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Capstone project — risk protection and superannuation FP4-1SN4-1 project Project cover sheet This document includes: student identification project declaration project instructions submission instructions project result, result summary and feedback project checklist project questions (including fact finder templates, cash flow templates and managed funds calculations). Student identification (student to complete) Please complete the fields shaded grey. Student number Student name Telephone number Project declaration (student to complete) You must read and acknowledge this declaration: DECLARATION: The project that I have attached and submitted is my own work, completed in person by me. I understand that I am not to give my completed project (or provide a copy of my project) to any person or organisation other than Kaplan Education Pty Ltd. I also understand the definition of the terms ‘collusion’ and ‘plagiarism’ and that penalties apply for ‘collusion’ and/or ‘plagiarism’ as stated in Kaplan Education’s Assessment Policy and Student Misconduct Policy. The policy is available at: <www.kaplanprofessional.edu.au> What you need to know Policies I have read and acknowledged the declaration above: This box must be marked for your project to be accepted for marking. By indicating yes, you agree to the declaration stated above. Project preparation instructions Only Microsoft Office compatible projects submitted in the template file will be accepted for marking by Kaplan Professional Education (KPE). PDF projects will not be accepted. Do not delete/remove any sections of the template. The project must be COMPLETED before submitting it to KPE. The maximum file size is 5MB. Once you submit your project for marking you will be unable to make any further changes to it. You will have 12 weeks from the date of your enrolment in this subject to submit your project. Should your project be deemed ‘not yet competent’ you will be give an additional 4 weeks to resubmit your project. Your project must be submitted to KPE on or before your project due date. Please check KapLearn for the due date. Project submission instructions Please refer to the Project submission instructions (pdf) in the Assessment section of KapLearn for details on how to submit your project. Note: Assessors should double-click on the fields below to select the student’s result. Project result (assessor to complete) Result — first submission Not yet competent Questions that must be re-submitted: Sections 2, 3 and 4 Result — re-submission (if applicable) Not yet competent Result summary (assessor to complete) First submission Re-submission (if required) Section 1 Demonstrated Not yet demonstrated Section 2 Not yet demonstrated Not yet demonstrated Section 3 Not yet demonstrated Not yet demonstrated Section 4 Not yet demonstrated Not yet demonstrated Section 5 Demonstrated Not yet demonstrated Feedback (assessor to complete) Please refer to your assignment document for comments. You are required to amend your paper in accordance with each comment provided for the sections that require resubmission. Capstone project — risk protection and superannuation FP4-1SN4-1 project This project contains five sections based on the information provided on your clients, George and Rebecca Brown, and their family. Complete all sections. The following checklist is provided as a guide to ensure you have completed the project requirements. Project checklist (student to complete) Step Action Completed? 1. Read the Study Guide Go to the What you need to know section and read the advice in the Study Guide on preparing your project. 2. Familiarise yourself with the project Think about the project questions while reading your learning materials and completing the activities and review questions. 3. Answer Sections 1–2: Part F Ensure that you complete the fact finder and risk profile templates for Question 2. 4. Answer Section 2: Part G — Statement of Advice • Follow the steps given in the Statement of Advice Preparation Checklist — you must submit the completed checklist • Use the family cash flow templates provided • Use an excel spreadsheet to prepare SOA Appendix 3. 5. Answer Sections 3–5 6. Upload your completed project You must submit the following completed items in this template: • the project cover sheet and completed student declaration • answers to all five project sections • the completed Statement of Advice Preparation Checklist • the completed Statement of Advice and appendices. Case study background — George and Rebecca Brown You work for the financial planning company, Markson and Co, which is a licensed securities dealer and a registered life insurance broker. Your company specialises in investment and insurance advice but does not provide stockbroking, real estate evaluations and advice, income tax preparation, superannuation fund accounting, superannuation fund administration or the preparation of legal documents such as Wills or trusts. George Brown is a senior engineer with an international mining company. He has been working for the same company for the last seven years and has been pleased that the company was primarily unaffected by the global financial crisis (GFC). He believes there is potential for further improvement in his salary as well as growth prospects within the company. Rebecca Brown is working part-time as a paralegal with the same company she worked for prior to having their children, Ruby and Sienna. She has a good relationship with the owners of the firm and does not see any change in her current employment situation for the time being. Both George and Rebecca are in good health and are non-smokers. They have private health cover for the family. George and Rebecca have approached you for financial advice. They advise you that they are confused in regard to their financial situation. This has come about due to conflicting information they have read, which states that although they will be living longer, nearly half of all 40 year olds will die over the next forty years. Further, their children have asked questions about the insurance plan advertisements they have seen on television which has raised concerns as to whether they have adequate insurance cover. Further, they want to make sure their children will be adequately provided for if something were to happen to them. They also believe they should have surplus income as a back-up. They would like to save any surplus in the most tax effective vehicle for the long term. Both George and Rebecca are concerned that if they have access to these funds they may spend them. George and Rebecca would like to reduce their mortgage and believe that this could help them to get ahead before they have to pay large school fees. Their current loan has a redraw facility. However; they enjoy their annual holidays and have an active social life, and want to make sure they have income available to continue these activities. George also advised you that his uncle recently passed away and he has inherited $75,000 cash along with shares valued at $27,000. They have never considered owning shares before but George is keen to understand the share market and perhaps buy some shares. George is prepared to take some risks in order to accumulate wealth quickly. However, Rebecca is more concerned about risk and does not wish to ‘gamble’ any of their funds. Detailed below are George and Rebecca’s current details. Personal information Surname: Brown Brown Christian Name: George Rebecca Salutation Mr Ms Age/Date of birth 28 March 1970 17 August 1971 Status Married Married Home address 4 Pringle Ave, Kensington 4 Pringle Ave, Kensington Health Good Good Smoker No No Occupation Senior Engineer Paralegal Employer Knight & Co. Ranier and Jackson Start date 2004 2008 Sick leave currently available 14 days plus 10 days per annum 6 days plus 10 days per annum Retirement age 60 59 Dependants/Family relationships Sienna (aged 11 years) Ruby ( aged 8 years) Professional relationships Solicitor Carlie Mattieson Time span of relationship 10 years Quality of relationship Poor Service provided Conveyancing for home purchase Accountant John Watson Time span of relationship 7 years Quality of relationship Excellent Service provided Annual tax return Annual income details Name: George Rebecca Salary $110,000 $55,000 Cash management account — interest $375 $375 Savings account — interest $88 $88 Inheritance — interest $3,750 Dividends (96.7% franked) $1,750 Notes: George and Rebecca’s salaries exclude superannuation guarantee (SG) contributions, which are currently paid at 9% per annum. Annual expenditure Mortgage $28,700 General living expenses $45,000 Accountant’s fees $500 Donations $1,000 Holidays (annually) $10,000 Assets and investments Principal residence $850,000 Purchased 6 years ago for $550,000. Outstanding mortgage $300,000 — joint names, variable rate 6.5% Contents $50,000 Joint names Car $18,000 Fully paid off — joint names Cash management $15,000 Cash management account earning 5% p.a. — joint names account Savings account $5,000 Everyday savings account earning 3.5% p.a. — joint names Cash management $75,000 Cash management account earning 5% p.a. — George’s name only account — inheritance ABC Superannuation — $190,000 Invested in a retail fund, balanced option — earns 6% p.a. net of fees and taxes. George No beneficiaries or binding nominations specified. The fund accepts salary sacrifice. SOH Industry $85,000 Invested in an accumulation industry fund, balanced option — earns 5% p.a. net Superannuation — of fees and taxes. The fund only has a defensive, balanced or high growth Rebecca options available. There is no untaxed element in the fund. No beneficiaries or binding nominations specified. The fund accepts salary sacrifice. Share portfolio $27,000 Currently earning 6.48% p.a. — 96.7% franked dividends — in George’s name only Current share portfolio Number of shares Company ASX Code 500 AMP Limited AMP 1,300 Insurance Australia Group Limited (formally NRMA) IAG 400 Commonwealth Bank Limited CBA 400 Telstra Corporation Limited TLS Investment objectives They have rated their investment objectives, using a scale ranging from 1 (not concerned) to 5 (very concerned). George Brown Income to keep pace with inflation 2 Legal, logical and appropriate tax relief 5 Easy access to your capital 1 Regular income from your investments 1 Easy to administer 3 Capital growth 5 Volatility 2 Rebecca Brown Income to keep pace with inflation 2 Legal, logical and appropriate tax relief 5 Easy access to your capital 1 Regular income from your investments 1 Easy to administer 4 Capital growth 5 Volatility 4 Estate planning George and Rebecca have Wills which they quickly wrote using the packages bought from the post office when Ruby was born. They do not have powers of attorney. Insurance and risk management George has three times his salary in term life and total permanent disability (TPD) insurance within his superannuation. He cannot take out any higher cover within this superannuation fund. Rebecca has $50,000 of life and TPD in her superannuation fund. George and Rebecca do not have income protection or trauma cover. They have family private hospital cover. Planning issues • George and Rebecca are seeking a long-term tax effective investment plan which will provide for them in their retirement. • George has recently inherited $75,000 from his uncle and would like advice on how to invest these funds to contribute to securing their future. • George has told you that he understands the risks associated with investing and is willing to invest in riskier securities in order to increase their returns. • Rebecca is more risk averse. She would like to ensure they do not lose any of their inheritance. • George and Rebecca’s children currently attend a public school but they would like to send both children to a private school to complete their secondary education. • George and Rebecca would like to do some renovations to their home, i.e. replacing the old bathroom which they believe will cost approximately $17,500. They are happy to use some of their inheritance to do this and anticipate the work to be done this year. • Both George and Rebecca are not sure if the current asset allocation used in their superannuation is appropriate and are seeking your advice on determining an asset allocation that they are comfortable with, and will improve the potential to meet their lifestyle and financial objectives. They would also like to know if they are on track to reach their retirement income goal of $60,000 per annum when George reaches age 60. • Rebecca has been unhappy with the service she receives from her industry fund and the limited number of choices she has for her account. In addition George has been earning better returns every year, even after fees are deducted. • They wish to have their full insurance needs reviewed. • George and Rebecca would like to reduce their mortgage and believe that this could help them to get ahead before they have to pay large school fees. • They expressed concern about the fees that you charge and seek clarification on those fees. As their financial planner, your task is to prepare a Statement of Advice (SOA) that will include strategies to meet George and Rebecca’s goals. The project (student to complete) Section 1 Establish a relationship with the client and identify their objectives, needs and financial situation Part A List particular strategies you will use to ensure that the Browns are comfortable with the interview process. (200 words) A comfortable interview environment will certainly help facilitate the dialogue and establish rapport between the client and the planner. It could be assisted by following actions: Creating a comfortable interview environment: make sure there is no interruption during the interview (Switch off mobile phone, put computer into standby mode, etc); the meeting room should be quiet without any distraction during the interview; offer something to eat, such as tea, coffee, water, candy, and biscuit. Greeting the client in a courteous manner makes them feel respected and valued. Give a meeting agenda and make sure they all understand what will happen during the interview. Find something in common to start with the conversation (such as pets, kids) and keep the conversation flow smoothly to enable us know each other. Ask different types of questions to encourage George and Rebecca talk about themselves Showing interest, keep good eye contact and never interrupt when they are talking. Listen to their