Sunday, August 26, 2007

Bond (Finance)

In finance, a bond is a debt security, in which the authorized issuer owes the holders a debt and is obliged to repay the principal and interest (the coupon) at a later date, termed maturity. Other stipulations may also be attached to the bond issue, such as the obligation for the issuer to provide certain information to the bond holder, or limitations on the behavior of the issuer. Bonds are generally issued for a fixed term (the maturity) longer than ten years. U.S Treasury securities issue debt with life of ten years or more, which is a bond. New debt between one year and ten years is a "note", and new debt less than a year is a "bill".

A bond is simply a loan, but in the form of a security, although terminology used is rather different. The issuer is equivalent to the borrower, the bond holder to the lender, and the coupon to the interest. Bonds enable the issuer to finance long-term investments with external funds. Certificates of deposit (CDs) or commercial paper are considered money market instruments.

In some nations, both bonds and notes are used irrespective of the maturity. Market participants normally use bonds for large issues offered to a wide public, and notes for smaller issues originally sold to a limited number of investors. There are no clear demarcations. There are also "bills" which usually denote fixed income securities with three years or less, from the issue date, to maturity. Bonds have the highest risk, notes are the second highest risk, and bills have the least risk. This is due to a statistical measure called duration, where lower durations have less risk, and are associated with shorter term obligations.

Bonds and stocks are both securities, but the difference is that stock holders own a part of the issuing company (have an equity stake), whereas bond holders are in essence lenders to the issuer. Also bonds usually have a defined term, or maturity, after which the bond is redeemed whereas stocks may be outstanding indefinitely. An exception is a consol bond, which is a perpetuity (i.e. bond with no maturity).

Issuers

The range of issuers of bonds is very large. Almost any organization could issue bonds, but the underwriting and legal costs can be prohibitive. Regulations to issue bonds are very strict. Issuers are often classified as follows:

Issuing bonds

Bonds are issued by public authorities, credit institutions, companies and supranational institutions in the primary markets. The most common process of issuing bonds is through underwriting. In underwriting, one or more securities firms or banks, forming a syndicate, buy an entire issue of bonds from an issuer and re-sell them to investors. Government bonds are typically auctioned.

Features of bonds

The most important features of a bond are:

  • nominal, principal or face amount—the amount over which the issuer pays interest, and which has to be repaid at the end.
  • issue price—the price at which investors buy the bonds when they are first issued, typically $1,000.00. The net proceeds that the issuer receives are calculated as the issue price, less issuance fees, times the nominal amount.
  • maturity date—the date on which the issuer has to repay the nominal amount. As long as all payments have been made, the issuer has no more obligations to the bond holders after the maturity date. The length of time until the maturity date is often referred to as the term or maturity of a bond. The maturity can be any length of time, although debt securities with a term of less than one year are generally designated money market instruments rather than bonds. Most bonds have a term of up to thirty years. Some bonds have been issued with maturities of up to one hundred years, and some even do not mature at all. In early 2005, a market developed in euros for bonds with a maturity of fifty years. In the market for U.S. Treasury securities, there are three groups of bond maturities:
    • short term (bills): maturities up to one year;
    • medium term (notes): maturities between one and ten years;
    • long term (bonds): maturities greater than ten years.
  • coupon—the interest rate that the issuer pays to the bond holders. Usually this rate is fixed throughout the life of the bond. It can also vary with a money market index, such as LIBOR, or it can be even more exotic. The name coupon originates from the fact that in the past, physical bonds were issued which had coupons attached to them. On coupon dates the bond holder would give the coupon to a bank in exchange for the interest payment.
  • coupon dates—the dates on which the issuer pays the coupon to the bond holders. In the U.S., most bonds are semi-annual, which means that they pay a coupon every six months. In Europe, most bonds are annual and pay only one coupon a year.
  • indenture or covenants—a document specifying the rights of bond holders. In the U.S., federal and state securities and commercial laws apply to the enforcement of those documents, which are construed by courts as contracts. The terms may be changed only with great difficulty while the bonds are outstanding, with amendments to the governing document generally requiring approval by a majority (or super-majority) vote of the bond holders.
  • Optionality: a bond may contain an embedded option; that is, it grants option like features to the buyer or issuer:
    • callability—Some bonds give the issuer the right to repay the bond before the maturity date on the call dates; see call option. These bonds are referred to as callable bonds. Most callable bonds allow the issuer to repay the bond at par. With some bonds, the issuer has to pay a premium, the so called call premium. This is mainly the case for high-yield bonds. These have very strict covenants, restricting the issuer in its operations. To be free from these covenants, the issuer can repay the bonds early, but only at a high cost.
    • puttability—Some bonds give the bond holder the right to force the issuer to repay the bond before the maturity date on the put dates; see put option.
    • call dates and put dates—the dates on which callable and puttable bonds can be redeemed early. There are four main categories.
      • A Bermudan callable has several call dates, usually coinciding with coupon dates.
      • A European callable has only one call date. This is a special case of a Bermudan callable.
      • An American callable can be called at any time until the maturity date.
      • A death put is an optional redemption feature on a debt instrument allowing the beneficiary of the estate of the deceased to put (sell) the bond (back to the issuer) in the event of the beneficiary's death or legal incapacitation. Also known as a "survivor's option".
  • sinking fund provision of the corporate bond indenture requires a certain portion of the issue to be retired periodically. The entire bond issue can be liquidated by the maturity date. If that is not the case, then the remainder is called balloon maturity. Issuers may either pay to trustees, which in turn call randomly selected bonds in the issue, or, alternatively, purchase bonds in open market, then return them to trustees.
  • convertible bond lets a bondholder exchange a bond to a number of shares of the issuer's common stock.
  • exchangeable bond allows for exchange to shares of a corporation other than the issuer.

