Case Study - Statement of Advice Case Study (Dennis and Donna Barker)Objective The objective of this first assessment is to develop a Research Report for the practical client situation described in the case study assigned to you.
Scope To achieve this objective, you will need to:
- Evaluate client's current situation and identify issues,
- Identify research requirements and parameters,
- Extract and analyse information, and
- Summarise and present results of research.
The assessment tasks in this assessment will allow you to demonstrate your knowledge and skills in these elements
Assessment Task 1
The first assessment involves the evaluation of the case study allocated to you, to assess the client's current situation and identify the issues.
This requires that you:
- undertake an analysis of the integrity of information provided by the client,
- identify and quantify the client objectives and expectations and test them for viability, and
- establish the basis for strategy development based on confirmed objectives.
For this activity, refer to the case study and complete your answers to these assessment tasks in the space provided in the following pages.
1.1 (a) Analysis of integrity of client information
What documents would you review to confirm accuracy or analyse the integrity of the information provided?
1.1 (b) Analysis of integrity of client information
Use the taxcalc website and a currenttax rate to calculate Dennis and Donna's:
- Investment income
- Superannuation contributions, and
- Surplus income after tax.
Use the Financial Planning Research spreadsheet provided to assist you in your calculations and then enter your results in the table below. You should use the copy and paste function to copy the calculations from the spreadsheet in to the tables below.
As your clients have private health insurance, the Medicare Levy surcharge does not apply. Also, assume that investments are jointly held so that 50% of the income is earned by each.
1.2 Identify client objectives and expectations
From the scenario in your case study,
a) write down one or more specific financial objectives and expectations for the generic needs provided,
b) quantify the objective by expressing the amount in today's dollars (PV- Present Value), and
c) Describe how you would verify each objective.
1.3 a) Develop strategic options
From the scenario in your case study, establish the basis for strategy development by identifying the strategic options for each generic need.
You should develop a minimum of three options for each generic need which would act as a hypothesis for you to investigate further.
Assessment Task 2
2.0 Identify research requirements and parameters
The next step in the Financial Service Advice Process includes the identification of research requirements and parameters.
This requires that:
- Aims and objectives of research including strategy, product and performance parameters are established against client requirements and expectations with all issues identified,
- Intended use of the research information is clearly established
- A wide range of relevant internal and external information resources required for the research are identified and accessed,
- Information requirements not met by regular sources are identified and strategies developed to access them legitimately, and
- Timeframes are established and requests for information prioritised to ensure milestones are met.
Complete your answers to this assessment task in the space in the table provided:
The first column you are required to fill in is (b) - What are some research questions that you could ask to determine the clients' aims and objectives?
You are required to provide 1 or 2 additional Research Questions for each generic need, but no calculations or sums are required at this stage.
The second column you are required to fill in is (c) - Where would you find this information?
You are required to provide some examples of websites, on-line calculators type of spreadsheet etc. you could utilise to answer the questions in part (b).
The final column (d) - Priority requires you to allocate a level of importance to each generic need.
Use the numbers 1 - 3 with 1 being the highest priority.
An example of a research question is provided in the first row for each generic need.
Assessment Task 3
3.0 Extract and analyse information
The next step in the Financial Service Advice Process includes the extraction and analysis of information according to research requirements and parameters.
This requires that:
- Data extraction criteria are established that are relevant to intended use and client requirements and do not unduly limit the scope of research,
- Trends are identified to provide meaningful information on performance of possible strategies, products and markets,
- Financial products are analysed within appropriate timeframes to ensure currency of decision making and comprehensive risk assessment is made of products identified through the research,
- Obtained information is prioritised according to client requirements and expectations, and
- Issues that require specialist research or advice are identified and appropriate advice obtained.
Complete your answers to this assessment task in the spaces provided in the following pages.
3.1 Research tax minimisation
Referencing theMedicare Levy Calculator and a currentTax Calculator research the four (4) different tax minimisation options specified below and calculate the potential annual tax that could be saved by your clients.
Use the Financial Planning Research spread sheet provided to assist you in your calculations and then enter your results in the table below. You should use the copy and past function to copy the calculations from the spreadsheet in to the tables below.