concerns, expectations and demands, and take notes. Use simple language, terminology and/or jargon can be mentioned only if they use it first. Take breaks if necessary. Sometimes people may find difficult to keep their attention focused after long hour conversation. Use non verbal expressions and appropriate body language. Modify my language and communication style to suit their demographic background if necessary. Always be open, transparent and helpful: make sure they understand the fees that may involved. Part B Give details of any legal requirements you need to comply with at the initial stage of your relationship with the clients. (250 words) Financial planning is a highly regulated industry in Australia. A financial planner must meet the minimum training requirements as defined in the Australian Securities and Investments Commission (ASIC) Regulatory Guide 146 Licensing: training of financial product advisers (RG 146) and be licensed by the ASIC. . It is also very important for a financial planner to keep up-to-date with training, as required by ASIC’s RG 146. Anyone who is a new entrant to the financial services industry will generally need to meet an experience requirement before obtaining a licence. They will need to operate under an existing AFS licence holder as either an authorised representative or a representative. A financial planner is recognised through common law as having a duty of care for their clients and is legally obliged to exercise as much as the circumstance require, and to ensure the clients is in no way mislead. The Financial Planning Association’s Code of Ethics and Rules of Professional Conduct define the benchmark for ‘reasonable care’ of its manner. A Financial Service Guide (FSG) must generally be given to the clients before providing any financial service (as defined by RG175) Compliance with privacy legislation is also very important. All the personal information collected by financial planner and/or the licensee is governed by the Privacy Act 1988 which contains a national scheme for the collection, use, correction, disclosure and transfer of personal information by organisations in the private sector. The Anti-Money Laundering and Counter-Terrorism Financing Act 2006 (AML/CFT) is another legislation that financial planners have to comply with. e.g. A planner is obliged to establish and verify the identity of the client regardless of the nature of the client. Part C If, at a later stage, George and Rebecca wish to make a complaint about your advice, what are their options? How much information are you required to give them, initially, about complaints procedures? (150 words) If they have a complaint, they could take the following steps: Tell me about their concerns, and I will try to resolve the complaint. If they are not satisfied with the result, they can contact the manager of Markson and Co. However, if the dispute is still not resolved in a manner acceptable to them, they have the right to complain to the Financial Ombudsman Service (FOS). FOS is an external dispute resolution scheme that provides free advice and assistance to consumers and investors to help them in resolving complaints relating to members of the financial services industry. Financial Ombudsman Service GPO Box 3 Melbourne VIC 3001 Phone: 1300 780 808 Fax: 03 9613 6399 Email: email@example.com Website: www.fos.org.au They may also contact the Australian Securities & Investments Commission (ASIC) on their free information line 1300 300 630 to make a complaint and obtain information about their rights. The above information is also normally available on the Financial Service Guide (FSG). Part D Neither of your clients have trauma insurance, and they are unsure about the adequacy of their current level of life and TPD insurance. Prepare a list of questions that you could use during the initial interview to help you determine appropriate levels of cover. You should cover asset preservation, income preservation and future expenditure needs, and the answers to these questions should enable you to complete the risk needs section of the fact finder. (250 words) Do you currently have insurance for you home and content? Cars? Income? Life? What are your assets and income (cash saving, invested assets, retirement account, life insurance, etc.)? What would be available to your family now, if you weren’t here to provide for them? Are you wealthy enough to be able to survive without your income? Could you maintain your current life style on social security benefits (e.g. through Centrelink)? Could you maintain you superannuation contribution if you didn’t have an income? Do you have debts? Such as mortgage, credit cards, personal loans. If your household needs two incomes to maintain the debt/mortgage, then both of you may need to have adequate insurance cover. Do you have dependants? If yes, can you think of any ongoing expenses which may occur? Do you plan on paying for part or all of your children’s education (secondary, tertiary education)? What are you basic necessities? What do you and your family need to pay for on a regular basis (e.g. utilities bills)? How will your family maintain a financial comfort zone? Life events may dramatically change your financial picture. What kind of special or one-time expenses may come along? Is there anything else you would like to account for in your life/TPD/Trauma insurance estimate? Part E Discuss the benefits and drawbacks of using tools to gather the information required to develop a financial plan for clients as compared to a more casual, conversational style approach. (200 words) A financial planner should never only rely on their intuition when determine client’s risk profile and needs. There are many tools that can be used to gather the necessary information for developing a financial plan. These tools can be factor-finders, questionnaires, psychometric testings, etc. The data gathered from these tools will help the financial planner to have a clear picture of the client’s financial position and expectation. However, most of these tools are normally in standardised form and may not be able to cover the full image of the client’s real situation. For instance, the client may think none of the pre-listed model in the risk profile questionnaire matches their particular circumstance. Alternatively, a financial planner could adopt a more casual and conversational approach to find out their personal needs and therefore discover the client risk tolerance. Psychometric testing could be another method to reveal client’s psychological profile. This tool offers a relatively cheap and easy way to assess client’s risk acceptance. Nevertheless the results can be misinterpreted by not taking account of client’s personal circumstance. On the other hand, a more casual and conversational style might help the financial planner to determine a client’s psychological acceptance of risk, but it could be time consuming. The effectiveness of using conversational style approach relies on the communication skills of the financial planner. Section 2 Analyse client objectives, needs, financial situation and risk profile to develop appropriate strategies and solutions Part A Record the information you have gathered from your clients in the fact finder below. Include the information you obtained from your questions in Section 1 Part D. Part B Identify any gaps in your data collection form, as well as any other issues that would need to be followed up with George and Rebecca. (100 words) The following information is missing: Home address does not include state and post code There is no contact phone number Dates of birth of their children are not given, no school details Home and content insurance coverage Superannuation details, date of joining fund Life insurance policy number for both George and Rebecca Insurance premiums Private health insurance: coverage, premium Fact finder Personal and employment details Personal details Client 1 Client 2 Title Mr Ms Surname Brown Brown Given and preferred names George Rebecca Home address 4 Pringle Ave, Kensington 4 Pringle Ave, Kensington Business address N/A N/A Contact phone 07-3639 3838 07-3639 3838 Date of birth 28 March 1970 17 August 1971 Age 42 41 Sex Male Female Male Female Smoker Yes No Yes No Expected retirement age 60 59 Dependants (children or other) Name Date of birth Sex School Occupation Sienna 30/April/2001 Female Kensington Primary Student Ruby 01/May/2004 Female Kensington Primary Student Employment details Client 1 Client 2 Occupation Senior Engineer Paralegal Employment status Self employed Employee Self employed Employee Not employed Pensioner Not employed Pensioner Permanent Part time Permanent Part time Casual Contractor Casual Contractor Other Government Other Government Business status Sole proprietor Partnership Sole proprietor Partnership Private company Trust Private company Trust Notes Any other person to be contacted? e.g. accountant, bank, solicitor, etc. Solicitor: Carlie Mattieson / 10 years poor relationship with George & Rebecca / Conveyancing for home purchase Accountant: John Watson / 7 years excellent relationship with George & Rebecca / Annual tax return Income, expenditure and net worth Income and expenses Client 1 Client 2 Notes Income from employment Salary $120,879 $60,440 Salary sacrifice $10,879 $5,440 9 % SG Salary after salary sacrifice $110,000 $55,000 Rental income Unfranked dividends Franked dividends $1750 $27,000*6.48% = $1,750 (96.7%franked) Franking (imputation) credits $725 $1,750*(30/70)*96.7% = $725 15000 @ 5% p.a. = $750 5000 @ 3.5% p.a. = $175 Interest $4,213 $463 Total = $925, 50% share = $463 each 75000 @ 5% p.a. = $3,750 Other income, e.g. taxable benefits Capital gains <1yr Capital gains >1yr Tax-free component of capital gains Assessable income $116,688 $55,463 Deductible expenses Rental expenses, repairs etc. Taxable income $116,688 $55,463 George 17547 + 37%*(116688 – 80000) = $31,122 Tax on taxable income $31,122 $9,572 Rebecca 3572 + 32.5%*(55463 – 37000) = $9,572 Non-refundable tax offsets (e.g. LITO/SATO) George 116,688*1.5% = $1,750 Medicare levy $1,750 $832 Rebecca 55,463*1.5% = $832 Medicare levy surcharge Franking rebate -$725 Refundable rebates and offsets Total tax $32,147 $10,404 Income after tax $84,541 $45,059 Notes Family cash flow Client 1 Client 2 Combined Income after tax (as calculated above) $84,541 $45,059 $129,600 Investment expenses Living expenses Mortgage $14,350 $14,350 $28,700 General living expenses $22,500 $22,500 $45,000 Accountant’s fees $250 $250 $500 Donations $500 $500 $1,000 Annual Holiday $5,000 $5,000 $10,000 Total expenses $85,200 Net cash flow $44,400 Assets and liabilities Asset Owner Value Liabilities Net value Notes Personal assets Family Home Joint tenant $850,000 $300,000 $550,000 Home contents Joint tenant $50,000 $50,000 Car Joint tenant $18,000 $18,000 Total $918,000 $300,000 $618,000 Investment assets Superannuation George $190,000 $190,000 Superannuation Rebecca $85,000 $85,000 Cash management Joint $15,000 $15,000 account Savings account Joint $5,000 $5,000 Cash management George $75,000 $75,000 account - inheritance Shares George $27,000 $27,000 Net worth $397,000 $397,000 Liabilities Loan Current debt Percentage Interest only Repayment deductible Home loan $300,000 No $2,392 p.m. Total $300,000 Goals and objectives Details Comments Save any surplus in the most tax effective vehicle for the long Long term term, long-term tax effective investment plan for retirement George received $75,000 inheritance and would like advise Discuss possible options for using the inheritance money how to invest these fund, Rebecca would like to ensure they do not lose any of their inheritance George is willing to invest in riskier securities Discuss possible options Send both children to private school to complete their Estimate cost and discuss possible options secondary education Home renovation cost approximately $17,500 Short term Review superannuation asset allocation, Rebecca is also not Discuss possible options happy with her current industry fund Plan for retirement for $60,000 p.a. when George reach 60 Superannuation and/or other investment options Protect income against sickness or accident To be reviewed Protect family and/or assets in the event of death To be reviewed Protect against serious illness or trauma To be reviewed Reduce/pay off mortgage To be discussed Other Annual holiday $10,000 Donation $1,000 Estate planning Do you have a Will? Yes No When was it last updated: when Ruby was born Executor’s name and contact details: Do you have Powers of Attorney? Yes No Attorney’s name and contact details: Do you have a funeral plan? Yes No Funeral provider and contact details: Amount paid Do you have superannuation beneficiaries in Yes No place? Type Binding Non-binding Beneficiary names and contact details: Current superannuation, rollovers, insurances and investments Superannuation details Personal super Policy type Company Policy Current value Death benefit Disability Annual member number benefit premium Employer super George Rebecca Fund name ABC Superannuation SOH Industry Superannuation Date of joining fund Type of fund Accumulation Defined Accumulation Defined benefit benefit Pension Pensioner Pension Pensioner Contribution (e.g. 5% of salary) By employer By yourself By employer By yourself Current value of your super fund $190,000 $85,000 Amount of death and disability $360,000 $50,000 cover Is there provision for you to top up Yes No Yes No or salary sacrifice? Non-concessional contributions Amount Year Amount Year Amount Year Amount Year Spouse contributions received Amount Year Amount Year Amount Year Amount Year Concessional contributions Amount Year Amount Year Amount Year Amount Year Any other contributions Amount Year Amount Year Amount Year Amount Year Life insurance details Life insured R’ship to Policy type Company Policy Death Other benefit Annual client number benefit premium George Self Life/TPD ABC Super ABC 2468X $360,000 Within super None Rebecca Self Life/TPD SOH Industry SOH 1357Y $50,000 Within super None Super General insurance details Item covered Owner Policy type Company Policy Cover Other benefit Annual number amount premium Principal Joint Indemnity Safer Home SHP4545A $850,000 n. a. $800 residence Insurance Content Joint Indemnity Safer Home SHP4545B $50,000 n. a. $400 Insurance Investment details Investment type Company Purchase date Units held/fixed rate Current value Owner Cash management The bank n. a. $15,000 Joint account Savings account The bank n. a. $5,000 Joint Cash management The