Telstra Super Financial Planning
Finacial planning report Presented by
Isabelle Fu Know-it-all Financial Planning
Question 1
There are six steps in the financial planning progress, which every financial planner should go through with their clients.
First, financial planner is required to identify the client’s financial data such as income, debts, financial commitments, etc. Sometimes, it’s not easy to get all the useful information at one time due to some private issues, so the planner should make reasonable enquiries to obtain complete and accurate information from the client. A financial planner should be equipped with excellent communication skills, clearly explaining the importance of quality information to the client.
Second, the financial …show more content…
planner should determine the client’s current financial situation, ongoing needs and requirements and their personal and overall goals and objectives. Financial planning is a people-oriented service helping clients achieving their goals. Clients and planners should mutually define goals and perhaps time frame for results.
Third, financial planner is required to analyze the client’s current financial situation and identify any financial problems or special issues through balance sheet, net worth and cash flow statement. Financial planner should identify the subject matter of advice sought by the client. Every client is different, therefore it is important to understand what’s the client’s need.
In this case, it is apparently that Justin intends to reduce his various debts as soon as possible, and be able to fund the wedding cost currently, and support the new family in the future. Additionally, Justine needs to do more going forward to boost his superannuation funds.
Some clients are in low-level financial literacy, so it is the planner’s duty to disclose all the information to the clients. Adviser should explain advice simply and in a language and in a format that the client understands.
Fourth, financial planner should identify suitable financial planning strategies and develop the financial planning recommendations. Planner should conduct a reasonable investigation into a financial product that will achieve client objectives based on collected information, especially for the risk that the client could endure.
In this case, the planner may provide some financial products and recommended asset allocation. Justine may also receive some advice including insurance, retirement planning, taxation strategies, and estate planning.
Adviser should not provide any product that is not suitable to client’s financial situation or their objectives. Besides, advisor must observe the best interest rule when giving advice to the client, and they also need to priories client’s interest over any other party’s.
Fifth, the financial planner needs to implement the plan. The planner should obtain the authority to proceed with the recommendations. The planner should also inform the client that when the plan is to be done. Besides, the planner needs to follow up with various external parties, if required, to ensure issues are followed through.
Finally, the planner should review the SoA with the client (at least once a year) to ensure the client’s investments and strategies are on track to achieve their goals, and revise where necessary.
These following documents must be given to the clients before advisors provided any further information to the clients.
As a general rule, the Financial Statement Guide (FSG) must be given to retail clients at the earliest practical opportunity before a financial service is provided and as soon as it becomes apparent that a financial service will be or is likely to be provide (s941 (D)). FSG includes the name and contact details of the providing entity and licensee and the kind of financial services offered and etc. (s942B)
Next, advisers must give retail clients a Statement of Advice (SoA) when giving personal advice. It must be given prior to any action that would implement the advice, such as signing an application for a product. (s946A) A SoA is designed to communicate personal financial advice recommendations appropriate to that client, and educate the clients.
Besides, advisers are required to provide a Product Disclosure Statement (PDS), which representing clients with sufficient information to make an informed decision about whether or not to buy a financial product. It must disclose full particulars of the product including significant risks, fees, expenses and charges, taxation implications and other information that could influence clients.(CCH 2013)
Advisers should provide PDS at or before the time that the advice is given Cooling-off period.
Additionally, a Record of Advice (RoA) can be provided when advisers are giving further advice rather than prepare a SoA, if clients’ financial situation and objectives haven’t changed significantly. A RoA performs a function similar to an SOA, but is typically a shorter, more informal document, with fewer content requirements than the SOA.
Know-it-all Financial Planning AFSL # 11289
Dear Mr. Justin,
According to your request of financial planning, I hereby attach my report analyzing your financial situation and recommending some strategies based on your goals and objectives. As discussed with you in our firm, I have paid particular attention in the calculation of various financial statements, such as the balance sheet, cash flow, tax calculation and asset allocations.
A full explanation is in ‘Recommendation and Conclusion’ part. Please do not hesitate to contact me if you have any questions. If you are comfortable with the strategies and decide to accept our recommendations, you need to sign the authority to proceed document and return it to me in 40 days.
Your personal details should be checked and if there are any changes to your situation you should let me know.
Thank you for affording our firm the opportunity to provide some suggestions for you. I will be glad to discuss any questions you may have at our meeting next week.
Yours sincerely
Isabelle Fu
Table of Contents
Executive summary 5
Personal profile 6-7
Risk profile and investment strategy 7-8
Recommended strategies 9-12
Appendix 1 12
Appendix 2 13
Appendix 3 13
Appendix 4 14-18
Reference list 19
Executive summary
What my advice is: You could invest $33,000 into a Common Wealth Bank term deposit - $10,000 for 12 months and $23,000 for 4 months. transfer your shares and property to your fiancée’s name after marriage. transfer Colonial First State Super Fund into Care Industry Super, and increase a TPD insurance cover amount to $500,000. make a $10,000 salary sacrifice into BT Lifetime Personal Super Fund. reduce investment proportion of shares and increase cash and fixed interest investments.
Why my advice is appropriate:
A less aggressive risk portfolio is given because you need more funds to pay off the mortgage and support the new family.
You are the main income earner, as a result, increasing types of insurance could ensure you are able to maintain the lifestyle and protect the family in the event of permanent injury or death.
You are able to reduce tax by transferring your assets and salary sacrificing to the super fund.
It is necessary to contribute more in superannuation for after retirement life.
Risk in my advice:
All investments except cash at bank carry some risks. The risk includes that the value of investment may not increase quickly or might decrease.
