the tax rules that apply to life insurance policies.

Topics covered in this chapter are:

• Selecting Representatives and Companies for Life Insurance
• Conducting a Life Insurance Needs Analysis
• Business and Personal Applications
• Tax Treatment of a Life Insurance Policy
• Calculating Taxes on Life Insurance

In this  chapter, we cover the legal aspects of life insurance contracts. Next, we look at the policy provisions found in life insurance contracts and the policy riders that insurance agents may recommend.

Topics covered in this chapter are:

• Legal Aspects of the Insurance Contract
• Policy Provisions, Riders, and Dividend Options

In this chapter, we look at the process of managing risk with disability insurance. We discuss the components to consider when tailoring a disability income policy, and we explain how the definition of disability in the policy determines the conditions under which benefits are paid. We cover the most common disability insurance provisions, and we illustrate how to conduct a disability needs analysis. We describe government-sponsored disability income programs in detail, including Employment Insurance, the Canada and Quebec Pension Programs, and Workers Compensation. We also describe some business and personal applications of life and disability insurance. Next, we discuss critical illness and long-term care insurance, provincial medical insurance, travel insurance, and extended health insurance. Finally, we describe the different types of insurance plans that are typically offered by employers, including private plans and group life and health insurance.

Topics covered in this chapter are:

• Disability Insurance
• Critical Illness Insurance
• Long-term Care Insurance
• Provincial Medical Insurance
• Extended Health Insurance
• Travel Insurance
• Group Life and Health Insurance

In this chapter, we discuss general insurance (including homeowners, automobile, and liability insurance), and professional liability insurance.

Topics covered in this chapter are:

• General Insurance Policies
• Automobile Insurance
• Homeowners Insurance
• Liability Insurance

In this chapter, you will learn about aspects of business law in Canada that relate to contracts and agency relationships. The purpose of the chapter is to acquaint you with the way business law affects contracts and the agents involved. We explain how contracts work with a focus on the importance of the agency relationship in the financial planning industry.

Topics covered in this chapter are:

• Features of Contracts
• Types of Contracts
• The Termination or Discharge of a Contract
• Agency Relationships

In this chapter, you will learn to differentiate among the various business structures in Canada, and you will learn why a business might choose to operate as a particular type. You will also learn about business valuations, employment law and business taxation.

Topics covered in this chapter are:

• Forms of Business Entities
• Business Valuations
• Employment Law
• Business Taxation
• Death of the Business owner—Estate Freezes

In this chapter, you will learn about aspects of family law in Canada relating to rights arising from cohabitation, marriage, separation, and divorce. The purpose of this chapter is to acquaint you with family law rights and obligations arising from relationship breakdown. We focus on both federally and provincially governed aspects of family law. Federal areas of the law include divorce, and for married spouses, custody and access, spousal support, and child support. We also discuss disclosure requirements under federal, provincial and territorial legislation that are necessary to determine support payments and the equitable distribution of property.

Topics covered in this chapter are:

• Fundamental Aspects of Family Law
• Financial Issues in Family Law
• Property Issues on Relationship Breakdown
• Domestic Contracts
• Impact of Divorce on a Client’s Financial Plan

In this chapter, you will first learn about the different types of trusts. Later in the chapter, you will learn why clients should arrange a power of attorney for personal care (or a living will) and an enduring power of attorney for property as a substitute decision-maker in the event of incapacity.

Topics covered in this chapter are:

• Setting Up a Trust
• Taxation of Trusts
• Power of Attorney
• Power of Attorney for Property
• Power of Attorney for Personal Care
• Risks and Considerations with Powers of Attorney

In this chapter, you will learn about estate planning or, more specifically, will planning under Canadian law, including common law in most of Canada and the Civil Code of Quebec. We explain how the probate process works and provide some strategies that clients can use to reduce the costs associated with the probate process and probate fees, if payable. We also explain how to reduce an estate’s income tax burden, both before and after death. Later in the chapter, we end by providing a checklist of issues you and your clients should consider when preparing an estate plan.

Topics covered in this chapter are:

• Preparing a Will
• Probating a Will
• Reducing the Impact of Probate
• Minimizing or Deferring Taxes Right before Death
• Minimizing or Deferring Taxes Upon Death