Advanced Diploma of Financial Planning
FNSASICT503A Provide Advice in Managed Investments
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LEARNER GUIDE
FACILITATOR’S DETAILS
This learner guide is only to be used as a supplement to your text and other
materials.
Contact Details:
Address:
TAFE NSW - Northern Sydney Institute
See Street, MEADOWBANK, NSW 2114, Australia
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Table of Contents
Contents
CHAPTER 1 - MANAGED FUNDS AN INTRODUCTION
CHAPTER 2 - SUPERANNUATION AND MANAGED FUNDS
CHAPTER 3 - TYPES OF MANAGED FUNDS
CHAPTER 4 - WHAT ARE MANAGED INVESTMENT SCHEMES?
CHAPTER 5 - GENERAL FUNDS - (SOURCE - ASIC.GOV.AU)
CHPATER 6 - OTHER MANAGED INVESTMENT SCHEMES
CHAPTER 7 - MORTGAGE FUNDS
CHAPTER 8 - MANAGED FUND TYPES
CHPATER 9 - PLATFORMS AND THIRD PARTY PROVIDERS
CHAPTER 10 - FEES AND COSTS
CHAPTER 11 - REDEEMING YOUR MANAGED FUNDS
CHAPER 12 - TYPES OF RISKS
CHAPTER 13 - INVESTING IN SHARES
CHAPTER 14 - BONDS AND OTHER INVESTMENTS
CHAPTER 15 - DIRECT PROPERTY OWNERSHIP
CHAPTER 16 - BORROWING TO INVEST
CHAPTER 17 - TAXATION
CHAPTER 18 - PROVIDING FINANCIAL ADVICE
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Managed Funds in Australia
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Chapter 1 - Managed Funds an Introduction
Financial planning requires an understanding of the financial concerns of your
Clients, the ability to understand and communicate investment risks and
ascertain and work together to achieve the financial goals and personal
objectives of a client.
Advising clients on strategy is what we aim to provide as advisers. Products
that get the client to where they want to go is the vehicle in which they would
like to travel. The recommended product such as investments, if necessary, is
important in a client meeting their financial needs and objectives.
Investment is a means to an end; it is not the strategy nor is what you as an
adviser have control over. Generally an investments purpose, for an individual,
is to increase his or her wealth and secure their future by either gaining
additional or maintain current income and/ or achieving increased capital
value in their investment by the use of capital gain.
To enable you to advise clients appropriately, it is important that you
understand the implications of the investment plan chosen—that is, its level of
volatility and the potential for loss. The possibility of return and the comfort
level of the client with the investments.
As an adviser you need to provide the opportunity of a review not of just asset
allocation but of the person being incline with their ongoing investment
strategy. The assessment of cash flow and assets and liabilities in line with
taxation and any Centrelink implications. This is not exhaustive however it is
important that a review is not about assets allocation and which funds your
money is invested in, it is about the person not the product.
Managed funds are services through which many investors may pool their
funds, using specialists to handle the daily investment decisions and
management as well as administration.
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What is a Managed Fund
The concept of the unit trust has its origins in England. A system was
developed to satisfy the needs of minors that had been left money, however
due to their age, they held no independent legal means to use the funds left
to them. The unit trust was put in place to assist the child when a person died.
The unit trust is a legal arrangement providing the deceased to rule from the
grave so that funds can be used to benefit a minor. This was achieved by
setting the funds left for a child to be put in the hands of a trustee (the legal
owner), these funds were then to be used for an on behalf of the beneficiary
(the beneficial owner) and until the child came of age.
This legal form was eventually put to use for investors (the beneficial owners),
who gave money to a trustee. The trustee then in turn invested money
employing the expertise of a fund manager. The unit trust concept was
introduced to Australia in 1936, but not until some 50 years later did it become
popular.
Trusts in Australia were structured as a three-way arrangement, with investors
investing in the trust as beneficiaries, the manager managing the trust assets,
and the trustee responsible for the assets being managed in accordance with
the law and the trust deed. Under the Managed Investments Act 1998
(Cwlth), managed investments may now be run by a single responsible entity.