What my advice doesn’t cover:
My advice doesn’t cover specific type of shares, adequacy of super for retirement, and how to make a specific budget to reduce debts.
Fees and commissions
The fee for my advice and for preparing this report is $700. Know-it-all will get $280 and I will get $420. Please pay this within 14 days of receiving this report. If you take my advice, Know-it-all will be paid upfront and ongoing commissions. You’ll also be charged fees for purchasing and investing in some of the products I recommended.
Next steps
Make sure you understand my advice
Ask me any questions you have
To follow my advice, complete the authority to proceed at the end of the document and return it to me.
Personal profile
Personal information
The client’s name is Justine, 39 years old, works as an administration manager. He is planning to marry in 18 months time. His fiancée has previously been married and has a child aged 5. He wonders if he could save $22,000 for the wedding cost and be able to support the new family at this stage.
He has a unit in Macleod, an investment flat and an old Ford Falcon G6. All of them still have outstand loans.
He also invests in BHP shares and China managed fund. HE haS some savings in the banks as well.
He invests 3 super funds, which contain a life and TPD insurance.
Goals and objectives
How to fund the cost of the wedding renovations in 18 months
How to minimize/rationalize the debt situation and repayments
How to rationalize the superannuation position
To determine if the investments are invested appropriately
Analysis
1. Balance sheet
(Further information in appendix 1)
Net worth ratio = (Net worth/ Total assets) x 100 = 54.2%
According to the figure, the net worth ratio is relatively low. You need to reduce your debt as soon as possible if you would like to fund the wedding cost and support a new family.
2. Tax calculation
(Further information in appendix 2)
You need to pay 21% of your total income as tax payable this year, which is on a quiet high marginal tax rate. Taxation planning can be considered.
3. Cash flow statement
(Further information in appendix 3)
In terms of the cash flow statements, you have saved $15,153 this year.
Risk profile and investment strategy
1. Purpose
A risk profile examines the client’s risk philosophy, including conservative, balanced, and aggressive classifications and etc. It is designed to evaluate the acceptable level of risk an individual is prepared to accept. I make the best effort to reduce risks by analyzing the term of investments, previous investment experience, investment knowledge, objectives, relative importance of investment portfolio in terms of client’s total wealth.
2. Summary
I have discussed your risk tolerance ability, existing investments and investments return volatility, for the purpose of developing suitable investment strategies.
The important issues to consider when deciding on an appropriate level of risk for your current circumstance are:
You are close to middle age and need to support a new family, which may has at least one child in the future. You are at a stage in your life where you should start getting the finances into shape and gain a stable growth by several investments.
Given the above, I created a ‘current asset allocation’ table (see below) indicates that you invest 3.86% in defensive asset classes and 96.14% in growth asset classes. This would be deemed a very aggressive asset allocation and is primarily due to the overweight position in property. I strongly recommend you have a mixture of asset sectors within the portfolio because you may be more conservative after marriage. This portfolio focuses on providing the client a stable income to fund the living cost, whilst generating a quite high amount of capital growth with less aggressive asset allocation. A re-allocation of funds to other asset classes might be considered through a sale of the property but would need to consider:
- Client’s preference for property
- Possible CGT if disposed as well as transaction costs
- If to be sold, when is the right time?
Instead of selling property, might be best to allocate all future funds into other asset classes to achieve desired allocation.
Investment theory
The initial principle which investors are wise to adopt is diversification. It reflects the old adage ‘don’t put all your eggs in one basket’ if you don’t want to run unnecessary risks. A diversified portfolio is strongly recommended, which could reduce the client’s risks and improve long term returns.
Share and property provide relatively high returns but the client may take more risks and fixed interest and cash may generate a quite low amount of income with lower risks. It is recommended that you could split your investments into attractive and unattractive areas, for example, sectors likely to enjoy future high growth and potentially depressed sectors, respectively; therefore, a re-allocation is provided below.
The re-allocation states some future funds allocated into other assets classes instead of selling property, which is a bit different from the result of Risk Tolerance Questionnaire (Further information in appendix 4) that I invited a person aged 43 to complete. This person has a stable family for a long time, so he has already accumulated some funds. He could tolerant more risks than you but he tends to be less aggressive. Although you are near middle age class, you have a new family to support; as a result, you need a constant high-income stream from the investments. The property could make a great wealth after paying off its debts, so it is not recommended to sell it. However, the re-allocation is still deemed as a very aggressive classification, so I reduce the risk exposed to the Australia and international share markets by decreasing share investments. Furthermore, I suggest that you could keep more cash for emergency or other reasons. Fixed interest is also a conservative way to get stable income annually. Current asset allocation
Investments
Cash
Fixed interest
Property
Aust. shares
Inter. shares
Total
Justin
18,000
0
410,000
28,000
10,000
466,000
Total - $
18,000
0
410,000
28,000
10,000
466,000
Total - %
3.86%
0
87.98%
6.01%
2.15%
100%
Recommended asset allocation
Investments
Cash
Fixed interest
Property
Aust. shares
Inter. shares
Total
Justin
30,000
33,000
410,000
20,000
5,000
498,000
Total - $
30,000
33,000
410,000
20,000
5,000
498,000
Total - %
6.02%
6.63%
82.33%
4.02%
1%
100%
Recommended strategies
1.Cash holdings
Invest $33,000 into a Common Wealth Bank term deposit - $10,000 for 12 months and $23,000 for 4 months.
Details
The term deposit is transacted through the Common Wealth Bank and is offered on 4,7 or 12 month term. Current interest rates available on the Cth term deposits range from 3% - 3.3% for between 4 – 12 months.