Types of bond

  • Fixed rate bonds have a coupon that remains constant throughout the life of the bond.
  • Zero coupon bonds do not pay any interest. They trade at a substantial discount from par value. The bond holder receives the full principal amount as well as value that has accrued on the redemption date. An example of zero coupon bonds are Series E savings bonds issued by the U.S. government. Zero coupon bonds may be created from fixed rate bonds by financial institutions by "stripping off" the coupons. In other words, the coupons are separated from the final principal payment of the bond and traded independently.
  • Other indexed bonds, for example equity linked notes and bonds indexed on a business indicator (income, added value) or on a country's GDP.
  • Subordinated bonds are those that have a lower priority than other bonds of the issuer in case of liquidation. In case of bankruptcy, there is a hierarchy of creditors. First the liquidator is paid, then government taxes, etc. The first bond holders in line to be paid are those holding what is called senior bonds. After they have been paid, the subordinated bond holders are paid. As a result, the risk is higher. Therefore, subordinated bonds usually have a lower credit rating than senior bonds. The main examples of subordinated bonds can be found in bonds issued by banks, and asset-backed securities. The latter are often issued in tranches. The senior tranches get paid back first, the subordinated tranches later.
  • Perpetual bonds are also often called perpetuities. They have no maturity date. The most famous of these are the UK Consols, which are also known as Treasury Annuities or Undated Treasuries. Some of these were issued back in 1888 and still trade today. Some ultra long-term bonds (sometimes a bond can last centuries: West Shore Railroad issued a bond which matures in 2361 (i.e. 24th century)) are sometimes viewed as perpetuities from a financial point of view, with the current value of principal near zero.
  • Bearer bond is an official certificate issued without a named holder. In other words, the person who has the paper certificate can claim the value of the bond. Often they are registered by a number to prevent counterfeiting, but may be traded like cash. Bearer bonds are very risky because they can be lost or stolen. Especially after federal income tax began in the United States, bearer bonds were seen as an opportunity to conceal income or assets.[1] U.S. corporations stopped issuing bearer bonds in the 1960s, the U.S. Treasury stopped in 1982, and state and local tax-exempt bearer bonds were prohibited in 1983.[2]
  • Registered bond is a bond whose ownership (and any subsequent purchaser) is recorded by the issuer, or by a transfer agent. It is the alternative to a Bearer bond. Interest payments, and the principal upon maturity, are sent to the registered owner.
  • Municipal bond is a bond issued by a state, U.S. Territory, city, local government, or their agencies. Interest income received by holders of municipal bonds is often exempt from the federal income tax and from the income tax of the state in which they are issued, although municipal bonds issued for certain purposes may not be tax exempt.
  • Book-entry bond is a bond that does not have a paper certificate. As physically processing paper bonds and interest coupons became more expensive, issuers (and banks that used to collect coupon interest for depositors) have tried to discourage their use. Some book-entry bond issues do not offer the option of a paper certificate, even to investors who prefer them.[3]
  • Lottery bond is a bond issued by a state, usually a European state. Interest is paid like a traditional fixed rate bond, but the issuer will redeem randomly selected individual bonds within the issue according to a schedule. Some of these redemptions will be for a higher value than the face value of the bond.
  • War bond is a bond issued by a country to fund a war.

Bonds issued by foreign entities

Some companies, banks, governments, and other sovereign entities may decide to issue bonds in foreign currencies as it may appear to be more stable and predictable than their domestic currency. Issuing bonds denominated in foreign curriencies also gives issuers the ability to access investment capital available in foreign markets. The proceeds from the issuance of these bonds can be used by companies to break into foreign markets, or can be converted into the issuing company's local currency to be used on existing operations. Foreign issuer bonds can also be used to hedge foreign exchange rate risk. Some of these bonds are called by their nicknames, such as the "samurai bond".

  • Eurodollar bond, a U.S. dollar-denominated bond issued by a non-U.S. entity outside the U.S.[citation needed]
  • Kangaroo bond,an Australian dollar-denominated bond issued by a non-Australian entity in the Australian market
  • Maple bond, a Canadian Dollar-denominated bond issued by a non-Canadian entity in the Canadian market
  • Samurai bond, a Japanese Yen-denominated bond issued by a non-Japanese entity in the Japanese market
  • Yankee bond, a US Dollar-denominated bond issued by a non-US entity in the US market
  • Shogun bond, a non-yen-denominated bond issued in Japan by a non-Japanese institution or government
  • Bulldog bond, a pound sterling-denominated bond issued in London by a foreign institution or government
  • Ninja loan, a Japanese yen syndicated loan by a foreign borrower [1]
  • Formosa bond, a non-New Taiwan Dollar-denominated bond issued by a non-Taiwan entity in the Taiwan market[4]
  • Panda bond, a Chinese renminbi-denominated bond issued by a non-China entity in the People's Republic of China market[5]
  • State of Israel bond, a bond demoninated in multiple currencies issued by the State of Israel through the Development Corporation of Israel.

Trading and valuing bonds

See also: Bond valuation

The interest rate that the issuer of a bond must pay is influenced by a variety of factors, such as current market interest rates, the length of the term and the credit worthiness of the issuer.

These factors are likely to change over time, so the market value of a bond can vary after it is issued. Because of these differences in market value, bonds are priced in terms of percentage of par value. Bonds are not necessarily issued at par (100% of face value, corresponding to a price of 100), but all bond prices converge to par when they reach maturity. At other times, prices can either rise (bond is priced at greater than 100), which is called trading at a premium, or fall (bond is priced at less than 100), which is called trading at a discount. Most government bonds are denominated in units of $1000, if in the United States, or in units of £100, if in the United Kingdom. Hence, a deep discount US bond, selling at a price of 75.26, indicates a selling price of $752.60 per bond sold. (Often, bond prices are quoted in points and thirty-seconds of a point, rather than in decimal form.) Some short-term bonds, such as the U.S. T-Bill, are always issued at a discount, and pay par amount at maturity rather than paying coupons. This is called a discount bond.

The market price of a bond is the present value of all future interest and principal payments of the bond discounted at the bond's yield, or rate of return. The yield represents the current market interest rate for bonds with similar characteristics. The yield and price of a bond are inversely related so that when market interest rates rise, bond prices generally fall and vice versa.

The market price of a bond may include the accrued interest since the last coupon date. (Some bond markets include accrued interest in the trading price and others add it on explicitly after trading.) The price including accrued interest is known as the "flat" or "dirty price". (See also Accrual bond.) The price excluding accrued interest is sometimes known as the Clean price.

The interest rate adjusted for the current price of the bond is called the "current yield" or "earnings yield" (this is the nominal yield multiplied by the par value and divided by the price).

Taking into account the expected capital gain or loss (the difference between the current price and the redemption value) gives the "redemption yield": roughly the current yield plus the capital gain (negative for loss) per year until redemption.

The relationship between yield and maturity for otherwise identical bonds is called a yield curve.

Bonds markets, unlike stock or share markets, often do not have a centralized exchange or trading system. Rather, in most developed bond markets such as the U.S., Japan and western Europe, bonds trade in decentralized, dealer-based over-the-counter markets. In such a market, market liquidity is provided by dealers and other market participants committing risk capital to trading activity. In the bond market, when an investor buys or sells a bond, the counterparty to the trade is almost always a bank or securities firm acting as a dealer. In some cases, when a dealer buys a bond from an investor, the dealer carries the bond "in inventory." The dealer's position is then subject to risks of price fluctuation. In other cases, the dealer immediately resells the bond to another investor.

Bond markets also differ from stock markets in that investors generally do not pay brokerage commissions to dealers with whom they buy or sell bonds. Rather, dealers earn revenue for trading with their investor customers by means of the spread, or difference, between the price at which the dealer buys a bond from one investor--the "bid" price--and the price at which he or she sells the same bond to another investor--the "ask" or "offer" price. The bid/offer spread represents the total transaction cost associated with transferring a bond from one investor to another.

Investing in bonds

Bonds are bought and traded mostly by institutions like pension funds, insurance companies and banks. Most individuals who want to own bonds do so through bond funds. Still, in the U.S., nearly ten percent of all bonds outstanding are held directly by households.

