Case study solution

Superannuation and Life Insurance Skills (Capstone project) FP3B-1SN3-2 Capstone project Project Cover Sheet This document includes: • student identification • project instructions • project submission instructions • project result, result summary and feedback • project checklist • Case study • Project sections (including fact finder templates, cash flow templates and managed funds calculations)

Student identification (student to complete) Please complete the fields shaded grey. Student number

INT######

Student name

[name]

Telephone number

[phone no.]

Project instructions Only Microsoft Office compatible projects submitted in the template file will be accepted for marking by Kaplan Professional Education (KPE). PDF projects will not be accepted. Do not delete/remove any sections of the template. The project must be COMPLETED before submitting it to KPE. The maximum file size is 5MB. Once you submit your project for marking you will be unable to make any further changes to it. You will have 12 weeks from the date of your enrolment in this subject to submit your project. Should your project be deemed ‘not yet competent’ you will be give an additional 4 weeks to resubmit your project. Your project must be submitted to KPE on or before your project due date. Please check KapLearn for the due date.

Project submission instructions Please refer to the Project submission/resubmission instructions (pdf) in the Assessment section of KapLearn for details on how to submit your project.

Note: Assessors should double-click on the fields below to select the student’s result.

Project result (assessor to complete) Result — first submission Not Yet Competent Sections that must be re-submitted: [insert assessor feedback] Result — re-submission (if applicable) Not Yet Competent

Result summary (assessor to complete) First submission

Re-submission (if required)

Section 1

Not yet demonstrated

Not yet demonstrated

Section 2

Not yet demonstrated

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Section 3

Not yet demonstrated

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Section 4

Not yet demonstrated

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Section 5

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Feedback (assessor to complete) [insert assessor feedback]

Superannuation and Life Insurance Skills Capstone project This project contains five sections based on the information provided on your clients, Ted and Eliza Hardgraves, and their family. Complete all sections. The following checklist is provided as a guide to ensure you have completed the project requirements.

Project checklist (student to complete) Step

Action

1.

Read the Study Guide Go to the What you need to know section and read the advice in the Study Guide on preparing your project.

2.

Familiarise yourself with the project Think about the project tasks while reading your learning materials and completing the activities and review questions.

3.

Answer Sections 1 - 2 up to Section 2 Part F Ensure that you complete the fact finder for Section 2 Part A.

4.

Answer Section 2: Part G – Statement of Advice • • •

Follow the steps given in the Statement of Advice Preparation Checklist — you must submit the completed checklist Use the family cash flow templates provided Use an Excel spreadsheet to prepare SOA Appendix 3.

5.

Answer Sections 3 - 5

6.

Upload your completed project. You must submit the following completed items in this template: • • • •

the project cover sheet answers to all five project sections the completed Statement of Advice Preparation Checklist the completed Statement of Advice and appendices.

Completed?

Case study — Ted and Eliza Hardgraves Background You work for the financial planning company, B and N Pty Ltd, which is a licensed securities dealer and a registered life insurance broker. Your company specialises in investment, insurance and retirement planning advice but does not provide stockbroking, real estate evaluations and advice, income tax preparation, superannuation fund accounting, superannuation fund administration or the preparation of legal documents such as Wills or trusts. Ted Hardgraves is a successful senior geologist with an international mining company. He has been working for the same company for the last seven years and due to his success has recently received a significant promotion and pay rise. He believes there is potential for further improvement in his salary as well as growth prospects within the company. His wife, Eliza Hardgraves works part-time as a paralegal with the same company she worked for prior to having their children, Harriett and Bill. She has a good relationship with the owners of the firm and does not see any change in her current employment situation for the time being. Both Ted and Eliza are in good health and are non-smokers. They have private health cover for the family. Ted and Eliza have approached you for financial advice. They advise you that they are confused in regard to their financial situation. This has come about due to conflicting information they have read, which states that although they will be living longer, nearly half of all 40-year-olds will die over the next forty years. Also, their children have asked questions about the insurance plan advertisements they have seen on television which has raised concerns as to whether they have adequate insurance cover. Further, they want to make sure their children will be adequately provided for if something were to happen to them. They also believe they should have surplus income following Ted’s recent promotions and pay rises. They would like to save any surplus in the most tax effective vehicle for the long term. Both Ted and Eliza are concerned that if they have access to these funds they may spend them. Ted and Eliza would like to reduce their mortgage faster than the current repayment schedule and believe that this could help them to get ahead before they have to pay large school fees. Their current loan has a redraw facility. However; they enjoy their annual holidays and have an active social life, and want to make sure they have income available to continue these activities. Ted also advised you that his aunt, Jenny, recently died and he has inherited around $63,700 made up of $10,000 in cash and approximately $53,700 in shares. They have never considered owning shares before but Ted is keen to understand the share market and perhaps buy some shares. Ted is prepared to take some risks in order to accumulate wealth quickly. However, Eliza is more concerned about risk and does not wish to ‘gamble’ any of their funds. Detailed below are Ted and Eliza’s current details.

Personal information Surname Name:

Hardgraves

Hardgraves

Christian Name:

Ted

Eliza

Salutation

Mr

Mrs

Age/Date of birth

28 March 1970

17 August 1971

Status

Married

Married

Home address

4 Pringle Ave, Kensington

4 Pringle Ave, Kensington

Health

Good

Good

Smoker

No

No

Occupation

Senior Geologist

Paralegal

Employer

Lemon Gold Pty Ltd

Ranier and Jackson

Start date

2004

2008

Sick leave currently available

14 days plus 10 days per annum

6 days plus 10 days per annum

Retirement age

65

64

Dependants/Family relationships

Harriett (aged 9 years)

Bill ( aged 8 years)

Professional relationships Solicitor

Carlie Mattieson

Time span of relationship

10 years

Quality of relationship

Poor

Service provided

Conveyancing for home purchase

Accountant

John Watson

Time span of relationship

7 years

Quality of relationship

Excellent

Service provided

Annual tax return

Annual income details Name:

Ted

Eliza

Salary

$140,000

$55,000

Inheritance - interest Dividends (99% franked)

$510 $3,436

Notes: Ted and Eliza’s salaries exclude superannuation guarantee (SG) contributions, which are currently paid at 9% per annum.

Annual expenditure Mortgage

$37,800

General living expenses

$50,400 $550

Accountant’s fees

$1,000

Donations

$11,000

Holidays (annually)

Assets and investments $650,000

Principal residence

Purchased 6 years ago for $550,000. Outstanding mortgage $470,000 – joint names, variable rate 6.25%

Contents

$50,000 Joint names

Car

$18,000 Fully paid off – joint names $5,000 Everyday savings account paying no interest – joint names

Savings Account

$10,000 Cash management account earning 5.1% p.a. – Ted’s name only

Cash management account - inheritance ABC Superannuation - Ted

$220,000 Invested in a retail fund, balanced option. No beneficiaries or binding nominations specified. The fund accepts salary sacrifice.

SOH Industry Superannuation - Eliza

$58,000 Invested in an accumulation industry fund, balanced option. The fund only has a defensive, balanced or high growth options available. No beneficiaries or binding nominations specified. The fund accepts salary sacrifice.

Share portfolio

$53,691 Dividend yield of 6.4% p.a. – 99% franked dividends – in Ted’s name only

Current share portfolio Number of shares

Company

ASX Code

AMP Limited

AMP

$2,158

$4.40

Insurance Australia Group Limited

IAG

$5,473

$1.75

400

Commonwealth Bank Limited

CBA

$22,052

$27.7

400

Telstra Corporation Limited

TLS

$1,552

$4.48

400

Westpac Banking Corporation

WBC

$9,900

$19.60

400

BHP Billiton Limited

BHP

$12,556

$11.41

500 1,300

Current Value (same as value at date of death)

Price of Shares when acquired by aunt Jenny

All shares were acquired by the deceased after 1 January 1986 and prior to 1 December 2011.

Investment objectives They have rated their investment objectives, using a scale ranging from 1 (not concerned) to 5 (very concerned). Ted Hardgraves Income to keep pace with inflation

2

Legal logical and appropriate tax relief

5

Easy access to your capital

1

Regular income from your investments

1

Easy to administer

3

Capital growth

5

Volatility

2

Eliza Hardgraves Income to keep pace with inflation

2

Legal logical and appropriate tax relief

5

Easy access to your capital

1

Regular income from your investments

1

Easy to administer

4

Capital growth

5

Volatility

4

Estate planning Ted and Eliza have Wills which they quickly wrote using packs bought from the post office when Bill was born. They do not have powers of attorney.

Insurance and risk management Ted has three times his salary in term life and total permanent disability (TPD) insurance within his superannuation. He cannot take out any higher cover within this superannuation fund. Eliza has $50,000 of life and TPD in her superannuation fund. Ted and Eliza do not have income protection or trauma cover. They have family private hospital cover.

Planning issues Ted and Eliza are seeking a long-term tax effective investment plan which will provide for them in their retirement. Ted has recently inherited $63,700 from his aunt and would like advice on how to invest these funds to contribute to securing their future. Ted has told you that he understands the risks associated with investing and is willing to invest in riskier securities in order to increase their returns. Eliza is more risk averse. She would like to ensure they do not lose any of their inheritance. Ted and Eliza’s children currently attend a public school but they would like to send both children to a private school to complete their secondary education. Ted and Eliza would like to do some renovations to their home, such as replacing the old bathroom which they believe will cost approximately $17,500. They are happy to use some of their inheritance to do this and anticipate the work to be done this year. Both Ted and Eliza are not sure if the current asset allocation used in their superannuation is appropriate and are seeking your advice on determining an asset allocation that they are comfortable with, and will improve the potential to meet their lifestyle and financial objectives. They would also like to know if they are on track to reach their retirement income goal of $125,000 per annum when Ted reaches age 65. Eliza is unhappy with the service she receives from her industry fund and the limited number of choices she has for her account. In addition Ted has been earning better returns every year even after fees are deducted. They wish to have their full insurance needs reviewed. Ted and Eliza would like to reduce their mortgage and believe that this could help them to get ahead before they have to pay large school fees. They express concern about the fees that you charge and seek clarification on your fees. As their financial planner, your task is to prepare a Statement of Advice (SOA) that will include strategies to meet Ted and Eliza’s goals.