It is said that the Australia interest rate has remained at that record low ever since, and surveys show no analysts are predicting any change. As a result, I do not believe there is any great benefit in locking away funds for any great length of time.
I suggest that you can invest $23,000 into a 4-month term Cth deposit paying a return of 3.3% and invest $10,000 into a 12-month term deposit paying 3.3% to provide short-term liquidity. The Cth offers a return of only 3.3% for a term of 12 months indicating that they do not believe interest rates are likely to change significantly over the next 12 months.
Benefits of recommendations
This strategy would provide a more diversified portfolio to you, which reducing some risks and improving returns.
You are assured of returns for the investment. Based on the current year cash flow statement (see appendix 3), you are able to save around $15,000 annually, so there is a strong possibility to afford the wedding cost of $22,000 with term deposits plus interests. Additionally, reducing living expense is also an effective way to save money. For more details, please refer to the second recommendation.
Compared to other types of investments (e.g. stocks, property), term deposits are so easy to set up and there's no learning curve or lead-time.
Risks of recommendations
You can't touch the funds during the term's duration.
If the term deposit allows early withdrawal (not all do), you will have to deal with penalty charges to get your money.
Interest rates on term deposits are currently low and after tax and inflation, your net rate of return is likely to be close to zero.
Since the interest rate is fixed for the duration of the term, you wouldn't be able to take advantage of any cash rate increases.
2.Debts reduction
I can help you set a budget, stick to the budget and work towards reducing the debts. I will also be able to limit your tax liabilities and assist you in using your savings to your advantage and help you feel less trapped financially. You could also transfer your shares and property to your fiancée’s name because she is on a lower marginal tax rate.
Details
Action required
By whom?
When?
Disposal of property and shares
Isabelle Fu
After marriage
Benefits of recommendations
You could afford the wedding cost of $22,000 if you follow the budget. Besides, you are also able to pay less tax. However, this strategy depends on the client’s preference.
Risks of recommendations
This may cause capital gain tax of property disposal and selling of shares. On disposal for CGT purposes, the impact of capital gains tax would be lower depending on the length of time the shares were held and the success or otherwise of the investments that have been made.
3.Superannuation
I recommend that you could transfer Colonial First State Super Fund into Care Industry Super, and increase a TPD insurance cover amount.
I recommend that you could buy Life insurance in BT Lifetime Personal Super fund. You are also suggested to get an income protection insurance for an amount of 75% of your monthly income.
I recommend that you could make a $10,000 salary sacrifice into BT Lifetime Personal Super Fund
Details
After transformation of super fund, it is recommended to buy more TPD insurance for an amount of $500,000 according to your current liabilities.
Salary sacrificing
Benefits of recommendations
You could save more money without paying three annual fees of the management of three super funds.
These insurances can ensure you maintain your lifestyle and protect your family in the event of permanent injury or death.
Superannuation is not caught under Fringe Benefit Tax (FBT), which would tax the client on the highest marginal tax rate. All employer contributions into an employee’s super fund are taxed at 15% and payable by the super fund out of the member’s account balance.
Risks of recommendations
You cannot access the money after 65 or permanently retirement.
Market risk, where the value of investments in an individual superannuation account may fluctuate and suffer significant falls in value in adverse market conditions (and considerable increases in value in favorable market conditions).
Economic risk, where real rates of return on investments may prove unsatisfactory because of rampant inflation or poor economic growth rates.
Operational risk includes superannuation legislation changes that may affect your benefit or ability to access a benefit, and government policy and law changes, and taxation changes that may affect the value of your investment. (HOSTPLUS Member Guide 2014)
4.Investment portfolio
I recommend that you could reduce investment proportion of shares and increase cash and fixed interest investments.
Details
Benefits of recommendations
The strategy will provide a more diversified investment portfolio.
Fixed interests continue to provide a low-risk investment and security of capital.
You may get capital gain in the future if the property value goes up, and you can also get returns from the rent paid by tenants.
Risks of recommendations
Liquidity
Funds held in a fixed interest product are locked away for the term of the loan and there is generally no access to liquidity during this period.
Property investments are not considered to be ‘liquid’ so you can’t withdraw his investment quickly.
Market risk
If demand of properties in market is less than supply of these, the property value may go down.
Mortgage risk
If the investment property is mortgaged with the same bank as your home, there is the risk that the bank could sell both properties if you run into difficulty with paying either mortgage. (Sorted 2014)
Appendix 1
Justin's personal balance sheet
Assets
$
$
Family house
480,000
Cash in savings account
18,000
Motor vehicle
45,000
Investment property
410,000
BHP shares
28,000
Managed fund
10,000
Superannuation funds (combined)
89,000
Total
1,080,000
Liabilities
Home mortgage
340,000
Investment property loan
120,000
Car loan
25,000
Credit card debt
10,000
Total
495,000
Net worth
585,000
Appendix 2
Justin's Tax Calculation
$
$
Assessable income
Salary
100,000
Rental income
2,400
Fully franked dividend
980
Plus imputation credits(30/70)
420
Managed fund income
250
Less Allowable deductions
Membership of a professional association
700
Travel for work purpose
1,100
Tax preparation expenses
900
Donations
300
Total allowable deductions
3,000
Taxable income
101,050
Gross tax payable
25,336
Add Medicare levy (2%)
2,021
Less imputation credits
420
Net tax payable
26,937
Appendix 3
Justin's Cash flow statement
Income
$
$
Salary (before PAYG tax)
100,000
Rental income
2,400
Share dividend
980
Managed fund income
250
Total
103,630
Less tax payable
26,937
Net income
76,693
Expenses
Membership of a professional association
700
Tax preparation expenses
900
Donations
300
Living expenses
22,000
Travel expenses
1,100
Home loan repayments
27,720
Car loan repayments
6,420
Credit card repayments
2,400
Total
61,540
Surplus
15,153
Appendix 4
Investor Risk Questionnaire
Prepared for
You HONG Age: 43
Member number
Your partner
Member number
Your Financial Planner is XINTONG FU
Consultation date 13/08/2014
Contact number
Private and Confidential
Initial appointment
Review appointment
FSG provided
/
/
Telstra Super Financial Planning Pty Ltd (ABN 74 097 777 725)
AFS License No: 218 705
In determining an appropriate asset allocation for you, it is important that all your attitudes and approaches to investment are considered. A number of factors should be taken into account including your investment objectives and time horizon, risk tolerance and personal financial situation.