As a rule, bond markets rise (while yields fall) when stock markets fall. Thus bonds are generally viewed as safer investments than stocks, but this perception is only partially correct. Bonds do suffer from less day-to-day volatility than stocks, and bonds' interest payments are higher than dividend payments that the same company would generally choose to pay to its stockholders. Bonds are liquid — it is fairly easy to sell one's bond investments, though not nearly as easy as it is to sell stocks — and the certainty of a fixed interest payment twice per year is attractive. Bondholders also enjoy a measure of legal protection: under the law of most countries, if a company goes bankrupt, its bondholders will often receive some money back (the recovery amount), whereas the company's stock often ends up valueless. However, bonds can be risky:

  • Fixed rate bonds are subject to interest rate risk, meaning their market price will decrease in value when the generally prevailing interest rate rises. Since the payments are fixed, a decrease in the market price of the bond means an increase in its yield. When the market's interest rates rise, then the market price for bonds will fall, reflecting investors' improved ability to get a good interest rate for their money elsewhere — perhaps by purchasing a newly issued bond that already features the newly higher interest rate. This drop in the bond's market price does not affect the interest payments to the bondholder at all, so long-term investors need not worry about price swings in their bonds.

However, price changes in a bond immediately affect mutual funds that hold these bonds. Many institutional investors have to "mark to market" their trading books at the end of every day. If the value of the bonds held in a trading portfolio has fallen over the day, the "mark to market" value of the portfolio may also have fallen. This can be damaging for professional investors such as banks, insurance companies, pension funds and asset managers. If there is any chance a holder of individual bonds may need to sell his bonds and "cash out" for some reason, interest rate risk could become a real problem. (Conversely, bonds' market prices would increase if the prevailing interest rate were to drop, as it did from 2001 through 2003.) One way to quantify the interest rate risk on a bond is in terms of its duration. Efforts to control this risk are called immunization or hedging.

  • Bond prices can become volatile if one of the credit rating agencies like Standard & Poor's or Moody's upgrades or downgrades the credit rating of the issuer. A downgrade can cause the market price of the bond to fall. As with interest rate risk, this risk does not affect the bond's interest payments, but puts at risk the market price, which affects mutual funds holding these bonds, and holders of individual bonds who may have to sell them.
  • A company's bondholders may lose much or all their money if the company goes bankrupt. Under the laws of many countries (including the United States), bondholders are in line to receive the proceeds of the sale of the assets of a liquidated company ahead of some other creditors. Bank lenders, deposit holders (in the case of a deposit taking institution such as a bank) and trade creditors may take precedence.

There is no guarantee of how much money will remain to repay bondholders. As an example, after an accounting scandal and a Chapter 11 bankruptcy at the giant telecommunications company Worldcom, in 2004 its bondholders ended up being paid 35.7 cents on the dollar. In a bankruptcy involving reorganization or recapitalization, as opposed to liquidation, bondholders may end up having the value of their bonds reduced, often through an exchange for a smaller number of newly issued bonds.

  • Some bonds are callable, meaning that even though the company has agreed to make payments plus interest towards the debt for a certain period of time, the company can choose to pay off the bond early. This creates reinvestment risk, meaning the investor is forced to find a new place for his money, and the investor might not be able to find as good a deal, especially because this usually happens when interest rates are falling.

Bond indices

A number of bond indices exist for the purposes of managing portfolios and measuring performance, similar to the S&P 500 or Russell Indexes for stocks. The most common American benchmarks are the Lehman Aggregate, Citigroup BIG and Merrill Lynch Domestic Master. Most indices are parts of families of broader indices that can be used to measure global bond portfolios, or may be further subdivided by maturity and/or sector for managing specialized portfolios.

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Credit (Finance)

In finance, credit (as in the term "credit card") is the granting of a loan and the creation of debt. Any movement of financial capital is normally quite dependent on credit, which in turn is dependent on the reputation or creditworthiness of the entity which takes responsibility for the funds.

The term credit is used similarly in commercial trade, to refer to the approval for delayed payments for purchased goods. Sometimes, credit is not granted to a person who has financial instability or difficulty. Companies frequently offer credit to their customers as part of the terms of a purchase agreement. Organizations that offer credit to their customers frequently employ a credit manager.

Credit is denominated by a unit of account. Unlike money (by a strict definition), credit itself cannot act as a unit of account. However, many forms of credit can readily act as a medium of exchange. As such, various forms of credit are frequently referred to as money and are included in estimates of the money supply.

Credit is also traded in the market. The purest form is the credit default swap market, which is essentially a traded market in credit insurance. A credit default swap represents the price at which two parties exchange this risk — the protection "seller" takes the risk of default of the credit in return for a payment, commonly denoted in basis points (one basis point is 1/100 of a percent) of the notional amount to be referenced, while the protection "buyer" pays this premium and in the case of default of the underlying (a loan, bond or other receivable), delivers this receivable to the protection seller and receives from the seller the par amount (that is, is made whole).

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Payday Loan

A payday loan or paycheck advance is a small, short-term loan that is intended to cover a borrower's urgent expenses until their next payday. Typical loans are between $100 and $1500, are usually on a 2 week term, and usually have interest rates in the range of 390 percent to 900 percent (annualized). They are also sometimes referred to as cash advances, though that term can also refer to cash provided against a prearranged line of credit such as a credit card.

Though payday lending is primarily regulated at the state level, the United States Congress passed a law in October 2006 that will cap lending to military personnel at 36% APR. The Defense Department called the lending "predatory", and military officers cited concerns that payday lending exacerbated soldiers' financial challenges, jeopardized security clearances, and even interfered with deployment schedules to Iraq.

Some federal banking regulators and legislators seek to restrict or prohibit the loans not just for military personnel, but for all borrowers, because the high costs are viewed as an unnecessary financial drain on the lower and lower-middle class populations who are the primary borrowers.

Lenders point out that these loans are often the only option available to consumers with bad credit who have urgent expenses and cannot get a bank loan, credit card, or other lower-interest alternative. Critics counter that most borrowers find themselves in a worse position when the loan is due than they were when they took the loan, with many getting trapped in a cycle of debt.

The industry's fast paced growth indicates a highly profitable business model. Statistics show that the majority of the industry's profit comes from repeat borrowers, who are unable to pay them off on the due date and instead repeatedly renew their loans, paying fees each time.

The Loan Process

Borrowers visit a payday lending store and secure a small cash loan, usually in the range of $100 to $500 with payment in full due at the borrower's next paycheck (usually a two week term). Finance charges on payday loans are typically in the range of $15 to $30 per $100 borrowed, which translates to rates ranging from 390 percent to 780 percent when expressed as an annual percentage rate (APR). The borrower writes a post-dated check to the lender in the full amount of the loan plus interest and fees. On the maturity date, the borrower is expected to return to the store to repay the loan in person. If the borrower doesn't repay the loan in person, the lender may process the check traditionally or through electronic withdrawal from the borrower's checking account.