bank n. a. $75,000 George account – inheritance Share portfolio Various n. a $27,000 George Risk needs Insurance needs — life and TPD Client 1 Client 2 Gross annual income (before tax) $116,600 $55,400 Less business expenses n. a. n. a. Number of years income required 17 17 Property repayment $300,000 $300,000 Other debts Sub-total = (income × years) + debts $2,282,200 $1,241,800 Less existing realisable assets (Insurance/savings/super) $672,000 $257,000 Insured benefit shortfall (before tax) $1,610,200 $984,800 Gross income is the total of earned income, i.e. before tax earnings derived from personal exertion, including salary, fees, commission, bonuses, fringe benefits or similar payments that would cease on disablement. Business expenses are expenses incurred by you in the process of earning income from your profession, business or partnership. Insurance needs — income protection/trauma Income protection Client 1 Client 2 Gross annual income $116,600 $55,400 Employer superannuation contributions Other employer fringe benefits n. a. n. a. Maximum allowable benefit (75% of annual income) $87,450 $41,550 Monthly income $7,288 $3,463 Less existing insurance Monthly benefit required (pre-tax) $7,288 $3,463 Waiting period to be served 60 days 60 days Trauma Medical costs (to cover out-of-pocket health costs) $100,000 $100,000 Additional expenses of a permanent nature, wheelchairs, home $100,000 $100,000 alterations, etc. Additional income: income protection only covers 75%, would you need extra? Total funds required $200,000 $200,000 Less cash available or assets that can be readily cashed $122,000 $122,000 Shortfall/surplus $78,000 $78,000 Acknowledgment The information provided in this financial fact finder is complete and accurate to the best of my knowledge. I understand that a policy purchased without the completion of a fact finder, or following partial or inaccurate completion, may not be appropriate to my needs. I also understand that a policy purchased that differs from that recommended by the planner may not be appropriate to my needs. I acknowledge that the planner has provided me with the completed financial fact finder, signed by me. George, BROWN Customer(s) signature(s) Rebecca, BROWN Planner’s name Wei, CHEN Planner’s signature Date Part C Now that you have determined the Brown’s needs and objectives, you need to identify their likely risk profile based on the information they have provided. George and Rebecca completed the risk profile below prior to your meeting with them. Identify any concerns that you may have with their responses compared with the information in the Case study and suggest questions you could use to clarify the responses. Justify why you do or do not think that the score and the resulting risk profile category is an accurate reflection of their tolerance to risk. (250 words) Investment attitude details Please answer the following questions regarding your attitude to financial issues. Are you concerned about the amount of tax that you are paying? Yes/No Why? Would like to pay less if possible How important is liquidity (i.e. funds available) to you? Very/Moderately/Not Why? Investing for the long term and have enough cash If you had funds available for investing, how would you choose to invest them? Why? Not sure Are there certain sorts of investment that you wish to avoid? Yes/No Which ones? Don’t want anything exotic or too risky RISK PROFILE Determining your investor risk profile Points This investor risk profile questionnaire has been designed to help you understand the type of investor you are, so that with the help of your adviser, you can choose the investments that best match your financial objectives. Which of the following best describes your current stage of life? George Rebecca Single with few financial commitments. You are keen to accumulate wealth for the future. Some funds must be kept available for enjoyment, such as cars, clothes, travel and 50 50 entertainment. A couple without children. You may be preparing for the future by establishing and furnishing a home. There are a lot of things you need to buy. You are probably better off financially now than 40 40 you may be in the future. Young family. This is the peak home purchasing stage. You have a mortgage and a very small amount of savings. Probably dissatisfied with your financial position and the amount of money 35 35 saved. Mature family. You are in your peak earning years and have got the mortgage under control. Many partners also work and any children are growing up and have either left home or require 30 30 less supervision. You are starting to think about retirement, although it may be many years away. Preparing for retirement. You probably own your own home and have few financial commitments; however, you want to ensure that you can afford a comfortable retirement. 20 20 Interested in travel, recreation and self-education. Retired. No longer working you must rely on existing funds and investments to maintain your 10 10 lifestyle. You may be receiving the pension and are keen to enjoy life and maintain your health. What return do you reasonably expect to achieve from your investments? George Rebecca A return without losing any capital. 10 10 3–7% p.a. 20 20 8–12% p.a. 30 30 13–15% p.a. 40 40 Over 15% p.a. 50 50 If you did not need your capital for more than 10 years, for how long would you be prepared to see your investment performing below your expectations before you cashed George Rebecca it in? You would cash it in if there were any loss in value 10 10 Less than 1 year 20 20 Up to 3 years 30 30 Up to 5 years 40 40 Up to 7 years 45 45 Up to 10 years 50 50 How familiar are you with investment markets? George Rebecca Very little understanding or interest 10 10 Not very familiar 20 20 Have had enough experience to understand the importance of diversification 30 30 Understand that markets may fluctuate and that different market sectors offer different income, 40 40 growth and taxation characteristics Experienced with all investment sectors and understand the various factors that may influence 50 50 performance If you can only get greater tax efficiency from more volatile investments, which balance George Rebecca would you be most comfortable with? Preferably guaranteed returns, before tax savings 10 10 Stable, reliable returns, minimal tax savings 20 20 Some variability in returns, some tax savings 30 30 Moderate variability in returns, reasonable tax savings 40 40 Unstable, but potentially higher returns, maximising tax savings 50 50 Six months after placing your investment you discover that your portfolio has decreased George Rebecca in value by 20%, what would be your reaction? Horror. Security of capital is critical and you did not intend to take risks 10 10 You would cut your losses and transfer your money into more secure investment sectors 20 20 You would be concerned, but would wait to see if the investments improve 30 30 This was a calculated risk and you would leave the investments in place, expecting performance 40 40 to improve You would invest more funds to lower your average investment price, expecting future growth 50 50 Which of the following best describes your purpose for investing? George Rebecca You want to invest for longer than five years, probably to the age of 55–60. You are mainly 50 50 investing for growth to accumulate long-term wealth You are not nearing retirement, have surplus funds to invest and you are aiming to accumulate 40 40 long-term wealth from a balanced fund You have a lump sum, e.g. an inheritance or an eligible termination payment from your employer, 30 30 and you are uncertain about what secure investment alternatives are available You are nearing retirement and you are investing to ensure that you have sufficient funds 20 20 available to enjoy retirement You have some specific objectives within the next five years for which you want to save enough 20 20 money You want a regular income and/or totally protect the value of your savings 10 10 Investor profile total points 220 140 Investor risk profile summary 0–50 Defensive You are a conservative investor. Risk must be very low and you are prepared to accept lower returns to protect capital. The negative effects of tax and inflation will not concern you, provided that your initial investment is protected 51–130 Moderate You are a cautious investor seeking better than basic returns, but risk must be low. Typically an older investor seeking to protect the wealth that you have accumulated, you may be prepared to consider less aggressive growth investments 131–210 Balanced You are a prudent investor who wants a balanced portfolio to work towards medium to long-term financial goals. You require an investment strategy that will cope with the effects of tax and inflation. Calculated risks will be acceptable to you to achieve good returns 211–300 Growth You are an assertive investor, probably earning sufficient income to invest most funds for capital growth. Prepared to accept higher volatility and moderate risks, your main concern is to accumulate assets over the medium to long term. You require a balanced portfolio, but more aggressive investment strategies may be included 301–350 High growth You are an aggressive investor prepared to compromise portfolio balance to pursue potentially greater long-term returns. Your investment choices are diverse, but carry with them a higher level of risk. Security of capital is secondary to the potential for wealth accumulation Based on the risk profile results, George and Rebecca may seem to be a ‘Growth’ investor and a ‘Balanced’ investor respectively. Both George and Rebecca got stable jobs. George is the household main earner as he contributes almost 2/3 of the overall family income. Two of the couple’s investment top priorities are ‘Legal logical and appropriate tax relief’ and ‘Capital growth’, whereas ‘Easy access to capital’ and ‘Regular income’ are their least concerns. It shows the couple is willing to take some risks to increase their return. Rebecca is also worry about the ‘Volatility’ and ‘Administration’, she seems to be more conservative than George. Before George received the inheritance from his uncle, the couple actually did not have much savings ($15000 cash management account plus $5000 savings). The couple have approximately $44,000 annual cash surplus, but most of their investment assets are allocated in cash. These factors may indicate either they are more conservative than what they declared in the risk profile questionnaire or they have limited investment knowledge and experience, or even both. Questions that can be asked to confirm their risk tolerance as follows: Have you invested in shares or other types of investment before (other than received share from inheritance)? How long have you been investing? How do you usually feel about your major financial decision after you make them? Investment can go up or down, by how much could the total value of all your investment go down before you would begin to feel uncomfortable? (e.g. 10%, 20%, etc.) Both of you indicated to expect 8-12% of return from your investment, do you understand the possible risk involved to have such return? Assume their responses confirm that George is ‘Growth’ investor and Rebecca is ‘Balanced’ investor. Meanwhile, considering George and Rebecca’s current situation, it would be better to rate their overall risk profile as ‘Balanced’ for any investment under joint name. Part D Given the information you now have on the Browns’ current situation and their tolerance of risk, what are the critical issues you need to consider to appropriately advise them? What sorts of investments would they each be comfortable with? (400 words) Debt: The mortgage interest rate of 6.5% is higher than the return from rest of their investment assets. It will probably take the couple 17.5 years to fully repay this loan (assuming monthly repayment of $2,392). It would be beneficial if they could reduce the mortgage. Risk protection: The couple seem under insurance. George and Rebecca need to increase their Life and TPD insurance cover. They do not have income protection or trauma insurance either. Savings: There are excessive funds ($95,000) in the saving account with an annual return of about 5% ($4675/$95000 gives 4.92%). Investment: Majority of their investments are cash. George also has $27000 shares. They need some fund to support their children’s secondary education. Tuitions for private school can be costly in the near future; they should be well prepared before it happens. Assume their children will go to secondary school for 6 years (from year 7 to year 12) when each of them turns 13. The estimated additional cost for each child is approximately $12,000 per annum. The funding requirement for education can be illustrated as follows: Year 2014 2015 2016 2017 2018 2019 2020 2021 2022 Age 13 14 15 16 17 18 Sienna Fund 12k 12k 12k 12k 12k 12k Age 10 11 12 13 14 15 16 17 18 Ruby Fund 12k 12k 12k 12k 12k 12k Retirement funding: George’s superannuation risk option does not quite match his risk profiles. Rebecca’s superannuation seems not performing well enough. Certain analysis and adjustments can be made to help them reach their retirement goals. Social security & Taxation: The Brown family is entitled to receive family tax benefit. Estate planning: The couple wrote their Will when Ruby was born, the Will has not been reviewed since then. They have no Powers of Attorney or guardianship for their children. As a ‘Growth’ investor, George has sufficient income to invest for capital growth. He is prepared to accept higher volatility in the short to medium term to accumulate growth asset over the long term. George’s investment portfolio can spread across all asset sectors but will include more growth assets. E.g. 30% in defensive assets (cash, fixed interest) and 70% in growth assets (Australia equity, international equity, property) As a ‘Balanced’ investor, Rebecca is more willing to have medium to long-term goals while accepting the risk of short to medium-term negative return. Rebecca’s portfolio is likely to have an equal mix of assets. E.g. 40% in defensive assets (cash, fixed interest) and 60% in growth assets (Australia equity, international equity, property) Part E Prepare appropriate insurance and superannuation strategies for George and Rebecca, and provide a detailed explanation as to why you consider them to be appropriate. Include the lump sum amount that they will need in retirement and strategies to help them reach that goal. Include recommendations on the amounts