The following Investor Risk Questionnaire is designed to assist you to understand your own unique investment attitudes and risk/return preferences.
Based on your answers to the following questions and with further discussion, your Telstra Super Financial Planning Planner will work with you to develop a portfolio designed to achieve your goals whilst remaining within acceptable and appropriate risk levels.
Depending on your circumstances,
It may be appropriate to complete the questionnaire more than once, for different investment goals.
Directions: Tick the circle next to your chosen response. Please choose only one response per question.
Question 1
Compared to others, how do you rate your willingness to take financial risk?
a Extremely low risk taker
b
Low risk taker
c
Average risk taker √
d
High risk taker
e Extremely high risk taker
Question 2
When you first think of the word ‘risk’ in a financial context, which of the following
words initially come to mind?
a
Danger
b
Uncertainty √
c
Opportunity
d
Thrill
Question 3
When do you plan to begin to withdraw funds from this portfolio?
a 2 years or less
b
3
– 5 years √
c
6
– 10 years
d
11 – 15 years
e More than 15 years
Question 4
Over what period do you plan to spend the money in this portfolio?
a 2 years or less
b
3
– 5 years √
c
6
– 10 years
d
11 – 15 years
e More than 15 years
Question 5
When you think of a long term investment, what do you consider
to be an appropriate ‘holding period’?
a 1 – 2 years
b
3
– 4 years
c
5
— 6 years √
d
7
— 8 years e 9 or more years
Question 6
In October 1987 the Australian Share Market fell more than 40% during the month. If
you owned an investment that fell by over 40% over a short period, what do you think
you would you do?
a
Sell all of the remaining investment
b
Sell a portion of the remaining investment √
c
Hold the investment and sell nothing
d
Buy more of the investment if you had available funds
Question 7
Consider this statement and indicate how strongly you agree with it:
To reach this financial goal, I prefer an investment with little or no fluctuation in value,
and I am willing to accept a lower return.
a
I strongly agree
b
I agree
c
I somewhat agree √
d
I disagree
e
I strongly disagree
Question 8
If you had to choose between more job security with a small pay rise and less job
security with a big pay rise, which do you think you would pick?
a
Definitely more job security with a small pay rise
b
Probably more job security with a small pay rise √
c
Unsure
d
Probably less job security with a big pay rise
e Definitely less job security with a big pay rise
Question 9
Consider this statement and indicate how strongly you agree with it:
During market declines, I tend to sell portions of riskier assets and invest the money in
safer assets.
a
I strongly agree √
b
I agree
c
I somewhat agree
d
I disagree
e
I strongly disagree
Question 10
What degree of risk have you taken with your financial decisions in the past?
a
Very small
b
Small
c
Medium √
d
Large
e
Very large
Question 11
Investments go up and down in value and experts often say that you should be
prepared to weather a downturn.
How much would the value of all your investments have to go down for you to feel
uncomfortable enough to consider selling out?
a
Any fall in value would make me feel uncomfortable
b
10%
c
20%
d
33%
e
50% √
f
More than 50%
Question 12
During the first half of 1994, some fixed interest investments fell by more than 6%. If I
owned an investment that fell by more than 6% over a short period, I would…
a
Sell all of the remaining investment
b
Sell a portion of the remaining investment √
c
Hold the investment and sell nothing
d
Buy more of the investment
Question 13
The chart below shows the highest one-year gain and highest one-year loss of three
different hypothetical investments of $10,000*. Given the potential gain or loss in any
one year, where do you think you would invest your money?
a
Fund A
Potential gains or losses
b
Fund B
$4,500
$4,229
c
Fund C √
$3,000
$1,921
$1,500
$593
$0
-$164
-$1,500
-$1,020
-$3,000
-$4,500
-$3,639
Fund A
Fund B
Fund C
*The maximum gain or loss on an investment is impossible to predict. The ranges shown in this chart are
hypothetical and are designed solely to gauge your tolerance for risk.
Question 14
What degree of risk are you currently prepared to take with your financial decisions?
a
Very small
b
Small
c
Medium
d
Large √
e
Very large
End of Questionnaire
Reference list
CCH 2013, Australian Master Financial Planning Guide, 16th edn, CCH Australia Limited.
HOSTPLUS Member Guide 2014, Risk of super, Viewed 11 August 2014, < http://memberguide.hostplus.com.au/4-risks-of-super>.
Mckeown, W, Kerry, M, Olynyk, M & Beal, D 2012, Financial planning, John Wiley $ Sons Australia, Ltd, Australia.
Sorted 2014, Investing in property, Viewed 10 August 2014, < https://www.sorted.org.nz/a-z-guides/property-investing>.
Telstra super financial planning 2014, Investor risk questionnaire, Viewed 10 August 2014, < http://www.telstrasuper.com.au/files/4eaa6844-1748-4403-abc0-9aa300d9d1c7/Investor_risk_questionnaire.pdf>
Isabelle Fu Know-it-all Financial Planning
Question 1
There are six steps in the financial planning progress, which every financial planner should go through with their clients.