Project questions (student to complete) Section 1

Establish the relationship with the client and identify their objectives, needs and financial situation

Part A List particular strategies you will use to ensure that the Hardgraves are comfortable with the interview process. (200 words) A comfortable interview process definitely helps to establish good connection between the client and the partner. Comfortable interview process could be established by doing following: 1. There should not be any disturbance while doing interview process. 2. Mobile phones should be switched off, computers should be on standby mode, there should be no noise near to interview room, and tea-snacks should be used for breaking the ice. 3. Client should be greeted in very courteous manner to make them feel valued and respected. 4. Agenda for the meeting/ interview should be conveyed 1-2 days before so as to make Hardgraves can do initial research and they can be comfortable within the discussion. 5. Conversation should be started with some casual talks so that client can adjust to the new environment and can think rationally. 6. Showing interest is the most important aspect, it can be achieved by cross questioning, making eye contact, never interrupt. 7. Notes should be made while listening to the Hardgraves’ concerns, expectations and demands. 8. Simple language and timely breaks should be used so that Hardgraves can keep their full attention to the meeting. 9. Body language should be positive which indicates helpful nature and open for the suggestion. Part B Give details of any legal requirements you need to comply with at the initial stage of your relationship with the clients. (250 words) A financial planner should meet the minimum training requirements as defined in the Australian Securities and Investments Commission (ASIC) Regulatory guide 146 licensing. Financial planner should be up-to-date with the training knowledge as per Australian Securities and Investments Commission (ASIC) Regulatory guide 146 A financial planner is recognised through law and he has a duty of care for their clients and he is legally obliged to exercise as much as the circumstance require. He has to ensure that client is in no way mislead. It is mandatory to provide a Financial Service Guide (FSG) to the clients before providing them any service, as defined by Australian Securities and Investments Commission (ASIC) Regulatory guide 175.

It is very important to comply with privacy legislation. It says that, “All the personal information collected by financial planner and/or the licensee is governed by the Privacy Act 1988 which contains a national scheme for the collection, use, correction, disclosure and transfer of personal information by organizations in the private sector.” It is also important for the financial planners to comply with the Anti-Money Laundering and Counter-Terrorism Financing Act 2006 (AML/CFT. It says that, “A planner is obliged to establish and verify the identity of the client regardless of the nature of the client.”

Part C If, at a later stage, Ted and Eliza wish to make a complaint about your advice, what are their options? How much information are you required to give them, initially, about complaints procedures? (150 words) If Ted and Eliza have a complaint, they could take the following steps: 1. They can tell to their financial planner about their complaint. Financial planner can resolve the complaint at his end. 2. If Ted and Eliza are still not satisfied with the solution, they can complain in the company of financial planner (B n Y Pty Ltd.). 3. If Ted and Eliza are still not satisfied with the solution they can move to complain in Financial Ombudsman Service (FOS). FOS is an external dispute resolution body that provides free consultation and assistance to consumers so as to resolve the complaint related to financial services industry. 4. In the end Ted and Eliza can also contact Australian Securities and Investments Commission (ASIC) to complaint and know their rights. This information is also available in the Financial Service Guide (FSG). Part D Neither of your clients have trauma insurance and they are unsure about the adequacy of their current level of life and TPD insurance. Prepare a list of questions that you could use during the initial interview to help you determine appropriate levels of cover. You should cover asset preservation, income preservation and future expenditure needs and the answers to the questions should enable you to complete the risk needs section of the fact finder (250 words) Below is the list of questions that will be used by financial planner to interview about the level of insurance cover: Hi, Ted and Eliza please answer my questions so that I can give my best to judge your insurance needs. 1. Do you have insurance for your home, car, medical, income, life? 2. What are your income sources and what are your assets? (This will gauge the present value of Ted, what he will leave to his family in case something bad happens to him) 3. Can you please explain your lifestyle? It will be your monthly and annually expenses and liabilities. 4. How much do you have in your superannuation account? 5. What are your short term and long term liabilities? What is the remaining amount of debt if you have any?

6. What are the expenses of your dependents? 7. How much is your basic necessity amount? How do you pay this amount, cash or credit? 8. Do you have any other big liability in mind which can occur and can change your way of living? 9. Do you have anything else to ass to your Trauma insurance estimate? Part E Discuss the benefits and drawbacks of using tools to gather the information required to develop a financial plan for clients as compared to a more casual, conversational style approach. (200 words) A financial planner should never only rely on their intuition when determine client’s risk profile and needs. There are many tools that can be used to gather the necessary information for developing a financial plan. These tools can be factor-finders, questionnaires, psychometric testings, etc. The data gathered from these tools will help the financial planner to have a clear picture of the client’s financial position and expectation. However, most of these tools are normally in standardised form and may not be able to cover the full image of the client’s real situation. For instance, the client may think none of the pre-listed model in the risk profile questionnaire matches their particular circumstance. Alternatively, a financial planner could adopt a more casual and conversational approach to find out their personal needs and therefore discover the client risk tolerance. Psychometric testing could be another method to reveal client’s psychological profile. This tool offers a relatively cheap and easy way to assess client’s risk acceptance. Nevertheless the results can be misinterpreted by not taking account of client’s personal circumstance. On the other hand, a more casual and conversational style might help the financial planner to determine a client’s psychological acceptance of risk, but it could be time consuming. The effectiveness of using conversational style approach relies on the communication skills of the financial planner.

Section 2

Analyse client objectives, needs, financial situation and risk profile to develop appropriate strategies and solutions

Part A Record the information you have gathered from your clients in the fact finder below. Include the information you obtained from your questions in Section 1 Part D. [insert student response] Part B Identify any gaps in your data collection form as well as any other issues that would need to be followed up with Ted and Eliza. (100 words)

Below are the gaps in the data as provided by Ted and Eliza, • •

In the home address section, state and post code are not mentioned There is no contact phone number given

•

Dates of birth of their children are not given, neither the school details are mentioned

•

Home and content insurance coverage are not given

•

Superannuation details, date of joining fund is missing

•

Amount of insurance premiums is not mentioned

Fact finder Personal and employment details Personal details Client 1

Client 2

Title

Mr

Mrs

Surname

Hardgraves

Hardgraves

Given & preferred names

Ted

Eliza

Home address

4 Pringle Ave, Kensington

4 Pringle Ave, Kensington

Business address

NA

NA

Contact phone

NA

NA

Date of birth

28-March-70

17-August-71

Age

44

43

Sex

Male

Smoker Expected retirement age Dependants (children or other) :

Male

Yes

65

No

Female

Male

Femal e

Female

No

Yes

No

No

64

Name

Date of birth

Sex

School

Occupation

Harriett

NA

NA

NA

NA

Bill

NA

NA

NA

NA

Employment details

Occupation

Client 1

Client 2

Senior Geologist

Paralegal

Employment status

Business status

Self employed

Employee

Self employed

Employee

Not employed

Pensioner

Not employed

Pensioner

Permanent

Part time

Permanent

Part time

Casual

Contractor

Casual

Contractor

Other

Government

Other

Government

Sole proprietor

Partnership

Sole proprietor

Partnership

Private company

Trust

Private company

Trust

Notes: Any other person to be contacted? E.g. accountant, bank, solicitor, etc.

Solicitor: Carlie Mattieson with 10 years poor relationship with Ted and Eliza and providing service of Conveyancing for home purchase Accountant: John Watson with 7 years excellent relationship with Ted and Eliza and providing service of Annual tax return

Income, expenditure and net worth Cash flow statement Income and expenses Client 1

Client 2

Notes

Income from employment Salary Salary sacrifice Salary after salary sacrifice

140,000 12,600 127,400

55,000 4,950 (9 % SG) 50,050

Rental income Unfranked dividends Franked dividends

3,436

(state franking % if applicable)

Franking (imputation) credits Interest Other income, e.g. taxable benefits Capital gains 1yr

(state % return if applicable)

510

(state % return if applicable)

Tax-free component of capital gains

131,346

50,050

Taxable income

131,346

50,050

Tax on taxable income

NA

NA

NA

NA

Assessable income Deductible expenses Rental expenses, repairs etc.

Non-refundable tax offsets (e.g. LITO/SAPTO) Medicare levy Medicare levy surcharge Franking rebate Refundable rebates and offsets Net tax payable

Family cash flow Client 1 Salary less any salary sacrifice amount

Client 2

127,400

50,050

Combined

Comment

177,450

Non-taxable income (e.g. income from superannuation income streams for a person aged over 60, Family Tax Benefits) Interest income Dividends received (excluding franking credits)

510

510

3,436

3,436

Rental income Other income Total income received before tax

131,346

50,050

181,396

Living expenses Mortgage

37,800

General Living expense

50,400

Accountant’s Fees Donations Holidays (Annually) Other expenses

550 1,000 11,000

100,750

Total expenses Total income received before tax less expenses

80,646

Net tax payable from the ‘Income and Expense’ table above

NA 80,646

Net cash flow

Assets and liabilities Asset

Owner

Value

Liabilities

Net value

Notes

Personal assets Family Home

Joint tenant

$650,000

Home contents

Joint tenant

$50,000

$50,000

Car

Joint tenant

$18,000

$18,000

Total

718,000

$470,000

470,000

$180,000

248,000

Investment assets Savings account

Joint tenant

Cash management account - inheritance

Shares

5,000

5,000

Ted

10,000

10,000

Ted

53,691

53,691

Total

68,691

Superannuation assets

ABC Superannuation

Ted

220,000

220,000

SOH Industry Superannuation

Eliza

58,000

58,000

Total

278,000

Net worth

594,691

Liabilities Loan

Current debt

Home Loan

470,000

Total

470,000

Percentage deductible

Comments

Repayment

Goals and objectives Details

Comments

Save any surplus in the most tax effective vehicle for the long term, long-term tax effective investment plan for retirement

Long term

Ted received $63,700 inheritance and would like advise how to invest these fund, Eliza would like to ensure they do not lose any of their inheritance

Discuss possible options for using the inheritance money

Ted is willing to invest in riskier securities

Discuss possible options

Send both children to private school to complete their secondary education

Estimate cost and discuss possible options

Home renovation cost approximately $17,500

Short term

Review superannuation asset allocation, Eliza is also not happy with her current industry fund

Discuss possible options

Protect income against sickness or accident

To be reviewed

Protect family and/or assets in the event of death

To be reviewed

Protect against serious illness or trauma

To be reviewed

Reduce/pay off mortgage

To be discussed

Estate planning Do you have a Will?