If the account is short on funds to cover the check, the borrower may now face a bounced check fee from their bank in addition to the costs of the loan, and the loan may incur additional fees and/or an increased interest rate as a result of the failure to pay.

Payday lenders generally do little due diligence to assess a borrower's ability to repay a loan, but many do require the borrower to bring one or more recent pay stubs to prove that they have a steady source of income.

Most payday borrowers are not able to repay their loans loan in full at their first paycheck, and will renew (or "flip") the loan, which is the practice of renewing a loan at maturity by paying additional fees without any principal reduction.

Payday lenders typically operate small stores or franchises, but large financial service providers also offer variations on the payday advance. See below: "Variations on Payday Lending".

Example

For example, a borrower seeking a payday loan may write a post-dated personal check for $460 to borrow $400 for up to 14 days. The payday lender agrees to hold the check until the borrower's next payday. At that time, the borrower has the option to redeem the check by paying $460 in cash, or renew the loan (a.k.a. "flip the loan") by paying off the $460 and then immediately taking an additional loan of $400, in effect extending the loan for another two weeks. If the borrower does not refinance the loan, the lender may deposit the check. In this example, the cost of the initial loan is a $60 finance charge, or 390% percent APR. If the borrower chooses to renew the loan three times, the finance charge would climb to $240 to borrow $400.

Summary of the Lending Market

  • The Payday loan industry has an annual loan volume of more than $28 billion. It is a quickly growing industry. Estimates from the year 2000 put loan volume at between $8 and $14 billion, indicating that the market has more than doubled in size in 6 years.
  • 91 percent of their revenue comes from borrowers who cannot pay off their loans when due, rather than from one-time users dealing with short-term financial emergencies.
  • Only one percent of payday loans go to borrowers who take out one loan per year and walk away free and clear after paying it off.
  • The typical payday borrower pays back $793 for a $325 loan

Controversy and Criticism

Payday lending is a controversial practice and faces both legal battles and public perception challenges in nearly every state.

Exploiting Financial Hardship For Profit

Critics blame payday lenders for exploiting people's financial hardship for profit. Lenders target the young and the poor, particularly those near military bases and in low-income communities. Borrowers may not understand that the high interest rates are likely to trap them in a "debt-cycle", where they have to repeatedly renew the loan and pay associated fees every two weeks until they can finally save enough to pay off the principal and get out of debt. Critics point out that payday lending unfairly disadvantages the poor, compared to the middle class who pay at most 25% or so on their credit cards.

However, supports argue that some individuals that require the use of payday loans have already exhausted or ruined any other alternatives. They may not be able to obtain a credit card, or rely on secondary sources (such as loans from friends and family members).[citation needed]

Aggressive Collection Practices

A payday lender can only legally use collection industry standard collection practices. These do not include threatening criminal prosecution for writing a bad check. Payday lenders have been known to call a debtors neighbors, or talk with their coworkers regarding overdue loans

Industry Claims Inflate Loan Costs

Defenders of the higher interest rates note that processing costs for payday loans do not differ much from their higher-principal, longer-term counterparts such as home mortgages. They argue that conventional interest rates at these lower dollar amounts and shorter terms would not be profitable. For example, a $100 one-week loan, at a 20% APR (compounded weekly) would generate only 38 cents of interest, which would fail to match loan processing costs.

Critics counter that payday lenders' processing costs are significantly lower than costs for mortgages and other traditional loans. Payday lenders usually look at recent pay-stubs, whereas larger-loan lenders do full credit checks and other due diligence when making a determination about the borrower's ability to pay back the loan.

Lenders Overstate the Industry's Risks

A study by the FDIC Center for Financial Research found that “operating costs lie in the range of advance fees” collected and that, after subtracting fixed operating costs and “unusually high rate of default losses,” payday loans “may not necessarily yield extraordinary profits.” Based on the annual reports of publicly traded payday loan companies, loan losses can average 15% or more of loan revenue. Underwriters of payday loans must also deal with people presenting fraudulent checks as security or making stop payments.

Critics concede that some borrowers may default on the loans, but point to the industry's pace of growth as an indication of its profitability. Consumer advocates condemn the practice as a whole, regardless of its profitability, because it "takes advantage of consumers who are already hard-pressed to pay their debts".

Alternatives to Payday Loans

Many believe that payday loans are the only option for consumers with bad credit, but other options do exist and most financial counselors would direct people to explore the alternatives. Other options are available to most payday loan customers.

Other options include:

  • Credit unions - Credit unions in several U.S. states are testing lower-interest loans with more stringent terms.
  • Credit payment plans
  • Paycheck cash advances from employers
  • Overdraft protection
  • Cash advances on credit cards
  • Emergency community assistance plans
  • Small consumer loans
  • Direct loans from family or friends

Ignoring the options above, payday lenders make the argument that the interest on a payday loan is less than the costs associated with bounced checks or late credit card payments. For example, bouncing a $100 check may incur an NSF fee from the bank of $28 and a returned check fee of $25 from the merchant. Critics counter that these other kinds of fees are exceptions, whereas the fees on a payday loan are a regular and repeating cost.

Payday lenders present their product's terms alongside a very different list of alternatives and associated fees (costs expressed here as APRs for two-week terms):

  • $100 payday advance with $15 fee= 391% APR;
  • $100 bounced check with $48 NSF/merchant fees = 1,251% APR;
  • $100 credit card balance with $26 late fee = 678% APR;
  • $100 utility bill with $50 late/reconnect fees = 1,304% APR.

Neutral consumer information

The Canadian federal government publishes a booklet called The Cost of Payday Loans which compares the costs of borrowing the same amount of money using various credit products, including a payday loan. The booklet also explains how payday loans work and the many fees and charges that can apply. It is published by the Financial Consumer Agency of Canada.

Regulation and Legislation

Regulation of lending institutions is handled primarily by individual states, and this growing industry exists atop an active and shifting legal landscape. Lenders lobby to enable payday lending practices, while opponents of the industry lobby to prohibit the high cost loans in the name of consumer protection.

The U.S. Congress recently approved a provision capping loans to military personnel at 36% APR. The Defense Department report said the average [military] borrower pays $827 on a $339 loan and called the lending "predatory". Military officers pushed for the law, saying the loans saddled low-paid enlisted men and women with debts that ruined their finances, jeopardized security clearances and left them unable to deploy to Iraq or other assignments. The provision was signed into law by President Bush on 2006-10-17, and will take effect on 2007-10-01.

Payday lending is legal and regulated in 37 states. In Georgia and 12 other states, it is either illegal or not feasible, given laws on the books. When not explicitly banned, laws that prohibit payday lending are usually in the form of usury limits: hard interest rate caps calculated strictly by APR.