The Australian Securities and Investments Commission (ASIC) licenses the
responsible entities.
The Corporations Act sets out some specific requirements for information to
be included in prospectuses, which basically includes all information that
investors and their advisers would reasonably expect to find in the prospectus,
for the purpose of making an informed assessment. When there is a significant
change in the information contained in a prospectus or a significant new
matter arises, a supplementary prospectus must be issued.
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Managed investment or Products
Advisers may recommend from a wide variety of investment products that are
classified as managed funds. Managed funds are in most cases unit trusts. As
in the case of cash management trusts, the general public is also able to
participate in the long-term fixed interest market through these managed
investment products. Normally you would need significant funds and
technology and an understanding of each market.
Portfolio managers seek to maximise the return to investors by an appropriate
allocation of stocks to maximise returns while minimising the risk of loss. The
returns to unit holders in these funds are normally variable, and depend on the
expertise of the portfolio manager in anticipating future interest rate
movements. Managed funds are usually a subsidiary of a merchant bank,
stockbroker, trading bank, life insurance company or friendly society. The
investor is merely a unit holder in the trust that ensures the fund managers
comply with the trust deed. Costs are in the order of 0% to 5% per cent as a
once-only up-front fee, and about 1 per cent is normally deducted annually as
the manager’s commission. Sometimes special tax concessions apply to
managed products offered by life insurance companies and friendly
societies, usually sold as life insurance or friendly society bonds.
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Why invest in a managed fund?
Advantages
 Use of professional investment managers.
 Diversification across asset classes as well as diversification with an asset
classes.
 Economies of scale and therefore access to investment opportunities
not otherwise accessible to individual investors. EG large whole
property. Domestic or Global fixed interest.
 Convenience of consolidated reporting.
 Taxation advantages in some cases (e.g. friendly society bonds, allocated
pensions).
 Regular income paid that may be compounded (reinvested) or paid to a
nominated bank account.
Disadvantages
 Lack of personal control of the investment selection.
 Ongoing investment management fees as well as entry and exit fees
which at times are significant.
 No control over personal taxation within the fund which is distributed
directly back to individuals each year.
 Locked into markets according to mandates of the fund.
 Possibility of the fund closing down and forced crystallisation of Capital
Gains
 Possible suspension of outflows to members due to illiquidity of the fund
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Chapter 2 - Superannuation and Managed Funds
Superannuation is a complex area of financial planning. The process of
keeping up to date in Financial Planning and specific areas of expertise is an
ongoing one.
Superannuation itself is not an investment, just as a company is not in itself a
business. It is what happens inside the superannuation fund and a company
that is relevant.
Superannuation funds can invest in many assets and be used to pay for life
insurance and some salary continuance insurance's.
What is superannuation?
(A definition of) A superannuation fund (may be expressed as) is: “(a superannuation fund is) an indefinitely continuing fund set up solely to
provide benefits to its members on retirement or (death benefits) to members’
dependants on death of the member. A superannuation fund is established by
governing rules (a trust deed for the private sector) and an Act of parliament or
Ordinance for a public sector fund) and is managed by Trustees.”1
What is superannuation? (Cont.)
In other words superannuation is a tax advantaged trust enabling people to
save to build up their financial assets to be used at retirement.
Superannuation, as a consequence of compulsory employer contributions, is
the most common way individuals will save for their retirement.
The contributions within the specified legislated limits and investment earnings
of a complying superannuation fund are concession ally taxed at maximum
15%. The rationale for providing tax concession to superannuation funds is to
1
Master Financial Planning Guide p. 186
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encourage individuals to contribute to a superannuation fund creating a “nest
egg” that they can draw on in retirement.
Please refer to the following where indicated. Upon reference, please read
each reference to understand each heading. You may have to use various
resource material where indicated. As such you will have to use the links
provided and utilise the Investment Book where indicated.