Yes

No

Yes

No

Yes

No

Do you have superannuation beneficiaries in place?

Yes

No

Type

Binding

Non-binding

When was it last updated?

When Bill was born. Executor/rix’s name and contact details:

Do you have powers of attorney? Attorney’s name and contact details:

Do you have a funeral plan? Funeral provider and contact details:

Amount paid

Beneficiary names and contact details:

Current superannuation, rollovers, insurances & investments Superannuation details Member

Ted

Eliza

Superannuation fund name

ABC Superannuation

SOH Industry Superannuation

Date of joining fund Type of fund

Accumulation Defined benefit Pension

Accumulation Defined benefit Pension

Contributions

By employer By yourself Other

By employer By yourself Other

Current value of your superannuation fund

220,000

58,000

Amount of death & disability cover Is there provision for additional contributions or salary sacrifice? Non-concessional contributions

Spouse contributions received

Concessional contributions

Any other contributions

Yes

No

Yes

Amount

Year

Amount

Year

Amount

Year

Amount

Year

Amount

Year

Amount

Year

Amount

Year

Amount

Year

Amount

Year

Amount

Year

Amount

Year

Amount

Year

Amount

Year

Amount

Year

Amount

Year

Amount

Year

No

Life insurance details Life insured

Policy Owner

Company

Policy number

Benefit type

Benefit or insured amount

Annual premium

NA

General insurance details Item covered

Owner

Policy type

Company

Policy number

Cover Amount

Other benefit

Annual premium

NA NA

Investment details Investment type

Company

Purchase date

Units held/ fixed rate

Current value

Owner

Risk needs Insurance needs — life and TPD Client 1 Gross annual income (before tax)

Client 2

131,346

50,050

Number of years income required

20

20

Property repayment

470,000

470,000

3,096,920

1,471,000

Less business expenses

Other debts Sub-total = (income × years) + debts Less existing realisable assets (Insurance/savings/superannuation) Insured benefit shortfall (before tax) Gross income is the total of earned income (i.e. before tax earnings derived from personal exertion, including salary, fees, commission, bonuses, fringe benefits or similar payments that would cease on disablement). Business expenses are expenses incurred by you in the process of earning income from your profession, business or partnership. Insurance needs – Income protection/trauma Income protection Gross annual income

Client 1

Client 2

131,346

50,050

NA

NA

Employer superannuation contributions Other employer fringe benefits

Maximum allowable benefit (75% of annual income)

98,509

37,537

Monthly income

8,209

3,128

Monthly benefit required (pre-tax)

8,209

3,128

Waiting period to be served

60 Days

60 Days

Medical costs (to cover out-of-pocket health costs)

$100,000

$100,000

Additional expenses of a permanent nature, wheelchairs, home alterations etc.

$100,000

$100,000

Total funds required

$200,000

$200,000

Less cash available or assets that can be readily cashed

$122,000

$122,000

Shortfall/surplus

$78,000

$78,000

Less existing insurance

Trauma

Additional income: income protection only covers 75%, would you need extra?

Acknowledgment The information provided in this financial fact finder is complete and accurate to the best of my knowledge. I understand that a policy purchased without the completion of a fact finder, or following a partial or inaccurate completion, may not be appropriate to my needs. I also understand that a policy purchased that differs from that recommended by the planner may not be appropriate to my needs. I acknowledge that the planner has provided me with the completed financial fact finder, signed by me. Customer(s) signature(s)

Ted Hardgrave Eliza Hardgrave

Adviser's name Adviser's signature

Date

Part C Now that you have determined the Hardgraves’ needs and objectives you need to identify their likely risk profile based on the information they have provided. Ted and Eliza completed the risk profile below prior to your meeting with them. Identify any concerns that you may have with their responses compared with the information in the case study and suggest questions you could use to clarify the responses. Justify why you do or do not think that the score and the resulting risk profile category is an accurate reflection of their tolerance to risk. (250 words). [insert student response] Investment attitude details Please answer the following questions regarding your attitude to financial issues. Are you concerned about the amount of tax that you are paying? Why?

Would like to pay less.

How important is liquidity (i.e. funds available) to you? Why?

Yes/No

Very/Moderately/Not

Enough cash is present

If you had funds available for investing, how would you choose to invest them? Why?

Seeking guidance for this.

Are there certain sorts of investment that you wish to avoid? Which ones?

Yes/No

Risky investments should be avoided

RISK PROFILE Determining your investor risk profile

Points

This investor risk profile questionnaire has been designed to help you understand the type of investor you are, so that with the help of your adviser, you can choose the investments that best match your financial objectives. Which of the following best describes your current stage of life?

Ted

Eliza

Single with few financial commitments. You are keen to accumulate wealth for the future. Some funds must be kept available for enjoyment, such as cars, clothes, travel and entertainment.

50

50

A couple without children. You may be preparing for the future by establishing and furnishing a home. There are a lot of things you need to buy. You are probably better off financially now than you may be in the future.

40

40

Young family. This is the peak home purchasing stage. You have a mortgage and a very small amount of savings. Probably dissatisfied with your financial position and the amount of money saved.

35

35

Mature family. You are in your peak earning years and have the mortgage under control. Many partners also work and any children are growing up and have either left home or require less supervision. You are starting to think about retirement, although it may be many years away.

30

30

Preparing for retirement. You probably own your own home and have few financial commitments; however, you want to ensure that you can afford a comfortable retirement. Interested in travel, recreation and self-education.

20

20

Retired. No longer working and must rely on existing funds and investments to maintain your lifestyle. You may be receiving the pension and are keen to enjoy life and maintain your health.

10

10

Client 1

Client 2

A return without losing any capital.

10

10

3–7% p.a.

20

20

What return do you reasonably expect to achieve from your investments?

8–12% p.a.

30

30

13–15% p.a.

40

40

Over 15% p.a.

50

50

If you did not need your capital for more than 10 years, for how long would you be prepared to see your investment performing below your expectations before you cashed it in? You would cash it in if there were any loss in value

10

10

Less than 1 year

20

20

Up to 3 years

30

30

Up to 5 years

40

40

Up to 7 years

45

45

Up to 10 years

50

50

Very little understanding or interest

10

10

Not very familiar

20

20

Have had enough experience to understand the importance of diversification

30

30

Understand that markets may fluctuate and that different market sectors offer different income, growth and taxation characteristics

40

40

Experienced with all investment sectors and understand the various factors that may influence performance

50

50

How familiar are you with investment markets?

If you can only get greater tax efficiency from more volatile investments, which balance would you be most comfortable with? Preferably guaranteed returns, before tax savings

10

10

Stable, reliable returns, minimal tax savings

20

20

Some variability in returns, some tax savings

30

30

Moderate variability in returns, reasonable tax savings

40

40

Unstable, but potentially higher returns, maximising tax savings

50

50

Six months after placing your investment you discover that your portfolio has decreased in value by 20%, what would be your reaction? Horror. Security of capital is critical and you did not intend to take risks

10

10

You would cut your losses and transfer your money into more secure investment sectors

20

20

You would be concerned, but would wait to see if the investments improve

30

30

This was a calculated risk and you would leave the investments in place, expecting performance to improve

40

40

You would invest more funds to lower your average investment price, expecting future growth

50

50

You want to invest for longer than five years, probably to the age of 55–60. You are mainly investing for growth to accumulate long-term wealth

50

50

You are not nearing retirement, have surplus funds to invest and you are aiming to accumulate longterm wealth from a balanced fund

40

40

You have a lump sum, e.g. an inheritance or an eligible termination payment from your employer, and

30

30

Which of the following best describes your purpose for investing?

you are uncertain about what secure investment alternatives are available You are nearing retirement and you are investing to ensure that you have sufficient funds available to enjoy retirement

20

20

You have some specific objectives within the next five years for which you want to save enough money

20

20

You want a regular income and/or totally protect the value of your savings

10

10

Investor profile total points

220

140

INVESTOR RISK PROFILE SUMMARY 0–50

Defensive

You are a conservative investor. Risk must be very low and you are prepared to accept lower returns to protect capital. The negative effects of tax and inflation will not concern you, provided that your initial investment is protected. 51–130

Moderate

You are a cautious investor seeking better than basic returns, but risk must be low. Typically an older investor seeking to protect the wealth that you have accumulated, you may be prepared to consider less aggressive growth investments. 131–210

Balanced

You are a prudent investor who wants a balanced portfolio to work towards medium to long-term financial goals. You require an investment strategy that will cope with the effects of tax and inflation. Calculated risks will be acceptable to you to achieve good returns. 211–300

Growth

You are an assertive investor, probably earning sufficient income to invest most funds for capital growth. Prepared to accept higher volatility and moderate risks, your main concern is to accumulate assets over the medium to long term. You require a balanced portfolio, but more aggressive investment strategies may be included. 301–350

High growth

You are an aggressive investor prepared to compromise portfolio balance to pursue potentially greater long-term returns. Your investment choices are diverse, but carry with them a higher level of risk. Security of capital is secondary to the potential for wealth accumulation. (Section 3 Part D commences on the next page)