In the United States, most states have usury laws which forbid interest rates in excess of a certain APR. Payday lenders have succeeded in getting around usury laws in some states by forming relationships with banks chartered in a different state with no usury ceiling (such as South Dakota or Delaware). This practice has been referred to as "Rate exportation", the "agency model" and the "rent-a-bank" model. Under the legal doctrine of rate exportation, established by Marquette Nat. Bank v. First of Omaha Corp. 439 U.S. 299 (1978), the loan is governed by the laws of the state the bank is chartered in. This is the same doctrine that allows credit card issuers based in South Dakota and Delaware — states that abolished their usury laws — to offer credit cards nationwide. As federal banking regulators became aware of this practice, they began prohibiting these partnerships between commercial banks and payday lenders. The FDIC still allows its member banks to participate in payday lending, but it did issue guidelines in March 2005 that are meant to discourage long term debt cycles by transitioning to a longer term loan after 6 payday loan renewals

For usury laws to be effective, they need to include all loan fees as part of the interest. Otherwise, lenders can charge any amount they want as fees and still claim a low interest rate.

Some states have laws limiting the number of loans a borrower can take at a single time. Some states also cap the number of loans per borrower per year, or require that after a fixed number of loan-renewals, the lender must offer a lower interest loan with a longer term, so that the borrower can eventually get out of the debt cycle. Borrowers often circumvent these laws by taking loans from more than one lender.

Regional Legislation

Withdrawal from North Carolina

On March 1, 2006, the North Carolina Department of Justice announced the state had negotiated agreements with all the payday lenders operating in the state. The state contended that the practice of funding payday loans through banks chartered in other states illegally circumvents North Carolina law. Under the terms of the agreements, the lenders will stop making new loans, will collect only principal on existing loans and will pay $700,000 to non-profit organizations for relief.

Banning in Georgia

Georgia law prohibited payday lending for more than 100 years, but the state was not successful in shutting the industry down until the 2004 legislation made payday lending a felony, allowed for racketeering charges and permitted potentially costly class-action lawsuits.

Regulation in New Mexico

New Mexico will cap fees, restrict total loans by a consumer and prohibit immediate loan rollovers, in which a consumer takes out a new loan to pay off a previous loan, under a new law that will take effect on 11/1/2007. A borrower who is unable to repay a loan will automatically be offered a 130-day payment plan, with no fees or interest. Once a loan is repaid, under the new law, the borrower must wait 10 days before obtaining another payday loan. The law will allow the term of a loan to run from 14 to 35 days, with the fees capped at $15.50 for each $100 borrowed. There also will be a 50-cent administrative fee to cover costs of lenders verifying whether a borrower qualifies for the loan, such as determining whether the consumer is still paying off a previous loan. A borrower's cumulative payday loans could not exceed 25 percent of the individual's gross monthly income.

Payday loans in Canada

According to the Canadian Criminal Code, any rate of interest charged above 60% per annum is considered criminal. On August 14, 2006, the Supreme Court of British Columbia issued its decision in a class action lawsuit against A OK Payday Loans. A OK charged its customers 21% interest, as well as a "processing" fee of C$9.50 for every $50.00 borrowed. In addition a "deferral" fee of $25.00 for every $100.00 was charged if a customer wanted to delay payment. The judge ruled that the processing and deferral fees were interest, and that A OK was charging its customers a criminal rate of interest. The payout as a result of this decision is expected to be several million dollars. The British Columbia Court of Appeal unanimously affirmed this decision.

Federal legislation passed in the spring of 2007 transferred regulatory authority on payday loans to the provinces.

Proponents' Stance

Although some view payday loans as predatory or even loan sharking that target low-income clients, proponents are adamant that payday loans provide a service that is not available from many national banks. Many banks do not offer small, short-term loans and these payday loans fill a niche in the economy.[citation needed] Many cities across the United States are implementing ordinances on the manner in which payday loan centers conduct business. Economic studies show that consumer credit, even at very high rates of interest, is generally welfare-enhancing.[citation needed]

A staff report released by the Federal Reserve Bank of New York concluded that a payday loan should not be categorized as "predatory" since they may improve household welfare. The working paper, "Defining and Detecting Predatory Lending," reports that "if payday lenders raise household welfare by relaxing credit constraints, anti-predatory legislation may lower it." The author of the report, Donald P. Morgan, defined predatory lending as "a welfare reducing provision of credit." Results of the report indicated that payday loans may actually do the opposite by improving the welfare of the consumer.

Variations on Payday Lending

Direct Deposit Advance

Some mainstream banks offer advances for customers whose paychecks or other funds are deposited electronically into their accounts. A customer requesting a "direct deposit advance" receives a predetermined cash advance amount that is deducted, along with a fee (usually around 10%-20% of the amount borrowed),[citation needed] when the next direct deposit is posted to the customer's account.

Refund Anticipation Loans

Income tax preparation firms including H&R Block partner with lenders to offer "refund anticipation loans" to filers; such loans are not technically payday loans (because they are repayable upon receipt of the borrower's income tax refund, not at his next payday), but they have similar credit and cost characteristics.

Internet Lending

Online payday loans are marketed through e-mail, online search, paid ads, and referrals. Typically, a consumer fills out an online application form or faxes a completed application that requests personal information, bank account numbers, Social Security Numbers and employer information. Borrowers fax copies of a check, a recent bank statement, and signed paperwork. The loan is direct deposited into the consumer's checking account and loan payment or the finance charge is electronically withdrawn on the borrower's next payday. The Consumer Federation of America conducted a survey of 100 Internet payday loan sites showed that loans from $200 to $2,500 were available, with $500 the most frequently offered. Finance charges ranged from $10 per $100 up to $30 per $100 borrowed. The most frequent rate was $25 per $100, or 650% annual interest rate (APR) if the loan is repaid in two weeks.

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Immunization (Finance)

In finance, interest rate immunization is a strategy that ensures that a change in interest rates will not affect the value of a portfolio. Similarly, immunization can be used to insure that the value of a pension fund's or a firm's assets will increase or decrease in exactly the opposite amount of their liabilities, thus leaving the value of the pension fund's surplus or firm's equity unchanged, regardless of changes in the interest rate.

Interest rate immunization can be accomplished by several methods, including cash flow matching, duration matching, and volatility and convexity matching. It can also be accomplished by trading in bond forwards, futures, or options.

Other types of financial risks, such as foreign exchange risk or stock market risk, can be immunized using similar strategies. If the immunization is incomplete, these strategies are usually called hedging. If the immunization is complete, these strategies are usually called arbitrage.

Cash flow matching

Conceptually, the easiest form of immunization is cash flow matching. For example, if a financial company is obliged to pay 100 dollars to someone in 10 years, then it can protect itself by buying and holding a 10 year zero coupon bond that matures in 10 years and has a redemption value of $100. Thus the firm's expected cash inflows exactly match its expected cash outflows, and a change in interest rates will not affect the firm's ability to pay its obligations. Nevertheless, a firm with many expected cash flows can find that cash flow matching is difficult or expensive to achieve in practice.

Volatility matching

A more practical alternative immunization method is duration matching. Here the duration of the assets, or first derivative of the asset's price function with respect to the interest rate, is matched with the duration of the liabilities. To make the match more accurate, the convexity or second derivative of the assets and libilities, can also be matched.

