CFP Board. HandbooK. Second Edition

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Financial Planning Competencv HandbooK

Second Edition

CHARLES R. CHAFFIN, EdD Editor

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Contents

Acknowledgments xiii

About the Book xv

Preface xvii

Charles R. Chaffin, EdD, CFP Board

About tiie Practice Questions xxiii

About the Contributors xxv

PART ONE

Intnoduction 1

Theopy and Practice 5

Function, Purpose, and Regulation ol Financial Institutions 15 Johri £ Grable, PhD, CFP®, University of Georgia

Sonya L. Britt, PhD, CFP®, Kansas State University

Financial Services Regulations and Requirements 25 John E. Grable, PhD, CFP®, University of Georgia

Sonya L. Britt, PhD, CFP®, Kansas State University

Consumer Protection Laws 35

John E. Grable, PhD, CFP®, University of Georgia Sonya L. Britt, PhD, CFP®, Kansas State University

Fiduciary 45

Martie Gilten, PhD, University of Florida

Financial Flanning Process 51

John £ Grable, PhD, CFP®, University of Georgia

Ronald A. Sages, PhD, AEP®, CFP®, CTFA, EA, Kansas State University

Financial Statements 63

Thomas Warschauer, PhD, CFP®, San Diego State University

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Michael Gutter, PhD, University of Florida 9 Financing Strategies

Martie Gilten, PhD, University of Florida Michael Gutter, PhD, University of Florida Jorge Ruiz-Menjivar, University of Georgia 10 Economic Concepts

Dave Yeske, DBA, CFP®, Golden Gate University 11 Time Value of Money

Jorge Ruiz-Menjivar, University of Georgia Martie Gillen, PhD, University of Florida Michael Gutter, PhD, University of Florida 12 Client and Planner Attltudes, Values, Biases,

and Behavioral Finance

Dave Yeske, DBA, CFP®, Golden Gate University 13 Principles of Communication and Counseling

John E. Grable, PhD, CFP®, University of Georgia Kristy L. Archuleta, PhD, LMFT, Kansas State University 14 Debt Management

Joseph W. Goetz, PhD, University of Georgia John E. Grable, PhD, CFP®, University of Georgia 15 Education Needs Analysis

Taylor Spangler, MS, University of Florida Michael Gutter, PhD, University of Florida Martie Gillen, PhD, University of Florida Sailesh Acharya, University of Florida 16 Education Savings Vehicles

Michael Gutter, PhD, University of Florida Martie Gillen, PhD, University of Florida 17 Financial Aid (Education)

Martie Gillen, PhD, University of Florida Michael Gutter, PhD, University of Florida 18 Gift and Income Tax Strategies (Education)

Martie Gillen, PhD, University of Florida Michael Gutter, PhD, University of Florida 19 Education Financing

Martie Gillen, PhD, University of Florida Michael Gutter, PhD, University of Florida

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Contents vii

20 Principles of Risk and Insurance 173

Dave Yeske, DBA, CFP0, Golden Gate University

21 Analysis and Evaluation of Risk Exposures 183 Dave Yeske, DBA, CFP®, Golden Gate University

22 Heatth Insurance and Health Care Cost Management 189 Andrew Head, MA, CFP®, Western Kentucky University

Sharon A. Bums, PhD, CPA (Inactive)

23 Disability Income Insurance (Individual) 197

Dave Yeske, DBA, CFP®, Golden Gate University

24 Long-Term Care Insurance 205

Andrew Head, MA, CFP®, Western Kentucky University Sharon A. Bums, PhD, CPA (Inactive)

25 Annuities 213

Andrew Head, MA, CFP®, Western Kentucky University John Gilliam, PhD, CFP®, Texas Tech University

26 Life Insurance (Individual) 225

27 Business Uses of Insurance 233

L Ann Coulson, PhD, CFP®, Kansas State University John Gilliam, PhD, CFP®, Texas Tech University

28 Insurance Needs Analysis 245

29 Insurance Policy and Company Selection 253

Thomas Warschauer, PhD, CFP®, San Diego State University Andrew Head, MA, CFP®, Western Kentucky University

