Financial Planning
What the exam tests
Financial Planning is the integrating domain: it tests whether you can run a disciplined advice process rather than sell a product. Expect questions on the six-step process, fact-finding, goal quantification, cash-flow analysis, risk profiling, documentation and review.
Core rules
- Process: establish and define the relationship; collect data and goals; analyse; develop recommendations; implement; monitor and review.
- Quantify every goal in today's money and convert with real returns, or inflate the goal and use nominal returns. Do not mix the two.
- Emergency reserve: typically 3–6 months of essential expenditure in accessible cash.
- Diagnostic ratios: savings ratio, debt-to-income, net worth to income, housing costs to income.
- Suitability rests on documented objectives, attitude to risk, capacity for loss and affordability - not on a risk score alone.
Worked example
A 35-year-old wants £1,000,000 in today's money at 65, with a real return of 4% a year. Real return already strips inflation, so no further adjustment is needed. The 30-year annuity factor is ((1.04)^30 − 1) / 0.04 = 56.085. Annual contribution = 1,000,000 / 56.085 = £17,830, assuming year-end contributions. If the client instead earned 6% nominal with 2% inflation, the real return would be (1.06/1.02) − 1 = 3.92%, not 4%.
Traps that cost marks
- Mixing nominal cash flows with real discount rates.
- Treating attitude to risk as the same as capacity for loss.
- Omitting tax and charges from projections.
- Recommending before establishing objectives.
- Forgetting the review step and the documented audit trail.