Part D Given the information you now have on the Hardgraves’ current situation and their tolerance of risk, what are the critical issues you need to consider to appropriately advise them? What sorts of investments would they each be comfortable with? (400 words) Debt: The mortgage interest rate of 6.5% is higher than the return from rest of their investment assets. So, It would be beneficial if they could reduce the mortgage. Risk protection: The couple seems to be under insurance. Ted and Eliza need to increase their Life and TPD insurance cover. They do not have income protection or trauma insurance either. Investment: Majority of their investments are cash. They need some fund to support their children’s secondary education. Tuitions for private school can be costly in the near future; they should be well prepared before it happens. Also school fees for the private school will be very high compared to the government schools. Retirement funding: Ted’s superannuation risk option does not quite match his risk profiles. Eliza’s superannuation seems not performing well enough. Certain analysis and adjustments can be made to help them reach their retirement goals. Social security & Taxation: The Hardgrave family is entitled to receive family tax benefit. Estate planning: The couple wrote their Will when Bill was born, the Will has not been reviewed since then. They have no Powers of Attorney or guardianship for their children. Part E Prepare appropriate insurance and superannuation strategies for Ted and Eliza, and provide a detailed explanation as to why you consider them to be appropriate. Include the lump sum amount that they will need in retirement and strategies to help them reach that goal. Include recommendations on the amounts and types of insurance cover you will recommend. Provide a summary of other recommendations that you will include in your SOA for Ted and Eliza. (500 words) Ted contributes about 66% of the total income to the family. So it will be very unfortunate to Eliza and their kids if something bad happens to Ted or he dies prematurely. Hence Hardgraves need to increase Ted’s Life and TPD insurance cover to an appropriate level (current shortfall $1.6 million). Further assume that it is also found out that Eliza actually performs lot more home duties than Ted. So, Ted may need to pay extra house keepings if something bad happens to Eliza to cover Eliza’s death. Eliza should also increase her Life and TPD insurance cover (current shortfall $1 million). Having appropriate life and TPD insurance will help to pay off debts and maintain their family’s standard of living if either Ted or Eliza could no longer provide for them. Income protection insurance Suggest Ted or Eliza undertakes income protection insurance that can cover 75% of their salary. Hardgraves should also have reasonable trauma insurance just in case they cannot afford medical costs if too many bad things happen. The main purpose of having trauma insurance is to have a amount to cover the medical cost for medical conditions. The estimated trauma insurance cover is $100,000 each. Superannuation: It is estimated that the couple will have a combined superannuation fund of $1.1 million when Ted turns 60.

Ted

Age

Oct - 2012

Oct - 2013

42

43

Oct - 2014 44

…… ……

Oct - 2028

Oct - 2029

Mar - 2030

58

59

60

A/C Balance Eliza

Age

A/C Balance

$190,000

$211,224

$233,758

……

$742,471

$797,771

$821,807

41

42

43

……

57

58

58

$85,000

$94,079

$103,624

……

$301,843

$322,017

$330,725

Ted

Net return

6% p.a.

Monthly contribution

$770.60

Eliza

Net return

5% p.a.

Monthly contribution

$385.30

Total

$1,152,532

Assume the couple switch to more conservative option when Ted turns 60. The combined fund will provide a net return of 3% per annum. It could provide an annual income of $60,000 ($5000 per month) for them and would be run out before Ted turn 88. The estimation is shown below Mar 2030

Mar 2031

Mar 2032

……

Mar 2057

Mar 2058

Apr 2059

60

61

62

……

87

88

89

$1,152,532

$1,126,756

$1,100,196

……

$96,896

$39,012

-$20,634

Ted A/C Balance

It appears out that they have thought well enough about their retirement goal. However, Ted’s current superannuation option does not match his risk preference. Since salary sacrifice contributions are taxed at a rate of 15%, it is another option that both Ted and Eliza can undertake to effectively build their wealth. The salary sacrifice can reduce the taxable income and this way Hardgraves will be able to pay less tax. Part F Provide a summary of the research that you have conducted to support one insurance product recommendation you will make for Eliza or Ted. (250 words) Life and TPD insurance can help to mitigate the financial impact that arose as a result of the death or terminal illness of the life insured. It can supply a lump sum to pay off debts and maintain the family’s standard of living if you can no longer provide them. If something bad happen to Eliza (e.g. worst case: death), the family will lose about $45,000 net income and may even increase further expenses (e.g. Ted need to pay for extra house keepings). The financial burden on Ted’s shoulders will be dramatically increased. Considering the mortgage and future financial needs for their children’s education, their family will certainly have difficult times if without proper insurance. I would recommend Eliza to have life and total and permanent disability insurance within her superannuation to $1,000,000. This amount should be able to cover the shortfall. Assume Eliza will continue work for another 17 years (until Ted reach 60). Her overall life & TPD insurance need is calculated by adding 17 years of her total income with current debt, which is $1,241,800. Then subtract this figure by her current realisable assets of $257,000 (See table below) to determine Eliza’s insurance shortfall. Realisable Assets Death Benefit Superannuation

Owner Eliza Eliza

Amount $50,000 $85,000

Cash management account

Joint

$15,000

Saving Account

Joint

$5.000

Cash management account

Ted

$75,000

Shares

Ted

$27,000

Total Realisable Assets

$257,000

Assume I did my research and find out Eliza’s superannuation fund has the option of $1 million coverage for life and TPD insurance. Having life & TPD insurance through superannuation can also be cost effective option as the premium are deducted from super contribution, which means paying for the cover before tax. Part G You must now prepare a Statement of Advice (SOA) based on the recommendations made, which will be used to record this advice (including amendments, if any) for Ted and Eliza. Remember that the SOA must be of a standard that is compliant and would be suitable to present to a client. [insert student response]

Important instructions • What to submit: you have been provided with a Statement of Advice Preparation Checklist and cash flow templates to use for the project SOA. Please include these with your submission. • Template SOAs and SOA preparation software: it is preferable that you do not use the sample SOA published by ASIC as a basis for your submission. The use of financial planning software and dealer templates to prepare your SOA is also not permitted. Submissions that exhibit excessive reliance on SOA templates may be considered a case of plagiarism or collaboration, and may not be considered to be a reasonable attempt at the project. • Assumptions: you must list the assumptions used in your SOA in your project submission. These will generally include: – any assumptions you have made regarding missing background information on the clients – any assumptions you have used to calculate future income from your recommended investments – any assumptions used for fees relating to the products you have recommended. • Strategy advice: you must provide strategy recommendations in the following areas based on the information given: – personal investment or debt reduction – personal insurance – superannuation – estate planning. Use the information on each of these areas given in the subject notes to provide reasons for each of the strategies recommended. • Product advice: product recommendations for any personal investment or estate planning recommendations are not required. However, you should recommend an appropriate superannuation and/or life insurance product to implement the advice you have provided. You are required to source, or develop, your own fund details. It is not necessary to include Product Disclosure Statements in your project for any products you may recommend in your SOA. Including insurance quotes in the SOA is not required. For insurance recommendations you may estimate the premiums based on the clients ages, health and occupations but they do not have to be prepared from actual quotes. • Cash flow projections: you must include detailed cash flow tables using Appendix 1 and Appendix 2 as a template showing Eliza and Ted’s situation before and after your recommendations. These should be included as Appendices 1 and 2 to your SOA. Remember to include any insurance premiums in the analysis. • Recommendations: You should include superannuation projections up to the retirement age of your clients before and after your recommendations as Appendix C to your Statement of Advice. In addition please show that your strategy will enable your clients to meet their retirement income goal until Ted is at least 84 (Eliza is 83, her life expectancy).

Statement of Advice preparation checklist (student to complete) SOA section

Action

i.

The following elements should appear on the cover sheet: • the words ‘Statement of Advice’ • the client’s name • the authorised representative’s name, AR number and contact details (if different to the licensee) • a statement that the authorised representative is an authorised representative of the licensee • the licensee’s name, ABN number, AFSL number, address and contact details • the date of issue of the SOA • a warning about the importance of the document

Cover sheet

ii.

Table of contents

Check that the pages in the table of contents agree with the page numbers in the completed SOA.

iii.

Executive summary

Headings should include: • Summary of our recommendations • Summary of expected outcomes if you implement our advice • Risks in our advice • Summary of our fees and commissions • Your next steps

iv.

Present position — information about the client

Headings should include: • Important information about you • Your reasons for seeking advice • What you would like to achieve • Your personal and financial information • Personal information • Your existing insurance • Your existing estate planning • Financial information • Current income and expense details

v.

Risk profile

Heading: • Your risk profile

vi.

Strategy recommendations (analysis of the investment strategies)

Headings should include: • Recommended action: – personal investment or debt reduction – personal insurance – superannuation – estate planning • Reasons for recommendations: – personal investment or debt reduction – personal insurance – superannuation – estate planning • Things you should consider (risks)

vii.

Product selection

You are only required to provide a superannuation and or insurance product recommendation. Do not provide product recommendations for personal investments or estate planning. Headings should include: • Product recommendations • Cooling off period advice

viii. Recommended asset allocation

Headings should include: • Recommended asset allocation • Comments on proposed asset allocation versus your risk profile

Completed?

SOA section

Action

ix.

Disclosure of fees, commission and/or benefits

Headings should include: • How are we paid • Commission and fees — upfront, ongoing commissions and financial planning advice fees • Product management and/or operational fees • Other benefits

x.

Ongoing service and review

Headings should include: • Ongoing services • Implementation

xi.

Authority to proceed

Headings should include: • Authority to proceed • Consent to ongoing contact

xi.

SOA Appendix 1

Use the family cash flow template below. Heading: • Financial position before implementation of strategy

xii.

SOA Appendix 2

Use the family cash flow template below. Heading: • Financial position after implementation of strategy

xii.

SOA Appendix 3

Include detailed projections of the clients’ super account balances before and after your recommendations up to their retirement age. Also show how the resultant balance can be drawn down until Eliza reaches age 84, her current life expectancy. You should include all assumptions for calculations and rates of return should be in today’s dollars (i.e. net of inflation).

Completed?

