Reference no: EM132199177

APPLIED FINANCIAL PLANNING ASSIGNMENT -

Question A-1

As the experienced financial education trainer for Sample Financial Planners you are responsible for the initial training of new graduates to the firm. In early 2018 the firm employed 4 graduates all from the University of South Australia, each having obtained excellent grades in all of their study at University.

You have decided that an excellent way of complementing the graduates' technical skills is to go through one of the client files from the firm, which outlines the particular financial planning process adopted with its clients. The client file selected is that of Mr. and Mrs. Green with all relevant documents as shown in the textbook.

Required:

a) Summarise all documents included in the client file of Mr. and Mrs. Green in a manner that outlines the purpose of each document and the processes adopted by the firm in ensuring that the firm has;

i) gathered all relevant information (quantitative and qualitative) from the client,

ii) a complete understanding of the client's financial needs and objectives,

iii) fully assessed the clients current and expected future financial constraints/obstacles,

iv) recognised the limitations of the advice that is given (particularly in relation to accurately being able to forecast future financial outcomes), and

v) provided the relevant advice in the form of a financial plan that is readily understandable to clients (in this case, Mr. and Mrs. Green) who are likely to have limited background exposure and knowledge of investments and financial planning issues.

b) Assume that instead of being the experienced financial education trainer (as per part a) of this question), you are one of the 4 University of South Australia graduates employed by Sample Financial Planners. As one of the recent appointees you want to impress the firm with your financial knowledge and skills.

For this part of the question you are required to provide the firm with some constructive feedback in relation to the documents included in the client file for Mr. and Mrs. Green. Specifically, you are required to include discussion of 3 points in which you could improve any / all of the following elements of the financial planning process as included in the file documentation from Sample Financial Planners:

i) the information gathering process,

ii) the assessment of financial needs, objectives and constraints, and / or

iii) the preparation, compilation and illustration of the financial plan.

Question A-2

In the financial advisory industry there is various terminology often stated that is quite particular to the operations and specifics of this industry which the general public may be unfamiliar with and may lead to them being wary of the industry because of this unfamiliarity.

Required: Assuming that you are an experienced licensed financial adviser for a well-established financial advisory firm, if you were giving a presentation to an audience of the general public who are interested in becoming clients of your firm but would like to increase their 'financial' knowledge before doing so, provide some informed commentary to the (potential) clients in relation to the meaning of each of the following terms in a manner understandable to the general public:

i) 'Independent versus non-independent financial advice' based on a potential conflict of interest

ii) 'Dollar-cost averaging' method of investing; and

iii) 'Top-down versus bottom-up' investing.

Note that the above terms should be examined in isolation - that is, there is no relationship required to be discussed between any of the above terms.

b) As part of the formation of the independent standards setting body - FASEA, changes have been made for the appropriate educational requirements for licensed financial planners / advisers/ new financial planners/advisers. Please summarise these changes.

Question A-3

As an experienced financial services professional for Blue Sky Financial Engineering Services, in the process of conducting a fact-finding interview with a financial planning client who has recently sought the services of your firm in order to establish a share portfolio, you have determined that the client only has limited personal funds available for such investment. Given the above, undertaking investments in shares with borrowings accessed via the use of a margin-lending package appears to be an attractive option in order for the client to 'get started' with such share portfolio.

Required:

a) As a financial adviser, outline the primary considerations that you need to raise / address with the client prior to them entering into such margin-lending arrangement.

Note: It is expected that student groups will prepare more than simply a list of advantages and disadvantages of margin-lending arrangements for this part of the question as student discussion needs to link the personal circumstances of the client to these margin-lending arrangements.

b) Assuming that the margin-lending facility is made available to the client, what considerations need to be assessed when selecting the types of shares that should make up the share portfolio?

c) Obtain some basic information in relation to 2 current margin-lending facilities available in the marketplace. Briefly differentiate each facility and provide a general recommendation as to which alternative may be most suitable for an investment portfolio of around $100,000 which is likely to be held for approximately 5 years in total. As part of your discussion / assessment, include information regarding each facilities:

i) loan-to-value ratio (LVR), and the

ii) rules by which margin calls are to be made.

Question B-1

Self-Managed Superannuation Funds ('SMSF') have experienced significant growth in terms of both the number of funds established and the relative value of SMSF assets in recent years. As a result your firm, Come in Spinner Financial Planning Consultants, has also been receiving many queries from financial planning clients regarding whether they should transfer the member account balance of their existing defined contribution (accumulation) superannuation fund to a SMSF.