Complete your answers in the space provided below.
Tax Minimisation Options
1. How much tax is currently paid on the cash and fixed interest investments?
2. If the cash and fixed interest investments were transferred from a joint ownership to Dennis' name how much tax would be saved?
3. How much would Donna save in tax if she salary sacrificed $16,675 of her income?
(note; this is maximum the clients can afford))
4. How much extra Low Income Tax Offset would Dennis be entitled to, if he salary sacrificed all of his income in the 32.5% tax bracket? (ie. $8,000)
(Note: Do not include investment income)
Assessment Task 3.2
3.2 Research surplus income
Using the previousTax Calculator for the current financial year, Calculate the tax payable and surplus income available if the client were to implement the tax minimization options identified in the previous assessment task.
Do not include the interest income in this calculation and complete your answers in the space provided below.
In your summary, consider the changes to total tax payable, surplus income and increased superannuation contributions.
Assessment Task 3.3
3.3 Research super contributions
Calculate the NET impact of the contemplated salary sacrifice strategies on annual superannuation savings (after tax).
You should refer to the Guide to superannuation for individuals on the ATO website to identify the current contribution tax and cap on contributions.
In your summary, consider the impact of the proposed changes in annual contributions on accumulated superannuation, contribution tax paid by the funds in relation to the change in surplus income.
Assessment Task 3.4
Using the Super Simulator on the AMP website, calculate both Donna and Dennis':
https://www.amp.com.au/super/supersimulator/index.html#!/
- Projected savings in an average market (on Donna's retirement in 7 years),
- Target super savings required to generate their desired retirement income (i.e. $30K+- pa for Donna and $10K+-pa for Dennis).
Additional Information
- Move the Blue Slider to align the above amounts of required income in retirement
- Dennis will be 59 years old in 7 years when Donna retires
- Salary sacrifice amount for Donna to be $16,600 - limited functionality of the simulator will not allow you to input an amount of $16,675
- Donna has informed you that she is about to start receiving $17,000 per year for the next 7 years as part of the proceeds from her great Aunt's estate. This amount will be paid annually into her superannuation fund as a personal (after tax) contribution
Use the ‘Print Screen' command on your computer to copy the image of the projected super savings for both Donna and Dennis and paste in the space provided below. Then read the Assumptions and Methodology section and list the key assumptions used by the Super Simulator under the headings provided.
Assessment Task 3.5
3.5 Compare superannuation funds
Compare two alternative superannuation funds of your choice (refer to Personal Super Fund Profiles on the Rainmaker website to find fund if required). In your analysis, you should consider the security of the fund in terms of the reputation of the product provider, their experience in the superannuation market, the long-term average return and whether the investment options match Dennis' risk profile. On the following page recommend one fund that will enable Dennis to receive a return in line with his risk profile.
Graph Returns
Create a graph using the Financial Planning Research Spreadsheet (Excel Worksheet) comparing the last year's return of the two funds on the previous page to Dennis' current fund.
Assessment Task 3.6
3.6 Research using investments to pay down mortgage
Calculate whether your clients would be better off in after tax dollars:
- Using their investment monies ($36,000) to pay down their mortgage; or
- Retaining the investments
You will need to calculate comparison savings in after tax dollars over the next 7 years to clear the debt before Donna retires. Assume Dennis has deductible work related expenses that will enable him to maintain his lower marginal tax rate.
Would Dennis and Donna be better off keeping their investments (bank account, term deposit and cash management account) or use the funds to pay down their mortgage? By how much?
Assessment Task 3.7
3.7 Calculate the future value of investment needs
Using the ‘ Compound Interest Formula' , calculate the future value of your client's investment needs, assuming a:
- 3% pa rate of inflation (net of inflation), and
Complete your answers in the table provided below bearing in mind the different timing requirements for funds. Show calculations using 8 decimal places, but the final results in two decimal places.
Then summarise your findings in terms of the future values (FV) arrived at, in relation to the client's stated present values (PV).