Statement of advice [Complete your SOA in this section of the template]

Assumption List for SOA •

Assume I have got the missing information from Ted and Eliza such as their superannuation details, insurance detail, etc.;

•

Assume I met Ted and Eliza in Oct 2012;

•

All the superannuation, insurance and investment products in the SOA are fictional, including fees, premium, return, cooling off period, etc.;

•

Assume all Product Disclosure Statement for investment and insurance products are given to Ted and Eliza;

•

All the commission, fees and benefits information are fictional;

•

Assume their home is insured for $850,000 and the contents for $50,000;

Mr Ted and Mrs Eliza Hardgrave 4 Pringle Ave, Kensington

Dear Ted and Eliza, Thank you for the opportunity to meet and discuss how we can help your achieve your financial goals and objectives. Based on the information contained in your completed fact finder and our conversation at our meeting, I believe that I have a reasonably clear understanding of your current situation, your goals and objectives, and your attitude to investment risk, security, and volatility. We are pleased to provide our recommendations in the detailed Statement of Advice that follows. This Statement of Advice has been prepared exclusively for you and is based on the information you have provided. Please take the time to carefully read and understand it, to ensure that it is consistent with your views and reflects the information we discussed. If there are any omissions or any details are incorrect, please bring them to our attention. In addition, if your circumstances have changed, or if this plan is not implemented in the next 30 days, we may need to revise the recommendation to ensure that they are still appropriate. Once implemented, the recommendations in this Statement of Advice should be reviewed on a regular basis to ensure that they continue to meet your ongoing needs. Changes in legislation, financial markets and your personal situation will occur over time, and as your financial adviser we can work with you to update your financial plan so that you stay on track to achieve your goals and objectives. If you accept our recommendation and are comfortable to proceed with implementation, please sign the attached Authority to Proceed and return it to us. We look forward to helping you implement the enclosed recommendations, and in the meantime we remain available to assist you with any queries you may have in relation to this Statement of Advice. Yours sincerely,

Statement of Advice Prepared for

Mr. Ted & Mrs. Eliza Hardgraves Prepared by

B n Y Pvt. Ltd.

You are entitled to receive a Statement of Advice (‘SOA’) whenever we provide you with any personal financial advice. Personal financial advice is advice that takes into account that any one or more of your objectives, financial situation and needs. This SOA is a record of the personal financial advice provided to you and includes information on the basis which this advice is given, information about fees and commissions and any interests or associations which might influence the advice. If this advice includes a recommendation to you to acquire a particular financial product (other than securities or an offer to issue or arrange the issue of a financial product to you, we will also provide you with a Product Disclosure Statement containing highly detailed supportive information about the particular product to help you make well informed decisions about the product. Be aware that the advice contained in the following SOA is valid for a period of 30 days only. If the plan is not implemented within this time, it will no longer be current and will need to be reviewed for accuracy

Statement of Advice Content FP3B-1SN3-2 Capstone project

1

Project Cover Sheet

1

Capstone project

4

Project checklist (student to complete)

4

Background

5

Personal information

6

Professional relationships

6

Annual income details

6

Annual expenditure

7

Assets and investments

7

Current share portfolio

7

Investment objectives

8

Ted Hardgraves

8

Eliza Hardgraves

8

Estate planning

8

Insurance and risk management

8

Planning issues

9

Section 1 Establish the relationship with the client and identify their objectives, needs and financial situation 10 Part A

10

Part B

10

Part C

11

Part D

11

Part E

12

Section 2 Analyse client objectives, needs, financial situation and risk profile to develop appropriate strategies and solutions13 Part A

13

Part B

13

Fact finder

13 3

Personal and employment details

13

Income, expenditure and net worth

15

Goals and objectives

18

Current superannuation, rollovers, insurances & investments 19 Part C

22

Part D

25

Part E

25

Part F

26

Part G

27

Important instructions

28

Statement of Advice preparation checklist (student to complete) 29 Executive Summary...............................6 ..................................................................................................................................................... 6 ..................................................................................................................................................... 7 ..................................................................................................................................................... 7 ..................................................................................................................................................... 7 ..................................................................................................................................................... 7 Important information ..........................8

..................................................................................................................................................... 8 ..................................................................................................................................................... 8 Your personal and financial information.........9

..................................................................................................................................................... 9 ..................................................................................................................................................... 9 ..................................................................................................................................................... 9 Financial information..........................10

................................................................................................................................................... 10 Your risk profile..............................11

................................................................................................................................................... 13 ................................................................................................................................................... 14 ................................................................................................................................................... 15 Recommended asset allocation...................16 Implementation.................................19

................................................................................................................................................... 20 ................................................................................................................................................... 21

4

SOA Appendix 1 – Financial position before implementation of strategy 22 SOA Appendix 2 – Financial position after implementation of strategy (2012/2013 financial year) 24 SOA Appendix 3 – Superannuation Projections

26

SOA Appendix 4 – Managed Investment Projections 29 SOA Appendix 5 – Mortgage Projections

31

SOA Appendix 6 – Implementation schedule

32

5

Executive Summary For the short term – up to one year Recommendations for Ted •

Total and permanent disability insurance outside of his superannuation should be equal to $1,500,000 (Approx.)

•

Use income protection insurance within the superannuation (maximum allowable limit is 75% of salary)

•

Take out trauma insurance outside of superannuation

•

Move superannuation to a growth portfolio within superannuation fund

•

Make salary sacrifice contribution of $1,200 ( about 10% of salary) per month to superannuation account

•

Reinvest the dividends

Recommendations for Eliza: •

Increase total and permanent disability insurance within superannuation to $1,000,000

•

Use income protection insurance within superannuation (maximum allowable limit 75% of salary)

•

Take out trauma insurance outside of superannuation

•

Make salary sacrifice contribution of $600 (about 10% of salary) per month to superannuation account

Financial Planner Recommendations: •

Double mortgage repayments on home

•

Use $17,500 from the inheritance to renovate house.

•

keep $15,000 in bank account as emergency fund

•

Review existing home and contents insurance to be sure that it is sufficient

For the long term – more than five years •

Invest $62,500 in a conservative managed fund with a monthly contribution of $600, this fund should be accessed when children go to their secondary studies

6

If these recommendations are followed then, Hardgraves will have: •

Appropriate insurance cover and health cover in the unforeseen event in which either of them die or become injured

•

Established appropriate levels of general insurance

•

Enough fund for emergency purpose

•

No inefficient debt

•

Growing children’s education over time so as to meet the financial needs to pay for their studies

•

The managed investment fund so that their share portfolio can grow over time

•

Updated Wills so that it can protect family in case of unlikely events

As has been discussed, all investment options are subjected to market risk and may or may not increase to increase the portfolio value. The fees for preparation of making this Statement of Advice is total $4,000 In order to decide whether to take our advice you should: •

Read the Statement of Advice fully to understand our advice.

•

Feel free to ask us any questions you have as a result of reading the Statement of Advice.

To follow our advice, please simply complete the ‘Authority to Proceed’ at the end of this Statement of Advice and return it to us.

7

Important information This section contains information that are used in preparing this statement of advice, such as: •

Reasons for seeking advice

•

Goals to achieve

•

Personal and financial information

In case any information mentioned in this document is incorrect, please feel free to contact Bn Y pvt. Ltd. Ted and Eliza – we agreed that we would provide advice on: •

Risk management and Insurance

•

Investments

•

Superannuation

•

Estate Planning

Following the discussion, according to us your main objectives and needs are as follows: •

You like to ensure that you have protection in the unlikely event

•

You like to have a long-term tax effective investment that could give sufficient funds for your future needs and for your children to complete secondary education

•

You like to do some renovation to your home

•

You like to have your annual family holiday

•

You like to retire at 60 (Ted) with $60,000 per annum

•

You want to ensure that your estate planning is adequate

8

Your personal and financial information List below is a summary of your relevant personal and financial details that you have provided. Personal details Client 1

Client 2

Title

Mr

Mrs

Surname

Hardgraves

Hardgraves

Given & preferred names

Ted

Eliza

Home address

4 Pringle Ave, Kensington

4 Pringle Ave, Kensington

Business address

NA

NA

Contact phone

NA

NA

Date of birth

28-March-70

17-August-71

Age

44

43

Sex

Male

Smoker Expected retirement age

Male Yes

No

65

Female

Male

Female Female

No

Yes

No

No

64

Dependants (children or other) : Name

Date of birth

Sex

School

Occupation

Harriett

NA

NA

NA

NA

Bill

NA

NA

NA

NA

Ted: you currently have $360,000(three times salary), life and TPD cover under your superannuation fund. Eliza: you have $50,000 life and TPD cover also under your superannuation. Your home is insured for $850,000 and the contents for $50,000. You both have private health insurance. You have advised that both of you have not reviewed your Wills since 2004. Neither of you has a Power of Attorney (POA) in place.

9

Financial information Income and expenses Assessable income Income after tax Annual expenses Estimated surplus/deficit

Ted $116,688 $84,541 $42,600

Eliza $55,462 $45,059 $42,600

Total $172,150 $129,600 $85,200 $44,400

Ted and Eliza – based on the above income and expenditure schedule you have a surplus of $44,400 income available. Please see ‘Cash Flow Statement’ in SOA Appendix 1 for details. Assets and liability Total personal assets Total investment assets Net worth

Value $918,000 $397,000

Liability $300,000 $397,000

Net value $618,000 $397,000 $1,015,000

Please refer to ‘Assets and Liabilities’ table in SOA appendix 1 for details. Incomplete and/or inaccurate information warning Note that if, for any reason, the information on which our advice is based upon, is either inaccurate or not complete, then it may be necessary to consider its appropriateness in respect to your particular circumstances, needs and objectives.

10

Your risk profile All investments have a certain element of risk. However, as a general rule, investment that have high rates of return involve high levels of risk, and more conservative investments bear lower returns. From our discussions, and from the answers of your risk profile questionnaire, we believe that Mr. Brown is a ‘Growth’ investor and Mrs. Brown is a ‘Balanced’ investor.

For Growth investors: You are relatively assertive investors, probably earning sufficient income to invest most funds for capital growth. You are prepared to accept higher volatility in the short to medium term to accumulate growth asset over the long term. You investment will spread across all asset sectors but will consist of more growth assets, which would be: •

About 30% in defensive assets, e.g. cash, fixed interest, and

•

About 70% in growth assets, e.g. Australian equities, international equities, property

The target asset allocation for your risk profile is illustrated below.

11

For Balanced investors: You are a cautious investor who is equally concerned with risk and return. You are willing to chase medium to long-term goals while accepting the risk of short to medium-term negative returns. Your investment mix is likely to include an equal mix of assets which would be: •

About 40% in defensive assets, e.g. cash, fixed interest, and

•

About 60% in growth assets, e.g. Australian equities, international equities, property

The target asset allocation for your risk profile is illustrated below.

12

Strategy recommendations

This section states: •

what are our advices and why these are appropriate for Hardgraves

•

reasons for the recommendations

•

things to consider and risks of the advice

Read this section and ask if you have any questions.