First, financial planner is required to identify the client’s financial data such as income, debts, financial commitments, etc. Sometimes, it’s not easy to get all the useful information at one time due to some private issues, so the planner should make reasonable enquiries to obtain complete and accurate information from the client. A financial planner should be equipped with excellent communication skills, clearly explaining the importance of quality information to the client.
Second, the financial …show more content…
planner should determine the client’s current financial situation, ongoing needs and requirements and their personal and overall goals and objectives. Financial planning is a people-oriented service helping clients achieving their goals. Clients and planners should mutually define goals and perhaps time frame for results.
Third, financial planner is required to analyze the client’s current financial situation and identify any financial problems or special issues through balance sheet, net worth and cash flow statement. Financial planner should identify the subject matter of advice sought by the client. Every client is different, therefore it is important to understand what’s the client’s need.
In this case, it is apparently that Justin intends to reduce his various debts as soon as possible, and be able to fund the wedding cost currently, and support the new family in the future. Additionally, Justine needs to do more going forward to boost his superannuation funds.
Some clients are in low-level financial literacy, so it is the planner’s duty to disclose all the information to the clients. Adviser should explain advice simply and in a language and in a format that the client understands.
Fourth, financial planner should identify suitable financial planning strategies and develop the financial planning recommendations. Planner should conduct a reasonable investigation into a financial product that will achieve client objectives based on collected information, especially for the risk that the client could endure.
In this case, the planner may provide some financial products and recommended asset allocation. Justine may also receive some advice including insurance, retirement planning, taxation strategies, and estate planning.
Adviser should not provide any product that is not suitable to client’s financial situation or their objectives. Besides, advisor must observe the best interest rule when giving advice to the client, and they also need to priories client’s interest over any other party’s.
Fifth, the financial planner needs to implement the plan. The planner should obtain the authority to proceed with the recommendations. The planner should also inform the client that when the plan is to be done. Besides, the planner needs to follow up with various external parties, if required, to ensure issues are followed through.
Finally, the planner should review the SoA with the client (at least once a year) to ensure the client’s investments and strategies are on track to achieve their goals, and revise where necessary.
These following documents must be given to the clients before advisors provided any further information to the clients.
As a general rule, the Financial Statement Guide (FSG) must be given to retail clients at the earliest practical opportunity before a financial service is provided and as soon as it becomes apparent that a financial service will be or is likely to be provide (s941 (D)). FSG includes the name and contact details of the providing entity and licensee and the kind of financial services offered and etc. (s942B)
Next, advisers must give retail clients a Statement of Advice (SoA) when giving personal advice. It must be given prior to any action that would implement the advice, such as signing an application for a product. (s946A) A SoA is designed to communicate personal financial advice recommendations appropriate to that client, and educate the clients.
Besides, advisers are required to provide a Product Disclosure Statement (PDS), which representing clients with sufficient information to make an informed decision about whether or not to buy a financial product. It must disclose full particulars of the product including significant risks, fees, expenses and charges, taxation implications and other information that could influence clients.(CCH 2013)
Advisers should provide PDS at or before the time that the advice is given Cooling-off period.
Additionally, a Record of Advice (RoA) can be provided when advisers are giving further advice rather than prepare a SoA, if clients’ financial situation and objectives haven’t changed significantly. A RoA performs a function similar to an SOA, but is typically a shorter, more informal document, with fewer content requirements than the SOA.
Know-it-all Financial Planning AFSL # 11289
Dear Mr. Justin,
According to your request of financial planning, I hereby attach my report analyzing your financial situation and recommending some strategies based on your goals and objectives. As discussed with you in our firm, I have paid particular attention in the calculation of various financial statements, such as the balance sheet, cash flow, tax calculation and asset allocations.
A full explanation is in ‘Recommendation and Conclusion’ part. Please do not hesitate to contact me if you have any questions. If you are comfortable with the strategies and decide to accept our recommendations, you need to sign the authority to proceed document and return it to me in 40 days.
Your personal details should be checked and if there are any changes to your situation you should let me know.
Thank you for affording our firm the opportunity to provide some suggestions for you. I will be glad to discuss any questions you may have at our meeting next week.
Yours sincerely
Isabelle Fu
Table of Contents
Executive summary 5
Personal profile 6-7
Risk profile and investment strategy 7-8
Recommended strategies 9-12
Appendix 1 12
Appendix 2 13
Appendix 3 13
Appendix 4 14-18
Reference list 19
Executive summary
What my advice is: You could invest $33,000 into a Common Wealth Bank term deposit - $10,000 for 12 months and $23,000 for 4 months. transfer your shares and property to your fiancée’s name after marriage. transfer Colonial First State Super Fund into Care Industry Super, and increase a TPD insurance cover amount to $500,000. make a $10,000 salary sacrifice into BT Lifetime Personal Super Fund. reduce investment proportion of shares and increase cash and fixed interest investments.
Why my advice is appropriate:
A less aggressive risk portfolio is given because you need more funds to pay off the mortgage and support the new family.
You are the main income earner, as a result, increasing types of insurance could ensure you are able to maintain the lifestyle and protect the family in the event of permanent injury or death.
You are able to reduce tax by transferring your assets and salary sacrificing to the super fund.
It is necessary to contribute more in superannuation for after retirement life.
Risk in my advice:
All investments except cash at bank carry some risks. The risk includes that the value of investment may not increase quickly or might decrease.