Assessment Task 3.8
3.8 Calculate the future investment needs
Using the formula provided below to calculate the regular investment required to create a future value from the previous page, determine how much Donna and Dennis would need to invest each year for 12 years into an Investment Bond so as to provide for their grandchildren's university education (Show calculations using eight decimal places, but the final results in two decimal places..
In your calculation, assume
- a 6% pa return (after management fees),
- no entry fee (rebated), and
- compounded annually.
Provide your answers in the space provided below
Assessment Task 3.9
3.9 Compare investment bonds
In your analysis, you should consider the security of the fund in terms of the reputation of the product provider, their experience in the investment bond market, the long term average return and whether the investment options match your client's risk profile.
Assessment Task 3.10
3.10 Calculate mortgage payments to pay-out home loan
After researching their current home-loan, Donna and Dennis would save money by considering a principle and interest loan, which has an interest rate of 6%.
Using the Home Loans Repayment Calculator from Your Mortgage , calculate what their current repayments would need to be increased to so as to pay-out the home loan over 7 years.
Assessment Task 3.11
3.11 Calculate the value of investments on retirement
Using the Future Value of a Cashflow formula, calculate the gross value of potential additional savings of $2,000 every 6 months assuming:
- Additional savings will continue until Dennis retires at 65, and
- An investment return of 8% pa compounding.
For the purpose of this calculation, you will need to calculate the number of periods until Dennis retires and the 8% interest rate will be compounded half yearly (ie. 4% per period)
Assessment Task 3.12
3.12 Additional super contributions
Would non-concessional super contributions be better than Education Bond for saving for the grandchildren's university education?
In this activity, you are required to explain the subjective reasons why an alternative strategy to Investment Bonds, namely making non-concessional superannuation contributions may be a better option for saving towards university fees for your client's grandchildren.
Assessment Task 3.13
3.13 Research insurance needs
Determine the personal insurance needs for your clients, considering their current insurance, appropriate policy ownership and changing needs as they transition towards retirement.
Since there are a number of methods that can be used by you to calculate insurance needs, you will be assessed on whether you can provide a reasonable basis for your calculations. Therefore, it is important to provide details of your calculations and to fully explain your method of calculation.
I. What insurance cover do your client's already have?
II. What are your client's Term Life insurance requirements?
In your calculations, you should assume that the:
- remaining spouse continues working to retirement as planned,
- deceased bequeaths all assets to the remaining spouse,
- remaining spouse is the beneficiary of existing insurance held,
- no provision in the life insurance calculation needs to be made for topping up superannuation, and
- Donna is able to increase her Life and TPD cover under her current superannuation fund, and Dennis can establish Life and TPD cover under his superannuation fund.
How much should Donna's life insurance cover be increased by?
How much Life insurance does Dennis require?
Assessment Task 3.13
III.What are your client's TPD insurance requirements?
(Assume $100K Home modification, medical costs)
IV. What are your client's Trauma insurance requirements?(assume $50K is required for medical expenses)
V. What are your client's Income Protection insurance requirements?
VI. Using the information provided in above stated table. Complete the quotation of the monthly cost for Trauma
VII. Using the information provided in the above stated table. Complete the quotation of the monthly cost for Income protection
VIII. What is the total annual cost of insurance cover proposed? (Monthly premiums x 12 for Trauma and Income Protection)
IX. Complete an updated cash-flow analysis after all of your previous recommendations havebeen taken into consideration and comment on the final outcome:
Assessment Task 3.14
3.14 Identify insurance ownership
In the table below, indicate whether the insurance premiums would be:
a) Fully tax deductible
b) Partly tax deductible
c) Not tax deductible.
Then make a recommendation on whether which insurance policies should be held by your clients' superannuation fund or personally and state your reasons.
a) Tax Treatment of Insurance Premium
b) Policy Ownership
c) Why?
Assessment Task 3.15
3.15 Compare Life Insurance products
Using information obtained from the previous activity, analyse the respective insurance products offered by both AMP Elevate Insurance and Zurich Futurewise. In your analysis you should consider the experience of the product provider, definitions of Income Protection and Trauma, their claims process and the cost of insurance.
