About the author: Lamar Watson, CFP®, is a Fee-Only Financial Advisor in the Washington, D.C. area, that works with clients virtually across the country. Lamar's work with his clients focuses on budgeting, employee benefits, paying down debt, buying their first home, and investing. Lamar is the Founder of Dream Financial Planning, a virtual financial planning firm specifically designed to help young professionals and minorities take control of their finances and fulfill their dreams. Feel free to schedule a complimentary consultation to learn how we use the The DREAM Financial Planning Process ™ to help our clients achieve their goals.
A few weeks ago, I was meeting with a potential client that works as a network engineer in Reston, VA. We had connected on LinkedIn, exchanged a few messages, and decided to meet at Starbucks in the Reston Town Center.
After introducing myself and exchanging pleasantries, I mentioned I was a CFP® professional. With a confused look on his face, he said, “Great what’s a CFP®?” I shouldn’t have been surprised, but I was. After being in the industry for 15 years I made the mistake of assuming everyone knows or understands our industry certifications.
I know there are Cisco certifications that are common in his field, but I certainly wouldn’t know what the abbreviations meant, so I understood. I regrouped and let him know that we help young professionals with everything from setting up a budget, buying their first home, optimizing employment benefits, maintaining adequate insurance coverage, and investing.
I still struggled to explain what a CFP® professional was, the process to get the certification, and how comprehensive the curriculum is. The problem for me is that the education requirements and exam process were so extensive it was difficult for me to explain in a way that was easy to understand. It took me a few minutes, but I realized he didn’t want a long drawn out explanation of the CERTIFIED FINANCIAL PLANNER ™curriculum. He wanted to know how me being a CFP® professional could help him and his family reach their goals.
What Exactly is a CFP®
At Dream Financial Planning we take each of our clients through the Dream Financial Planning Process ™ to ensure we’re covering the topics that are most important to them.
However, I’d still like to discuss the Certified Financial Planner™ designation and the topic areas that it covers. According to the CFP board, there are approximately 85,000 CFP practitioners in the United States. At first glance that sounds like a really big number. That’s until you realize there are over 271,000 personal financial advisors according to the Bureau of Labor Statistics.
A CERTIFIED FINANCIAL PLANNER™ professional is an individual that is authorized to use the CFP® certification marks by the CFP Board. CERTIFIED FINANCIAL PLANNER™ professionals (CFP® professionals) must first acquire the knowledge required to deliver professional, competent, and ethical financial planning services to clients. Additionally, they must pass a comprehensive certification examination, complete three years of professional financial planning experience, and adhere to the high standards of ethics and practice outlined in the CFP Board’s Standards of Professional Conduct.
CFP® professionals are also required to complete 30 hours of continuing education every two years, including two hours of ethics education. CFP® professionals providing financial planning services must also abide by a fiduciary standard– meaning that they must in utmost good faith act in the best interest of the client.
I’ve included a link to the complete 2015 Principal Knowledge Topics that are covered on the CFP® exam. Below I’ve underlined and put in bold font 7 of the main topic areas. I’ve also included the subtopics that I think are most relevant to the young professionals that I work with and a brief explanation of each. The list below is not a complete list of the CFP Board curriculum.
General Financial Planning
Cash flow management – The curriculum covers saving, how to budget, consumption habits, and discretionary vs. non-discretionary expenses.
Financing strategies – Define and discuss different types of home mortgages, evaluate benefits of buying vs. renting a home.
Debt management – Understand how to how to use debt effectively and manage payments.
Education needs analysis – The curriculum covers how to help clients calculate future college expenses.
Education savings vehicles – Compare and contrast different ways to save for future college and education expenses in a tax-efficient way. Compare and contrast 529 plans, pre-paid college expenses, and Coverdell Education savings account.
Financial Aid – Understand different government loan and grant programs including, but not limited to Federal Pell Grants, Federal Perkins Loan Program, Federal College Work-Study Program, Unsubsidized and Subsidized Federal Stafford Loans.
Risk Management and Insurance Planning
Insurance needs analysis – The curriculum covers methods to determine the appropriate amount of coverage for all types of insurance including, but not limited to Life, Health, Long-Term Care, and Short-Term and Long-Term Disability.
Health insurance and health care cost management – Discuss traditional forms of medical insurance including basic coverage and major medical. Define co-payments, coinsurance, stop-loss limit versus maximum out of pocket amount.
Disability income insurance – Disability insurance replaces lost income when a person becomes disabled. Topics covered include the need for disability insurance, the difference between short term and long-term disability. Compare and contrast different types of coverage and taxability of benefits received.
Long Term care insurance – Perform a Long-Term Care needs analysis, discuss alternatives to Long-Term Care insurance including Medicare and Medicaid and their limitations. This insurance kicks in when the covered is unable to perform 2 of the 6 activities for daily living (ADLs) for at least 90 days. The ADLs include the ability to control one’s bladder, eating, dressing, bathing transferring from bed to chair, and using the toilet.
Characteristics uses and taxation of investment vehicles – Compare different investment vehicles including cash and cash equivalents, individual bonds, and individual stocks.
Asset allocation and portfolio diversification – Develop an asset allocation that takes into account the client's risk tolerance, financial position, and tax situation. Asset allocation is the process of deploying assets among various investment classes. Approximately 90% of long-term portfolio performance is determined by the asset allocation of the portfolio.
Income tax fundamentals and calculations – Understand Form 1040 including income, inclusions in gross income, exclusions to gross income, and deductions from adjusted gross income.
Tax reduction/management techniques – Discuss how to help clients minimize taxes. Calculate the benefits of tax-preferred education, retirement, and flex spending plans.
Retirement Savings and Income Planning
Retirement needs analysis – Curriculum covered how to help clients calculate an appropriate savings plan to meet retirement spending goals. Understand assumptions used including desired retirement age, projected investment returns, and the negative effects of inflation.
Social Security and Medicare – Provide an overview of the Social Security system and help clients determine the best time to start collecting Social Security retirement benefits and the taxation of those benefits. Identify the four parts of Medicare, the out of pocket expenses required for the insured and alternative insurance options to cover potential gaps in medical coverage.
Types of Retirement Plans – Describe the features and benefits of different defined benefit, defined contribution, and individual retirement accounts.
Characteristics and consequences of property titling – Curriculum covered title and ownership of property, different types of joint ownership, community property, and tax ramifications of each.
Strategies to transfer property – Discussed different ways to transfer property at death. By contract (for example IRAs), the probate process, by law (for example joint account with rights of survivorship), or trust terms.
Estate Planning documents – Reviewed basic Estate Planning documents including Last Will and Testament, General Durable Power of Attorney, Living Will, and General Healthcare Power of Attorney.
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Certified Financial Planner Board of Standards Inc. (CFP Board) owns the certification marks CFP®, CERTIFIED FINANCIAL PLANNER™, CFP® (with plaque design), and CFP® (with flame design) in the U.S., which it authorizes use of by individuals who complete CFP Board's initial and ongoing certification requirements.
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