and types of insurance cover you will recommend. Provide a summary of other recommendations that you will include in your SOA for George and Rebecca. (500 words) Insurance: George contributes about 2/3 of the total income to the family. It would be a disaster to Rebecca and their kids if George die prematurely or unable to work. Hence need to increase George’s Life and TPD insurance cover to an appropriate level (current shortfall $1.6 million). Assume I also found out Rebecca actually performs lot more home duties than George. George may need to pay extra house keepings to cover Rebecca’s death. Rebecca should also increase her Life and TPD insurance cover (current shortfall $1 million). Having appropriate life and TPD insurance will help to pay off debts and maintain their family’s standard of living if either George or Rebecca could no longer provide for them. Income protection insurance Suggest both George and Rebecca undertakes income protection insurance that can cover 75% of their salary. They should also have reasonable trauma insurance just in case they cannot afford medical costs if bad things happen. The main purpose of having trauma insurance is to have a lump sum to cover the medical cost for certain medical conditions. The estimated trauma insurance cover is $100,000 each. Superannuation: It is estimated that the couple will have a combined superannuation fund of $1.1 million when George turns 60. Oct - 2012 Oct - 2013 Oct - 2014 …… Oct - 2028 Oct - 2029 Mar - 2030 George Age 42 43 44 …… 58 59 60 A/C Balance $190,000 $211,224 $233,758 …… $742,471 $797,771 $821,807 Rebecca Age 41 42 43 …… 57 58 58 A/C Balance $85,000 $94,079 $103,624 …… $301,843 $322,017 $330,725 George Net return 6% p.a. Monthly contribution $770.60 Total $1,152,532 Rebecca Net return 5% p.a. Monthly contribution $385.30 Assume the couple switch to more conservative option when George turns 60. The combined fund will provide a net return of 3% per annum. It could provide an annual income of $60,000 ($5000 per month) for them and would be run out before George turn 88. The estimation is shown below Mar 2030 Mar 2031 Mar 2032 …… Mar 2057 Mar 2058 Apr 2059 George 60 61 62 …… 87 88 89 A/C Balance $1,152,532 $1,126,756 $1,100,196 …… $96,896 $39,012 -$20,634 It seems that they have already on the right track towards their retirement goal. However, George’s current superannuation option does not quite match his risk preference. If George switches to a ‘Growth’ option rather than ‘Balanced’, he may be able to generate more funds in the long run. Assume the ‘Growth’ option gives a net annual return of 7%; George’s fund will achieve $954,158 when he turns 60. Since salary sacrifice contributions are taxed at a rate of 15%, it is another option that both George and Rebecca can undertake to effectively build their wealth. The salary sacrifice will reduce the taxable income and consequently pay less tax. ***note: more accurate estimation is given in the SOA. Part F Provide a summary of the research that you have conducted to support one insurance product recommendation you will make for Rebecca or George. (250 words) Life and TPD insurance can help to mitigate the financial impact that arose as a result of the death or terminal illness of the life insured. It can supply a lump sum to pay off debts and maintain the family’s standard of living if you can no longer provide them. If something bad happen to Rebecca (e.g. worst case: death), the family will lose about $45,000 net income and may even increase further expenses (e.g. George need to pay for extra house keepings). The financial burden on George’s shoulders will be dramatically increased. Considering the mortgage and future financial needs for their children’s education, their family will certainly have difficult times if without proper insurance. I would recommend Rebecca to have life and total and permanent disability insurance within her superannuation to $1,000,000. This amount should be able to cover the shortfall of $984,800 as identified in the factor-finder. Assume Rebecca will continue work for another 17 years (until George reach 60). Her overall life & TPD insurance need is calculated by adding 17 years of her total income with current debt, which is $1,241,800. Then subtract this figure by her current realisable assets of $257,000 (See table below) to determine Rebecca’s insurance shortfall. Realisable Assets Owner Amount Death Benefit Rebecca $50,000 Superannuation Rebecca $85,000 Cash management account Joint $15,000 Saving Account Joint $5.000 Cash management account George $75,000 Shares George $27,000 Total Realisable Assets $257,000 Assume I did my research and find out Rebecca’s superannuation fund has the option of $1 million coverage for life and TPD insurance. Having life & TPD insurance through superannuation can also be cost effective option as the premium are deducted from super contribution, which means paying for the cover before tax. Part G You must now prepare a Statement of Advice (SOA) based on the recommendations made, which will be used to record this advice (including amendments, if any) for George and Rebecca. Remember that the Statement of Advice must be of a standard that is compliant and would be suitable to present to a client. Important instructions What to submit: you have been provided with a Statement of Advice Preparation Checklist and cash flow templates to use for the project SOA. Please include these with your submission. Template SOAs and SOA preparation software: it is preferable that you do not use the sample SOA published by ASIC as a basis for your submission. The use of financial planning software and dealer templates to prepare your Statement of Advice is also not permitted. Submissions that exhibit excessive reliance on SOA templates may be considered a case of plagiarism or collaboration, and may not be considered to be a reasonable attempt at the project. Assumptions: you must list the assumptions used in your SOA in your project submission. These will generally include: – any assumptions you have made regarding missing background information on the clients – any assumptions you have used to calculate future income from your recommended investments, and – any assumptions used for fees relating to the products you have recommended. Strategy advice: you must provide strategy recommendations in the following areas based on the information given: – personal investment or debt reduction – personal insurance – superannuation – estate planning. Use the information on each of these areas given in the subject notes to provide reasons for each of the strategies recommended. Product advice: product recommendations for any personal investment or estate planning recommendations are not required. However, you should recommend an appropriate superannuation and/or life insurance product to implement the advice you have provided. You are required to source, or develop, your own fund details. It is not necessary to include Product Disclosure Statements in your project for any products you may recommend in your SOA. Including insurance quotes in the SOA is not required. For insurance recommendations you may estimate the premiums based on the clients ages, health and occupations but they do not have to be prepared from actual quotes. Cash flow projections: you must include detailed cash flow tables using Appendix 1 and Appendix 2 as a template showing Rebecca and George’s situation before and after your recommendations. These should be included as Appendices 1 and 2 to your SOA. Do not forget to include any insurance premiums in the analysis. Recommendations: You should include superannuation projections up to the retirement age of your clients before and after your recommendations as Appendix C to your Statement of Advice. In addition please show that your strategy will enable your clients to meet their retirement income goal until George is at least 84 (Rebecca is 83, her life expectancy). Statement of Advice Preparation Checklist (student to complete) SOA section Action Completed? i. Cover sheet The following elements should appear on the cover sheet: the words ‘Statement of Advice’ the client’s name the authorised representative’s name, AR number and contact details (if different to the licensee) a statement that the authorised representative is an authorised representative of the licensee the licensee’s name, ABN number, AFSL number, address and contact details the date of issue of the SOA a warning about the importance of the document ii. Table of contents Check that the pages in the table of contents agree with the page numbers in the completed SOA. iii. Executive summary Headings should include: summary of our recommendations summary of expected outcomes if you implement our advice risks in our advice summary of our fees and commissions your next steps iv. Present position — Headings should include: information about important information about you the client your reasons for seeking advice what you would like to achieve your personal and financial information personal information your existing insurance your existing estate planning financial information current income and expense details v. Risk profile Heading: your risk profile vi. Strategy Headings should include: recommendations recommended action: (analysis of the – personal investment investment – personal insurance strategies) – superannuation – estate planning reasons for recommendations: – personal investment – personal insurance – superannuation – estate planning things you should consider (risks) SOA section Action Completed? vii. Product selection You are only required to provide a super and or insurance product recommendation — do not provide product recommendations for personal investments or estate planning. Headings should include: product recommendations cooling off period advice viii. Recommended Headings should include: asset allocation recommended asset allocation comments on proposed asset allocation versus your risk profile ix. Disclosure of fees, Headings should include: commission and/or how are we paid benefits commission and fees — upfront, ongoing commissions and financial planning advice fees product management and/or operational fees other benefits x. Ongoing service Headings should include: and review ongoing services implementation xi. Authority to proceed Headings should include: authority to proceed consent to ongoing contact xii. SOA Appendix 1 Use the family cash flow template below. Heading: financial position before implementation of strategy xiii. SOA Appendix 2 Use the family cash flow template below. Heading: financial position after implementation of strategy xiv. SOA Appendix 3 Include detailed projections of the clients super account balances before and after your recommendations up to their retirement age. Also show how the resultant balance can be drawn down until Rebecca reaches age 83 (her current life expectancy). You should include all assumptions for calculations and rates of return should be in today’s dollars (i.e. net of inflation) Statement of advice [Complete your SOA in this section of the template] Assumption List for SOA Assume I have got the missing information from George and Rebecca such as their superannuation details, insurance detail, etc.; Assume I met George and Rebecca in Oct 2012; All the superannuation, insurance and investment products in the SOA are fictional, including fees, premium, return, cooling off period, etc.; Assume all Product Disclosure Statement for investment and insurance products are given to George and Rebecca; All the commission, fees and benefits information are fictional; Assume their home is insured for $850,000 and the contents for $50,000; 19 October 2012 Mr George and Mrs Rebecca Brown 10 Carlisle St., Martins Hill QLD 4789 Dear George and Rebecca, Thank you for the opportunity to meet and discuss how we can help your achieve your financial goals and objectives. Based on the information contained in your completed fact finder and our conversation at our meeting on 12 October 2012, I believe that I have a reasonably clear understanding of your current situation, your goals and objectives, and you attitude to investment risk, security, and volatility. We are pleased to provide our recommendations in the detailed Statement of Advice that follows. This Statement of Advice has been prepared exclusively for you and is based on the information you have provided. Please take the time to carefully read and understand it, to ensure that it is consistent with your views and reflects the information we discussed. If there are any omissions or any details are incorrect, please bring them to our attention. In addition, if your circumstances have changed, or if this plan is not implemented in the next 30 days, we may need to revise the recommendation to ensure that they are still appropriate. Once implemented, the recommendations in this Statement of Advice should be reviewed on a regular basis to ensure that they continue to meet your ongoing needs. Changes in legislation, financial markets and your personal situation will occur over time, and as your financial adviser we can work with you to update your financial plan so that you stay on track to achieve your goals and objectives. If you accept our recommendation and are comfortable to proceed with implementation, please sign the attached Authority to Proceed and return it to us. We look forward to helping you implement the enclosed recommendations, and in the meantime we remain available to assist you with any queries you may have in relation to this Statement of Advice. Yours sincerely, Mr. Wei, Chen Authorised Representative of Markson and Co Adviser Authorised Rep No. 72315 Statement of Advice Prepared for Mr. George & Mrs. Rebecca Brown Prepared by Wei Chen 999 Cambridge Parade, Wynnum, 4179 07 9876 5555 Authorised Representative (No. 72315) of Markson and Co ABN: 12 345 054 321 Australian Financial Services Licence no. 54321 5678 Ann Street, Brisbane, 4000 19 October 2012 You are entitled to receive a Statement of Advice (‘SOA’) whenever we provide you with any personal financial advice. Personal financial advice is advice that takes into account that any one or more of your objectives, financial situation and needs. This SOA is a record of the personal financial advice provided to you and includes information on the basis which this advice is given, information about fees and commissions and any interests or associations which might influence the advice. If this advice includes a recommendation to you to acquire a particular financial product (other than securities or an offer to issue or arrange the issue of a financial product to you, we will also provide you with a Product Disclosure Statement containing highly detailed supportive information about the particular product to help you make well informed decisions about the product. Be aware that the advice contained in the following SOA is valid for a period of 30 days only. If the plan is not implemented within this time, it will no longer be current and will need to be reviewed for accuracy Statement of Advice Content EXECUTIVE SUMMARY ......................................................................................................................................................... 