What my advice doesn’t cover:
My advice doesn’t cover specific type of shares, adequacy of super for retirement, and how to make a specific budget to reduce debts.
Fees and commissions
The fee for my advice and for preparing this report is $700. Know-it-all will get $280 and I will get $420. Please pay this within 14 days of receiving this report. If you take my advice, Know-it-all will be paid upfront and ongoing commissions. You’ll also be charged fees for purchasing and investing in some of the products I recommended.
Next steps
Make sure you understand my advice
Ask me any questions you have
To follow my advice, complete the authority to proceed at the end of the document and return it to me.
Personal profile
Personal information
The client’s name is Justine, 39 years old, works as an administration manager. He is planning to marry in 18 months time. His fiancée has previously been married and has a child aged 5. He wonders if he could save $22,000 for the wedding cost and be able to support the new family at this stage.
He has a unit in Macleod, an investment flat and an old Ford Falcon G6. All of them still have outstand loans.
He also invests in BHP shares and China managed fund. HE haS some savings in the banks as well.
He invests 3 super funds, which contain a life and TPD insurance.
Goals and objectives
How to fund the cost of the wedding renovations in 18 months
How to minimize/rationalize the debt situation and repayments
How to rationalize the superannuation position
To determine if the investments are invested appropriately
Analysis
1. Balance sheet
(Further information in appendix 1)
Net worth ratio = (Net worth/ Total assets) x 100 = 54.2%
According to the figure, the net worth ratio is relatively low. You need to reduce your debt as soon as possible if you would like to fund the wedding cost and support a new family.
2. Tax calculation
(Further information in appendix 2)
You need to pay 21% of your total income as tax payable this year, which is on a quiet high marginal tax rate. Taxation planning can be considered.
3. Cash flow statement
(Further information in appendix 3)
In terms of the cash flow statements, you have saved $15,153 this year.
Risk profile and investment strategy
1. Purpose
A risk profile examines the client’s risk philosophy, including conservative, balanced, and aggressive classifications and etc. It is designed to evaluate the acceptable level of risk an individual is prepared to accept. I make the best effort to reduce risks by analyzing the term of investments, previous investment experience, investment knowledge, objectives, relative importance of investment portfolio in terms of client’s total wealth.
2. Summary
I have discussed your risk tolerance ability, existing investments and investments return volatility, for the purpose of developing suitable investment strategies.
The important issues to consider when deciding on an appropriate level of risk for your current circumstance are:
You are close to middle age and need to support a new family, which may has at least one child in the future. You are at a stage in your life where you should start getting the finances into shape and gain a stable growth by several investments.
Given the above, I created a ‘current asset allocation’ table (see below) indicates that you invest 3.86% in defensive asset classes and 96.14% in growth asset classes. This would be deemed a very aggressive asset allocation and is primarily due to the overweight position in property. I strongly recommend you have a mixture of asset sectors within the portfolio because you may be more conservative after marriage. This portfolio focuses on providing the client a stable income to fund the living cost, whilst generating a quite high amount of capital growth with less aggressive asset allocation. A re-allocation of funds to other asset classes might be considered through a sale of the property but would need to consider:
- Client’s preference for property
- Possible CGT if disposed as well as transaction costs
- If to be sold, when is the right time?
Instead of selling property, might be best to allocate all future funds into other asset classes to achieve desired allocation.
Investment theory
The initial principle which investors are wise to adopt is diversification. It reflects the old adage ‘don’t put all your eggs in one basket’ if you don’t want to run unnecessary risks. A diversified portfolio is strongly recommended, which could reduce the client’s risks and improve long term returns.
Share and property provide relatively high returns but the client may take more risks and fixed interest and cash may generate a quite low amount of income with lower risks. It is recommended that you could split your investments into attractive and unattractive areas, for example, sectors likely to enjoy future high growth and potentially depressed sectors, respectively; therefore, a re-allocation is provided below.
The re-allocation states some future funds allocated into other assets classes instead of selling property, which is a bit different from the result of Risk Tolerance Questionnaire (Further information in appendix 4) that I invited a person aged 43 to complete. This person has a stable family for a long time, so he has already accumulated some funds. He could tolerant more risks than you but he tends to be less aggressive. Although you are near middle age class, you have a new family to support; as a result, you need a constant high-income stream from the investments. The property could make a great wealth after paying off its debts, so it is not recommended to sell it. However, the re-allocation is still deemed as a very aggressive classification, so I reduce the risk exposed to the Australia and international share markets by decreasing share investments. Furthermore, I suggest that you could keep more cash for emergency or other reasons. Fixed interest is also a conservative way to get stable income annually. Current asset allocation
Investments
Cash
Fixed interest
Property
Aust. shares
Inter. shares
Total
Justin
18,000
0
410,000
28,000
10,000
466,000
Total - $
18,000
0
410,000
28,000
10,000
466,000
Total - %
3.86%
0
87.98%
6.01%
2.15%
100%
Recommended asset allocation
Investments
Cash
Fixed interest
Property
Aust. shares
Inter. shares
Total
Justin
30,000
33,000
410,000
20,000
5,000
498,000
Total - $
30,000
33,000
410,000
20,000
5,000
498,000
Total - %
6.02%
6.63%
82.33%
4.02%
1%
100%
Recommended strategies
1.Cash holdings
Invest $33,000 into a Common Wealth Bank term deposit - $10,000 for 12 months and $23,000 for 4 months.
Details
The term deposit is transacted through the Common Wealth Bank and is offered on 4,7 or 12 month term. Current interest rates available on the Cth term deposits range from 3% - 3.3% for between 4 – 12 months.
