The case study
Introduction
You are a financial planner for NANCA Financial Planning and authorised to provide financial product advice on a range of investments (excluding direct shares), superannuation and retirement planning, and insurance and risk protection.
You are also able to provide taxation information that is incidental to the advice provided. In other words, you can provide information about any potential tax savings or tax benefits that could result from your recommendations, but you must refer the client to a tax professional for specific tax advice.
You do not have the authority to provide estate planning or property advice and you must refer clients to suitable professionals should you identify they need advice in areas for which you have not been appropriately authorised and trained. (Refer to the sample SOA and the wording used regarding tax, estate planning and real estate, as well as the summary of what advice areas are covered, and what are not, at the beginning of the sample SOA.)
Section 1: Meeting your client
The first phone call
Sharon Elsom has agreed to speak with you following a suggestion made to her by her bank's personal lending officer who knows you and is respectful of the quality advice you provide to your clients. She was in the process of successfully organising a loan to purchase her car at the time.
Sharon is unsure of what is involved in personal financial planning, but concedes that planning for her future financial objectives could be of value. She agrees to have her contact details passed on to you by the bank's lending officer so that you can tell her about what is involved in the financial planning process, what the possible benefits might be to her, and costs involved.
When you phone Sharon, you provide her with details about the financial planning process, and why you will need to ask her for certain types of financial information. You stress that you work for a licensee (a person authorised by the Government to deal in financial products) any information she gives you will be treated confidentially. You let her know that this information will only be used to provide the financial advice you consider will meet her needs. You tell her all this information is in the Financial Services Guide (FSG) that you will send her.
Sharon is reassured by your introduction so you proceed. You explain you need her to contribute to the compilation of a financial profile in order to help you work out how she can best meet her financial goals. This means that she will need to tell you what she owns, what she owes, what she earns and her living expenses. She can record all this information in the fact finder you will send her with the FSG. You inform Sharon that the fact finder also includes a risk profile section and the information she provides you will give you sense of her appetite for different financial planning strategies.
You make a date and time with Sharon to come to your office and take down her address and phone numbers. You ask Sharon to bring along to the meeting her completed fact finder and as much financial information as she can, such as income details, expenses, superannuation, insurance details, etc.
When you have concluded the call, you make a file note about the conversation including the date, the potential client's name, and the name of the person who referred her to you. This is the start of your paper trail. You also complete some of the initial details in your data collection form so that it looks like Table 1.
Finally you write to Sharon, as promised during your initial conversation, and include the fact finder, the FSG and a checklist of the information she needs to bring to the meeting.
Table 1 Personal details
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Client 1
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Client 2
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Title
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Miss
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Surname
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Elsom
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Given & preferred names
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Sharon
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Home address
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16/118 Gloucester St, Brunswick East, Vic.
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Business address
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n.a.
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Contact phone
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(03) 7766 5544
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Date of birth
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15 September 1986
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Sex
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Male
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û
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Female
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Male
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Female
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Smoker
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Yes
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û
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No
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Yes
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No
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Expected retirement age
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Haven't really thought about it, but probably 62
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The first meeting
Sharon arrives at your office for the meeting. After greeting her and offering her a glass of chilled water, she confirms that she received your package of documents and that she has filled in the fact finder and the risk profile.
You then take her through the key elements of the FSG, including your role and capacity to assist her with her planning needs and your company's fees. You make sure that Sharon understands this information before you proceed to the next step.
Collecting the data
You learn the following information about Sharon through a process of thorough and polite questioning. From time to time she provides you with a relevant document to confirm her financial situation. You confirm the details in the fact finder as you proceed.
Sharon's current situation
Sharon, born 15 September 1986, is single with no dependants, and lives in a rented flat for which she pays rent of $490 per week.
Sharon is a sales manager for a small solar panel manufacturing company and has been with that firm for three years.
Sharon earns $82,000 p.a. and receives superannuation guarantee (SG) contributions from her employer in addition to this.
Sharon owns a new Mazda CX5 that she recently borrowed $37,000 from her bank to purchase.
The loan is over five years at a fixed rate of 8.9% p.a. with the repayments being $770 per month. There is a prepayment fee of $175, though this fee is waived if the loan is refinanced to another product with the same bank. The car has full comprehensive insurance with an annual premium of $1300.