3 Summary of our recommendations ............................................................................................................................ 3 Summary of expected outcomes if you implement our advice .................................................................................. 4 Risks in our advice ...................................................................................................................................................... 4 Summary of our fees and commissions ...................................................................................................................... 4 Your next steps ........................................................................................................................................................... 4 IMPORTANT INFORMATION ABOUT YOU ................................................................................................................................... 5 Your reasons for seeking advice ................................................................................................................................. 5 What you would like to achieve ................................................................................................................................. 5 YOUR PERSONAL AND FINANCIAL INFORMATION ........................................................................................................................ 6 Personal information.................................................................................................................................................. 6 Your existing insurance .............................................................................................................................................. 6 Your existing estate planning ..................................................................................................................................... 6 FINANCIAL INFORMATION...................................................................................................................................................... 7 Current income and expense details .......................................................................................................................... 7 YOUR RISK PROFILE .............................................................................................................................................................. 8 STRATEGY RECOMMENDATIONS............................................................................................................................................ 10 Recommended action .............................................................................................................................................. 10 Reasons for recommendations ................................................................................................................................. 11 Things you should consider ...................................................................................................................................... 13 PRODUCT RECOMMENDATIONS ............................................................................................................................................ 14 Cooling off period ..................................................................................................................................................... 14 RECOMMENDED ASSET ALLOCATION ...................................................................................................................................... 15 Comment on proposed asset allocation versus your risk profile .............................................................................. 15 DISCLOSURE OF FEES, COMMISSIONS AND/OR BENEFITS ............................................................................................................ 18 How are we paid? .................................................................................................................................................... 18 ONGOING SERVICE ............................................................................................................................................................. 20 IMPLEMENTATION ............................................................................................................................................................. 21 AUTHORITY TO PROCEED ..................................................................................................................................................... 22 Consent to ongoing contact ..................................................................................................................................... 23 SOA APPENDIX 1 – FINANCIAL POSITION BEFORE IMPLEMENTATION OF STRATEGY .................................................24 SOA APPENDIX 2 – FINANCIAL POSITION AFTER IMPLEMENTATION OF STRATEGY (2012/2013 FINANCIAL YEAR) ....26 SOA APPENDIX 3 – SUPERANNUATION PROJECTIONS ...............................................................................................28 SOA APPENDIX 4 – MANAGED INVESTMENT PROJECTIONS .......................................................................................30 SOA APPENDIX 5 – MORTGAGE PROJECTIONS ...........................................................................................................31 SOA APPENDIX 6 – IMPLEMENTATION SCHEDULE .....................................................................................................32 Executive Summary Summary of our recommendations For the short term – up to one year I recommend that George take out life and total and permanent disability insurance outside of his superannuation to $1,500,000 take out income protection insurance within his superannuation to the maximum allowable limit of 75% of his current salary take out trauma of $100,000 insurance outside of superannuation move his superannuation from a balanced to a growth portfolio within his current superannuation fund make salary sacrifice contribution of $1,200 ( about 10% of his salary) per month to his superannuation reinvest the dividend proceeds back to the current share portfolio I recommend that Rebecca: increase her life and total and permanent disability insurance within her superannuation to $1,000,000 take out income protection insurance within her superannuation to the maximum allowable limit of 75% of her current salary take out trauma of $100,000 insurance outside of superannuation make salary sacrifice contribution of $600 (about 10% of her salary) per month to her superannuation I recommend that: you double your mortgage repayments on your home to $4,784 per month use $17,500 from the inheritance to renovate your house. keep $15,000 in bank account as emergency fund review your existing home and contents insurance and ensure it is sufficient For the long term – more than five years Invest $62,500 in a moderately conservative managed fund with a monthly contribution of $600, and then be accessed when your children start their secondary studies 3 Summary of expected outcomes if you implement our advice Should you decide to follow through with the recommendations of this report, we estimate that: You will have appropriate insurance and health cover in the unlikely event that either of you should die or become sick or injured Establish appropriate levels of general insurance you will have enough fund for emergency purpose Repayment of inefficient debt Improved growth performance for both of your superannuation funds which ultimately will result in match your retirement need your children’s education funds should grow over time and meet the financial needs to pay for their studies The managed investment fund and your share portfolio should grow over time your updated Wills can protect your family in the case of unlikely events Risks in our advice As has been discussed, all investment options do carry some risk. You should be aware that the value of your managed investments may not increase as quickly as you expect, or the value may not change or go down. Summary of our fees and commissions The fees for our service and the preparation of making this Statement of Advice total $2,400 (including GST). Markson and Co is entitled to receive $1,600 and I will receive the balance. Neither Markson and Co nor I will receive initial or ongoing commission costs for our investment recommendations. Where necessary, the costs will be rebated to you. However, if you follow our insurance advice, Markson and Co may be entitled to receive initial and ongoing commission. You may be charged fees for purchasing and investing in some products we recommend. Further details on the fees, commissions and benefits relevant to our advice can be found in the Disclosure of commissions, fees and benefits section. Your next steps In order to decide whether to take our advice you should: Read the Statement of Advice fully to understand our advice. Feel free to ask us any questions you have as a result of reading the Statement of Advice. To follow our advice, please simply complete the ‘Authority to Proceed’ at the end of this Statement of Advice and return it to us. 4 Important information about you This section contains information about you that we used in preparing our advice, such as: Why you are seeking advice What you would like to achieve Your personal and financial information As you read through this section, please inform us if you think any of this information is incorrect or incomplete because it may affect our advice. Your reasons for seeking advice George and Rebecca – we agreed that we would provide advice on: Risk management and Insurance Investments Superannuation Estate Planning What you would like to achieve Following our discussion, we understood your main objectives and needs as follows: You would like to ensure you have protection in the unlikely event that something should happen to either of you You would like to have a long-term tax effective investment that could give sufficient funds for your future needs and for your children to complete secondary education You would like to do some renovation to your home You would like to have your annual family holiday You expect to retire at 60 (George) with $60,000 per annum You want to ensure that your estate planning is adequate Because the information you have provided to us and our understanding of your financial circumstances, need and objectives is limited, you should consider if our advice is appropriate before acting on it. 5 Your personal and financial information List below is a summary of your relevant personal and financial details that you have provided. Personal information Personal details Surname George Rebecca Given names Brown Brown Date of birth 28 March 1970 17 August 1971 Age 42 41 Marital status Married Married Health status Excellent Excellent Smoker status No No Employment status Full-time Part-time Employer name Knight & Co. Renier and Jackson Occupation Senior engineer Paralegal Annual salary $120,879 $60,440 Children and dependant details Name Date of birth Sex School Occupation Sienna 30 April 2001 Female Kensington Primary Student Ruby 01 May 2004 Female Kensington Primary Student Your existing insurance George: you currently have $360,000(three times salary), life and TPD cover under your superannuation fund. Rebecca: you have $50,000 life and TPD cover also under your superannuation. Your home is insured for $850,000 and the contents for $50,000. You both have private health insurance. Your existing estate planning You have advised that both of you have not reviewed your Wills since 2004. Neither of you has a Power of Attorney (POA) in place. 6 Financial information Current income and expense details Income and expenses George Rebecca Total Assessable income $116,688 $55,462 $172,150 Income after tax $84,541 $45,059 $129,600 Annual expenses $42,600 $42,600 $85,200 Estimated surplus/deficit $44,400 George and Rebecca – based on the above income and expenditure schedule you have a surplus of $44,400 income available. Please see ‘Cash Flow Statement’ in SOA Appendix 1 for details. Assets and liability Value Liability Net value Total personal assets $918,000 $300,000 $618,000 Total investment assets $397,000 $397,000 $397,000 Net worth $1,015,000 Please refer to ‘Assets and Liabilities’ table in SOA appendix 1 for details. Incomplete and/or inaccurate information warning Note that if, for any reason, the information on which our advice is based upon, is either inaccurate or not complete, then it may be necessary to consider its appropriateness in respect to your particular circumstances, needs and objectives. 7 Your risk profile All investments have a certain element of risk. However, as a general rule, investment that have high rates of return involve high levels of risk, and more conservative investments bear lower returns. From our discussions, and from the answers of your risk profile questionnaire, we believe that Mr. Brown is a ‘Growth’ investor and Mrs. Brown is a ‘Balanced’ investor. For Growth investors: You are relatively assertive investors, probably earning sufficient income to invest most funds for capital growth. You are prepared to accept higher volatility in the short to medium term to accumulate growth asset over the long term. You investment will spread across all asset sectors but will consist of more growth assets, which would be: About 30% in defensive assets, e.g. cash, fixed interest, and About 70% in growth assets, e.g. Australian equities, international equities, property The target asset allocation for your risk profile is illustrated below. 