It is said that the Australia interest rate has remained at that record low ever since, and surveys show no analysts are predicting any change. As a result, I do not believe there is any great benefit in locking away funds for any great length of time.
I suggest that you can invest $23,000 into a 4-month term Cth deposit paying a return of 3.3% and invest $10,000 into a 12-month term deposit paying 3.3% to provide short-term liquidity. The Cth offers a return of only 3.3% for a term of 12 months indicating that they do not believe interest rates are likely to change significantly over the next 12 months.
Benefits of recommendations
This strategy would provide a more diversified portfolio to you, which reducing some risks and improving returns.
You are assured of returns for the investment. Based on the current year cash flow statement (see appendix 3), you are able to save around $15,000 annually, so there is a strong possibility to afford the wedding cost of $22,000 with term deposits plus interests. Additionally, reducing living expense is also an effective way to save money. For more details, please refer to the second recommendation.
Compared to other types of investments (e.g. stocks, property), term deposits are so easy to set up and there's no learning curve or lead-time.
Risks of recommendations
You can't touch the funds during the term's duration.
If the term deposit allows early withdrawal (not all do), you will have to deal with penalty charges to get your money.
Interest rates on term deposits are currently low and after tax and inflation, your net rate of return is likely to be close to zero.
Since the interest rate is fixed for the duration of the term, you wouldn't be able to take advantage of any cash rate increases.
2.Debts reduction
I can help you set a budget, stick to the budget and work towards reducing the debts. I will also be able to limit your tax liabilities and assist you in using your savings to your advantage and help you feel less trapped financially. You could also transfer your shares and property to your fiancée’s name because she is on a lower marginal tax rate.
Details
Action required
By whom?
When?
Disposal of property and shares
Isabelle Fu
After marriage
Benefits of recommendations
You could afford the wedding cost of $22,000 if you follow the budget. Besides, you are also able to pay less tax. However, this strategy depends on the client’s preference.
Risks of recommendations
This may cause capital gain tax of property disposal and selling of shares. On disposal for CGT purposes, the impact of capital gains tax would be lower depending on the length of time the shares were held and the success or otherwise of the investments that have been made.
3.Superannuation
I recommend that you could transfer Colonial First State Super Fund into Care Industry Super, and increase a TPD insurance cover amount.
I recommend that you could buy Life insurance in BT Lifetime Personal Super fund. You are also suggested to get an income protection insurance for an amount of 75% of your monthly income.
I recommend that you could make a $10,000 salary sacrifice into BT Lifetime Personal Super Fund
Details
After transformation of super fund, it is recommended to buy more TPD insurance for an amount of $500,000 according to your current liabilities.
Salary sacrificing
Benefits of recommendations
You could save more money without paying three annual fees of the management of three super funds.
These insurances can ensure you maintain your lifestyle and protect your family in the event of permanent injury or death.
Superannuation is not caught under Fringe Benefit Tax (FBT), which would tax the client on the highest marginal tax rate. All employer contributions into an employee’s super fund are taxed at 15% and payable by the super fund out of the member’s account balance.
Risks of recommendations
You cannot access the money after 65 or permanently retirement.
Market risk, where the value of investments in an individual superannuation account may fluctuate and suffer significant falls in value in adverse market conditions (and considerable increases in value in favorable market conditions).
Economic risk, where real rates of return on investments may prove unsatisfactory because of rampant inflation or poor economic growth rates.
Operational risk includes superannuation legislation changes that may affect your benefit or ability to access a benefit, and government policy and law changes, and taxation changes that may affect the value of your investment. (HOSTPLUS Member Guide 2014)
4.Investment portfolio
I recommend that you could reduce investment proportion of shares and increase cash and fixed interest investments.
Details
Benefits of recommendations
The strategy will provide a more diversified investment portfolio.
Fixed interests continue to provide a low-risk investment and security of capital.
You may get capital gain in the future if the property value goes up, and you can also get returns from the rent paid by tenants.
Risks of recommendations
Liquidity
Funds held in a fixed interest product are locked away for the term of the loan and there is generally no access to liquidity during this period.
Property investments are not considered to be ‘liquid’ so you can’t withdraw his investment quickly.
Market risk
If demand of properties in market is less than supply of these, the property value may go down.
Mortgage risk
If the investment property is mortgaged with the same bank as your home, there is the risk that the bank could sell both properties if you run into difficulty with paying either mortgage. (Sorted 2014)
Appendix 1
Justin's personal balance sheet
Assets
$
$
Family house
480,000
Cash in savings account
18,000
Motor vehicle
45,000
Investment property
410,000
BHP shares
28,000
Managed fund
10,000
Superannuation funds (combined)
89,000
Total
1,080,000
Liabilities
Home mortgage
340,000
Investment property loan
120,000
Car loan
25,000
Credit card debt
10,000
Total
495,000
Net worth
585,000
Appendix 2
Justin's Tax Calculation
$
$
Assessable income
Salary
100,000
Rental income
2,400
Fully franked dividend
980
Plus imputation credits(30/70)
420
Managed fund income
250
Less Allowable deductions
Membership of a professional association
700
Travel for work purpose
1,100
Tax preparation expenses
900
Donations
300
Total allowable deductions
3,000
Taxable income
101,050
Gross tax payable
25,336
Add Medicare levy (2%)
2,021
Less imputation credits
420
Net tax payable
26,937
Appendix 3
Justin's Cash flow statement
Income
$
$
Salary (before PAYG tax)
100,000
Rental income
2,400
Share dividend
980
Managed fund income
250
Total
103,630
Less tax payable
26,937
Net income
76,693
Expenses
Membership of a professional association
700
Tax preparation expenses
900
Donations
300
Living expenses
22,000
Travel expenses
1,100
Home loan repayments
27,720
Car loan repayments
6,420
Credit card repayments
2,400
Total
61,540
Surplus
15,153
Appendix 4
Investor Risk Questionnaire
Prepared for
You HONG Age: 43
Member number
Your partner
Member number
Your Financial Planner is XINTONG FU
Consultation date 13/08/2014
Contact number
Private and Confidential
Initial appointment
Review appointment
FSG provided
/
/
Telstra Super Financial Planning Pty Ltd (ABN 74 097 777 725)
AFS License No: 218 705
In determining an appropriate asset allocation for you, it is important that all your attitudes and approaches to investment are considered. A number of factors should be taken into account including your investment objectives and time horizon, risk tolerance and personal financial situation.