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Types of Superannuation Funds In Australia
 Corporate funds
 Industry funds
 Public Sector funds
 Small APRA funds
 SMSF
 Retail funds
 RSA's
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Chapter 3 - Types of Managed Funds
Types of Managed Funds include  Public Unit trusts
 Retail
 Wholesale / Institutional
 Conservative
 Balanced
 Growth
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Active
Passive
Indexed
Exchange traded
Listed and Unlisted Managed Investments
Hedged Funds
 Single sector
 Fund of Funds
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Chapter 4 - What are managed investment schemes?
Generally in a managed investment scheme:
 people are brought together to contribute money to get an interest in
the scheme ('interests' in a scheme are a type of 'financial product' and
are regulated by the Corporations Act 2001 (the Corporations Act).
 your money is pooled together with other investors (often many
hundreds or thousands of investors) or used in a common enterprise.
 a 'responsible entity' operates the scheme. You do not have day to day
control over the operation of the scheme.
Managed investment schemes cover a wide variety of investments. Some of
the popular managed investment schemes you may be offered include:
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cash management trusts
unlisted property trusts
property trusts
Australian equity (share) trusts
many agricultural schemes (e.g. horticulture, aquaculture, racehorse
syndications)
international equity trusts
some film schemes
timeshare schemes
mortgage funds, including unlisted mortgage funds
actively managed strata title schemes
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What types of investments are NOT managed investment schemes
Generally, only investments which are 'collective' are managed investment
schemes. Some examples of investments that are not managed investments
schemes include:
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regulated superannuation funds;
approved deposit funds;
debentures issued by a body corporate;
barter schemes;
franchises;
direct purchases of shares or other equities;
schemes operated by an Australian bank in the ordinary course of
banking business (e.g.: term deposit).
How safe are managed investment schemes?
Generally a scheme must be registered with us if it has more than 20 members
or the scheme is promoted by someone who is in the business of promoting
investment schemes.
Registered managed investment schemes must operate within the
Corporations Act. We have been given special powers to supervise the
operation of these schemes. To be registered, a scheme must:
 be operated by a responsible entity (who has sole responsibility for the
operation of the scheme and must be a public company holding a licence
authorising it to operate the scheme); and
 have a 'constitution' (this document outlines the rules of the scheme);
and
 have a 'compliance plan' (this document outlines how the responsible
entity will ensure the scheme complies with the constitution and the
Corporations Act).
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Registered schemes must also:
 issue a product disclosure statement (PDS). This document must be
issued by a scheme wanting to raise money from the public. It must
clearly and concisely set out enough detail about the product for you to
compare a range of similar financial products so that you can make an
informed decision about which ones to invest in;
 conduct independent audits of the scheme and the responsible entity;
 keep the scheme's property separate from the property of the
responsible entity and other schemes;
 have a procedure for removing the responsible entity.
Constitution and compliance plan
The constitution sets out the rules of the investment scheme including matters
like:
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how much it costs to buy interests in the scheme;
the investment powers of the responsible entity;
how to resolve complaints by investors;
the rights of investors to withdraw from the scheme.
The compliance plan sets out how the responsible entity will make sure the
scheme complies with the Corporations Act and the scheme's constitution.
You may ask if your money is safe even though there is no separate trustee for
every managed investment scheme. Parliament considered this issue in detail.
After examining the arguments and evidence, it decided that the changes
made to the Corporations Act in 1998 do offer adequate protection for
investors. The Corporations Act contains safeguards for your protection which
are set out in this information sheet.
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Chapter 5 - General funds - (Source - asic.gov.au)
Managed funds are sometimes referred to as trusts.
1 Cash management
These funds invest only in the money market, and usually only in instruments
which are guaranteed or supported by a government, bank or large company.
For example, short-term government bonds and bank bills.
2 Fixed interest and bond
These funds invest in a mixture of government bonds, cash and bank bills. They
generally aim to outperform an index or other similar fund/s, targeting
investors who wish to receive an income stream and maintain the value of
their investment over the long term. You should always be aware that returns
over the short term may fluctuate or can even be negative.
3 Share (sometimes called equity trusts)
Share funds invest in shares, mainly in listed companies.