Immunization in practice

Immunization can be done in a portfolio of a single asset type, such as government bonds, by creating long and short positions along the yield curve. It is usually possible to immunize a portfolio against the risk factors that are most prevalent. A principal component analysis of changes along the U.S. Government Treasury yield curve reveals that more than 90% of the yield curve shifts are parallel shifts, followed by a smaller percentage of slope shifts, and a very small percentage of curvature shifts. Using that knowledge, an immunized portfolio can be created by creating long positions with durations at the long and short end of the curve, and a matching short position with a duration in the middle of the curve. These positions protect against parallel shifts and slope changes, in exchange for exposure to curvature changes.

Difficulties

Immunization, if possible and complete, can protect against term mismatch but not against other kinds of financial risk such as default by the borrower (of a bond).

Users of this technique include banks, insurance companies, pension funds, and bond brokers.

The disadvantage associated with duration match is it assumes the duration of assets and liabilities are unchanged which is not true.

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Financial Planner

A Financial Planner or Personal Financial Planner is a practicing professional who helps people to deal with various personal financial issues through proper planning, which includes but not limited to these major areas: tertiary education planning, retirement planning, investment planning, risk management and insurance planning, tax planning, estate planning and business succession planning (for business owners). The work engaged in by this professional is commonly known as personal financial planning. In carrying out the planning function, he is guided by the financial planning process to create a detailed strategy tailored to a client's specific situation, for meeting a client's specific goals.

Objectives

People enlist the help of a financial planner because of the complexity of knowing how to perform the following:

  • Providing direction and meaning to financial decisions;
  • Allowing the person to understand how each financial decision affects the other areas of finance; and
  • Allowing the person to adapt more easily to life changes in order to feel more secure.

Defining personal financial decisions

Personal financial planning is broadly defined as a process of determining an individual's financial goals, purposes in life and life's priorities, and after considering his resources, risk profile and current lifestyle, to detail a balanced and realistic plan to meet those goals. The individual's goals are used as guideposts to map a course of action on 'what needs to be done' to reach those goals.

Along side the data gathering exercise, the purpose of each goal is determined to ensure that the goal is meaningful in the context of the individual's situation. Through a process of careful analysis, these goals are subjected to a reality check by considering the individual's current and future resources available to achieve them. In the process, the constraints and obstacles to these goals are noted. The information will be used later to determine if there are sufficient resources available to get to these goals, and what other things need to be considered in the process. If the resources are insufficient or absent to meet any of the goals, the particular goal will be adjusted to a more realistic level or will be replaced with a new goal.

Planning often requires consideration of self-constraints in postponing some enjoyment today for the sake of the future. To be effective, the plan should consider the individual's current lifestyle so that the 'pain' in postponing current pleasures is bearable over the term of the plan. In times where current sacrifices are involved, the plan should help ensure that the pursuit of the goal will continue. A plan should consider the importance of each goal and should prioritize each goal. Many financial plans fail because these practical points were not sufficiently considered.

Scope

Financial planning should cover all areas of the client’s financial needs and should result in the achievement of each of the client's goals. The scope of planning would usually include the following:

Risk Management and Insurance Planning
Managing cash flow risks through sound risk management and insurance techniques
Investment and Planning Issues
Planning, creating and managing capital accumulation to generate future capital and cash flows for reinvestment and spending
Retirement Planning
Planning to ensure financial independence at retirement
Tax Planning
Planning for the reduction of tax liabilities and the freeing-up of cash flows for other purposes
Estate Planning
Planning for the creation, accumulation, conservation and distribution of assets
Cash Flow and Liability Management
Maintaining and enhancing personal cash flows through debt and lifestyle management

The process

The personal financial planning process is generally accepted as a six-step process as follows:

Step 1: Setting goals with the client This step (that is usually performed in conjunction with Step 2) is meant to identify where the client wants to go in terms of his finances and life.

Step 2: Gathering relevant information on the client This would include the qualitative and quantitive aspects of the client's financial and relevant non-financial situation.

Step 3: Analysing the information The information gathered is analysed so that the client's situation is properly understood. This includes determining whether there are sufficient resources to reach the client's goals and what those resources are.

Step 4: Constructing a financial plan Based on the understanding of what the client wants in the future and his current financial status, a roadmap to the client goals is drawn to facilitate the achievements of those goals.

Step 5: Implementing the strategies in the plan Guided by the financial plan, the strategies outlined in the plan are implemented using the resources allocated for the purpose.

Step 6: Monitoring implementation and reviewing the plan The implementation process is closely monitored to ensure it stays in alignment to the client's goals. Periodic reviews are undertaken to check for misalignment and changes in the client's situation. If there is any deviation or significant change to the client's situation, the strategies and goals in the financial plan are revised accordingly.

What is a financial planner's job function?

A financial planner specializes in the planning aspects of finance, in particular personal finance, as contrasted with a stock broker who is only concerned with the actual investments, or with a life insurance intermediary who advises on risk products.

Financial planning is usually a six-step process, and involves considering the client's situation from all relevant angles to produce integrated solutions. The six-step financial planning process has been adopted by the International Organization for Standardization (ISO) and the details can be obtained from the organisation. Financial planners are also known by the title financial advisor in some countries, although these two terms are technically not synonymous, and their roles have some functional differences.

Although there are many types of 'financial planners', the term is used largely to describe those who consider the entire financial picture of a client and then provide a comprehensive solution. To differentiate from the other types of financial planners, some planners may be called 'comprehensive' financial planners.

Other financial planners may specialize in one or more areas, such as, insurance planning and retirement planning.

Financial planning is a growing industry with projected faster than average job growth through 2014.

Licensing, regulations and self-regulation

The title of 'financial planner' is largely an unregulated term in many countries. Lack of regulation has allowed financial services personnel in these countries to use the title indiscriminately. Financial products intermediaries, such as life insurance and unit trusts agents, use the title to project a professional image to clients even when they are not trained in the professional aspects of financial planning. This has sometimes led to abuse. Clients may be deceived to receive financial planning services that are unprofessional, from unethical providers.

To protect the industry, financial planning professionals and practitioners from across the globe (starting from the United States) have begun to form trade organisations to provide self-regulations and to maintain some orderliness in the industry. Some, such as the FPA, have begun to organize high-level training programmes and certify members who successfully completed these programmes.

The title of 'financial planner' continues, however, to be used by individuals in the financial industry in most countries, as there are little or no legal barriers to prevent the use of the title. The governments in many countries where the financial planning profession is taking roots are beginning to play an increasingly active role in tasking themselves to ensure the market is orderly. More stringent laws and guidelines are being progressively introduced to keep the profession in check.

In Australia, the financial planning services are initially delinated by law by the granting of licence to deal in securities or advise on investments. Licences are issued under the stringent criteria by the Australian Securities and Investments Commission (ASIC), which has evolved these regulations vigourously over the years. Financial planning is now a highly regulated industry in Australia especially where financial advice to the public is involved. Practitioners who offer advice that could influence a client's decision to purchase a financial product must meet minimum training requirements and be licensed by the ASIC. The meaning of 'licenced' refers to Australian Financial Services Licence (AFSL) holders and representatives or authorised representatives of licence holders. Broadly, most people embarking in financial planning will start as an authorised representative of a licence holder.

