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- Web Chapter B
Career Basics
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- Chapter Goals
Evaluate financial planning as a business.
Construct a business plan for a PFP business.
Define the major types of planner compensation.
Appreciate the importance of marketing and the
ways of doing it.
Classify common profiles for planning as a career.
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- The Business Plan
An initial business plan is an outline or more often a
detailed description of how you expect to establish
and grow your firm over the next one to five years.
In a sense, it is the financial planner’s financial plan
for the business.
It provides the structure and mandates the thinking
process and approach necessary to be successful in
a new or existing financial planning activity.
We next will discuss the various steps in the
business plan individually.
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- Obtain Proper Education and
Experience
Planners should:
– Have an undergraduate degree.
– Complete a specialization in personal financial planning,
either as part of your degree program or through an adult
education program.
– Have practical professional experience in planning. This
can be done by working for someone else or beginning on
your own, perhaps by performing your first plan at no
charge.
– Have a planning designation. The CFP® certification is the
most prominent among planners.
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- Obtain Proper Education and
Experience, cont.
The CFP® certification requires a college degree, a
minimum of a five-course 15-credit curriculum,
passing a comprehensive exam, and three years of
related business experience.
Other designations include:
– The Chartered Financial Consultant (ChFC), which is often
for people with insurance backgrounds.
– The Personal Financial Specials (PFS) for CPA financial
planners.
– The Chartered Financial Analyst (CFA) for investment
specialists.
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- Secure the Services of Advisors
Every business or career can benefit from advisors.
In PFP, advisors include:
– An attorney, perhaps one that specializes in small
businesses.
The attorney or attorneys will ensure that you stay on
the right side of regulation and will draw up the
documents necessary to establish your business.
– An accountant.
The accountant will give you advice on record keeping,
file required tax returns, and often serve as an advisor
on overall financial matters.
– A mentor.
Often has experience in financial planning or is a
success in another business.
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- Develop a Mission Statement
A mission statement provides the rationale for
establishing your business or career and helps the
planner keep their focus.
The statement is often short, typically no more than a
paragraph, and can be just one sentence.
Examples:
– “To establish the preeminent planning firm in the market by
fostering excellence in financial advice and service and
helping clients reach their financial and nonfinancial goals.”
– “To profitably concentrate on people of modest means and
enable them to receive the quality in decision making
usually reserved for higher income individuals.”
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- Establish the Services and Structure of
the Firm
Firms may provide financial planning services
exclusively or offer other services as well.
Pure financial planning firms vary by size.
– Small firms consist of one or two financial planners with or
without support personnel.
– Medium sized firms may have several planners and support
personnel and may have some separation into planning and
investing and sometimes other activities.
– Large firms have separate full departments, often with
management at the head of each activity.
– An alternative approach is to separate planners into semi-
independent clusters along with investment people, other
professional staff, and sometimes back office personnel.
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- Establish the Services and Structure of
the Firm, cont.
One organizational approach is as follows:
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- Establish the Services and Structure of
the Firm, cont.
The legal structures are similar to that of other
businesses.
They include individual proprietorships, partnerships,
and corporations.
The corporations may be:
– C Corp.
– S Corp.
– A limited liability company (LLC).
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- Decide on a Form of Compensation
Fee-only financial planners receive all of their
revenues from clients, none from commission and
sales of products.
– Fees may consists of flat fees for a service, hourly fees, and
those arising from a percentage of assets under
management and yearly retainer fees.
– Fee-only financial planners believe they have the most
objective form of providing advice, avoiding potential
conflicts of interest between selling products and acting in
the clients’ interest.
– They can select from a wide variety of financial instruments
without being limited by product providers.
– Under CFP rules CFP® practitioners cannot call themselves
fee-only planners unless that is the exclusive way they
practice.
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- Decide on a Form of Compensation,
cont.
Commission-only planners often work for financial
services firms or are independent and offer the
products of insurance firms.
– Since such planners sell products they must select a
broker-dealer to affiliate with.