Sharon's needs and objectives
During your conversation with Sharon it becomes apparent that her principal financial objective is to purchase her first home and to receive advice from you as to the appropriate investment strategy to achieve this. At this stage she is unsure of the location where she would like to buy but it would most likely be a unit or townhouse.
On her own calculations, based on what she feels comfortable in borrowing and with her savings, she could afford a unit up to a purchase price of $620,000. She also said that she would like to have saved at least 15% of the purchase price and, if possible, be able to purchase her home in no more than 5 years' time.
She is also concerned about the debt she has incurred buying her car and would like to know the benefits and ramifications of paying it off early, particularly in terms of her primary objective of saving for, and purchasing, her first home.
Sharon admits that she knows very little about the sharemarket, how it works, or what it actually means to own shares. However, she is keen to learn more about it following her success with the purchase of Westpac Banking Corporation shares.
Sharon is in good health and believes the insurances within her superannuation fund provide adequate cover.
She does not place superannuation and retirement planning as a priority at the moment, saying that retirement is a long way off and her employer looks after her superannuation anyway.
Sharon does not have a will or powers of attorney in place, and appears to you to be not overly concerned about the adequacy of her estate planning.
Superannuation
Sharon has $32,000 in her employer's default superannuation fund, the ABXY Industry Super Fund, and is invested in the 'balanced' portfolio option. Sharon joined the fund on 19 January 2008.
Sharon does not make any additional contributions to her superannuation fund.
The fund has returned the following, after fees and tax:
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2009/10
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2010/11
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20011/12
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2012/13
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2013/14
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2014/15
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8.9%
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10.2%
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2.1%
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11.3%
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9.8%
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7.0%
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The investment objective of the fund is to achieve returns after tax and fees that exceed the inflation rate by 4%, as measured by the CPI, over rolling five-year periods.
The asset allocation for Sharon's balanced superannuation fund is:
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Cash
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7%
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Australian fixed interest
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12%
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International fixed interest
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10%
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Australian equities
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30%
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Property
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18%
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International equities
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23%
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Insurance
Sharon's superannuation fund provides a death and total and permanent disability (TPD) benefit of $50,000 in addition to her accumulated superannuation value. The premium is $1.50 per week for this level of cover and is deducted from her fund.
Sharon has no other personal insurance cover.
Sharon's car has full comprehensive insurance with an annual premium of $1300.
Sharon also has home contents insurance cover of $20,000 with an excess of $100 including legal liability cover of up to $20 million. Sharon pays $28 per month from her credit card for this policy.
Sharon has adequate private health insurance cover that she pays $120 per month for on her credit card. This premium includes the private health insurance rebate.
Sharon has advised you that she is comfortable with the insurances she has in place and does not believe that she requires any further advice at this time.
Investments
Sharon has $45,000 in a soon to mature, one year, term deposit earning 3.25% p.a. She plans to use these funds and future savings towards the purchase of her own home in about 5 years' time, or earlier if possible.
Following advice from her uncle at a family barbecue, Sharon purchased 70 Westpac Banking Corporation shares on 25 November 2008 at $16.93. The full dividend received for the most recent year was $1.86 per share fully franked. Dividends received are not reinvested.
Sharon also has a small transaction account where her pay is deposited. This account is used to pay various expenses and her credit card. The account, on average, would have $1500 and it does not receive any interest.
Other information
Sharon has a credit card with a limit of $8,000 that she uses for all her general expenses and entertainment. However, she does not spend up to her limit and her average expenses are $950 per month, (including home contents and health insurance), which she repays within the interest free period.
Each year Sharon goes on a two-week cruise with a friend, which costs $2500.
In addition, she usually spends two weeks with her family during her employer's Christmas leave period.
Sharon is very healthy and has taken very little sick leave and has accumulated 27 days sick leave.
Other expenses include a donation to the McGrath Foundation of $50 per month, tax deductible 'bucket' donations of $10 per month to various registered charities, and accountant's expenses of $175 p.a.
Sharon does not have any dependants and both her parents are well, fit and active. She has an older brother who is married with two young children and a younger sister who still lives with her parents.
