October 2005

Q1) If a typical financial planner is going to refer a client to specialist for Insurance, Retirement planning, investment planning, tax planning and other specialized areas, What is his contribution for success in the process other than the initial analysis and providing a plan of action? Does a typical CFP also specialize in one of the above fields?

[Dan's Answer] Most practicing planners will take care of retirement planning and investment planning in-house. A significant number will also place insurance. The contribution to success of things that are referred out varies. Some planners take a very active role others do not. A planner's employer has a lot to say about how detailed a planner may get with a client. Independent firms can be every bit as restrictive as a big publicly traded organization. I wish I could give a more detailed answer but there is a tremendous diversity of styles of practice within the planning community so not every planner will perform the same services in the same detail or at the same price. While this provides many choices to the marketplace it can also confuse consumers.

Q2) My question is that if I sell mutual funds through a broker and receive commissions, don't I have to disclose the amount or rate of commission I receive to my client? Another Scenario would be, what if I am also a RIA and sell mutual funds for a commission. Wouldn't I have to disclose the commission I am making to the client?

[Dan's Answer] RIA's cannot receive commissions in their capacity as an RIA. They must "switch hats" to that of a registered representative of an NASD firm. There is no requirement from the NASD to disclose your commission. The SEC requires funds to disclose sales charges, which may or may not be the same as the commission, in the prospectus. If you are a CFP licensee, you must always disclose method of compensation but only have to disclose amount if asked.

Q3) I find the budgeting experience a necessary one to get a baseline of where the money is going. It is the first step for the next level of corrective action. To the practicing professionals - How do you ensure that the customer gets this step accurately? Without correct numbers from this step, the financial planning would pretty much be on an false foundation. How do one trade off between taking this step to the extreme and penny pinching mode and develop a balance?

[Dan's Answer] In practice, it is common to find people highly resistant to a "budget." Some simply can not get themselves to commit to one. Some people respond better to "spending plan." Name games aside, for some people, if you can't get a handle on their expenses, you should decline the engagement altogether. For others, you may be able to do a reasonable job with a less detailed budget. It may be acceptable to simply plan on the client spending $x per month and not worry about what they spend it on. Every family is different and sometimes you will need to adjust your process a bit. I say "a bit" because if you overdo being flexible, you could end up doing what the client wants you to do instead of what they need you to do. This is another example of an area that requires a balancing.

Q4) In reading chapter 8 and 9 of Mittra's book, I was flabbergasted to find out how many different schemes are available to either avoid or significantly minimize federal estate taxes. If this is the case, I then ask, "Who came up with these schemes in the first place?", and "Who passed them into laws?"

[Dan's Answer] Lawyers mostly. When the "tax simplification" acts that come out of Congress are thousands of pages long, it is not hard to find things you don't like in the tax code.


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