4 Mortgage
These funds invest in residential, industrial and commercial property
mortgages. Find out more about investing in an unlisted mortgage fund.
5 Property
These funds invest directly or indirectly in residential or (more frequently)
commercial properties. The advantage of investing indirectly is that of greater
liquidity, as you would only have to sell your interest in the fund as opposed to
having to wait to sell the entire property, and your liquidity is higher if the
property securities trust is listed. Find out more about investing in unlisted
property trusts.
Newer Styled Funds
As the industry has responded to market demand, new products have been
developed within the broad categories of managed funds. They may be
specialised or diversified funds.
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For example, some funds invest in a range of categories of funds, so as to
spread risk. This can be through a diversified portfolio of income-producing
assets, such as money market and fixed interest assets, with some exposure to
some "growth" assets such as shares and property. Or by investing in a wide
variety of asset classes, including shares, property, bonds and cash.
Other funds focus on a specific sector. Some specialised share funds may invest
only in Australian shares or overseas shares, or focus on a specific area of the
market, like the resource sector, small emerging companies or ethical
companies (see 'Responsible' investing). You will also find funds which only
invest in Australian companies that produce fully franked dividends, and are
designed to take advantage of the dividend imputation taxation rules.
International share funds can involve investments in shares across a variety of
countries within a specific region, say the South-East Asia region, or in
particular overseas markets, or even a combination of regions and markets.
Reference - www.asic.gov.au
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Chpater 6 - Other managed investment schemes
These funds are often quite complex. It is a good idea that you get professional
advice before investing in one of the following schemes.
1 Investor directed portfolio services
Because it is quite common for investors to hold units in a number of managed
funds, products have been developed to simplify managing those investments.
These products are called investor directed portfolio services (IDPS) and
include investment platforms, master trusts and wrap accounts.
2 Direct real property
From a practical point of view, property syndicates are very similar to unlisted
property trusts, the main difference being that you have a legal entitlement
(along with all the other investors) to the property underlying the fund. With a
property trust, another party which holds the property for the benefit of the
investors has legal ownership.
3 Primary production and film schemes
These are schemes where the nature of an interest held by investors in that
scheme is that of a "grower" of the primary product (e.g. tea trees, pine trees,
paulownia trees, olives, viticulture, beans, coffee etc). The investor/grower
usually enters into an agreement with the manager/responsible entity for the
scheme to plant, establish and maintain the trees until they are harvested at
maturity. Profits from the harvest are distributed according to your holdings in
the scheme.
When your interest includes rights to the land on which the scheme operates,
the responsible entity must ensure that your rights are protected. That is, the
land is registered in your name with the land titles office.
Film schemes operate in a similar way to primary production schemes.
These schemes are often run in a away to maximise taxation benefits for
investors. However, there have been a number of times when the purported
tax benefits of a scheme have been disallowed by the Australian Taxation
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Office a number of years after people invested. Always make sure that the
stated tax benefits do in fact apply. Do not just rely on assertions from the
fund manager.
The Australian Taxation Office now provides written product rulings on which
schemes fall within certain tax laws. Before investing in a scheme which
advertises tax benefits, contact the Australian Taxation Office to find out if it
has issued a ruling on the scheme.
4 Serviced strata schemes
A serviced strata scheme can involve a hotel, resort, or apartment block.
We consider that there is likely to be a serviced strata scheme when an
investor in a strata (apartment) unit has a right (by agreement or an
understanding with the promoter) to a return which depends, in whole or in
part, on the use of other investors' strata units (as opposed to common
property). For example, your return depends on an arrangement for pooling
income or for fairly allocating tenants.
We also consider that there is likely to be a serviced strata scheme when an
investor in a strata unit has a right (including by agreement or an
understanding with the promoter) to a return which depends, in whole or in
part, on an investor's strata unit being used as part of a serviced strata
arrangement. For example, you depend on the serviced strata arrangement to
receive some kind of fixed or indexed return.
5 Timesharing
A timesharing scheme is a scheme:
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in Australia or elsewhere, where participants are entitled to use, occupy or
possess, for 2 or more periods, property to which the scheme relates; and
that is to operate for not less than 3 years.