– Their investment product offerings typically come from the
broker-dealer who is responsible for their actions. The
broker dealer may also serve as the planner’s back office.
– Many commission-only planners believe they save their
clients money by not charging fees.
– They say that performing services appropriately comes not
from the form of compensation but from the character of the
individual providing the service.
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- Decide on a Form of Compensation,
cont.
Fee and commission planners obtain contracted for
fees directly for their planning services performed
and include the professional respectability they
believe comes from receiving fees. At the same time
they receive potentially high commission income
from sales of products, which often well exceeds
their fee income.
– Often regard themselves as having the best parts of the
other two forms of compensation by combining them.
– Many commission-only and fee and commission planners
like their affiliation with broker dealers. It allows planners to
reduce their due diligence on products and to pare their
record keeping responsibilities, which in turn permits them
to spend more time performing financial planning and
marketing their services.
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- Decide on a Form of Compensation,
cont.
Commission-only and fee and commission planners
are sometimes regarded as more capable in
marketing than fee-only planners.
– The startup time for a new business is often shorter for
them than for fee-only planners because of this capability
and their ability to receive large commissions after
completing a plan.
– Becoming successful as a fee-only financial planner may
require patience since ongoing supervisory revenues, often
the bulk of revenue, tend to take time to build up.
– Supervisory revenues are continuing billings for planner
review and/or management of client assets, particularly
financial assets, with the goal of maintaining and increasing
client financial wealth.
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- Decide on a Form of Compensation,
cont.
On the other hand, fee-only advisors are more likely
to ultimately develop a steady source of revenues
without the need for seeking new clients and new
product sales each year.
Demand for fee-only advice has been growing
steadily over the past decade due to its perceived
attraction by consumers, but at present only a
modest number of financial advisors call themselves
fee-only financial planners.
Many people believe fee-only advice will continue to
gain in popularity.
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- Select a Broker Dealer
The broker-dealer serves many functions, and the
products it offers is limited.
– Their cost, services, and overall quality will reflect on
profitability and even the clients’ opinion of the planner.
– Payouts by broker dealers to planners receiving
commission and services to planners can vary.
– These services allow the planner to spend more time on
client operations and marketing.
– A planner who is compensated solely through fees will have
a greater choice and can select more than one broker-
dealer.
– The majority of fee-only planners have historically
established relationships with discount brokerage firms.
– They serve as custodians for client accounts but do not
provide the level of back office services broker dealers for
16 planners accepting commissions receive.
- Develop Policy Statements
Policy statements are the practices that a firm has in
attempting to fulfill client engagements and in
operating its business in general.
A number of these practices pertain to regulatory
compliance and the development of a compliance
manual.
Under client engagements, planners should indicate
to clients the goal, the scope of the work, the type of
analysis employed, what the output looks like, and
the expected benefits from the engagement.
There can be separate policy statements covering
each service that a planner may offer.
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- Develop Policy Statements, cont.
A synopsis of one policy statement for an investment
review:
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- Technology for Operations
Planners use computers, printers, scanners, and
software in a variety of areas.
– Software is available for financial planning, investment
management, transactions, marketing and database
management and record keeping.
– The software may be established by planners themselves
on spreadsheets or it can be purchased from outside
vendors.
– Many financial planners purchase software useful in
performing comprehensive financial plans. They require
integrated decision making and the software is especially
helpful in calculating capital needs under a variety of
scenarios.
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- Technology for Operations, cont.
Investment management software can be helpful in
determining overall asset allocation and individual
security decisions.
– Software providing securities transactions and daily
holdings and their valuation are readily available and are
often linked to individual broker-dealers or other institutions
in which the assets are custodied.
Database management and marketing software are
often combined.
– Information can be called upon to derive facts about and to
transmit information to clients and prospects on a variety of
subjects.
– Record-keeping software helps in establishing business
accounts, in developing income standards and balance
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sheets, and otherwise analyzing business performance.
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