Given the level of enquiries received by Come in Spinner Financial Planning Consultants, it is considered that it would be of benefit for the firm to provide a seminar to its current (and prospective) clients, discussing the relative 'popularity', nature and operations of SMSF's. As a result your firm has booked the main ballroom of the Adelaide Convention Centre on December 24, 2018 (Christmas Eve) to hold the seminar, where it is expected that over 800 people will attend before going home to wait for Santa Claus to arrive.

Note that on average the seminar audience is likely to consist of people who have expressed an interest in being involved in a SMSF and are aware of the basic characteristics of such type of superannuation fund but are not familiar with any specific operational or legislative issues that may impact on the fund members and / or trustees.

Required:

a) As you would like to commence the seminar presentation with a general discussion of the growth in recent times of SMSF's, undertake some basic research to provide evidence to support discussion of the statement that: "Self-managed superannuation funds ('SMSF') have experienced significant growth in terms of both the number of funds established and the relative value of SMSF assets in recent years".

Present this information in a format that would be readily understandable by the seminar audience.

b) Given the initial discussion in this question, it is considered that in your seminar presentation you will need to make sure that clients are aware of the additional responsibilities on them that follow from establishing a SMSF given that fund members will also be trustees. Such additional responsibilities are both of an operational and legislative nature when compared to being a member of an externally managed superannuation fund (such as an employer sponsored superannuation fund or fund that is managed by a commercial provider - for example; a large financial institution or investment company).

i) Provide a general overview of these additional operational and legislative responsibilities that arise from acting a SMSF trustee for the benefit of the seminar audience.

ii) A SMSF (as with any other superannuation fund) may contain members that are both in accumulation mode (contributing to their member account balance) and in pension mode (regularly withdrawing from their member account balance).

Outline the principal differences, if any, to the seminar audience that are likely to arise for the SMSF trustees managing its member's account balances in each of the specified modes.

Hint: Issues such as taxation, eligibility for contributions / withdrawal and death benefits may be of relevance for this section of the question.

Question B-2

One of the long-standing financial planning clients of Glycerine Wealth Management Services, Mr. Tony Rudd, is looking to establish a 'transition to retirement' pension in the near future, whereby he continues to work (on a reduced number of hours basis) and 'top up' his (now) reduced salary income by withdrawing some of his accumulated superannuation fund balance from his existing superannuation funds in the form of a non-commutable pension. Tony has just turned 57 years of age and is likely to continue working (on a reduced number of hours basis) for at least another 5 years and has accumulated quite large superannuation fund balances in each of;

1. industry superannuation fund,

2. public sector fund,

3. self-managed superannuation fund ("SMSF") he currently is a member of with his former wife, Britney.

Tony's current member account balances of each superannuation fund and sources of accumulated benefits relevant to each fund are shown in the table below:

Super Fund Name	Untaxed Element $	Taxed Element $	Tax-free Element $	Total $
Industry		300,000	30,000	330,000
Public sector	200,000		50,000	250,000
SMSF		160,000	40,000	200,000
Total	200,000	460,000	120,000	780,000

Tony is divorced from Britney and has 3 financially independent children from that marriage as well as twins (a boy and a girl aged 19 who are both full-time students living at home) with his current partner (Ricki-Lee). Tony was a former professional tennis player and is now a mature-age rap singer, having a current recording contract with Soni Records where he performs at shopping centres and corporate events. By his calculations, Tony expects he will need to withdraw about $50,000 p.a. from the transition to retirement pension and will continue to earn approximately $90,000 p.a., each before-tax, from his part-time employment.

Required:

a) Outline in a language that would be understood by Tony (given that Glycerine Wealth Management Services is a well-regarded firm with expertise in superannuation and retirement planning), how the strategy that is sought to be developed (to establish a transition to retirement pension in order to top up his reduced income) works in operational terms.

b) In addition to the above discussion, include considered explanatory responses to each of the following specific issues / concerns raised by Tony in relation to the outcomes of this strategy:

i) Is there a minimum / maximum amount that can be withdrawn from the transition to retirement pensions?

ii) Does he need to withdraw the same pension payment amount / percentage annually from each of the superannuation funds?

iii) Are there any preferences in the order as to which fund(s) he should withdraw from to provide his required pension payments?

iv) Can he still make contributions to any / all of the superannuation funds he has (industry, public sector, SMSF) even though he is taking a transition to retirement pension from them?

v) If the response to section iv) of this part of the question is yes, although Tony knows a superannuation fund pays tax on its earnings where the member is making superannuation contributions, what about any liability of the superannuation fund to pay tax on the earnings used to support a transition to retirement pension?

That is, how does the fund know how much of the members account balance is from superannuation contributions and how much is supporting a transition to retirement pension?

