Textbook Case

Lewis J. Altfest, one of the most quoted financial planners in the industry, has written what many consider to be the ultimate text on financial planning. At a whopping 624 pages, Personal Financial Planning is the only text that covers every topic required by the new Academy of Financial Services-CFP Board guidelines. According to Altfest, “This text goes beyond the traditional personal finance texts to teach students how to do actual financial planning and integrates the theory and practice of personal finance.”

The book first introduces the concept of personal financial planning, noting that it is a multi-step process. It begins with establishing the scope of activity and ends with monitoring and reviewing the plan as set out. Altfest walks readers through the importance of communication, data gathering and goal setting, noting that they are interrelated topics. “Goals are the focal point of professional financial planning,” writes Altfest. “There are normally many types of goals and these depend, to a great extent, on a person’s life values.” He differentiates between short- and long-term goals. For example, saving for a car is a short-term goal and establishing a savings structure that allows the client to maintain the same lifestyle both before and after retirement is a long-term goal.

Altfest writes about the importance of financial statements for personal financial planning. The objective is to be able to make a preliminary assessment of the financial health of a household early in the data-gathering process. The balance sheet reveals assets, liabilities and equity, whereas a cash-flow tally serves as an income statement indicating how well a household is operating. Altfest explains how to help clients set up budgets by establishing goals, deciding on a period of time, calculating cash inflows and outflows, and reviewing the projections to see if they are reasonable or not. “There are a variety of methods to facilitate savings, including a simple structural approach providing motivation, eliminating an option to spend, reducing temptation and minimizing discomfort,” he writes.

Altfest also focuses on portfolio management, noting that a strategic asset allocation looks at investment policy over the long term, while a tactical one makes cyclical changes based on opportunities at that time. “Once the strategic and tactical asset allocations are established, individual assets are selected for each category,” writes Altfest. “Clearly, the goal is to select the assets that provide the highest returns for the overall risk taken.”

Obviously, the goal for most personal financial plans is retirement planning. Altfest writes that for younger people, retirement planning is expressed positively, as an opportunity to achieve financial independence. But for clients that are middle-aged or older, retirement generates a different thought, he writes. “They are concerned that they will not be able to retire when they want to or to maintain their current standard of living.” Mostly, these people fear they could run out of money. Altfest writes that financial planners need to have an organized approach for both kinds of clients, and should be able to explain pensions (including qualified and nonqualified, noting that only qualified plans allow for a tax deduction for plan deposits), Social Security and tax-deferred annuities. He also defines the risks in retirement planning, including inflation, withdrawal risk, longevity risk and health risk.