Risk profiling
With your assistance, Sharon completed the risk profile section in the fact finder prior to attending the meeting. Following discussions with Sharon she confirmed that she was closest to the balanced investor profile. The completed fact finder and risk profile are in Appendix 1 of the assignment.
Closing the interview
Prior to concluding your meeting with Sharon, you review the information provided to her to check that it is complete and accurate.
Sharon is naturally curious about the next step in the process. You answer some additional questions she has about what happens next. You explain that with her agreement you will prepare a written report, an SOA, based on the information she has just shared with you. The SOA will be a financial plan detailing a number of actions she could take to meet her financial goals.
Sharon agrees to proceed to the next stage of the financial planning process, and you make an appointment with her to present the plan in a fortnight.
Note: There is a series of questions relating to Section 1 in the assessment workbook that you need to answer. Your answers to these questions are your opportunity to demonstrate your ability to establish a relationship with a client.
Section 2: Analysing the data
The next step in the financial planning process is to analyse the data provided by Sharon. You do this to ensure that you can fully understand her financial situation and needs and are therefore in a position to design a plan that addresses her goals and objectives.
By analysing the data provided under the following headings you can now start thinking of the strategic options that may be appropriate for Sharon, leading you to then preparing a financial planning strategy that is designed to meet her needs:
- current position
- debt management
- risk/protection
- savings
- investment
- retirement funding
- future income stream
- social security issues (if any) and implications
- present and future taxation issues
- estate planning.
Section 3: The strategy
Now that you have analysed the data and selected strategies that could be appropriate, you are in a position to start drafting the preferred strategy you believe is appropriate for Sharon. You will then be able to research and select possible products that can support the implementation of that strategy. All of this information you will use in your SOA for her.
Note: There is a series of questions relating to Section 4 in the assessment workbook that you need to answer. You will use your answers for Section 4 to help you decide on your recommendations for Sharon. Your answers to these questions are your opportunity to demonstrate your ability to develop a strategy that aligns with her requirements.
Strategy tips
Students should note that there may be more than one strategy or group of strategies that could be appropriate in Sharon's circumstances. In fact it would be unusual in developing strategies for any clients where one specific strategy or set of strategies could be classified as 'the best' or 'perfect'.
The ultimate test is that the strategies selected can be justified and explained in terms of the client's stated goals, financial situation and profile.
In Sharon's case, there are certain variables to consider, such as:
1. In dollar terms, what appropriate house deposit is she aiming to accumulate and over what time period?
2. What would be the ramifications if the car loan was paid off using her maturing term deposit savings? In this case, how should she invest her remaining capital and future savings to reach her house deposit goal over a maximum five-year period?
3. What would be the ramifications if the car loan was not paid off (or only paid off in part)? In this case, what could be an appropriate investment strategy for Sharon's maturing term deposit and future savings to reach her house deposit goal?
4. How does her risk profile fit into the time horizon she has selected to purchase her first home and for point 2 and 3 above?
5. Could a valid strategy potentially have Sharon in a position to purchase her first home within five years? How much risk would she need to accept to achieve her declared savings goal?
A number of strategy options may appear available to Sharon to achieve her primary goal. Whatever strategy you select however, must be seen to be appropriate, including being within Sharon's tolerance to risk, and satisfy minimum requirements under the best interests test.
It is important that you discuss the reason, risks, advantages and disadvantages of each recommendation.
Section 4: Presenting the SOA
You meet with Sharon as arranged to present her SOA. You take the time to outline the proposed strategies and recommendations, confirming throughout that Sharon understands the plan and how it has been designed to meet her needs.
Satisfied with your explanation of the plan and responses to each of her questions, Sharon agrees to go ahead with your recommendations.
Note: There is a series of questions relating to Section 6 in the assessment workbook that you need to answer. Your answers to these questions are your opportunity to demonstrate your ability to continue to engage your client.
Section 5: Providing ongoing service
Sharon is not sure she will have time for regular reviews of her financial plan. She expresses the opinion that the advice seems comprehensive with no need at this stage to commit to scheduled reviews.
There is a series of questions relating to Section 7 in the assessment workbook that you need to answer. The questions are your opportunity to demonstrate your ability to work with a client to implement a plan over the longer term.
Attachment:- Financial Planning Assignemnt.rar