ChFC – HS300, Chap 05
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What kinds of things might an advisor disclose during the initial session?
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Philosophy Education Employement History Certifications and Licenses Sources of Compensation
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At a high level, the fact finding process should do what?
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Evaluate the client's total financial condition Identify what type of person the client really is Determine where the client wants to be Formulate the most appropriate strategies for getting there
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What is the formula for the Liquidity Ratio?
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Liquidity Ratio = Liquid Assets / Total Current Debts Liquidity Ratio = Liquid Assets / (Current Liabilities + Annual Loan Payments)
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What does the Liquidity Ratio represent?
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The ability of the client to pay off debt with liquid assets.
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What is the ideal range for a client's Liquidity Ratio?
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1 < liquidity ratio < 2
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What is the formula for the Solvency Ratio?
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Solvency Ratio = Net Worth / Total Assets
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What does the Solvency Ratio represent?
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The extent to which the market value of a client's total assets could decline before wiping out all of his/her wealth as measured by net worth.
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What is the ideal Solvency Ratio?
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Mathematically, it can be no greater than 1, but the closer to 1 the better.
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What is the formula for Cash Flow?
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Cash Flow = Income - Expenses
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What is the relationship between one's Financial Position and Cash Flow?
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A Financial Position is a snapshot in time; a static view. Cash Flow is dynamic and represents financial activity. Thus, the current Financial Position plus Cash Flow leads to one's future Financial Position. FP + CF = FP'
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What is Cash Flow Management?
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Cash Flow Analysis Cash Flow Planning Budgeting
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What is Cash Flow Analysis also known as?
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Income and Expense Analysis
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What is Cash Flow Analysis?
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Gathering data concering the client's cash flow situation Presenting the data in an organized format Identifying strengths and weaknesses Identifying patterns
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What is Cash Flow Planning?
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Identifying courses of action that will help optimize net cash flow.
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What is Budgeting?
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The process of creating and following an explicit plan for spending and investing the resources available to the client.
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What are the two types of annual expenses?
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Fixed Discretionary
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What is the formula for one's Savings Ratio?
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Savings Ratio = (Net Cash Flow + Recurring Savings & Investments) / Annual After-Tax Income
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What does one's Saving's Ratio represent?
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The percentage of after-tax income saved by a client.
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What is the formula for one's Debt Service Ratio?
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Debt Service Ratio = Total Debt Payments / Net Income
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What is a financial asset?
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Cash and cach-equivalents Investments Life insurance cash-value
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What is a non-financial asset?
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Examples include: House, car, applicances, furniture, jewelry, etc.