The following Investor Risk Questionnaire is designed to assist you to understand your own unique investment attitudes and risk/return preferences.
Based on your answers to the following questions and with further discussion, your Telstra Super Financial Planning Planner will work with you to develop a portfolio designed to achieve your goals whilst remaining within acceptable and appropriate risk levels.
Depending on your circumstances,
It may be appropriate to complete the questionnaire more than once, for different investment goals.
Directions: Tick the circle next to your chosen response. Please choose only one response per question.
Question 1
Compared to others, how do you rate your willingness to take financial risk?
a Extremely low risk taker
b
Low risk taker
c
Average risk taker √
d
High risk taker
e Extremely high risk taker
Question 2
When you first think of the word ‘risk’ in a financial context, which of the following
words initially come to mind?
a
Danger
b
Uncertainty √
c
Opportunity
d
Thrill
Question 3
When do you plan to begin to withdraw funds from this portfolio?
a 2 years or less
b
3
– 5 years √
c
6
– 10 years
d
11 – 15 years
e More than 15 years
Question 4
Over what period do you plan to spend the money in this portfolio?
a 2 years or less
b
3
– 5 years √
c
6
– 10 years
d
11 – 15 years
e More than 15 years
Question 5
When you think of a long term investment, what do you consider
to be an appropriate ‘holding period’?
a 1 – 2 years
b
3
– 4 years
c
5
— 6 years √
d
7
— 8 years e 9 or more years
Question 6
In October 1987 the Australian Share Market fell more than 40% during the month. If
you owned an investment that fell by over 40% over a short period, what do you think
you would you do?
a
Sell all of the remaining investment
b
Sell a portion of the remaining investment √
c
Hold the investment and sell nothing
d
Buy more of the investment if you had available funds
Question 7
Consider this statement and indicate how strongly you agree with it:
To reach this financial goal, I prefer an investment with little or no fluctuation in value,
and I am willing to accept a lower return.
a
I strongly agree
b
I agree
c
I somewhat agree √
d
I disagree
e
I strongly disagree
Question 8
If you had to choose between more job security with a small pay rise and less job
security with a big pay rise, which do you think you would pick?
a
Definitely more job security with a small pay rise
b
Probably more job security with a small pay rise √
c
Unsure
d
Probably less job security with a big pay rise
e Definitely less job security with a big pay rise
Question 9
Consider this statement and indicate how strongly you agree with it:
During market declines, I tend to sell portions of riskier assets and invest the money in
safer assets.
a
I strongly agree √
b
I agree
c
I somewhat agree
d
I disagree
e
I strongly disagree
Question 10
What degree of risk have you taken with your financial decisions in the past?
a
Very small
b
Small
c
Medium √
d
Large
e
Very large
Question 11
Investments go up and down in value and experts often say that you should be
prepared to weather a downturn.
How much would the value of all your investments have to go down for you to feel
uncomfortable enough to consider selling out?
a
Any fall in value would make me feel uncomfortable
b
10%
c
20%
d
33%
e
50% √
f
More than 50%
Question 12
During the first half of 1994, some fixed interest investments fell by more than 6%. If I
owned an investment that fell by more than 6% over a short period, I would…
a
Sell all of the remaining investment
b
Sell a portion of the remaining investment √
c
Hold the investment and sell nothing
d
Buy more of the investment
Question 13
The chart below shows the highest one-year gain and highest one-year loss of three
different hypothetical investments of $10,000*. Given the potential gain or loss in any
one year, where do you think you would invest your money?
a
Fund A
Potential gains or losses
b
Fund B
$4,500
$4,229
c
Fund C √
$3,000
$1,921
$1,500
$593
$0
-$164
-$1,500
-$1,020
-$3,000
-$4,500
-$3,639
Fund A
Fund B
Fund C
*The maximum gain or loss on an investment is impossible to predict. The ranges shown in this chart are
hypothetical and are designed solely to gauge your tolerance for risk.
Question 14
What degree of risk are you currently prepared to take with your financial decisions?
a
Very small
b
Small
c
Medium
d
Large √
e
Very large
End of Questionnaire
Reference list
CCH 2013, Australian Master Financial Planning Guide, 16th edn, CCH Australia Limited.
HOSTPLUS Member Guide 2014, Risk of super, Viewed 11 August 2014, < http://memberguide.hostplus.com.au/4-risks-of-super>.
Mckeown, W, Kerry, M, Olynyk, M & Beal, D 2012, Financial planning, John Wiley $ Sons Australia, Ltd, Australia.
Sorted 2014, Investing in property, Viewed 10 August 2014, < https://www.sorted.org.nz/a-z-guides/property-investing>.
Telstra super financial planning 2014, Investor risk questionnaire, Viewed 10 August 2014, < http://www.telstrasuper.com.au/files/4eaa6844-1748-4403-abc0-9aa300d9d1c7/Investor_risk_questionnaire.pdf>