Personal Investment We recommend that: •

Double your mortgage repayments on your home so as to remove the debt early

•

Use $17,500 from the inheritance to renovate the house.

•

keep $15,000 in bank account as emergency fund

•

maintain your share portfolio and reinvest the dividend proceeds

Personal Insurance Recommendations Name

Type of cover

Product

Total amount of cover

Ted

Life and TPD

Mediassist insurance

$1,500,000

Eliza

Life and TPD

SOH Super Fund

$1,000,000

Ted

Income protection (to age 60) 60 days waiting period*

ABC Super Fund

$7,288 p.m.

Eliza

Income protection (to age 60) 60 days waiting period*

SOH Super Fund

$3,463 p.m.

Ted

Trauma

Mediassist insurance

$100,000

Eliza

Trauma

Mediassist insurance

$100,000

*A waiting period of 60 days has been recommended as it is estimated you will have enough funds available to enable you service any debts for this period of time. A 60-day waiting period will also reduce the cost of premiums. The longer the waiting period, the lower the premiums you pay. A Product Disclosure Statement (PDS) has been included for the trauma product from Medi Future Insurance. This will explain all details of your cover. Although we are not authorised to provide general insurance, I would recommend that you ensure that your home and contents are reviewed with adequate levels in place. 13

Superannuation Recommendations: •

Ted moves his current superannuation investment strategy from a balanced investment to a growth investment.

•

Ted makes salary sacrifice contribution of $1,200 (about 10% of his salary) per month to the superannuation fund

•

Eliza makes salary sacrifice contribution of $600 (about 10% of her salary) per month to the superannuation fund

Personal investment From the Cash Flow Statement in Appendix 1, Hardgraves currently have surplus funds of $44,400 per year, which can be invested. This fund can also be used to increase the mortgage repayment. Sooner the debt is paid off, the larger they will have disposable money. Shares should be retained, as shares can give them long-term capital growth. Reinvesting the dividends can be a good way to increase the potential returns. Share portfolio without dividend reinvestment Initial Year 1 Year 2 Investment Portfolio Value

$27,000

Dividend Received

Year 3

…

Year 8

Year 9

Year 10

$27,000

$27,000

$27,000

…

$27,000

$27,000

$27,000

$1,750

$1,750

$1,750

…

$1,750

$1,750

$1,750

Total value in Year 10 = 27000 + 1750*10 years = $44,500 ; Total Return = $17,500

Share portfolio with dividend reinvestment

Portfolio Value Dividend Reinvested

Initial Investment

Year 1

Year 2

Year 3

…

Year 8

Year 9

Year 10

$27,000

$28,750

$31,630

$32,596

…

$41,903

$44,618

$47,509

$1,750

$1,860

$2,050

…

$2,550

$2,715

$2,891

Total value in Year 10 = $47,509 ; Total Return = $20,509

Re-investment of dividends will generate 11% more returns compared to retaining the dividends back to pocket every year. Besides, many companies also have dividend reinvestment plan that do not require additional transaction fees. It would be a costeffective way to purchase shares through reinvesting dividends.

14

Personal insurance Insurance is a method which provides financial protection in a cost effective way. Life insurances are designed in such a way that if something happens to the insurer than family’s living standard can be maintained. An amount of $1,500,000 for Ted and $1,000,000 for Eliza is appropriate at this time. These amounts will cover the shortfall as identified in gap analysis. Additional life and TPD insurance is recommended to Ted because he cannot take out higher cover within his superannuation fund.

Superannuation Ted needs to change his superannuation risk preference so as to match it with his risk profiles. Eliza is suggested to maintain her superannuation in a balanced investment style. The salary sacrifice contribution will help them to increase their wealth in a tax effective way over the long term.

Paying off the mortgage There may be early repayment penalty by banks which should be keep in mind before paying early.

15

Recommended asset allocation Hardgraves’ investment assets are invested across different asset classes as mentioned in below table:

Table 1: Asset allocation Ted Asset Allocation Defensive Assets Australian Cash Australian Fixed Interest International Fixed Interest Total for Defensive Assets Growth Assets Australia Equities Australian Property International Equities Total for Growth Assets

Eliza

Weight

Risk Profile Weight

Variance (Weight)

Weight

Risk Profile Weight

Variance (Weight)

34.4% 12.6% 6.3% 53.3%

5% 15% 10% 30%

29.4% -2.4% -3.7% 23.3%

19.5% 17.9% 8.9% 46.3%

10% 20% 10% 40%

9.5% -2.1% -1.1% 6.3%

27.8% 6.3% 12.6% 46.7%

35% 10% 25% 70%

-7.2% -3.7% -12.4% -23.3%

26.8% 8.9% 17.9% 53.7%

30% 10% 20% 60%

-3.2% -1.1% -2.1% -6.3%

16

Table 2: Asset allocation for managed funds Asset Allocation Defensive Assets Australian Cash Australian Fixed Interest International Fixed Interest Total for Defensive Assets Growth Assets Australia Equities Australian Property International Equities Total for Growth Assets Grand Total

Education Foundation Investments Funds

15% 25% 15% 55% 25% 10% 10% 45% 100%

Table 3: Asset allocation after implementation of recommendations Ted Eliza Asset Allocation Defensive Assets Australian Cash Australian Fixed Interest International Fixed Interest Total for Defensive Assets Growth Assets Australia Equities Australian Property International Equities Total for Growth Assets Grand Total

Weight

Risk Profile Weight

Variance (Weight)

Weight

Risk Profile Weight

Variance (Weight)

6.6% 11.7% 7.8% 26.1%

5% 15% 10% 30%

1.6% -3.3% -2.2% -3.9%

15.9% 21.2% 11.6% 48.7%

10% 20% 10% 40%

5.9% 1.2% 1.6% 8.7%

46.6% 7.8% 19.5% 73.9% 100%

35% 10% 25% 70% 100%

11.6% -2.2% -5.5% 3.9% 0%

26.7% 9.6% 15.1% 51.3% 100%

30% 10% 20% 60% 100%

-3.3% -0.4% -4.9% -8.7% 0%

17

Table 4: Asset value Ted Asset Allocation

Eliza

Current Value

Value after recommendation

Current Value

Value after recommendation

Australian Cash

$104,000

$18,184

$18,500

$27,469

Australian Fixed Interest

$38,000

$32,051

$17,000

$46,454

International Fixed Interest

$19,000

$21,367

$8,500

$19,969

Total for Defensive Assets

$161,000

$71,601

$44,000

$83,892

Australia Equities

$84,000

$127,785

$25,500

$45,968

Australian Property

$19,000

$21,367

$8,500

$16,484

International Equities

$38,000

$53,418

$17,000

$25,999

Total for Growth Assets

$141,000

$202,569

$51,000

$88,451

Total Value

$302,000

$274,171

$95,000

$172,343

Defensive Assets

Growth Assets

18

Implementation Ted and Eliza are suggested that in order to proceed with these recommendations, below steps should be completed first: •

Read, sign and return the Authority to Proceed attached.

•

Read the attached Product Disclosure Statement and supporting material.

•

Complete and sign the applicable form/s contained in the Product Disclosure Statement for Medi Future Insurance Pty., Ltd.

•

Complete and sign the applicable form/s contained in the Product Disclosure Statement for Education Foundation Investments, including your tax file number.

•

Arrange an appointment with me and bring any completed application forms.

Note: The recommendations contained in this SOA are current for 30 days only. Please contact me for further discussion if you are unable to act on our recommendation within this time frame.

19

Authority to proceed

We acknowledge that the product(s) listed in the table below are to be implemented in our names: Insurance Product Life and TPD cover for Ted with Medi Future Insurance Trauma cover for Ted with Medi Future insurance Trauma cover for Eliza with Medi Future insurance Investments Education Foundation Investments Funds

Amount of Cover $1,500,000 $100,000 $100,000 Amount $62,500

Before signing this document, please check that I have: •

given you the ‘B n Y Pvt. Ltd. Financial Services Guide (FSG)

•

given you all the Product Disclosure Statements for the products recommend

•

confirmed that the personal information I have collected is correct

•

discussed your goals and objectives

•

confirmed that you are happy with your risk profile

•

discussed any risks in the recommendations

•

discussed fees that need to be paid

Also before signing this document, confirm that: •

we have kept a copy of the SOA and we have had the opportunity to read, consider and understand the document, supporting material and have asked questions

•

the SOA dated 19 Oct 2012 accurately summarises our current situation, investments, insurances and financial goals. We understand that any inaccurate or incomplete information provided to us, may bring risk to meeting our needs appropriately

•

we have read and understood the ‘Disclosure of commissions, fees and benefits’ section of SOA

•

we understand that the value of recommended investments may rise and fall in line with the market conditions and you cannot guarantee future performance

•

we understand that this statement is solely for our use of the clients to whom it is addressed and B n Y Pvt. Ltd. Pty., Ltd, does not accept any liability whatsoever to third parties who use or rely on the whole or any part of the content, and

•

we hereby request Financial Planner to provide services detailed in the section ‘Ongoing Services’

20

We consent to being contacted by our adviser on an ongoing basis, in line with the agreed ongoing service review structure detailed within this recommendation.

Our preferred hours of contact are between ______ (am/pm) and ______ (am/pm).

Signed _________________________________

Date ____ / ____ / ____

Client Name Signed _________________________________

Date ____ / ____ / ____

Client Name Signed _________________________________

Date ____ / ____ / ____

Financial Planner

21

SOA Appendix 1 – Financial position before implementation of strategy Cash Flow Statement Ted

Eliza

Notes

Income from employment Salary

$120,879

$60,440

SG Contribution

$10,879

$5,440

Salary after salary sacrifice

$110,000

$55,000

9% SG

Rental income Unfranked dividends Franked dividends Franking (imputation) credits

Interest

$1,750

27000*6.48% = $1,750 (96.7% franked)

$725

1750*(30/70)*96.7% = $725

$4,213

$463

$116,688

$55,463

Taxable income 2012/2013

$116,688

$55,463

Tax on taxable income

$31,122

$9,572

$1,750

$832

15000 @ 5% p.a. = $750 5000 @ 3.5% p.a. = $175 Total = $925, 50% share = $463 each 75000 @ 5% p.a. = $3,750

Other income, e.g. taxable benefits Capital gains 1yr Tax-free component of capital gains Assessable income Deductible expenses Rental expenses, repairs etc.

