FINA2209 WEEK 3 TUTORIAL QUESTIONS (FINANCIAL PLANNING
PROCESSES AND PROCEDURES)
3.1 You are a Compliance Manager for a licensee which has 15 authorised
representatives. You have just been notified that a complaint has been made against one
of the authorised representatives by a former client.
The representative works from an office remote from ‘head office’ and, on your last audit
inspection visit nine months ago, you found that some of the representative’s files were
not in order.
The basis of the former client’s complaint is that they believe they were not advised that
their adviser would be charging ongoing fees from their portfolio.
You now plan to conduct an audit visit, without notice, at the representative’s office.
What will you be looking for at the representative’s office in order that you can prepare
an initial response to the complainant? Prepare a bullet-point checklist and explain why
each item is required.
The Compliance Manager should be reviewing the client file held by the representative with a
view to understanding whether or not the client was notified that fees would be charged for
ongoing services.
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Was the client provided with a (then) current copy of the Financial Services Guide?
This is a legal requirement under FSRA.
If yes, was it handed to them personally at a meeting or was it posted to the client?
There is a need to understand how it was delivered to the client. For post, it is difficult
to prove receipt however the client could, for example, confirm receipt of it in writing
at a first meeting.
If personally delivered, did the representative obtain a receipt from the client to the
effect that they were provided with the FSG? Documentary proof with a client signature
will go a long to evidencing to the client that they were notified of ongoing fees in the
first instance via the FGS.
Does the representative have a File Note which records that the FSG was provided to
the client? More documentary evidence will aid in evidencing to the client.
If there is a File Note, does it mention that the representative explained to the client
how and when fees are charged? Documentary evidence.
Does the Statement of Advice detail with clarity the fees both - initial and ongoing – to
the client? Does the SoA explain when fees would be charged and how they would be
charged? The licensee and the representative have legal obligations for disclosure of
all costs and fees associated with their services in SoAs. This should also be more
documentary evidence that the client was made aware of the ongoing fees.
Did the client sign an ‘Authority to Proceed’ and if yes, is it dated the day of, or day
prior to, plan implementation? Further documentary evidence.
If the client did sign an ATP, did it detail that fees would be charged for ongoing
services? Documentary evidence of having been made aware of the ongoing fees.
All of these steps should build a portfolio of evidence which can be presented to the client that
they were in fact notified that ongoing fees would be charged – how much and when they
would be charged.
If the evidence of notifying the client about ongoing fees cannot be found in the representative’s
client file, then the client might likely have a case to seek a refund of the ongoing fees charged
to date.
3.2 This scenario requires you to think about how you would address a situation, which
is highly likely you will one day encounter in professional practice. It places you in a
situation of having to respond to a request from a potential client while being cognisant
of your obligations at law and the obligations you have to your licensee. It also highlights
a potential problem which could arise with the Best Interest Duty.
You are in an initial meeting with a potential new client and you have just explained the
process of developing advice and then presenting it as a Statement of Advice. You paid
particular attention to the need to conduct a data gathering process with the client in
order to gain a detailed understanding of their objectives and financial position.
At that point in the discussion, you noticed that the client seemed somewhat uneasy –
squirming in the chair a little, a slight grimace emerging in the facial expression. At the
end of the explanation the potential client said, “Well, look, I just want you to give me
some advice on what do with my superannuation when I retire next year. I don’t need all
that other stuff like insurance and wills. I just want to know what to do with my super.”
Explain what you would do in this situation. What would you say to the potential client?
What might you offer to do? Would you accept such instructions from this person? If
not, why? If you did accept such instructions, what key components would you include in
the advice?
While limiting advice to the superannuation capital might be possible at law, there are several
issues to consider. One is the Best Interests Duty (BID) and another is the licensee’s policy on
such situations. Does the licensee provide limited advice? If yes what are the prerequisites
before being able to prepare the limited advice?
What might the licensee require the client to do? For example there are provisions about how
written warnings can be provided which warns that the advice might not be entirely appropriate
for the client.
In addition, for the adviser’s ‘peace of mind’, it is important to answer how the licensee ensures
that it can meet the BID with limited advice.
3.3 Angela has just turned 25 years of age and has been working as an IT professional for
five years. She earns $75,000 per year in salary after tax. Angela came to Australia eight
years ago but her immediate family continues to live in the United States. As a result,
Angela had to learn very quickly to look after herself and her financial affairs. Angela
shares a flat with a friend, Janette, and her share of the rent is $250 per week.
Angela’s other weekly expenses include:
Public transport fares $80
Utility bills $50
Mobile phone $70
Food $250
Clothes $200
Miscellaneous $50
Angela is always conscious to ensure that she is saving some of her income and has
arranged an automatic debit for $200 from her bank account into the United Australian
Imputation Fund each month. The amount accumulated in the fund comprises the
original $2,000 she was given for her twenty-first birthday to start the fund and
contributions and earnings of $8,000, giving a total sum of $10,000. The managed fund is
a growth fund with a portfolio of Australian share investments. If Angela has any money
left over, she keeps it in her bank account, which totals $3,000.