Becoming a financial planner involves two main steps:

  1. Meet the training requirements of Policy Statement 146;
  2. Select a licence holder with whom to be affiliated.

The licence holder is the authorised representative, and will be ultimately responsible for the advice given by the planner. The licence holder therefore must make sure the representatives meet all compliance and training prerequisites. As of November 2005, there were approximately 4,300 licence holders registered with ASIC and over 42,500 authorised representatives in Australia.

In 2001, the Singapore government introduced the Financial Advisers Act (FAA) to regulate the conduct of financial advisory business in the country. The FAA does not, however, specifically require a high level qualification before an individual can use the title 'financial planner'. The Act also defines a financial adviser to mean a firm with a corporate structure which is properly licenced by the Monetary Authority of Singapore (MAS)to perform financial advisory business. In both the Australia and Singapore situation, there is no law specifically on 'holding out' oneself to be a financial planner.

Licensing of financial planners and financial advisers

The first country to introduce legislation that require a person to be licensed before he can hold himself out to be a 'financial planner' is Malaysia. This is quite unexpected as the financial planning concept is considered quite a new introduction in the Asian region as compared to those in the west, such as the United States and Australia where the profession is more established. The Securities Commission(SC) (refer ) of Malaysia introduced legislation through amendments made to the Securities Industry Act in 2003 to regulate financial planning and the use of the title or related-title of 'financial planner' or to conduct activities related to financial planning.

In 2005, amendments to the Malaysian Insurance Act require those who carry out financial advisory business (including financial planning activities related to insurance) and/or use the title of financial adviser under their firm (which, like in Singapore, must be a corporate structure) to obtain a licence from Bank Negara (BNM) (refer ) Some persons who offer financial advisory services, e.g. licenced life insurance agents, are exempted from licensing as a practising requirement.

One of the basic requirements to apply for a financial planner or financial adviser licence in Malaysia is that the key company officers, e.g. directors, must be a RFP designee (most, if not all Malaysian FChFPdesignees also carries the RFP designation). Subsequently, in September 2006, the CFP qualification is included as one of the alternatives that can be used by the financial adviser licence applicant. With this development, the demand for financial planning courses has begun to take root in more concrete forms in Malaysia. The licence applicant must also be a member of a self-regulatory organisation (SRO) in financial planning recognised by the authorities. For this purpose, the two SROs currently recognised by both the Security Commission and Bank Negara are the Malaysia Financial Planning Council (MFPC) and the Financial Planning Association of Malaysia (FPAM). The purpose of this requirement is to ensure some form of self-supervision for persons practicing financial planning.

In some countries, e.g., the United States, financial planners must be registered as an investment advisor first. This requires an employee within a firm to pass the series 65 or 66 Registered Investment Advisor Exam. A private advisor or company can apply to the state and SEC for a RIA Registered Investment Advisor License or Status.

Being 'licenced' to practice financial planning is not the same as merely having a professional 'qualification' in financial planning. A person may be professionally qualified in financial planning, but without a licence required by the law, he cannot practice the trade in that country or call himself a financial planner there. As of now, there are quite a bit of qualifications related to financial planning that can be found in world. The most prestigious financial planning designations are those which are not just of advanced standing and well-known, but are also recognised by the relevant authorities for licensing purpose. The FChFP, RFP,CFP, ChFC, RFC, FFSI, CWM ™, MFP ™, or PFS, FPS designations are advanced financial planning or closely related qualifications that are independently offered and regulated by esteemed financial industry organizations but not all are recognised for licensing purpose.

In some places, individual employees within a licensed & Registered Investment Advisor firm such as a: brokerage, bank or insurance company may be exempt if providing complementary financial planning services in relation to their existing products and services. Moreover, financial planners should be extremely careful in providing estate planning or taxation advise for a fee, as these fields are highly regulated by government agencies that control the practice of lawyers and Certified Public Accountants (CPAs). The term "Investment Advisor" also includes any person who uses the title "financial planner" and who, for compensation, engages in the business, whether principally or as part of another business, of advising others, either directly or through publications or writings, as to the value of securities or as to the advisability of investing in, purchasing or selling securities, or who, for compensation and as part of a regular business, publishes analyses or reports concerning securities.

From the California Department of Corporations

A financial planner will be registered with the state if he or she has less than 25 million in AUM, and with the SEC if he or she has more than 30 million in AUM. The planner is required to present a client with the ADV Part II or equivalent before the client enters into a contract with the planner. No certification, tests or training ensure that any planner is suitable for the client or any investor, and it is important to read the ADV Part II, interview them, and fully understand any contract.

History of certifications in financial planning across the globe

In a newly emerging profession such as financial planning, there is a lack of regulation, especially in the early years of development. The need for some forms of self-regulation and the demand that a financial planner be competent and trustworthy have prompted several independent financial services organizations to introduce certifications and ethical benchmarks to meet these challenges in accordance to the need in each country. Those who meet the requirement of the certification process and ethical standards will be awarded a professional financial planning designation.

One of the oldest, most well-known financial planning certification service marks is the Certified Financial Planner(CFP), which has gained global recognition because of its active standard setting activities and worldwide presence. The CFP designation was first introduced in the United States in the early 1970's to meet the need of the consumers. The CFP mark now belongs to the CFP® Board of Standard’s(“CFP Board”), USA, which has member associations world-wide.

The CFP Board was founded in July 1985 as the International Board of Standards and Practices for Certified Financial Planners, Inc., (IBCFP) by the College for Financial Planning (College) and the Institute of Certified Financial Planners (ICFP). The IBCFP became Certified Financial Planner Board of Standards Inc.(CFP Board) on February 1, 1994. As a professional regulatory organization acting in the public interest by fostering professional standards in personal financial planning, the CFP Board establishes and enforces education, examination, experience and ethics requirements for CFP® certificants. The CFP service mark is promoted world-wide through member associations, the FPAs.

Another well-known certification mark with a unique history is the Fellow Chartered Financial Practitioner(FChFP), which is conferred by the Asia-Pacific Financial Services Association(APFinSA). The FChFP designation is the first known professional designation in financial planning that is completely developed in Asia and the programs leading to the designation is tailored to each country's need by local professionals and practitioners who writes these courses. It is also among the earliest to be vigorously promoted in this region. The FChFP designation was pioneered by the National Association of Malaysian Life Insurance and Financial Advisors(NAMLIFA) and was first launched on 31st May 1996 to its members in Malaysia as an 8-module financial planning programme. The FChFP was adopted by APFinSA in 2001 (of which NAMLIFA is a member) as the highest professional financial services designation amongst its member associations in 11 countries. This development effectively made the FChFP designation a regionally recognized designation in financial planning.