30 Property and Casualty Insurance 263

Derek R. Lawson, MS, Sonas Financial Group, Inc. and Kansas State University

Sarah D. Asebedo, MS, CFP®, Virginia Tech

Martin C. Seay, PhD, CFP®, Kansas State University

31 Characteristics, Uses, and Taxation of Investment Vehicles 275 Swarn Chatterjee, PhD, University of Georgia

Lance Palmer, PhD, CPA, CFP®, University of Georgia

32 Types of Investment Risk 283

Thomas Warschauer, PhD, CFF®, San Diego State University

33 Quantitative Investment Concepts 291

34 Measures of Investment Returns 299

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35 Asset Allocation and Portfolio Diversification 307 Dave Yeske, DBA, CFP®, Golden Gate University

36 Bond and Stock Valuation Concepts 315

37 Portfolio Development and Analysis 325

Thomas Warschauer, PhD, CFF®, San Diego State University

38 Investment Strategies 335

Dave Yeske, DBA, CFP® Golden Gate University

39 Alternative Investments 343

L Michael Ladd, CFA, CAIA, CMT, CFP®

40 Fundamental Tax Law 353

41 Income Tax Fundamentals and Calculations 363

42 Characteristics and Income Taxation of Business Entities 373 Webster Hewitt, CPA, CFP®, University of Georgia

43 Income Taxation of Trusts and Estates 383

Martin C. Seay, PhD, CFP®, Kansas State University Lance Palmer, PhD, CPA, CFP®, University of Georgia

44 Alternative Minimum Tax (AMT) 391

Webster Hewitt, CPA, CFP®, University of Georgia Lance Palmer, PhD, CPA, CFP®, University of Georgia

45 Tax Reduction and Management Techniques 399

46 Tax Consequences of Property Transactions 409

Lance Palmer, PhD, CPA, CFFl®, University of Georgia

47 Passive Activity and At-Risk Rules 417

48 Tax Implications of Special Circumstances 423

49 Charitable/Philanthropic Contributions and Deductions 431 Webster Hewitt, CPA, CFF®, University of Georgia

50 Retirement Needs Analysis 43g

Andrew Head, MA, CFP®, Western Kentucky University Sharon A. Burns, PhD, CPA (Inactive)

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Contents ix

51 Social Security and Medicare 447

Sarah D. Asebedo, MS, CFP®, Virginia Tech

52 Medicaid 463

Katie Seay, CFP®, The Trust Company

53 Types of Retirement Plans 471

John £ Grable, PhD, CFP®, University of Georgia

54 Qualilied Plan Rules and Options 479

55 Other Tax-Advantaged Plans 485

56 Regulatory Considerations 491

57 Key Factors Affecting Plan Selection for Businesses 495 Andrew Head, MA, CFP®, Western Kentucky University

Sharon A. Burns, PhD, CPA (Inactive)

58 Distribution Rules and Taxation 501

59 Retirement Income and Distribution Strategies 509 Dave Yeske, DBA, CFP®, Golden Gate University

Elissa Buie, MBA, CFP®, Golden Gate University

60 Business Succession Flanning 515

John E. Grable, PhD, CFP®, University of Georgia Joseph W. Goetz, PhD, University of Georgia Kevin Valentino, MS, University of Georgia

61 Characteristics and Consequences of Property Titling 527 Andrew Head, MA, CFP®, Western Kentucky University

Sharon A. Burns, PhD, CPA (Inactive)

62 Gifting Strategies 533

Elissa Buie, MBA, CFP®, Golden Gate University

63 Estate Flanning Documenta 541

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65 Sources for Estate Uquidity

Elissa Buie, MBA, CFP®, Golden Gate University 66 Types, Features, and Taxation of Trusts

Elissa Buie, MBA, CFP®, Golden Gate University 67 Marital Deduction

Elissa Buie, MBA, CFP®, Golden Gate University 68 Intra-Famiiy and Other Business Transfer Techniques

Elissa Buie, MBA, CFP®, Golden Gate University 69 Postmortem Estate Flanning Techniques