Real property time-sharing schemes, for example, commonly include titlebased schemes where a purchaser becomes a tenant in common with the right
to a share of the real property.
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6 Commercial horse breeding (broodmares/stallion)
The life of broodmare schemes is not restricted to the breeding life of a
specific mare, unlike stallion schemes, where the life of the scheme is
restricted to the functional life of a particular stallion.
In a stallion scheme, the asset being syndicated is a specific stallion whose
identity is known. The promoter usually buys or leases the stallion before the
scheme's fundraising. The promoter actively markets the scheme. The
manager manages the day-to-day activities of the stallion. The promoter and
manager can be the same and may have a substantial interest in the scheme.
Usually the promoter issues about 40 "shares" or interests in the scheme. This
is because a stallion is usually capable of providing between 40 and 80 stud
services per season.
Reference - www.asic.gov.au
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Chapter 7 - Mortgage Funds
What is a mortgage fund’?
Mortgage funds can also be called ‘mortgage trusts’ or ‘mortgage schemes’.
A mortgage fund is a type of investment in which you buy units in a fund that is
operated by a professional fund manager. Other investors also buy units in the
mortgage fund.
The fund’s money is lent out (as mortgage loans) to a range of borrowers who
use the money to buy and/or develop properties. It might also be used for
other investments (for example, investing in other mortgage funds).
In return for investing your money (your ‘capital’), the fund manager promises
to pay you a regular income, usually quarterly or half-yearly (called
‘distributions’).
There are two types of mortgage funds-
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Pooled mortgage funds
Contributory mortgage funds
All investors share in all
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mortgages/investments.
All investors share the income
and spread the risks of all
mortgages/investments.

Some funds promote that you
can withdraw your money at short

notice, but it might take a while (e.g.
12 months) to get it back.
You or the fund's manager choose which
mortgage(s) you invest in.
Your mortgage(s) might pay a different income
than other mortgages in the fund.
Your risk depends on the quality of borrower(s) you
or the fund manager lend to.
For most funds, you can only withdraw your money
when your mortgage(s) matures.
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What is an ‘unlisted’ mortgage fund?
An unlisted mortgage fund is not listed on a public market, such as the
Australian Securities Exchange (the ASX).
The differences between listed and unlisted mortgage funds can make it
harder for investors to easily know what’s going on with their investment.
What’s the difference between a mortgage fund and other investments?
Investment type
How it works
Unlisted debenture
You lend your money to a business, usually for a fixed term. You are not
guaranteed a fixed rate of interest or return of your capital. The business
might invest in mortgages and/or properties. Refer to Investing in
debentures guide asic.gov.au
Unlisted mortgage fund
You invest your money in a mortgage fund. You might not be able to
withdraw from the fund at short notice. You are not guaranteed a fixed
rate of interest or return of your capital. The mortgage fund invests in
residential and commercial mortgages. Investing in mortgage funds
guide www.asic.gov.au
Unlisted property trust
You invest your money in a property trust. You only get your money back
when the property trust ends or if you have a right to withdraw. You are
not guaranteed a return on your investment or the return of your capital.
The property trust invests directly in property, rather than in mortgages
over property. Investing in property trusts guide www.asic.gov.au
These investments are not the same as term deposits offered by prudentially regulated financial
institutions.
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Why is the PDS important?
The fund manager must give you a Product Disclosure Statement (PDS). The
PDS tells you how the mortgage fund works and you should read it in full.
Under the law, the PDS must include enough detail for you to compare similar
financial products so you can make an informed decision about which one to
invest in.
Concentrate on the sections that:
 explain the key features and risks of the investment
 tell you about the fees you will pay for this investment
 give you information about certain indicators (or ‘benchmarks’),
which can help you assess the risks of unlisted mortgage funds.
You should find this information in the first few pages of the PDS.
The fund manager must also tell you if there are significant changes to the
information in the PDS (this is called ‘ongoing disclosure’). Check the mortgage
fund’s website and look for regular updates in the mail (if you decide to
invest).
