financial planning and strategies
1. Case Study Information
a. Financial Planner Scenario
You are a qualified Financial Planner working forFUTURIST Financial Services, a large financial planning company. FUTURIST Financial Services Pty Ltd is a Principal Member of the Financial Planning Association of Australia (FPA) and holds an Australian Financial Services Licence (AFSL Number 123456). You have undertaken the required education and continued professional development (CPD) to be ASIC – RG 146 qualified. You are an Authorised Representative of FUTURIST Financial Services Pty Ltd (Representative Number 678910) and can provide advice in all areas of financial planning including:
• Cash, Deposit and Payment Products
• Debentures and Bonds
• Derivatives limited to securities options contracts and warrants
• Life Products – Investment Life Insurance Products
• Personal Insurance Products
• General Insurance
• Managed Investment Products
• Retirement Savings Account Products
• Securities (domestic & international)
(***However, you have not had practical experience or undertaken training in either Self-Managed Superannuation Funds or Margin Lending. Therefore, you are not authorised to provide advice on either of these specialist areas.)
On Monday 29 June, 2015 you met with new clients, Mr and Mrs Le, who were referred to you by the local accountant. During the interview, you completed a Confidential Client Questionnaire (CCQ or Fact Find), which included a detailed Risk Tolerance Assessment. You also obtained signed authorities from both clients, so you could make enquiries regarding their existing investments if the need arises.
During the course of the interview you raised many issues that the clients had not previously considered; therefore, Mr and Mrs Le agreed it would be timely for you to analyse their situation and to prepare a comprehensive financial plan for their consideration. The clients signed a Letter of Engagement for full advice, which outlined your mutual obligations and the cost of $1,950 plus GST for the plan preparation.As the clients will soon travel interstate for their annual holidays, you have agreed to meet with them again in September, to present your recommendations. The client scenario is detailed over the page.
b. Client Scenario
Jeff and Vanessa Le have been happily married for over 10 years. They are both Australian residents, healthy, non-smokers who enjoy an active lifestyle in Brisbane. They have two children, Sue and Simon, 12 and 8.
Jeff and Vanessa enjoy spending time with the family and would like to provide some type of legacy for their two children. Neither Jeff nor Vanessa has a current Will or Power of Attorney.
Four years ago the clients purchased a new home and land package for $650,000 and would now value it to be around $600,000 because of the market movements. They intend to stay in this home for the foreseeable future.
JeffLe is 44 years of age (DOB: 23/7/1970) and is employed full time by Green Energy Systems Pty Ltd. After completing a business degree, Jeff was recently appointed to his current position of Business Manager. His employment contract is revised annually and from 1 January 2014, is as follows:
Total Employment Contract (TEC) including super $170,000
Annual indexation 3%
Jeff’s cash salary is based on his TEC less the SGC. Jeff has accrued approximately 24 weeks of long service leave with the company and does not expect any changes in his employment arrangements.
Jeff’s employer is currently contributing to his Macquarie Superannuation account, which has a current balance of approximately $260,000. The funds are currently invested approximately 30% in a Cash option, 30% in the International shares option and 40% in the Australian Shares option. Jeff has made no nomination for a death benefit and holds approximately $173,000 in the taxable component and $100,000 in the tax-free component. Jeff has choice of superannuation.
Jeff also has a small RSA account with a current value of $2,200 from a previous employer. The funds are fully preserved and taxable.
Vanessa (DOB 23/08/1975) has no experience with finances and leaves the management of the finances to Jeff. She therefore continues to have a poor understanding of her finances and relies greatly on Jeff for interpretation and clarification of all forms of written communication.
Vanessa has been employed on a permanent basis as a Dental Technician since 3 June 1998. She currently earns $1000 per week net (indexed at 2.5%pa). She will be entitled to 12 weeks of long service leave on full pay after ten years of continuous service. Although she loves her job, Vanessa intends to fully retire with Jeff when he turns age 65.
Vanessa’s employer pays the mandatory 9.5% Super Guarantee into her existing Hesta Super account, which has a current balance of $102,000. These funds are invested in the ‘Conservative’ option and Vanessa has nominated Jeff as a non-binding beneficiary on this account. Vanessa also has a SunSuper account with a current balance of $20,000; the funds are invested in the Growth option.
When the clients retire, they want to downsize their home and spend the first few years travelling around Australia. They figure that they should be able to realise an additional $50,000 from downsizing their home which will go some way toward purchasing the new four wheel drive and caravan they also wish to purchase.
Up until retirement they believe that they will be committed to supporting their children’s education through University.
The clients are concerned that their retirement plans may be jeopardised if something unforseen happens to Jeff. They would therefore like to review their insurances and consider additional cover if required. Jeff currently has death and TPD for $150,000 inside his Macquarie super with monthly premium costs of $202.54, while Vanessa holds 2 units of death and TPD cover in her employer super costing $2 per week. They hold no other personal insurance cover except for an old MLC Whole of Life policy, which was set up in 1982. Jeff pays annual premiums of $187 for $10,000 of death cover. The policy matures when he turns 95 years of age and it has a current cash value of $15,997 with accrued bonuses of $17,306.
As discussed, in retirement, Jeff would like to buy a new four wheel drive. He would like to trade in Vanessa’s existing car at that time. Currently, Vanessa’s drives a Toyota (currently valued at $20,000) and expects she would be driving something similar nearer retirement. Jeff expects he will need additional funds of around $50,000 to cover the cost of the new 4WD. When the Toyota was purchased, Jeff insured it for an agreed value. Jeff also owns a small boat, which he values at around $4,500, which is not insured.