Elissa Buie, MBA, CFP®, Golden Gate University 70 Estate Flanning for Non-fraditional Relationships

Elissa Buie, MBA, CFP®, Golden Gate University Supplement: CFP Board s Code of Ettiics and Professional Responsibility

PARTTWO Introduction

Thomas Warschauer, PhD, CFP®, San Diego State University 71 Establishing and Definnig the Client-Planner Relationship

Elissa Buie, MBA, CFP®, Golden Gate University Dave Yeske, DBA, CFP®, Golden Gate University

72 Gathering Information Necessary to Fulfill the Engagement Elissa Buie, MBA, CFP®, Golden Gate University

73 Analyzing and Evaluating the Clients current Financial Status Thomas Warschauer, PhD, CFP®, San Diego State University Vickie Hampton, PhD, CFP®, Texas Tech University

Andrew Head, MA, CFP®, Western Kentucky University 74 Developing Financial Flanning Recommendations

John E. Grable, PhD, CFP®, University of Georgia Lance Palmer, PhD, CPA, CFP®, University of Georgia 75 Communicating the Financial Flanning Recommendations

Dave Yeske, DBA, CFP®, Golden Gate University John E. Grable, PhD, CFP®, University of Georgia

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Contents xi

76 Implementing the Financial Flanning Recommendations Ronald A. Sages, PhD, AEP®, CFP®, CTFA, EA Kansas State University

665

77 Monitoring the Financial Flanning Recommendations Thomas Warschauer, PhD, CFP®, San Diego State University Sharon A. Burns, PhD, CPA (Inactive)

677

PARTTHREE

Intnoduction 685

78 Gathering Data Irom Clients: Insights from Cognitive Task Analysis Kelly S. Steeiman, PhD, Michigan Technological University Jason S. McCarley, PhD, Flinders University

John E. Grable, PhD, CFP®, University of Georgia Lance Palmer, PhD, CPA, CFP®, University of Georgia Dave Yeske, DBA, CFP®, Golden Gate University Charles R. Chaffin, EdD, CFP Board

79 The Need for Education 703

Joyce Schnur, CFP®, MBA, ChFC, Kaplan University Charles R. Chaffin, EdD, CFP Board

80 Financial Flanning Standards Board 709

Michael Snowdon, CFP®, Financial Planning Standards Board

81 Behavioral Finance and Its Implications for Financial Advisors 737 Keith Redhead, PhD, Coventry University

82 Applications of Behavioral Economics in Personal Financial Planning 751 Swarn Chatterjee, PhD, University of Georgia

Joseph W. Goetz, PhD, University of Georgia

83 Marriage and Family Therapy Applications to Financial Planning 763 Kristy L. Archuleta, PhD, LMFT, Kansas State University

D. Bruce Ross III, MS, University of Georgia

84 Financial Therapy: The Integration of Financial Flanning and Theory 779 Kristy L. Archuleta, PhD, LMFT, Kansas State University

Bradley T. Klontz, PsyD, CFP®, Kansas State University Sonya L. Britt, PhD, CFP®, Kansas State University

85 Aging Clients: Special Considerations 795

DeannaL. Sharpe, PhD, CFP®, University of Missouri

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86 Accounting for Time: Important Distinctions and Concepts

for Financial Planners 829

John £ Grable, PhD, CFP®, University of Georgia Robert Rodermund, MS, Linden wood University

87 The Psychology of Decisions: A Short Tutorial 843 Jason S. McCariey, PhD, Fiinders University

Kelly S. Steelman, PhD, Michigan Technoiogicai University John £ Grable, PhD, CFP®, University of Georgia

Lance Palmer, PhD, CPA, CFP®, University of Georgia Dave Yeske, DBA, CFP®, Golden Gate University Charles R. Chaffin, EdD, CFP Board

CONCLUSION

88 Moving Forwand 861

Elissa Buie, MBA, CFP®, Golden Gate University Sharon A. Burns, PhD, CPA (Inactive)

Vickie Hampton, PhD, CFP®, Texas Tech University Lance Paimer, PhD, CPA, CFP®, University of Georgia Thomas Warschauer, PhD, CFP3, San Diego State University