Case Studies
Chapters 1 - 3
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 Chapter
1: The Financial Planning Process
o Major Steps
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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)?
 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
 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
 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
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The analytical methods are not exclusive – rather a
combination is usually needed for each client
 Analytic
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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
 Analytic
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Methods – Continued
Pie Chart Approach
o Not so much a process but a presentation style
o Visual Illustration of key financial components
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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
 Analytic
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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
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Review these as we work through the mini-cases
 Analytic
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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
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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)
 Analytic
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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
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Risk tolerance key component
o General trends of “population” used as benchmark
o See illustration on page 56 – portfolio allocations by age
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Analytic Methods – Continued
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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
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required annuity
o Adjust goals to meet ability
Major shortcoming here is timing of cash out and ability to change
annuity over time.
 Analytic
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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?
 Analytic
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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
 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)
 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)
 Financial
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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
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Projecting Income Statements – Future Statements
o What type of growth is probably within income category
o What types of growth are there across expenses
 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
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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
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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?
 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)
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