8 For Balanced investors: You are a cautious investor who is equally concerned with risk and return. You are willing to chase medium to long-term goals while accepting the risk of short to medium-term negative returns. Your investment mix is likely to include an equal mix of assets which would be: About 40% in defensive assets, e.g. cash, fixed interest, and About 60% in growth assets, e.g. Australian equities, international equities, property The target asset allocation for your risk profile is illustrated below. 9 Strategy recommendations This section tells you: what our advice is and why it is appropriate for you reasons for our recommendations things you should consider and risks of our advice Read this section and ask if you have any questions. Recommended action Personal Investment I recommend that: you double your mortgage repayments on your home to $4,784 per month use $17,500 from the inheritance to renovate your house. keep $15,000 in bank account as emergency fund maintain your share portfolio and reinvest the dividend proceeds Invest $62,500 in a moderately conservative managed fund, and then be accessed when your children begin their secondary education, suggest $600 monthly contribution for 10 years Personal Insurance I recommend the following Name Type of cover Product Total amount of cover George Life and TPD Medi Future insurance $1,500,000 Rebecca Life and TPD SOH Super Fund $1,000,000 Income protection (to age 60) George ABC Super Fund $7,288 p.m. 60 days waiting period* Income protection (to age 60) Rebecca SOH Super Fund $3,463 p.m. 60 days waiting period* George Trauma Medi Future Insurance $100,000 Rebecca Trauma Medi Future Insurance $100,000 *A waiting period of 60 days has been recommended as it is estimated you will have enough funds available to enable you service any debts for this period of time. A 60-day waiting period will also reduce the cost of premiums. The longer the waiting period, the lower the premiums you pay. A Product Disclosure Statement (PDS) has been included for the trauma product from Medi Future Insurance. This will explain all details of your cover. 10 Although we are not authorised to provide general insurance, I would recommend that you ensure that your home and contents are reviewed with adequate levels in place. Superannuation I recommend that: George moves his current superannuation investment strategy from a balanced investment to a growth investment. George makes salary sacrifice contribution of $1,200 (about 10% of his salary) per month. to his superannuation Rebecca makes salary sacrifice contribution of $600 (about 10% of her salary) per month to her superannuation Estate Planning I recommend that you seek advice immediately to review your Wills and establish Power of Attorney. You should also ensure that the binding nomination in your superannuation is up-to-date as this need to be renewed every third year. Product recommendations Note that I can only recommend products on our recommended list, which have been approved by Markson and Co. Reasons for recommendations Personal investment As can be seen in the Cash Flow Statement in Appendix 1, you currently have surplus funds of $44,400 per year, which can be invested. It can also be used to increase your mortgage repayment. The quicker your debt is paid off, the sooner you will have more disposable money. Please check SOA Appendix 5 for recommended mortgage repayment projection. Managed funds will give you diversified investment over different types of assets that can create wealth. The funds are managed by professional fund managers who have access to a range of investments and opportunities that are either not normally available to or affordable for individual investors. There is a large amount of cash $95,000 being deposited in the bank with a 5% rate of return per year. It would be very beneficial to you if you could use some of this money to set up a fund to cover your children’s education expenses in the near future. The recommendation to invest $62,500 in a moderately conservative managed fund is for your children’s secondary education expenses. This fund will provide a relatively low level of risk and will likely provide greater growth of funds than simply keeping the money in a bank account. Since Rebecca is the personal with lower marginal income tax rate it would be tax effective to put this investment under her name. 11 Keeping your shares could provide you with long-term capital growth. Reinvesting dividends would be a good way to further increase your potential returns. There could be large differences between a flat rate return and a compound rate return (reinvesting dividend) for investment in the long run. The table below illustrate the possible outcomes by adopting these two different methods assuming 6.48% return per annum for 10 years. Share portfolio without dividend reinvestment Initial Year 1 Year 2 Year 3 … Year 8 Year 9 Year 10 Investment Portfolio $27,000 $27,000 $27,000 $27,000 … $27,000 $27,000 $27,000 Value Dividend $1,750 $1,750 $1,750 … $1,750 $1,750 $1,750 Received Total value in Year 10 = 27000 + 1750*10 years = $44,500 ; Total Return = $17,500 Share portfolio with dividend reinvestment Initial Year 1 Year 2 Year 3 … Year 8 Year 9 Year 10 Investment Portfolio $27,000 $28,750 $31,630 $32,596 … $41,903 $44,618 $47,509 Value Dividend $1,750 $1,860 $2,050 … $2,550 $2,715 $2,891 Reinvested Total value in Year 10 = $47,509 ; Total Return = $20,509 The re-investment method may eventually generate 11% more returns than put dividend back to pocket every year. Besides, many companies also have dividend reinvestment plan that do not require additional transaction fees. It would be a cost-effective way to purchase shares through reinvesting dividends. Personal insurance Insurance can provide a cost-effective way that offers financial protection for you and your family if you become ill, injured or die. Life insurance may help to you pay off debts and maintain your family’s standard of living if you can no longer provide them. An amount of $1,500,000 for George and $1,000,000 for Rebecca is considered appropriate at this time. These amounts will cover the shortfall as identified in your client questionnaire and should be sufficient. Additional life and TPD insurance is recommended to George because he cannot take out higher cover within his superannuation fund. By holding the insurance within your current super fund you can pay for the cost through your super fund and the premium are tax deductible to the fund. Income protection insurance is designed to provide a regular income in the event that you are unable to work due to sickness or injury. The income protection recommended is the maximum available for George and Rebecca at this time. 12 Nobody likes to think about the possibility of suffering a serious illness or injury in the future. It’s hard to foresee unexpected event, however you can make plans to help support yourself. Trauma insurance will pay a lump sum to cover the medical costs for certain medical conditions, e.g. cancer, heart attack or stroke. Having this type of insurance will ensure you are not out-of-pocket and can afford the best of care should any of these events arise. Superannuation The main purpose to change George’s superannuation risk preference is to match up with his risk profiles. Rebecca should maintain her superannuation in a balanced investment style. The salary sacrifice contribution will help you to further build your wealth in a tax effective way over the long term. Estate planning Estate planning can be extremely complex, you should visit expert to seek advice. A will should be reviewed regularly or following a major change in personal circumstances (e.g. marriage or divorce, or the birth of children) to ensure it is up to date. As a guide you should consult with your legal advisor for a review or when your circumstances change. If you do not have a legal advisor, we will be more than happy to make a referral. Generally speaking, superannuation benefit is not included as an estate asset in your Will. However, by using a binding nomination, you can nominate a beneficiary (e.g. your spouse) to receive the proceeds from superannuation plan and/or distributed to your Will. A binding nomination is a formal document that must be signed and dated by the member in the presence of two independent witnesses who are at least 18 years old. It is valid for three years from the date you sign it. You can renew, change or revoke your nomination at any time. Things you should consider Paying off the mortgage Please be aware there may be discharge or legal fees associated with paying off the mortgage early. You will have to discuss this with your mortgage provider. Taxation issues You need to be aware that I am not tax advisor and can only supply limited taxation advice. I recommend that you consult with a taxation expert on any taxation advice you may require. 13 Product recommendations George and Rebecca, following our investment strategy, we recommend that you invest in the following products: Medi Future Insurance: This Company has been providing insurance services for more than 30 years. It offers a comprehensive range of insurance products with affordable premiums. Education Foundation Investments: It is a boutique investment fund manager providing a solid return for the past two decades. The fund has a conservative investment style with a long-term focus, and aim to deliver consistent returns for clients. The fund is diversified across a range of specialist investment managers with an emphasis on cash and fixed interest securities. Relevant research material and Product Disclosure Statements (PDS) are attached for your attention. It is very import that you read these documents carefully and contact us should you have any questions or if there are areas of the document that you do not fully understand. All of these products are on our approved recommended list. Cooling off period You have 14 days from the time your investment is confirmed to change your mind on any products. If you wish to return a product and get a refund you must notify us within 14 days after confirmation. Please note that if you return a product within the cooling off period you may get back less than you originally paid for. This can be due to market fluctuations, taxes and administrative costs. *Details on the cooling off period for each product are also provided in PDS. 14 Recommended asset allocation Your investment assets are invested across different asset classes. The table below summarises: Weight: the proposed asset allocation resulting from our recommendations. Risk profile weight: the recommended asset allocation for your investment risk profile. Variance (weight): the variance between the recommended and proposed asset allocation. Comment on proposed asset allocation versus your risk profile As shown in the table 1 below, George’s current asset allocation does not match his risk profile weighting very well. Table 1: Current Asset allocation George Rebecca Asset Allocation Risk Risk Variance Variance Weight Profile Weight Profile (Weight) (Weight) Weight Weight Defensive Assets Australian Cash 34.4% 5% 29.4% 19.5% 10% 9.5% Australian Fixed Interest 12.6% 15% -2.4% 17.9% 20% -2.1% International Fixed Interest 6.3% 10% -3.7% 8.9% 10% -1.1% Total for Defensive Assets 53.3% 30% 23.3% 46.3% 40% 6.3% Growth Assets Australia Equities 27.8% 35% -7.2% 26.8% 30% -3.2% Australian Property 6.3% 10% -3.7% 8.9% 10% -1.1% International Equities 12.6% 25% -12.4% 17.9% 20% -2.1% Total for Growth Assets 46.7% 70% -23.3% 53.7% 60% -6.3% These asset allocations are calculated using all your current investment assets, including superannuation and excluding your principal residence. The asset allocation for recommended managed funds is shown in table 2 below (also available in the PDS from the fund manager). Please be aware the fund manager may very their asset allocation at any time in accordance with their view of the investment market. 15 Table 2 illustrates the asset allocation for managed fund. This information is also available in the PDS from the fund manager. Table 2: Asset allocation for managed funds Education Foundation Asset Allocation Investments Funds Defensive Assets Australian Cash 15% Australian Fixed Interest 25% International Fixed Interest 15% Total for Defensive Assets 55% Growth Assets Australia Equities 25% Australian Property 10% International Equities 10% Total for Growth Assets 45% Grand Total 100% Table 3 below estimates your new asset allocations once you follow my recommendations. The proposed asset allocation for George is more in line with his risk profile as Growth investor. Please note the change of Rebecca’s risk weighting after recommendation is mainly affected by the managed funds that adopt more conservative investment style. This variance however may be diminished as more funds would be added to her superannuation in the future. Table 3: Asset allocation after implementation of recommendations George Rebecca Asset Allocation Risk Risk Variance Variance Weight Profile Weight Profile (Weight) (Weight) Weight Weight Defensive Assets Australian Cash 6.6% 5% 1.6% 15.9% 10% 5.9% Australian Fixed Interest 11.7% 15% -3.3% 21.2% 20% 1.2% International Fixed Interest 7.8% 10% -2.2% 11.6% 10% 1.6% Total for Defensive Assets 26.1% 30% -3.9% 48.7% 40% 8.7% Growth Assets Australia Equities 46.6% 35% 11.6% 26.7% 30% -3.3% Australian Property 7.8% 10% -2.2% 9.6% 10% -0.4% International Equities 19.5% 25% -5.5% 15.1% 20% -4.9% Total for Growth Assets 73.9% 70% 3.9% 51.3% 60% -8.7% Grand Total 100% 100% 0% 100% 100% 0% 16 Table 4 shows the change of your asset allocation in dollar value. Table 4: Asset value George Rebecca Asset Allocation Value after Value after Current Value Current Value recommendation recommendation Defensive Assets Australian Cash $104,000 $18,184 $18,500 $27,469 Australian Fixed Interest $38,000 $32,051 $17,000 $46,454 International Fixed Interest $19,000 $21,367 $8,500 $19,969 Total for Defensive Assets $161,000 $71,601 $44,000 $83,892 Growth Assets Australia Equities $84,000 $127,785 $25,500 $45,968 Australian Property $19,000 $21,367 $8,500 $16,484 International Equities $38,000 $53,418 $17,000 $25,999 Total for Growth Assets $141,000 $202,569 $51,000 $88,451 Total Value $302,000 $274,171 $95,000 $172,343 Note: The assets valuation above reflects the estimation for 2012/2013 financial year. 17 Disclosure of fees, commissions and/or benefits How are we paid? Commission and fees – upfront, ongoing commissions and financial planning advice fees The total fee for our advice and for the preparation of this Statement of Advice is $2,400 (including GST). Markson and Co is entitled to receive $1,600 and I will receive the balance. Please pay this fee within 14 days of receiving this Statement of Advice. If you wish to implement the products I have recommended, I will receive commission from the issuer of the products I have recommended. I believe that these are the best products for you; however, there may be other suitable products that may pay a lower commission. Initial Initial Ongoing Ongoing commission commission Commission commission Insurance Product Premium paid to paid to me paid to paid to me Dealer Dealer $120 (equal 2% per year $90 (75% of 90% of the Life and TPD insurance for to 10% of the based on that $1,200 the upfront ongoing George premium for year’s commission) commission the first year) premium $312 (equal $280.80 5% per year to 120% of 80% of the (90% of the based on that Trauma insurance for George $260 the premium ongoing upfront year’s for the first commission commission) premium year) $288 (equal $259.20 5% per year to 120% of 80% of the (90% of the based on that Trauma insurance for Rebecca $240 the premium ongoing upfront year’s for the first commission commission) premium year) Initial Initial Ongoing Ongoing Amount to commission commission Commission commission Investment Product be invested paid to paid to me paid to paid to me Dealer Dealer $125 (50% of Education Foundation $62,500 $250 the upfront nil nil Investments Funds commission) The amount of ongoing commission received by the Markson and Co will depend on the amount of premium you pay. There will be no initial or ongoing commission paid for the life and TPD insurance recommended. Neither Markson and Co nor I will receive any commission earned for any superannuation recommendations, and where necessary will be rebated. 