Question B-3

An Australian resident taxpayer has approached you as their trusted financial adviser after having sought the services of a taxation accountant to assist with the lodgment of their Australian income tax return for the latest year. The client has investments in a number of companies that are listed on the Australian Stock Exchange together with various local (Australian) and international managed funds all undertaken following your recommendations.

The same client has also recently been advised (in mid-2018) that they are the beneficiary of a residential property (complete with existing furniture and fittings - lounge, refrigerator, beds etc.) situated in the Adelaide hills area arising from the deceased estate of a relative.

The property was originally constructed by the (now- deceased) relative in mid-to-late 1999 in a then new housing development area. At this stage the client is unsure whether to:

1. live in the property (as they are currently living in rented accommodation in Darwin, Northern Territory);

2. rent out the property as an investment; or

3. sell the property.

Required: The client is seeking assistance with your considered responses to the following questions:

a) Why was it the case for some managed fund distributions received in the last year that the amount included as assessable income in the client's income tax return;

i) exceeded the actual cash amount paid to the client, and

ii) for other managed fund distributions received in the last year their assessable income was less than the actual cash amount paid to the client?

This was despite the client being assessed for taxation purposes on a cash basis.

b) Why may it be relevant to enquire as to the use of the inherited residential property by the deceased prior to their death in relation to the potential application of the capital gains tax (CGT)?

c) What issues are relevant regarding the inherited residential property in terms of the timing of the:

i) initial acquisition date of the property by the deceased,

ii) date of death of the relative, and

iii) expected date of sale of the inherited property by your client, in relation to the potential application of the CGT for your client?

d) What difference, if any, would it make in relation to the potential application of the CGT to your client, if they were to live in the property at some stage prior to a subsequent sale?

Note: Although the client has followed your investment recommendations they are not, unlike yourself, an expert in the area of taxation and investments, so your discussion will need to be worded carefully to ensure that any technical issues raised are understandable to the client without including information not directly relevant to the queries raised.

Question B-4

As Self-Managed Superannuation Funds ('SMSF') are directly managed by the funds own members, given that they are both the trustee and the member, sometimes difficult situations in the fund management and operations can result.

Required:

a) What potential conflict of interest issues may arise in relation to the conduct of the trustees of a SMSF that may create some difficulties, given the requirement that a superannuation fund meet the regulatory obligations imposed by the 'sole purpose test' at all times?

Hint: What is likely to be different with the operations of a SMSF as compared to an externally managed superannuation fund that may create circumstances where potential conflict of interest issues may arise?

b) Describe to your clients, Ms. Billie-Jo Green (51 years of age) and Mr. Armstrong Day (48 years of age) who have jointly operated the Green Day Self-Managed Superannuation Fund ('Green Day SMSF') for a number of years whilst also operating a fast-food business, how the 'in-house' assets test works in relation to each of the following assets that they personally own (or own in associated family entities - partnerships, trusts, companies) and are currently (in mid-2018) contemplating transferring into the Green Day SMSF (that is, you are required to state whether the following assets can be transferred into the Green Day SMSF and if so, how or if the in-house assets test applies). For each asset also briefly comment on its general suitability as an investment for a SMSF):

i). Telstra shares;

ii). Equity in the family fast-food business operated as a partnership;

iii). Business premises for the fast-food business;

iv). Holiday beach shack that is rented out at some time during the year for shortterm accommodation as well as being used by Billie-Jo and Armstrong for holiday periods;

v). Gold coins;

vi). Racehorse called Pet Food Flyer that has previously had 6 starts for 1 win and is currently in training for the 2018 Melbourne Cup;

vii). Shares in a gold mining company that is in the process of becoming listed on the South African Stock Exchange; and

viii). Existing 'whole-of-life' insurance policies.

Question B-5

After attending a public seminar where you presented general information on different investment choices, Tom and Amy Baker have come to you for more specific advice on how to invest a $500,000 inheritance they have recently received.

Required:

a. Tom and Amy are not financially literate and to help them get an appreciation of the different investment opportunities, you have decided to deliver a detailed presentation discussing 2 different investment choices:

• Residential property (apartment or flat) investment in Goodwood;
• Investment in a managed fund;

The examples must:

• cover the five year period from July 2013 to June 2018;
• where possible, use actual data from real investments;
• include any costs, fees and taxes that apply to the investments;
• assume the investment was cashed out on 30th June 2018 and, with consideration of all cash inflows and outflows over the 5 year period of investment, determine the overall effective annual rate of return for the investments.

b. In addition, you need to discuss investment of the inheritance in their superannuation fund(s) as a possible alternative to the above.

Note - Need only B2 from above questions.