Through the Insurance and Financial Practitioners Association of Singapore(IFPAS), Singapore was the second country to successfully introduce the FChFP designation to its practitioners in 2003. It was during this time that the original letters of the designation 'ChFP' was modified to 'FChFP' to prevent the public from confusing it with the CFP mark. The FChFP designation has since spread to all over the Asia-Pacific region and is quick gaining strength in places like Hong Kong, China and Taiwan.

The Registered Financial Planners Institute was formed in 1983 to promote professionalism among those who are or will be active in the field of financial planning for individuals and businesses. The RFPI is a International organization with chapters and members throughout the world. RFPI has gained worldwide recognition during the past 7 years with members in USA, Canada, China, Hong Kong, Philippines, Singapore, Malaysia, Taiwan, Japan and many other countries. As the popularity continues to grow in the area of financial planning and financial planners throughout the world many other organizations have begun awarding similar designations to financial planning professionals. This has created some confusion as to the regulation of financial planning designations in general. RFPI is trademarked and registered in the USA, China, HK, Philippines and currently pending in several other countries. The RFP Institute offers study programs both in class room conducted seminars and correspondence courses. RFPI is a collective membership of Financial Planners and is designed to serve the interest of both its members and the general public in matters relating to financial planning. RFPI recognizes qualified individuals by designation of RFP, SRFP who are in the field of financial planning which would include: insurance, attorneys, real estate, bankers, CPA's, stock brokers, securities or other professionals licensed in similar fields that have the ability to properly financial plan individuals or businesses in their related fields. RFPI awards several designations to those professionals meeting the RFPI requirements in education, examination and experience, RFP applicants must have completed the RFPI approved education and have minimum two years of experience practicing financial planning, SRFP applicants must have minimum of 5 years experience and an associates degree or higher with emphasis on personal taxation, estate planning, retirement planning.Qualified applicants can submit RFPI membership application along with supporting documents to provide evidence of completed education and experience and include membership fees. All RFP,(Registered Financial Planner) SRFP (Senior Registered Financial Planner) members must agree to adhere to the RFPI Code of Ethics and shall maintain competency by fulfilling 20 hours of continuous education every three years in their respective field of financial planning.

The Registered Financial Planner(RFP)designation is conferred by the Malaysian Financial Planning Council (MFPC). The designation and the MFPC was created through the collaborative work of the Life Insurance Association of Malaysia(LIAM), National Association of Malaysian Life Insurance and Financial Advisors(NAMLIFA) and Malaysian Insurance Institute (MII) who also become the founding members of the Association or Charter Promoter Organisations (ChPOs). Since then, other organisations such as the Malaysian Association of Chartered Financial Consultant (MAChFC) have joint the Association as a member.

The Personal Financial Specialist(PFS) credential was established for CPAs in the United States who specialize in personal financial planning. The credential is awarded exclusively to AICPA members who have demonstrated considerable experience and expertise in that area. As of today, the AICPA has granted approximately 3,300 CPA/PFS credentials.

In Australia, the financial planning specialisation, CPA (FPS), is available to those members of CPA Australia who can demonstrate their eligibility through experience and education within the financial services industry.

The objectives of the FPS designation are to:

  • achieve public recognition for those who hold the specialisation

enhance the quality of financial planning services that members provide;

  • increase practice development and career opportunities for CPAs.

The FPS designation is available to CPAs, and is based on a points system, where a minimum of 100 points must be accrued. Although all CPA Australia members who provide financial product advice must be licensed by ASIC, a member does not have to be licensed to first obtained the CPA (FPS) designation.

The Chartered Financial Consultant(ChFC) is another prestigious financial planning qualification, which is conferred byAmerican College, USA).Since 1982, the ChFC has remained among the most extensive education available for professionals seeking a designation in financial planning. Todate, more than 41,000 individuals have attained this distinction. This designation has also spread to Asia, where designees are found in countries like Singapore, Malaysia, Indonesia, China and Hong Kong.

In Europe, the €uropean Financial Planner (€FP) designation conferred by the €uropean Financial Planning Association(€FPA) is gaining ground as a financial planning certification mark. The €FPA is the largest professional and educational organisation for financial planners and financial advisors in Europe and is the only Financial Planning Association created solely in the interest of european financial planning consumers and practitioners.

In one of the significant recent developments, several major financial services organisations with international/regional affiliations have grouped together to form the International Federation of Financial Standards Associations(IFFSA). The organisations that originally initiated the IFFSA concept are the €uropean Financial PlannerEFPA and the Asia-Pacific Financial Services Association(APFinSA). It is expected that more organisations will join as associates of this new entity.

The rest of the certification qualifications related to financial planning include: Fellow, Financial Services Institute (conferred by LOMA, USA); The highest known conditions set for conferment of a financial planning credential seems to be those of the CWM Chartered Wealth Manager (conferred by the AAFM) designation which requires an accredited MBA, PhD or CFA to apply (Note: This entry requirement is not uniform and only applies to some places where the AAFM operates).

Accredited business school, training centers and education providers in financial planning

In America, more than 150,000 financial services professionals have earned advanced degrees and designations from The American College. Their leading financial planning programs include ChFC programme and courses leading to the CFP certification awarded by the CFP Board of Standards.

Another American organisation active in the promotion of financial planning courses is the International Association of Registered Financial Consultants(IARFC), which confers the Registered Financial Consultant (RFC) designation. The IARFC has introduced a financial planning self-study and examination process for Registered Financial Consultant applicants.

In Singapore, the Financial Planning Association of Singapore (FPAS) appoints educational providers to conduct tutorials for students interested in taking the CFP examinations. Two of its active education providers are Financial Perspectives and FTC. The Singapore College of Insurance(SCI)conducts localised courses leading to the ChFC designation which is awarded by The American College. Finally, the Insurance and Financial Practitioners Association of Singapore (IFPAS)uses the educational provider, Professional Education and Consultancy (PEC)to conduct tutorials for its FChFP students. These training companies, i.e. Financial Perspectives, FTC and PEC, also provide a host of other financial related trainings to the financial practitioners in Singapore.

As for Malaysia, the Financial Planning Association of Malaysia (FPAM) has active education providers such as IMS, IFPA, PNB, KDU and IBBM to conduct its CFP courses. The Malaysian Financial Planning Council (MFPC)also appoints education providers for its RFP courses. Some of them to date are MII, NAMLIFA, MIM-IMS, IBBM, OUM, Kolej Kasturi and Regent School of Economics.For the FChFP, the courses are conducted in-house by the National Association of Malaysian Life Insurance and Financial Advisors (NAMLIFA)and its branches throughout the country. Other Malaysian training providers active in supporting financial planning education in the non-designation domain include BrainStation Academy, AD Capital and Jon Wise.

Globally, cross-recognition agreements are being developed to facilitate the learning of financial planning. The 2 major accrediting agencies AACSB and ACBSP in the west, which accredit over 560 of the best business school programs, provides the Certification of MFP Master Financial Planner Professional from the American Academy of Financial Management, which is available to AACSB and ACBSP business school graduates with finance or financial services related concentrations.


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