18 Product management and/or operational fee You may be charged for buying and investing in products that have been recommended in this statement. The product provider will also charge a fee for the management of the funds. Education Foundation Investments and charge a 1.2% fee. For example, a $62,500 investment will incur $750 management cost. Other benefits Markson and Co and I may also receive additional benefits. With benefits exceeding $300, they will be recorded in a register that meets the requirement of the Financial Planning Association (FPA) Code of Practice on alternative forms of remuneration. A copy of the Register for Attain Financial Planning Pty Ltd or I is publicly available and can be provided at your request. 19 Ongoing service The advice is this SOA is based on your current circumstance, needs and objectives, which may change over time. Government will continue to change the tax and superannuation rules that may apply to your investment. They may also introduce new legislation that may be beneficial to you. Additionally, new products and services will be introduced to the market and some products will perform better than others. These changes should be assessed on an ongoing manner in relation to your particular situation. This will ensure you have the most appropriate investments to meet your goals and objectives. The ongoing review process aims to: Keep us updated on your circumstances, both personal and financial Revisit your risk profile Keep you updated on the economy and any investment and legislative changes that may impact your recommended strategy Keep you updated on your investment portfolio performance When applicable, recommend any changes to your investment or insurance strategy Please note: One 6-month review and one annual review will be given for free in the first year. A fee of $200 per hour will be charged for any additional services performed. The estimated total cost will be confirmed with you prior to any work being commenced. 20 Implementation George and Rebecca – in order to proceed with our recommendations, you will need to complete the steps below: Read, sign and return the Authority to Proceed attached. Read the attached Product Disclosure Statement and supporting material. Complete and sign the applicable form/s contained in the Product Disclosure Statement for Medi Future Insurance Pty., Ltd. Complete and sign the applicable form/s contained in the Product Disclosure Statement for Education Foundation Investments, including your tax file number. Arrange an appointment with me and bring any completed application forms. Please see SOA Appendix 6 for a detailed implementation program. Note: The recommendations contained in this SOA are current for 30 days only. Please contact me for further discussion if you are unable to act on our recommendation within this time frame. 21 Authority to proceed We acknowledge that the product(s) listed in the table below are to be implemented in our names: Insurance Product Amount of Cover Life and TPD cover for George with Medi Future Insurance $1,500,000 Trauma cover for George with Medi Future insurance $100,000 Trauma cover for Rebecca with Medi Future insurance $100,000 Investments Amount Education Foundation Investments Funds $62,500 Before signing this document, please check that I have: given you the ‘Markson and Co’ Financial Services Guide (FSG) given you all the Product Disclosure Statements for the products recommend confirmed that the personal information I have collected is correct discussed your goals and objectives confirmed that you are happy with your risk profile discussed any risks in the recommendations discussed fees that need to be paid Also before signing this document, confirm that: we have kept a copy of the SOA and we have had the opportunity to read, consider and understand the document, supporting material and have asked questions the SOA dated 19 Oct 2012 accurately summarises our current situation, investments, insurances and financial goals. We understand that any inaccurate or incomplete information provided to us, may bring risk to meeting our needs appropriately we have read and understood the ‘Disclosure of commissions, fees and benefits’ section of SOA we understand that the value of recommended investments may rise and fall in line with the market conditions and you cannot guarantee future performance we understand that this statement is solely for our use of the clients to whom it is addressed and Markson and Co Pty., Ltd, does not accept any liability whatsoever to third parties who use or rely on the whole or any part of the content, and we hereby request Wei Chen to provide services detailed in the section ‘Ongoing Services’ 22 Consent to ongoing contact We consent to being contacted by our adviser on an ongoing basis, in line with the agreed ongoing service review structure detailed within this recommendation. Our preferred hours of contact are between ______ (am/pm) and ______ (am/pm). Signed _________________________________ Date ____ / ____ / ____ Client Name Signed _________________________________ Date ____ / ____ / ____ Client Name Signed _________________________________ Date ____ / ____ / ____ Financial Planner 23 SOA Appendix 1 – Financial position before implementation of strategy Cash Flow Statement George Rebecca Notes Income from employment Salary $120,879 $60,440 SG Contribution $10,879 $5,440 9% SG Salary after salary sacrifice $110,000 $55,000 Rental income Unfranked dividends Franked dividends $1,750 27000*6.48% = $1,750 (96.7% franked) Franking (imputation) credits $725 1750*(30/70)*96.7% = $725 15000 @ 5% p.a. = $750 5000 @ 3.5% p.a. = $175 Interest $4,213 $463 Total = $925, 50% share = $463 each 75000 @ 5% p.a. = $3,750 Other income, e.g. taxable benefits Capital gains <1yr Capital gains >1yr Tax-free component of capital gains Assessable income $116,688 $55,463 Deductible expenses Rental expenses, repairs etc. Taxable income 2012/2013 $116,688 $55,463 Tax on taxable income $31,122 $9,572 Non-refundable tax offsets (e.g. LITO/SATO) Medicare levy $1,750 $832 Medicare levy surcharge Franking rebate -$725 Refundable rebates and offsets Total tax $31,147 $10,404 Income after tax $84,541 $45,059 24 Family cash flow George Rebecca Combined Income after tax (as calculated above) $84,541 $45,059 $129,600 Living expenses Home mortgage $14,350 $14,350 $28,700 General living expenses $22,500 $22,500 $45,000 Accountant’s fee $250 $250 $500 Donations $500 $500 $1,000 Annual Holiday $5,000 $5,000 $10,000 Total expenses $85,200 Net cash flow $44,400 Assets and liabilities Asset Owner Value Liabilities Net value Notes Personal assets Family Home Joint tenant $850,000 $300,000 $550,000 Home contents Joint tenant $50,000 $50,000 Car Joint tenant $18,000 $18,000 Total $918,000 $300,000 $618,000 Investment assets Superannuation George $190,000 $190,000 Superannuation Rebecca $85,000 $85,000 Cash management account Joint $15,000 $15,000 Savings account Joint $5,000 $5,000 Cash management account - George $75,000 $75,000 inheritance Shares George $27,000 $27,000 Total $397,000 $397,000 Net worth $1,015,000 Liabilities Percentage Loan Current debt Interest only Repayment deductible Home loan $300,000 No. $2392 p.m. Total $300,000 25 SOA Appendix 2 – Financial position after implementation of strategy (2012/2013 financial year) Cash flow statement George Rebecca Notes Income from employment Salary $120,879 $60,440 SG Contribution $10,879 $5,440 9 % SG Contribution start from early Nov 2012, Salary Sacrifice Contribution $9,600 $4,800 effectively 8 month contributions Salary after salary sacrifice $100,400 $50,200 Rental income Unfranked dividends Franked dividends $1,750 27000*6.48% = $1,750 (96.7% franked) Franking (imputation) credits $725 1750*(30/70)*96.7% = $725 15000 @ 5% p.a. = $750 Interest $375 $375 50% share = $375 each Other income, e.g. taxable benefits Capital gains <1yr Capital gains >1yr Tax-free component of capital gains Assessable income $103,250 $50,575 Deductible expenses Rental expenses, repairs etc. Taxable income 2012/2013 $103,250 $50,575 Tax on taxable income $26,150 $7,984 Non-refundable tax offsets (e.g. LITO/SATO) Medicare levy $1,549 $759 Medicare levy surcharge Franking rebate -$725 Refundable rebates and offsets Total tax $26,973 $8,743 Income after tax $76,277 $41,833 26 Family cash flow George Rebecca Combined Income after tax (as calculated above) $76,277 $41,833 $118,109 Living expenses Home mortgage $23,917 $23,917 $47,834 General living expenses $22,500 $22,500 $45,000 Accountant’s fee $250 $250 $500 Donations $500 $500 $1,000 Annual Holiday $5,000 $5,000 $10,000 EF Managed Fund @ $600 p.m. for 8 month $2,400 $2,400 $4,800 Medi Future Trauma insurance cover $260 $240 $500 Medi Future Life and TPD cover $1,200 $1,200 Total expenses $110,833 Net cash flow $7,275 Note: mortgage expense includes old repayments(July 2012 – Oct 2012) and new repayment(Nov 2012 – Jun 2013) Assets and liabilities Asset Owner Value Liabilities Net value Notes Personal assets Family Home Joint tenant $850,000 $274,249 $575,751 Home contents Joint tenant $50,000 $50,000 Car Joint tenant $18,000 $18,000 Total $918,000 $274,249 $643,751 *Assume that approximately $25,751 has been paid off home loan from Nov 2012 t0 June 2013 Investment assets Superannuation George $213,671 $213,671 Superannuation Rebecca $95,143 $95,143 Cash management account Joint $15,000 $15,000 Shares George $28,750 $28,750 EF managed investment Rebecca $69,706 $69,706 Total $422,369 $422,269 Net worth $1,066,020 *Assume contributions period for superannuation & managed investment is from Nov 2012 to June 2013 Liabilities Percentage Loan Current debt Interest only Repayment deductible Home loan $274,249 No. $4783 p.m. Total $274,249 27 SOA Appendix 3 – Superannuation Projections Table 1 Superannuation account balance projections Current situation After recommended strategy George’s Rebecca’s George’s account Rebecca’s George’s Combined Combined Date account balance account balance balance at year account balance age account balance account balance at year end at year end end at year end 42 Oct-2013 $190,000 $85,000 $275,000 $190,000 $85,000 $275,000 43 Jun-2013 $204,008 $91,003 $295,011 $213,671 $95,143 $308,813 44 Jun-2014 $226,097 $100,390 $326,486 $251,307 $111,004 $362,311 45 Jun-2015 $249,548 $110,257 $359,805 $291,664 $127,676 $419,340 46 Jun-2016 $274,445 $120,629 $395,074 $334,939 $145,202 $480,141 47 Jun-2017 $300,878 $131,532 $432,410 $381,342 $163,624 $544,966 48 Jun-2018 $328,942 $142,992 $471,934 $431,099 $182,988 $614,088 49 Jun-2019 $358,736 $155,039 $513,775 $484,454 $203,344 $687,797 50 Jun-2020 $390,368 $167,702 $558,070 $541,665 $224,740 $766,405 51 Jun-2021 $423,950 $181,013 $604,964 $603,012 $247,232 $850,244 52 Jun-2022 $459,605 $195,005 $654,610 $668,794 $270,874 $939,668 53 Jun-2023 $497,458 $209,713 $707,171 $739,332 $295,726 $1,035,057 54 Jun-2024 $537,646 $225,173 $762,819 $814,968 $321,849 $1,136,817 55 Jun-2025 $580,313 $241,425 $821,737 $896,073 $349,308 $1,245,381 56 Jun-2026 $625,611 $258,508 $884,118 $983,040 $378,173 $1,361,213 57 Jun-2027 $673,703 $276,464 $950,167 $1,076,294 $408,514 $1,484,809 58 Jun-2028 $724,761 $295,340 $1,020,101 $1,176,290 $440,408 $1,616,698 59 Jun-2029 $778,969 $315,181 $1,094,150 $1,283,514 $473,933 $1,757,448 60 Mar-2030 $821,807 $330,725 $1,152,533 $1,368,989 $500,198 $1,869,188 Table 1(a) Assumptions: George: strategy Rebecca: strategy Value George: current Rebecca: current recommendations recommendations Contribution amount: SG and any $906.60 before contribution tax $453.30 before contribution tax $2,106.60 before contribution tax $1,053.30 before contribution tax other (pmt) $770.60 after contribution tax $385.30 after contribution tax $1,790.60 after contribution tax $895.30 after contribution tax Contribution frequency Monthly Monthly Monthly Monthly Rate = the rate of return of the fund, 6% p.a. 5% p.a. 7% p.a. 5% p.a. net of inflation 28 Table 2 Superannuation income analysis post retirement George’s age Combined Assumptions Combined fund account balance 60 $1,869,188 Rate of return net of inflation 3% 61 $1,865,209 Frequency of drawdown Monthly 62 $1,861,109 Income per annum $60,000 63 $1,856,885 64 $1,852,532 65 $1,848,046 66 $1,843,425 67 $1,838,662 68 $1,833,755 69 $1,828,698 70 $1,823,488 71 $1,818,119 72 $1,812,587 73 $1,806,887 74 $1,801,013 75 $1,794,961 76 $1,788,724 77 $1,782,298 78 $1,775,677 79 $1,768,854 80 $1,761,823 81 $1,754,579 82 $1,747,114 83 $1,739,422 84 $1,731,496 29 SOA Appendix 4 – Managed Investment Projections Year Sienna's age Ruby's age Date Withdraw Fund Balance Oct-2012 $62,500 1 11 8 Dec-2012 $64,277 Dec-2013 $75,287 2 12 9 $12,000 $63,287 Dec-2014 $74,241 3 13 10 $12,000 $62,241 Dec-2015 $73,136 4 14 11 $12,000 $61,136 Dec-2016 $71,969 