Jeff manages the family budget through the joint bank account ($3,500 balance) and his cheque account ($2,300 balance). Although Vanessa uses a credit card, they try to clear any debt each month. Vanessa has recently used the card for some unexpected expenses, so the current outstanding balance on the card is $19,400.
The clients also have $408,902 outstanding on their principle and interest loan facility which is secured against their home. They initially borrowed $576,000 over 25 years at 7.5% interest when they purchased their new home. The clients are trying to repay the debt, but have only repaid a small amount; this concerns them. The annual interest rate on the loan is still 7.5% with no penalty for early repayment or closure of the facility.
Jeff estimates that they need at least $60,000 pa (not including home loan repayments) to fund their core annual living costs and would like to maintain their current living standards in retirement. The clients would also like $30,000 in 2019 to cover an overseas trip.
Both Jeff and Vanessa are concerned that they spend a lot of the money they earn and yet can’t seem to save. They would like to know how to best utilise the available funds they have to reduce their debt and achieve the goals they have. What is the best way to manage their finances leading up to their retirement? Jeff and Vanessa do not expect any future inheritances or windfalls, as both their parents have passed away.
Both Jeff and Vanessa would like to ensure that they do not jeopardise their future plans and want to protect what they have. Vanessa recently increased their home insurance to $570,000; however, she retained the home contents level of cover at $30,000.
In the past, both Jeff and Vanessa have dabbled in buying direct shares – they confessed that they do not know much about investing and tended to take advice from their friends. They jointly purchased 600 of the first Telstra float and on 8 January 2003, Jeff purchased 1,000 Woolworths shares. The clients have always taken the dividend distributions, which they generally use to purchase birthday or Christmas gifts. Vanessa admits that she gets anxious when she sees the share prices go up and down. Jeff only likes the Woolworths shares as they have performed better. Jeff would like to consider purchasing an investment property as some of his friends have recently purchased units in Brisbane.
Their accountant has suggested that Jeff and Vanessa should also try to put more money into super. The clients are at a stage where they want to focus on saving for their retirement, but do not seem to have any spare cash. They do not fully understand the benefits of using superannuation nor the technical jargon their accountant uses such as binding death nomination, anti-detriment provisions, concessional contributions and investment based pensions. They would like your advice in this area. They would also like to know what they should do with Vanessa’s superannuation, as her employer advised that she can now elect a super fund of her choice or stay with Hesta.
Jeff and Vanessa have always funded their own health costs and would like to know if there are any benefits in taking out private health cover at this stage in life. They have agreed that if funds were needed quickly, they would not know where to turn, and would not know what to do if Jeff was injured and could not work.
Although Jeff is quite happy in his job at the moment, he does want a comfortable retirement. They want to enjoy their retirement and definitely do not want to spend time managing their financial affairs. They would like to know if they are likely to qualify for the age pension, mostly to get the discounts on rates etc and a health card.
Both Jeff and Vanessa have indicated that they feel very uneasy with the fluctuations they have seen in the share market recently. They do not want to invest in high risk or speculative investments. After completing the Finametrica Risk Tolerance Questionnaire, Jeff’s final score was 54, while Vanessa achieved a score of 42. (Which equals 540 and 420 respectively on the risk scale contained in the “Sample of full Client Data Collection” document.)
Jeff and Vanessa are now at a stage where they acknowledge that they need help to manage their financial affairs. Other key objectives are to: organise their finances so they are easy to manage, reduce their tax bill and ensure that they can provide for a comfortable retirement. They are concerned that they have moderate superannuation savings, mortgage debt and limited understanding of superannuation, retirement planning and estate planning.
The clients have an excellent relationship with their accountant, who charges them $1,200 per year to prepare both their tax returns. Part of your mandate is to explain to the clients how they would benefit from the services and products that you and your Practice offer and to influence the clients to use your services.
CPI 2.50% Standard Variable Home Loan Rate 5.20%
AWOTE 4.94% Line of Credit facility Rate 6.15%
Cash Rate 4.75% Credit Card Interest Rate 16.75%
Expected Returns – before fees & taxes (source ASIC):
Asset Type Lower Limit Mean Cautionary Limit
Shares 5.0% 9.0% 13.0%
Property 4.5% 8.0% 11.5%
Balanced assets 5.0% 8.0% 11.0%
Fixed interest 3.5% 6.0% 8.5%
Cash 3.0% 4.5% 6.0%
2. Assessment Task
You are the financial adviser assigned to Mr and Mrs Le. You must submit a comprehensive financial plan for the clients to consider. All legal and professional requirements and the expected standards for this assessment must be followed. Also full disclosures and disclaimers and a formal scope of advice section are required.
Your recommendations must be suitable and relevant to this client scenario. You must: use appropriate strategies and specific products in your recommendations, outline the characteristics of any investments, compare products if required and provide sound reasoning as to why the strategies and products are appropriate and why investment changes, if any, are required.
You are allowed to make valid assumptions with regard to areas not discussed in the scenario above; however, these assumptions must be disclosed on a separate sheet attached to the inside cover of yourFinancial Plan. General assumptions specific to the clients’ situation (such as the inflation rate) should be included within the body of your financial plan.
You are expected to demonstrate your effective communication skills and technical knowledge by presenting a comprehensive financial plan that is focused on client needs and in line with ethical, professional and legal expectations and requirements. Your financial plan will be assessed from a client and compliance perspective.
Remember that clear and concise writing and effective strategies will be rewarded and penalties will apply for spelling, grammar and punctuation errors as well as poor presentation.
• Fund Returns (APRA): http://www.apra.gov.au/Statistics
• AWOTE (Treasury) http://www.treasury.act.gov.au/snapshot/AWOTE.pdf
• Cash rate http://www.rba.gov.au/statistics/cashrate_target.html
refer to the Textbook ref List
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