Assessment Task 3.16
Your clients have expressed a preference to see a female wills and estate specialist who lives relatively close to them in Hurstbridge Victoria (postcode 3099) to help them establish a will and power of attorney for your clients.
Using the Accredited Specialist Directory on the Law Institute of Victoria website, identify the two specialists located near your clients who can help can provide appropriate advice.
Assessment Task 4
4.0 Summarise and present results of research
The next step in the Financial Service Advice Process includes the extraction and analysis of information according to research requirements and parameters.
This requires that:
- Information on financial strategies and products is collated and checked against research specification,
- Written performance, trend and risk analyses are prepared and checked against research specification,
- Any qualifications or issues for further research are described and documented, and
- Research findings are presented to the financial planner.
4.1 Check findings
For each one of the Research Questions that you investigated in relation to the case study, summarise your:
- answer to the research question, and
- assessment of risk on a scale of 1 to 3 (where 1 is high
Cashflow Management
1. Income 1. Given the annual adjustment to the superannuation contributions contemplated in the tax minimisation strategy in 3.2, how would this affect surplus savings?
2. How much surplus income is now available each year to invest?
2. Tax minimisation
3. How much tax is paid on the cash and fixed interest investments?
4. If the cash and fixed interest investments were transferred to Dennis' name how much tax would be saved?
5. How much tax would Donna save if she salary sacrificed to her super contribution limit?
6. How much extra Low Income tax Offset would Dennis be entitled to if he salary sacrificed all of his income above the 19% tax bracket?
3. Expenses 7. How much can the interest rate on the mortgage potentially be reduced by?
8. How much interest pa could potentially be saved if the cash and fixed interest funds were applied to the mortgage?
Wealth Creation
4. Superann-uation
9. Given the contemplated salary sacrifice changes, how would this affect the annual superannuation savings (after tax)?
10. What would be Donna and Dennis' projected super savings in an average market on retirement in 7 years time?
11. What would be Donna and Dennis' target super savings to fund their desired retirement income?
12. What superannuation shortfall will they have after all recommendations have been put place?
1. Investment Planning 1. What is the future value of car on retirement (7 years)?
2. What is the future value of $120K university fees in 12 years?
3. How much do Dennis and Donna need to contribute each year towards the grandchildren's education bonds to reach their goal?
4. Once all recommendations have been put in place, what is their annual surplus income?
5. What future value of investment savings can be generated if they save an additional $2,000 every six months at a rate of 8% pa compounded six monthly?
6. How much of these funds will need to be contributed towards super to make up the shortfall?
2. Debt reduction 7. How long it would take to pay off the home loan if the new rate and additional repayments recommendation is followed?
8. Is it financially better to retain the investment and put it into Dennis' name or to use the funds to pay down the mortgage?
9. By how much?
1. Personal Insurance
1. How much Term Life insurance does Donna require?
2. How much TPD insurance does Donna require?
3. How much Trauma Insurance do Donna and Dennis require?
4. What is the maximum amount of Income Protection Donna can apply for?
5. What is the maximum amount of Income Protection Dennis can apply for?
6. What would be the approximate monthly cost of their stand-alone insurance cover?
2. Estate Planning 7. Who are the local will and estate specialists?
Assessment Task 4.2
4.2 Further research
In the space provided below, detail:
- At least one additional research question that you believe needs answering, and
- If specialist research or advice is required.
Cashflow Management
1. Income - Are there are any potential additional sources of income, such as an inheritance?
2. Tax Minimisation - Can we confirm with your accountant if there are any issues that should be considered in relation to the proposed strategy?
3. Expenses - Do you think that your current expenses will continue to be appropriate into retirement?
Wealth Creation
4. Superann-uation - Are you comfortable with Dennis' superannuation being rolled into a more appropriate fund to match his risk profile?
5. Investment Planning - Do you understand how Investment bonds work?
6. Debt Reduction - Are there any other debts that should be considered in the plan (e.g. credit card debt)?
7. Personal Insurance - Are there any insurance providers that you would prefer we not recommend?
8. Estate Planning - Do you have your own solicitor that could help you with your Estate Planning requirements?
Attachment:- Case Study - Worksheet.rar