5 15 12 $24,000 $47,969 Dec-2017 $58,059 6 16 13 $24,000 $34,059 Dec-2018 $43,365 7 17 14 $24,000 $19,365 Dec-2019 $27,842 8 18 15 $12,000 $15,842 Dec-2020 $24,119 9 19 16 $12,000 $12,119 Dec-2021 $20,187 10 20 17 $12,000 $8,187 Assumptions: Opening balance: $62,500 Monthly Contribution: $600 Rate of return net of inflation: 5.5% p.a. All cash withdraw will be made at the end of year 30 SOA Appendix 5 – Mortgage Projections Current situation After recommended strategy Year Date Account Balance Account Balance Oct-2012 $300,000 $300,000 0 Jun-2013 $293,749 $274,249 1 Oct-2013 $290,521 $260,950 2 Oct-2014 $280,407 $219,285 3 Oct-2015 $269,616 $174,830 4 Oct-2016 $258,102 $127,397 5 Oct-2017 $245,817 $76,788 6 Oct-2018 $232,709 $22,789 7 Oct-2019 $218,723 -$34,826 8 Oct-2020 $203,801 9 Oct-2021 $187,879 10 Oct-2022 $170,891 11 Oct-2023 $152,765 12 Oct-2024 $133,425 13 Oct-2025 $112,791 14 Oct-2026 $90,774 15 Oct-2027 $67,282 16 Oct-2028 $42,218 17 Oct-2029 $15,474 18 Oct-2030 -$13,060 Assumptions: Opening balance: $300,000 Mortgage interest rate: 6.5% p.a. Current monthly repayment: $2,392 Recommended monthly repayment: $4,784 Please note: The mortgage will be fully repaid in 17.6 years if under current repayment The mortgage will be fully repaid in 6.4 years if under recommended repayment 31 SOA Appendix 6 – Implementation schedule Action By Whom Timeframe Arrange time for next meeting (2 weeks) Wei Chen Immediately Read and sign Authority to Proceed George & Rebecca 1 week Read Product Disclosure Statement George & Rebecca 1 week Complete application forms George & Rebecca 1 week Arrange to meet with accountant to discuss George & Rebecca 1 week accounting /tax issues Contact super fund to increase insurance Rebecca 2 weeks Contact super fund to change asset/risk allocation George 2 weeks Contact super fund to add insurance George & Rebecca 2 weeks Contact bank to increase mortgage repayments George & Rebecca 2 weeks Meet with George & Rebecca to collect forms and Wei Chen 2 weeks check on progress Deposit funds from savings into managed George & Rebecca 2 weeks investment Arrange to meet with solicitor to update Will and George & Rebecca 2 weeks powers of attorney Arrange for review meeting Wei Chen 6 months (Section 3 commences on the next page) 32 Section 3 Present appropriate strategies and solutions to the client and negotiate a financial plan, policy or transaction Part A The SOA has been completed and a meeting has been organised with George and Rebecca to present the recommendations and, if they agree, to implement them. Outline the steps that should be followed in presenting this advice to George and Rebecca. In your answer, you should address at least four of the following requirements regarding presentation of advice: • the order in which you present the information • what back-up information and documents you might need • any risks associated with the solution • two predictable questions the Browns might ask you and the answers you will give • the language you will use to present the strategy to George and Rebecca. (250 words) The following procedures shall apply when presenting the advice to George and Rebecca: Restate the reasons why they come to seek the financial advice and they expectations (goals & objectives) Reconfirm whether there is any significant change to their situation Revisit all information collected from the data find form and summarise their current situation including the area where they can make improvement Talk about their risk profile and explain the rationale behind Go through each recommendations and explain how these recommendation can meet their goals and objectives, including further explanation about particular recommended product’s Product Disclosure Statement if necessary Give a summary of recommendations and strategies; explain how their asset allocations can meet with their risk profile after taking recommendations Explain the cost of taking recommendations and associated risks Disclose fees, commissions and benefit involved Explain the ongoing service and implementation plan Ensure they are clear about every forms that need to signed It is also important to ask questions when following above steps to ensure both George and Rebecca are fully understand the plan and the implications of the advice provided. Part B Suggest a minimum of two concerns that the Browns might have with the strategy that you have proposed. Explain how you would address each of these concerns. (100 words) Concern 1: How are these investment funds selected? These investments are all from our approved product list (APL). The APL is a result of extensive research, analysis and approved by our licensee – Markson and Co. I have also carefully investigated these investment products and ranked them as the best options to suit your current risk profile. Concern 2: What if we do not like the investments you recommend? If you are not happy with taking the recommended investment you can simply inform us your wishes. Prior to undertaking any actions on investment, we have to get your permission first. That’s why the ‘Authority to proceed’ is provided to you. Part C During the course of your discussion with George, you discover that he has suffered from a back injury and you suspect that this may result in a premium loading being applied to his income protection. Explain how you would justify the need for this policy to him, despite the extra costs. (150 words) It would be beneficial to George’s family if he take adequate income protection insurance. Imagine he is unable to work due to unexpected illness/injury/partial or total disability; the family will lose approximately $84,000 annual income (after tax). They may even find difficulties to keep the life style they used to enjoy as Rebecca’s income can only cover their general living expenses. They probably need to extend their mortgage, cancel their annual holiday, and save more for their children’s future education. Unlike life & TPD insurance (protection on death & disability) and trauma insurance (protection on defined medical conditions), Income protection insurance can provide a monthly payment (usually up to 75% of the income) if the insured is temporarily unable to work due to illness or injury. Income protection insurance is perhaps the easiest policy on which to make a claim, given a legitimate disability and a reasonable contract of insurance. This type of policy only requires the life insured to be able to prove they are disabled at least one month at a time The Australian Taxation Office allows tax deductions for insurance premiums where it can be proven that those premiums relate to the earning of assessable income; therefore income protection insurance is also tax deductible. If George is more concerned about the cost of loading, certain adjustments on waiting period/ benefit period may help to reduce the premium. Section 4 Agree on the plan, policy or transaction and complete documentation Part A George and Rebecca have finally agreed to proceed with your recommendations. Explain your fee and cost structure to George and Rebecca in plain English. (100 words) The total fee for our advice and for the preparation of this Statement of Advice is $2,400 (including GST). Markson and Co is entitled to receive $1,600 and I will receive the balance. If you wish to implement the products I have recommended, I will receive commission from the issuer of the products I have recommended (please refer to SOA – Disclosure of commissions, fees and benefits). All fees and commissions are clearly disclosed in both the SOA and the PDS. All remuneration, commission and other benefits are presented in dollar terms in the SOA. A fee of $200 per hour will be charged for any additional services performed (e.g. ongoing service). Part B Prepare a timeframe for implementing the plan. Explain the reasons behind the timeframe. (100 words) Action By Whom Timeframe Arrange time for next meeting (2 weeks) Wei Chen Immediately Read and sign Authority to Proceed George & Rebecca 1 week Read Product Disclosure Statement George & Rebecca 1 week Complete application forms George & Rebecca 1 week Arrange to meet with accountant to discuss accounting George & Rebecca 1 week /tax issues Contact super fund to increase insurance Rebecca 2 weeks Contact super fund to change asset/risk allocation George 2 weeks Contact super fund to add insurance George & Rebecca 2 weeks Contact bank to increase mortgage repayments George & Rebecca 2 weeks Meet with George & Rebecca to collect forms and check Wei Chen 2 weeks on progress Deposit funds from savings into managed investment George & Rebecca 2 weeks Arrange to meet with solicitor to update Will and powers George & Rebecca 2 weeks of attorney Arrange for review meeting Wei Chen 6 months George and Rebecca should have enough time to read and review all the application and PDS during the first week. They should also talk with their accountant to make sure they understand all the accounting/taxation implications that may affect them after taking the recommended actions. Increasing mortgage repayment involves lots of money; they may need more time to think about it. Once their written confirmation and application are being received during the meeting in two weeks time, further actions can be implemented. Lastly, it would be easy for them to meet with solicitor when everything else has been arranged. Another meeting in 6 months time should be enough to perform a review on their progress. Part C Identify the documentation that you may require from George and Rebecca before proceeding with your advice. (100 words) The final updated SOA with ‘Authority to proceed’ that signed by Rebecca and George is needed before implementing the advice. It simply gives the planner a permission to proceed with planned actions. The application forms for recommended insurance and investment products have to be completed and signed as well. The identity verification document (e.g. Driver’s licence, passport) may also be need for confirming the signature. Part D List the documentation that you may need to present to George and Rebecca at this stage. (100 words) A checklist of all the possible activities associated with the provision of financial advice Product Disclosure Statements for all recommended insurance and investment products Copies of all singed documents (e.g. SOA and application forms) The implementation schedule A letter to the solicitor that explains their needs for updating the Will and establishing powers of attorney A confirmation of next meeting for review Section 5 Provide ongoing service where requested by client Part A Draft an outline of the level of ongoing service you intend to recommend to George and Rebecca. In your outline, discuss the type of information that you would regularly provide to George and Rebecca in relation to their portfolio. (250 words) Ongoing financial planning reviews are important part of ensuring the financial plan remains relevant over time. The ongoing review is similar to what have been done in the previous meeting before implement SOA. The planner will collect data, examine resources, prioritise clients’ goals and objectives, make recommendation and initiate implementation plan if necessary. The review process will normally address changes to the following areas and adjusts the financial plan accordingly: Income and expenditure: it’s vital to maintain their budget in an acceptable level and make sure Rebecca and George have adequate savings. A change in career, or earning ability, may have a significant impact on their lifestyle habits or retirement planning capabilities. Balance sheet: it is important to ensure that all their assets and liabilities are reflected accurately. These will affect not only the content of the advice relevant to them, such as level of assurance cover, but also impact investments where tax is relevant. Their family situation: they may be able to receive more social benefits as their family situation changes. Their financial planning needs and objectives should be reviewed before considering any changes on your financial and investment strategies Their insurance needs: their family member might need more health insurance cover as everyone grows older. The general economic environment: the economy can change without notice, a new regulation or legislation will impact on their financial plan. Superannuation: if either George or Rebecca decides retire earlier, they would have to adopt relevant adjustment to their superannuation so that to have sufficient income stream when they retire. Investment product: there may be a new product available in the market which better suits their risk profile and need. Taxation: their taxation position and any relevant changes in the current tax law should be updated regularly. There may be opportunities to reduce the tax payable. Estate Planning: If they've had any life or family changes, such as a birth, adoption or divorce, they may need to revise their beneficiary designations. The above points should be reviewed at least once a year through a formal meeting. If there is any change needs to be handled in an urgent manner, a special review can be arranged. Reviewing their financial plan at least once a year could help ensure George and Rebecca are on track to reach their long-term goals. It is also an opportunity for them to compare their investment portfolio performance with the original expectations. Although the purpose of the review process is not necessarily to change the investment, making certain investment amendments may be needed if there are significant difference between the existing performance and the expectation. The review simply offers a chance to implement any new plan of action that has been developed in light of changing goals or changing performance. Any urgent issue should be reviewed immediately; the investment portfolio could be reviewed every 3 to 6 months; a full review would be given on an annual basis. Part B What would you do to ensure that George and Rebecca know the specific costs relating to an ongoing service? (100 words) Other than simply explaining the cost structure to George and Rebecca, a written service fee schedule should be given to them. Any remuneration, commission, fees or other benefits in relation to providing ongoing service and how these cost are calculated shall all be explained and included in the fee schedule. The estimated total cost of an ongoing service will be confirmed with them prior to any work being commenced.
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