Educating Youth
Sample Question & Answer by Joseph Balsamo.
Q:
Good morning,
My son is doing a math project and wondered if you could provide some information:
1) Description of a Financial Planner’s career
2) What knowledge is required to be in this career
3) What specific usage of mathematics concepts are used in this career?
Any information would be helpful.
A:
First, what is financial planning? It is a detailed, comprehensive process that itemizes goals and how to achieve them considering all relevant financial aspects. For instance, a client who is looking to purchase a home in the next 3 years would need to consider their cash flow, current financial status (assets and liabilities), future expected financial needs and how this relates to other financial goals. The financial planner’s job is to help the client put together, implement and review the plan to ensure success. Quite often, the planner and client form a close working relationship that grows into a long-term relationship built on a foundation of ethics and trust. A financial planner’s scope is all encompassing and specifically involved with investment, retirement, estate and tax planning issues. Thus, the financial planning field is a long-term commitment and not for those looking to make a “quick buck”.
CFP professionals work for various organizations including banks, trust, insurance and mutual fund companies, along with accounting firms, independent financial planning firms and private practices. Compensation structures vary from salary, salary and bonus, fee based to straight commission or a combination of any. Thus, a CFP can choose a model that best suits their practice.
Aside from having strong relationship building and analytical skills, a financial planner requires thorough training in order to achieve the Certified Financial Planner designation administered by the Financial Planners Standards Council. Also knowledge of finance, economics and mathematics is a necessity for investment portfolio construction and analysis. Commonly applied math concepts include: the time value of money, compound interest, various rates of return, amortization, and cash flow projections.
The phrase “big picture thinking” is commonly used in business. A successful financial planner embodies this mentality by always looking for inter-connected issues and offering knowledge based solutions. What further complicates matters is emotion, and money is a very emotional topic. The financial planner’s job is to manage the client’s emotions when dealing with their financial affairs since emotions often skew their objectivity. The ability to harness these sentiments and make the client aware of the solutions makes financial planning a very rewarding career choice with a very bright future.
The following is a list of formulas from the CFP Exam Syllabus that are required knowledge.
Types and measures of investment returns
1. Future value
2. Present value
3. Net present value
4. Internal rate of return (IRR)
5. Compounding periods
6. Interest rate
7. Simple annuities (ordinary and annuity due)
8. Simple interest calculation
9. Annualized return
10. Real rate of return
11. After-tax return
12. Convert nominal rate to effective rate
13. Convert effective rate to nominal rate
14. Current yield - stocks and bonds
15. Yield to maturity
16. Market value of a bond
17. Market value of a strip bond
18. Time-weighted return
19. Risk-free return
20. Standard deviation
21. Holding period return
22. Total return
Financial Statement ratio analysis
1. Current ratio
2. Quick ratio
3. Debt-to-equity ratio
4. Debt-to-total assets ratio
5. Interest coverage ("times interest earned")
6. Net profit margin
7. Gross profit margin
8. Return on common equity
9. Return on total assets
10. Earnings per common share
11. Price/Earnings ratio (P/E multiple)
12. Asset turnover
13. Inventory turnover
14. Receivable turnover
15. Working capital
16. Dividend payout
17. Market capitalization
I hope this helps with the math project.
Sincerely,
Joe Balsamo, CFP
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