Non-refundable tax offsets (e.g. LITO/SATO) Medicare levy Medicare levy surcharge Franking rebate

-$725

Refundable rebates and offsets Total tax

$31,147

$10,404

Income after tax

$84,541

$45,059

22

Family cash flow Ted

Eliza

$84,541

$45,059

$129,600

Home mortgage

$14,350

$14,350

$28,700

General living expenses

$22,500

$22,500

$45,000

Accountant’s fee

$250

$250

$500

Donations

$500

$500

$1,000

$5,000

$5,000

$10,000

Income after tax (as calculated above)

Combined

Living expenses

Annual Holiday Total expenses

$85,200

Net cash flow

$44,400

Assets and liabilities Asset Personal assets

Owner

Family Home Home contents Car Total Investment assets Superannuation Superannuation Cash management account Savings account Cash management account – inheritance Shares Total Net worth Liabilities

Joint tenant Joint tenant Joint tenant

Loan

Current debt

Home loan Total

$300,000 $300,000

Value $850,000 $50,000 $18,000 $918,000

Liabilities $300,000

$300,000

Net value

Notes

$550,000 $50,000 $18,000 $618,000

Ted Eliza Joint Joint Ted

$190,000 $85,000 $15,000 $5,000

$190,000 $85,000 $15,000 $5,000

$75,000

$75,000

Ted

$27,000 $397,000

$27,000 $397,000 $1,015,000

Percentage deductible

Interest only

Repayment

No.

$2392 p.m.

23

SOA Appendix 2 – Financial position after implementation of strategy (2012/2013 financial year) Cash flow statement Ted

Eliza

Notes

Salary

$120,879

$60,440

SG Contribution

$10,879

$5,440

9 % SG

Salary Sacrifice Contribution

$9,600

$4,800

Contribution start from early Nov 2012, effectively 8 month contributions

Salary after salary sacrifice

$100,400

$50,200

Income from employment

Rental income Unfranked dividends Franked dividends

$1,750

27000*6.48% = $1,750 (96.7% franked)

Franking (imputation) credits

$725

Interest

$375

$375

$103,250

$50,575

Taxable income 2012/2013

$103,250

$50,575

Tax on taxable income

$26,150

$7,984

$1,549

$759

1750*(30/70)*96.7% = $725 15000 @ 5% p.a. = $750 50% share = $375 each

Other income, e.g. taxable benefits Capital gains 1yr Tax-free component of capital gains Assessable income Deductible expenses Rental expenses, repairs etc.

Non-refundable tax offsets (e.g. LITO/SATO) Medicare levy Medicare levy surcharge Franking rebate

-$725

Refundable rebates and offsets Total tax

$26,973

$8,743

Income after tax

$76,277

$41,833

24

Family cash flow Ted

Eliza

$76,277

$41,833

$118,109

Home mortgage

$23,917

$23,917

$47,834

General living expenses

$22,500

$22,500

$45,000

Accountant’s fee

$250

$250

$500

Donations

$500

$500

$1,000

Annual Holiday

$5,000

$5,000

$10,000

EF Managed Fund @ $600 p.m. for 8 month

$2,400

$2,400

$4,800

$260

$240

Income after tax (as calculated above)

Combined

Living expenses

Medi Future Trauma insurance cover Medi Future Life and TPD cover

$1,200

$500 $1,200

Total expenses

$110,833

Net cash flow

$7,275

Note: mortgage expense includes old repayments(July 2012 – Oct 2012) and new repayment(Nov 2012 – Jun 2013)

Assets and liabilities Asset Personal assets Family Home Home contents Car Total

Owner Joint tenant Joint tenant Joint tenant

Value $850,000 $50,000 $18,000 $918,000

Liabilities $274,249

$274,249

Net value

Notes

$575,751 $50,000 $18,000 $643,751

*Assume that approximately $25,751 has been paid off home loan from Nov 2012 t0 June 2013

Investment assets Superannuation Superannuation Cash management account Shares EF managed investment Total Net worth

Ted Eliza Joint Ted Eliza

$213,671 $95,143 $15,000 $28,750 $69,706 $422,369

$213,671 $95,143 $15,000 $28,750 $69,706 $422,269 $1,066,020

*Assume contributions period for superannuation & managed investment is from Nov 2012 to June 2013

Liabilities Loan

Current debt

Home loan Total

$274,249 $274,249

Percentage deductible

Interest only

Repayment

No.

$4783 p.m.

25

SOA Appendix 3 – Superannuation Projections Table 1

Ted’s age 42 43 44 45 46 47 48 49 50 51 52 53 54 55 56 57 58 59 60

Table 1(a)

Superannuation account balance projections

Date

Ted’s account balance at year end

Oct-2013 Jun-2013 Jun-2014 Jun-2015 Jun-2016 Jun-2017 Jun-2018 Jun-2019 Jun-2020 Jun-2021 Jun-2022 Jun-2023 Jun-2024 Jun-2025 Jun-2026 Jun-2027 Jun-2028 Jun-2029 Mar-2030

$190,000 $204,008 $226,097 $249,548 $274,445 $300,878 $328,942 $358,736 $390,368 $423,950 $459,605 $497,458 $537,646 $580,313 $625,611 $673,703 $724,761 $778,969 $821,807

Current situation Eliza’s account Combined balance at year account balance end $85,000 $91,003 $100,390 $110,257 $120,629 $131,532 $142,992 $155,039 $167,702 $181,013 $195,005 $209,713 $225,173 $241,425 $258,508 $276,464 $295,340 $315,181 $330,725

$275,000 $295,011 $326,486 $359,805 $395,074 $432,410 $471,934 $513,775 $558,070 $604,964 $654,610 $707,171 $762,819 $821,737 $884,118 $950,167 $1,020,101 $1,094,150 $1,152,533

Ted’s account balance at year end $190,000 $213,671 $251,307 $291,664 $334,939 $381,342 $431,099 $484,454 $541,665 $603,012 $668,794 $739,332 $814,968 $896,073 $983,040 $1,076,294 $1,176,290 $1,283,514 $1,368,989

After recommended strategy Eliza’s account Combined account balance at year balance end $85,000 $95,143 $111,004 $127,676 $145,202 $163,624 $182,988 $203,344 $224,740 $247,232 $270,874 $295,726 $321,849 $349,308 $378,173 $408,514 $440,408 $473,933 $500,198

$275,000 $308,813 $362,311 $419,340 $480,141 $544,966 $614,088 $687,797 $766,405 $850,244 $939,668 $1,035,057 $1,136,817 $1,245,381 $1,361,213 $1,484,809 $1,616,698 $1,757,448 $1,869,188

Assumptions:

Value

Ted: current

Eliza: current

Ted: strategy recommendations

Eliza: strategy recommendations

Contribution amount: SG and any other (pmt)

$906.60 before contribution tax $770.60 after contribution tax

$453.30 before contribution tax $385.30 after contribution tax

$2,106.60 before contribution tax $1,790.60 after contribution tax

$1,053.30 before contribution tax $895.30 after contribution tax

Contribution frequency

Monthly

Monthly

Monthly

Monthly

Rate = the rate of return of the fund, net of inflation

6% p.a.

5% p.a.

7% p.a.

5% p.a.

26

Table 2 Superannuation income analysis post retirement Ted’s age

Combined account balance

Assumptions

Combined fund

60 61 62

$1,869,188 $1,865,209 $1,861,109

Rate of return net of inflation Frequency of drawdown Income per annum

3% Monthly $60,000

63

$1,856,885

64

$1,852,532

65

$1,848,046

66

$1,843,425

67

$1,838,662

68

$1,833,755

69

$1,828,698

70

$1,823,488

71

$1,818,119

72

$1,812,587

73

$1,806,887

74

$1,801,013

75

$1,794,961

76

$1,788,724

77

$1,782,298

78

$1,775,677

79

$1,768,854

27

80

$1,761,823

81

$1,754,579

82

$1,747,114

83

$1,739,422

84

$1,731,496

28

SOA Appendix 4 – Managed Investment Projections Year

Harriett's age

Bill's age

1

11

8

2

12

9

Date Oct-2012 Dec2012 Dec2013

10

Dec2014

Withdraw

$64,277 $75,287 $12,000

3

13

14

11

Dec2015

12

Dec2016

15

16

13

Dec2017

14

Dec2018

17

15

Dec2019

18

16

Dec2020

19

17

Dec2021

20

$15,842 $24,119

$12,000 10

$19,365 $27,842

$12,000 9

$34,059 $43,365

$24,000 8

$47,969 $58,059

$24,000 7

$61,136 $71,969

$24,000 6

$62,241 $73,136

$12,000 5

$63,287 $74,241

$12,000 4

Fund Balance $62,500

$12,119 $20,187

$12,000

$8,187

29

Assumptions: Opening balance: $62,500 Monthly Contribution: $600 Rate of return net of inflation: 5.5% p.a. All cash withdraw will be made at the end of year

30

SOA Appendix 5 – Mortgage Projections Year

0 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18

Date

Current situation Account Balance

Oct-2012 Jun-2013 Oct-2013 Oct-2014 Oct-2015 Oct-2016 Oct-2017 Oct-2018 Oct-2019 Oct-2020 Oct-2021 Oct-2022 Oct-2023 Oct-2024 Oct-2025 Oct-2026 Oct-2027 Oct-2028 Oct-2029 Oct-2030

After recommended strategy Account Balance

$300,000 $293,749 $290,521 $280,407 $269,616 $258,102 $245,817 $232,709 $218,723 $203,801 $187,879 $170,891 $152,765 $133,425 $112,791 $90,774 $67,282 $42,218 $15,474 -$13,060

$300,000 $274,249 $260,950 $219,285 $174,830 $127,397 $76,788 $22,789 -$34,826

Assumptions: Opening balance: $300,000 Mortgage interest rate: 6.5% p.a. Current monthly repayment: $2,392 Recommended monthly repayment: $4,784 Please note: The mortgage will be fully repaid in 17.6 years if under current repayment The mortgage will be fully repaid in 6.4 years if under recommended repayment

