Part -1:
Statement of Advice Case Study (Dennis and Donna Barker)
Scope This case study is applicable to the Diploma of Financial Planning Statement of Advice series of tasks.
Case Study
You are an authorised representative of a full-service licensed dealer group, Mentor Financial Planning Pty Ltd. Dennis and Donna Barker have come in to see you to ask for your assistance to plan out their next seven years and then help them settle into retirement.
Donna (aged 53) and Dennis (aged 52) have been married for 29 years and live at Lot 3 Wattle Road, Hurstbridge, Victoria. Their only child, a daughter, Megan, is independent and has two children.
Donna works full time for Best Marketing, and has recently been promoted. She now earns $90,000 p.a, plus an addition Superannuation Guarantee Contribution of 9.5%. She has heard about salary sacrifice and thinks this might be a good idea to help build funds for her retirement.
She has informed you that she is about to start receiving $17,000p.a 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
Donna's superannuation is currently in a balanced retail superannuation fund, MM Superannuation. Her current balance is $220,000 and earns on average 7% p.a. after fees and taxes. She also has $100,000 in term life and TPD insurance cover within her superannuation fund.
She drives a new Land Cruiser that is fully paid for. It has low kilometers and she expects to keep it until she retires. Upon retirement she intends to purchase a new car, and expects that she will need an additional $30,000 on top of the trade-in she expects to receive from the Land Cruiser.
Dennis works full time making custom furniture for Newbold's Pty Ltd. He earns $45,000 p.a. plus an addition Superannuation Guarantee Contribution of 9.5%, and intends doing this work for the foreseeable future.
He has $51,000 in superannuation savings, held within the PP Superannuation Fund. The funds are invested in a capital stable portfolio with a very low allocation to growth assets. Returns on this fund are around 4% p.a. after fees and taxes.
They are living on a semi-rural property that is valued at around $750,000, but they currently have a mortgage of $130,000 in the form of a line of credit. The interest rate on this facility is 7% and they currently pay interest only repayments of $758.33 per month ($9,100 pa).
Both are non-smokers and in excellent health, and they do not have a current will or any powers of attorney.
Diploma Case Study,
Their personal expenses are around $40,000 p.a. and they spend an additional $10,000 p.a. on holidays. (Total outgoings are therefore $59,100). Aside from private health cover, car, and house and contents insurance, and the only personal insurance they have is the coverage provided in Donna's superannuation fund.
Donna intends to work for seven more years (until aged 60), once she retires they believe they will need $40,000 p.a (in today's dollars) for their living expenses in retirement. However, Dennis intends to then start working part-time until age 65 and estimates that he will earn $25,000 p.a.and they intend to use this income to fund any holidays or other expenses as required.
Before Donna retires in seven years-time they wish to pay off the remainder of the mortgage. They also want to increase the amount of money in both of their superannuation funds.
They have also stated that they want to ensure they have sufficient money for their grandchildren (now aged 6 and 4 years) to attend university. They estimate they will need to accumulate approximately $120,000 (in today's dollars) over the next 12 years to pay for this.
Aside from their superannuation funds, they also have $9,000 in a bank account earning 4% p.a., $15,000 in a term deposit earning 4% p.a. and $12,000 in a cash management account earning 5% p.a. However, they are not happy with the taxation implications of these accounts, as any interest earned seems to go in tax. Their everyday transaction account holds $3,000 but this has been set aside for emergencies and the clients do not want this changed.
Their credit card limit is $8,000, but the balance is paid out monthly as part of their $40,000 pa personal expenses. After completing a comprehensive risk profile analysis, you ascertain that they both have ‘balanced' risk profiles.
Lifestyle Assets
| Assets |
Owner |
Value ($) |
Liabilities ($) |
Net Asset Value ($) |
| Home |
Joint |
750,000 |
130,000 |
620,000 |
| Cars |
Joint |
40,000 |
Nil |
40,000 |
| Contents |
Joint |
50,000* |
Nil |
50,000* |
| Total |
|
840,000 |
|
710,000 |
Investment Assets
| Assets |
Owner |
Value ($) |
Return (%) |
Liabilities ($) |
Net Asset Value ($) |
| Bank Account |
Joint |
9,000 |
4 |
Nil |
9,000 |
| Term Deposit |
Joint |
15,000 |
4 |
Nil |
15,000 |
| Cash Management Fund |
Joint |
12,000 |
5 |
Nil |
12,000 |
| Total |
|
36,000 |
|
|
36,000 |
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
Part -2:
Assessment Task 1
1.0 Evaluate the client's current situation and identify the issues
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
From the scenario in your case study, list in the table below what documents you would review to analyse the integrity of the information provided by the client.
1.1 (b) Analysis of integrity of client information
Use the https://www.taxcalc.com.au/ 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.
From the various options that you have given in 1.3 (a), please list four (4) options / alternatives that you would want to present to the clients to get their approval before conducting detailed research.
For example, you might start this discussion to confirm objectives with "I understand that you have a preference to do X, but if I could show you a significant advantage in doing Y, would you consider it?"
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.
Assessment Task 3.1
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.
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.
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
3.4 Research super target
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).
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. Copy and paste it in the space below.
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.
Assessment Task 4
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.