Angela is sick of travelling on buses and trains and wants to buy a second-hand car in the
next 12 months if she can afford it. If possible, she does not want to use her managed
fund, but hopes to save enough ($10,000) to buy the car. Additionally, she would like to
purchase a small unit in an inner suburb of Sydney in the next two years, which she
estimates would cost her $500,000. She currently has no insurance cover. In 2015, she
would like to take a holiday to see her brothers and sisters in the United States. She
estimates she would need $25,000 to undertake this holiday.
A) This is your first meeting with Angela. What issues do you believe you should discuss
with her?
B) Prepare an annual cash-flow budget for Angela to assist her in determining whether
she has any excess savings capacity.
A)
Consider:
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present goals;
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anticipated future goals;
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financial and non-financial goals; and
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psychological capabilities.
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Objectives:
live the good life;
like to own her own home.
Some suggested strategies:
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increase Angela’s contributions to superannuation;
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draw up a budget and stick to it; and
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review where she can cut down on expenses (e.g. clothes)
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invest in a diversified portfolio of assets.
B)
Income
75 000
Rent
Transport
Utilities
Mobile phone
Food
Clothes
Miscellaneous
Savings to managed fund
Surplus
13 000
4 160
2 600
3 640
13 000
10 400
2 600
2 400
23 200
3.4 Late one Saturday night, after cruising home in the Ferrari from a superb dinner at
their favourite Dalkeith restaurant, Monique and William Howard have a serious
discussion.
‘I just can’t understand where all the money goes,’ says Monique, as she sips some
specially imported French champagne that they discovered on their last annual European
holiday.
‘It’s got me beat,’ replies William, as he finishes off a mouthful of vintage port and slips
a CD into their brand new Bose entertainment system.
This conversation is becoming increasingly common in the Howards’ household. William
has worked his way up the ladder in a well-known city accounting practice, and has just
been promoted to a junior partner position on a $350,000 per annum package. Monique
is a sculptor, with two successful exhibitions, and recently received requests for two
commissioned works for which she will receive $20,000 each. On average, her total annual
income in any one year is approximately $750,000.
However, William and Monique have found their lifestyle has adapted to their rising
income at an alarming rate. Monique used to buy dresses at chain-store sales, but now
finds in her mid-30s that, to be a successful artist in the Dalkeith district, she needs to
maintain an image and hence only wears designer clothes. William prefers to wear pure
wool suits styled in Italy. Soon after William’s promotion, the couple moved into their
current home in Dalkeith. They have $800,000 owing on the mortgage. Their two
children, two-year-old Maddison and four-year-old Thorn, are in preschool four days a
week, amounting to $640 per week. William and Monique expect the fees to increase in
coming years with their children attending private schools and they have agreed to
finance their children’s university education, which should amount to $35,000 each.
William is in his mid-30s, works incredibly hard and compensates for his absence with
extravagant gifts for his family and weekends at a resort in the Yarra Valley. Monique
likes her fast lifestyle but has started to worry about the future, and about William, who
has lost that ‘zing’ he had in his 20s.
Monique estimates that they have saved nothing over the past two years. Until now, they
have thought that William’s superannuation will be enough — William’s company
contributes an extra 10% on top of his salary to the superannuation fund and he salary
sacrifices an additional $20,000 per year. However, his youngest brother, aged 31, has
just been diagnosed with a hereditary bone disease that will see him in a wheelchair by
the age of 40. Concerned, William recently visited his brother’s specialist who confirmed
that William is carrying the same defective gene and is likely to succumb to the same
diagnosis.
Except for the family home and the superannuation, the Howard family have no
investments, apart from holdings in an ethical investment trust (mostly green investments
in sustainable timber forests). They geared into the investment in a bid to reduce their
tax liability. Unfortunately, the trust has been performing poorly since the global
financial crisis, which has resulted in negative returns of −10% and −12% over the last
two years. To add insult to injury, the Australian Taxation Office is reviewing the
eligibility of any tax deduction William claimed on the $250,000 he borrowed to buy the
units.
William and Monique have come to you seeking advice. Analyse their current situation
and the problems they currently face.
This would include:
no budgets in place;
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lack of financial awareness issues;
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reliance on high income to support their extravagant lifestyles;
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education of their children if one or both parents fall ill or die prematurely;
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most assets held are highly geared;
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taxation issues should deduction be amended;
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poor returns from investment trust;
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possible insufficient super;
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William’s possible future ill health; and
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volatility of world art markets.
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3.5 Read the Financial Times article titled ‘Six financial personality types-which one are
you?’ available in the week 2 folder on LMS.
After reading the article, reflect on which personality type you think you are and
discuss examples from your life that support your self-assessment.
Now take the Financial Times money psychology quiz available at
https://ig.ft.com/sites/quiz/psychology-of-money/. In class we will discuss your examples
and self-assessment as well as the quiz questions and your quiz result.
There is no right or wrong personality type when it comes to managing your personal
finances. You simply need to be aware of the patterns and behaviours that you exhibit which
may lead to less than optimal outcomes for your personal finances and the steps you can take
to mitigate these issues.
In class, students will discuss their examples and how they arrived at their self-assessment.