31

SOA Appendix 6 – Implementation schedule Action Arrange time for next meeting (2 weeks) Read and sign Authority to Proceed Read Product Disclosure Statement Complete application forms Arrange to meet with accountant to discuss accounting /tax issues Contact super fund to increase insurance Contact super fund to change asset/risk allocation Contact super fund to add insurance Contact bank to increase mortgage repayments Meet with Ted & Eliza to collect forms and check on progress Deposit funds from savings into managed investment Arrange to meet with solicitor to update Will and powers of attorney Arrange for review meeting

By Whom Financial Planner Ted & Eliza Ted & Eliza Ted & Eliza

Timeframe Immediately 1 week 1 week 1 week

Ted & Eliza

1 week

Eliza Ted Ted & Eliza Ted & Eliza

2 weeks 2 weeks 2 weeks 2 weeks

Financial Planner

2 weeks

Ted & Eliza

2 weeks

Ted & Eliza

2 weeks

Financial Planner

6 months

32

Section 3 Present appropriate strategies and solutions to the client and negotiate a financial plan, policy or transaction Part A The SOA has been completed and a meeting has been organised with Ted and Eliza to present the recommendations and, if they agree, to implement them. Outline the steps that should be followed in presenting this advice to Ted and Eliza. In your answer, you should address at least four of the following requirements regarding presentation of advice: •

the order in which you present the information

•

what back-up information and documents you might need

•

any risks associated with the solution

•

two predictable questions the Browns might ask you and the answers you will give

•

the language you will use to present the strategy to Ted and Eliza. (250 words)

The following procedures shall apply when presenting the advice to Ted and Eliza: • •

Restate the reasons why they come to seek the financial advice and they expectations (goals & objectives) Reconfirm whether there is any significant change to their situation

•

Revisit all information collected from the data find form and summarise their current situation including the area where they can make improvement

•

Talk about their risk profile and explain the rationale behind

•

Go through each recommendations and explain how these recommendation can meet their goals and objectives, including further explanation about particular recommended product’s Product Disclosure Statement if necessary

•

Give a summary of recommendations and strategies; explain how their asset allocations can meet with their risk profile after taking recommendations

•

Explain the cost of taking recommendations and associated risks

•

Disclose fees, commissions and benefit involved

•

Explain the ongoing service and implementation plan

•

Ensure they are clear about every forms that need to signed

It is also important to ask questions when following above steps to ensure both Ted and Eliza are fully understand the plan and the implications of the advice provided.

FP3B-1SN3-2

Part B Suggest a minimum of two concerns that the Browns might have with the strategy that you have proposed. Explain how you would address each of these concerns. (100 words) Concern 1: How are these investment funds selected? These investments are all from approved product list (APL) of B n Y pvt. Ltd. This approved products are optimized after extensive research, by simulation and practice. These investment products are studied in detail and then ranked as the best options to suit the Hardgraves’ current risk profile. Concern 2: What if we do not like the investments you recommend? If you are not happy with taking the recommended investment you can simply inform your concerns. Prior to undertaking any actions on investment, we have to get your permission first. That’s why the ‘Authority to proceed’ is provided to you. Part C During the course of your discussion with Ted, you discover that he has suffered from a back injury and you suspect that this may result in a premium loading being applied to his income protection. Explain how you would justify the need for this policy to him, despite the extra costs. (150 words) It would be beneficial to Ted’s family if he take adequate income protection insurance. Imagine he is unable to work due to unexpected illness/injury/partial or total disability; the family will lose approximately $84,000 annual income (after tax). They may even find difficulties to keep the life style they used to enjoy as Eliza’s income can only cover their general living expenses. They probably need to extend their mortgage, cancel their annual holiday, and save more for their children’s future education. Unlike life & TPD insurance (protection on death & disability) and trauma insurance (protection on defined medical conditions), Income protection insurance can provide a monthly payment (usually up to 75% of the income) if the insured is temporarily unable to work due to illness or injury. Income protection insurance is perhaps the easiest policy on which to make a claim, given a legitimate disability and a reasonable contract of insurance. This type of policy only requires the life insured to be able to prove they are disabled at least one month at a time The Australian Taxation Office allows tax deductions for insurance premiums where it can be proven that those premiums relate to the earning of assessable income; therefore income protection insurance is also tax deductible. If Ted is more concerned about the cost of loading, certain adjustments on waiting period/ benefit period may help to reduce the premium.

FP3B-1SN3-2

Section 4 Agree on the plan, policy or transaction and complete documentation Part A Ted and Eliza have finally agreed to proceed with your recommendations. Explain your fee and cost structure to Ted and Eliza in plain English. (100 words) The total fee for our advice and for the preparation of this Statement of Advice is $4000. B n Y Pvt. Ltd. is entitled to receive $2000 and I will receive the balance amount of 2000. If you wish to implement the products I have recommended, I will receive commission from the issuer of the products I have recommended. All fees and commissions are clearly disclosed in both the SOA and the PDS. All remuneration, commission and other benefits are presented in dollar terms in the SOA. A fee of $200 per hour will be charged for any additional services performed (e.g. ongoing service).

Part B Prepare a timeframe for implementing the plan. Explain the reasons behind the timeframe. (100 words) Action Arrange time for next meeting (2 weeks) Read and sign Authority to Proceed Read Product Disclosure Statement Complete application forms Arrange to meet with accountant to discuss accounting /tax issues Contact super fund to increase insurance Contact super fund to change asset/risk allocation Contact super fund to add insurance Contact bank to increase mortgage repayments Meet with Ted & Eliza to collect forms and check on progress Deposit funds from savings into managed investment Arrange to meet with solicitor to update Will and powers of attorney Arrange for review meeting

By Whom Planner Ted & Eliza Ted & Eliza Ted & Eliza

Timeframe Immediately 1 week 1 week 1 week

Ted & Eliza

1 week

Eliza Ted Ted & Eliza Ted & Eliza

2 weeks 2 weeks 2 weeks 2 weeks 2 weeks

Ted & Eliza

2 weeks

Ted & Eliza

2 weeks

Financial Planner

6 months

Ted and Eliza should have enough time to read and review all the application and PDS during the first week. They should also talk with their accountant to make sure they understand all the accounting/taxation implications that may affect them after taking the recommended actions. Increasing mortgage repayment involves lots of money; they may need more time to think about it. Once their written confirmation and application are being received during the meeting in two weeks time, further actions can be implemented. Lastly, it would be easy for them to meet with solicitor when everything else has been arranged. Another meeting in 6 months time should be enough to perform a review on their progress.

FP3B-1SN3-2

Part C Identify the documentation that you may require from Ted and Eliza before proceeding with your advice. (100 words) The final updated SOA with ‘Authority to proceed’ that signed by Eliza and Ted is needed before implementing the advice. It simply gives the planner a permission to proceed with planned actions. The application forms for recommended insurance and investment products have to be completed and signed as well. The identity verification document (e.g. Driver’s licence, passport) may also be need for confirming the signature. Part D List the documentation that you may need to present to Ted and Eliza at this stage. (100 words) A checklist of all the possible activities associated with the provision of financial advice Product Disclosure Statements for all recommended insurance and investment products Copies of all singed documents (e.g. SOA and application forms) The implementation schedule A letter to the solicitor that explains their needs for updating the Will and establishing powers of attorney A confirmation of next meeting for review

FP3B-1SN3-2

Section 5 Provide ongoing service where requested by client Part A Draft an outline of the level of ongoing service you intend to recommend to Ted and Eliza. In your outline, discuss the type of information that you would regularly provide to Ted and Eliza in relation to their portfolio. (250 words) Ongoing financial planning reviews are important part of ensuring the financial plan remains relevant over time. The ongoing review is similar to what have been done in the previous meeting before implement SOA. The planner will collect data, examine resources, prioritise clients’ goals and objectives, make recommendation and initiate implementation plan if necessary. The review process will normally address changes to the following areas and adjusts the financial plan accordingly: •

•

Income and expenditure: it’s vital to maintain their budget in an acceptable level and make sure Eliza and Ted have adequate savings. A change in career, or earning ability, may have a significant impact on their lifestyle habits or retirement planning capabilities. Balance sheet: it is important to ensure that all their assets and liabilities are reflected accurately. These will affect not only the content of the advice relevant to them, such as level of assurance cover, but also impact investments where tax is relevant.

•

Their family situation: they may be able to receive more social benefits as their family situation changes.

•

Their financial planning needs and objectives should be reviewed before considering any changes on your financial and investment strategies

•

Their insurance needs: their family member might need more health insurance cover as everyone grows older.

•

The general economic environment: the economy can change without notice, a new regulation or legislation will impact on their financial plan.

•

Superannuation: if either Ted or Eliza decides retire earlier, they would have to adopt relevant adjustment to their superannuation so that to have sufficient income stream when they retire.

•

Investment product: there may be a new product available in the market which better suits their risk profile and need.

•

Taxation: their taxation position and any relevant changes in the current tax law should be updated regularly. There may be opportunities to reduce the tax payable.

•

Estate Planning: If they've had any life or family changes, such as a birth, adoption or divorce, they may need to revise their beneficiary designations.

The above points should be reviewed at least once a year through a formal meeting. If there is any change needs to be handled in an urgent manner, a special review can be arranged. Reviewing their financial plan at least once a year could help ensure Ted and Eliza are on track to reach their long-term goals. It is also an opportunity for them to compare their investment portfolio performance with the original expectations. Although the purpose of the review process is not necessarily to change the investment, making certain investment amendments may be needed if there are significant difference between the existing performance and the expectation. The review simply offers a chance to implement any new plan of action that has been developed in light of changing goals or changing performance. Any urgent issue should be reviewed immediately; the investment portfolio could be reviewed every 3 to 6 months; a full review would be given on an annual basis. FP3B-1SN3-2

Part B What would you do to ensure that Ted and Eliza know the specific costs relating to an ongoing service? (100 words) Other than simply explaining the cost structure to Ted and Eliza, a written service fee schedule should be given to them. Any remuneration, commission, fees or other benefits in relation to providing ongoing service and how these cost are calculated shall all be explained and included in the fee schedule. The estimated total cost of an ongoing service will be confirmed with them prior to any work being commenced.

FP3B-1SN3-2