CASE EXAMPLEPERSONAL FINANCIAL STATEMENTS John and Mary Henderson, ages 52 and 48, respectively, are engaging in private wealth management and have the following personal financial statements: a statement of financial position and a statement of cash flow. John is a marketing manager for a large publicly traded corporation, while Mary has recently returned to high school teaching after taking time off to raise (with John) their two children and be a homemaker. Their two children are ages 14 and 19. The 19-year-old is now in college. John and Mary also are helping support Johns 82-year-old mother. The sample statements are for the combined assets, liabilities, income, and expenses of John and Mary. Statements for each of them separately could be prepared, if desired. The categories of assets, liabilities, income, and expenses in these statements have been selected to facilitate the planning process. They normally are good starting points but are not meant to be exhaustive. The categories, of course, can be modified to fit the planners needs and purposes. In addition, financial concerns and wealth management professionals will have their own checklists, questionnaires, forms, and reports as appropriate for their areas of expertise. Statement of Financial Position (Balance Sheet) Table 1.1 is the statement of financial position for the Hendersons. Dollar amounts are stated in even thousands for the sake of convenience. Assets are valued at their current fair market values,

25

account values, and cash values, except for Johns vested and in the money stock options, which are valued at their intrinsic value (the stocks fair market value less the option exercise price times the number of vested unexercised options). See Chapter 18 for a discussion of valuing stock options. Statement of Cash Flow Table 1.2 shows the statement of cash flow for the Hendersons as of the most recent 12-month period. All transactions are recorded on a cash basis. The items of income and expenses are selected to show the familys economic activities over the time period and to facilitate planning. Other breakdowns of income and expenses can, of course, be used as desired. Other Planning Statements and Projections The previously cited statements of financial position and cash flow give a picture of the persons or familys overall economic position as of a given point or period of time. However, a number of other forms, statements, or projections also may be prepared for in-depth planning in a variety of areas. These might include the following items, among others: A listing of investments held by asset class (e.g., common stocks, bonds, investment companies, real estate, other alternative investments, and so forth), including current values, when acquired, tax bases, yields, and other investment data for asset allocation and investment planning purposes. Pro forma income tax returns for tax planning. Projections of future education costs and resources for education financing. Projections of retirement income needs and sources of retirement income (including distribution planning). A listing of employer stock options (and other stock compensation plans) for asset allocation purposes and for planning how and when to exercise options. An analysis of lump-sum and income needs in case of the clients and his or her spouses death for life insurance planning. An analysis of income needs in case of the clients and his or her spouses long-term disability for disability income planning. An analysis of potential transfer tax (e.g., estate tax) liabilities and other estate settlement costs and probate and nonprobate asset distribution patterns, first on the assumption that the client dies first followed by the death of his or her spouse, and then on the assumption that the order of deaths is reversed, for estate planning purposes. Personal family data will also be gathered for estate planning and other planning purposes. ETHICS AND WEALTH MANAGEMENT The various professionals who offer advice and services in this field often are subject to codes of professional conduct and regulations. These codes and regulations vary among the professional groups, but often deal with: Competence required of a professional in the field Confidentiality regarding client information and other matters Conflicts of interest in dealing with clients and required disclosure of such conflicts Compensation for services rendered and any requirements for disclosure of such compensation Principles involved in proper professional conduct Compliance with and enforcement of rules and procedures A discussion of the codes and rules of all relevant professions is beyond the scope of this book. However, as examples, the following is a listing of some professions and groups, with accompanying websites where the reader can find the complete rules and practice standards for each (in alphabetical order).