A PDS does not have to be lodged with ASIC before it can be used to raise
money from investors. ASIC does not endorse the underlying investment in any
way.
Consider the risks
The return offered on an investment is not the only way to assess how risky it
is.
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ASIC's benchmarks for mortgage funds can help you assess the risks
See www.asic.gov.au
ASIC has developed 8 benchmarks that apply to unlisted mortgage funds to
help you assess the risks.
Benchmark 1: Liquidity (for pooled mortgage funds*)
Benchmark 2: Fund borrowing
Benchmark 3: Portfolio diversification (for pooled mortgage funds*)
Benchmark 4: Related party transactions
Benchmark 5: Valuation policy
Benchmark 6: Loan-to-valuation ratio (LVR)
Benchmark 7: Distributions
Benchmark 8: Withdrawing from the fund
Benchmarks are designed to help you:
 understand the risks and
 decide whether to invest your money.
The fund manager should tell you in their PDS if the unlisted managed fund
meets each benchmark. If the fund doesn’t meet a particular benchmark, they
should explain why not, allowing you to make up your mind whether you’re
comfortable with the explanation.
The fund manager should also update you about any significant changes to the
mortgage fund’s performance against the benchmarks (through ongoing
disclosure).
The Investing in mortgage funds guide has more detail on each benchmark, and
how you can use them to assess the risks in unlisted mortgage funds.
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Benchmark 1: Liquidity (for pooled mortgage funds*)
‘Liquidity’ means a mortgage fund’s ability to meet its short-term cash needs.
Liquidity is an important measure of a mortgage fund’s ability to meet its
payment obligations to you as an investor and to other parties. If the fund
hasn’t enough cash or liquid assets, there might not be enough money to pay
you regular distributions, or pay your money back when you expect it.
Benchmark 2: Fund borrowing
You can get a good idea of a mortgage fund’s financial status by knowing:
 how much money the mortgage fund owes (its debts) and when
those debts are due to be repaid (their ‘maturity profile’).
 how much money the fund can borrow compared to how much it
has already borrowed (its ‘undrawn credit facility’).
If a mortgage fund has debts that are due to be repaid in a relatively short
timeframe, this can be a significant risk factor, especially during times when
credit is more difficult and costly to get.
Unless the mortgage fund can renew or extend the due date of its debts, it
might be forced to sell assets (possibly for less than their estimated value) to
repay them. It might even have to stop operating. In this case, you could lose
all or part of your capital because other creditors of the mortgage fund will be
repaid before you.
Benchmark 3: Portfolio diversification (for pooled mortgage funds*)
Just as you can spread your own investments to manage risk, a mortgage fund
can manage risk by spreading the money it lends and invests between different
loans, borrowers and investments. This is called ‘portfolio diversification’.
Is the mortgage fund’s portfolio heavily concentrated on a small number of
loans, or loans to a small number of borrowers? If so, there is a higher risk that
a single negative event affecting one loan will put the overall portfolio (and
your money) at risk.
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Benchmark 4: Related party transactions
A ‘related party transaction’ is a transaction (for example, a loan) involving
parties that have a close relationship with the fund manager.
The risk with related party transactions is that they might not be made with
the same rigor and independence as transactions made on an arm’s length
commercial basis. There could be a greater risk of the loans defaulting (putting
your money at greater risk) if:
 the mortgage fund has a high number of loans to, or investments
with, related parties, and
 the processes for assessing, approving and monitoring these loans
and investments are not rigorous.
Benchmark 5: Valuation policy
Knowing exactly how much a mortgage fund’s underlying assets are worth
(that is, accurate valuations of the mortgage security) can help you assess its
financial position. To work out how accurate these valuations are likely to be,
you need to know how they’re done.
Without information about how valuations are done, it will be more difficult
for you to assess how risky a mortgage fund’s loan portfolio is. Keeping
valuations up-to-date and shared among a panel means they are more likely to
be accurate and independent.
Benchmark 6: Loan-to-valuation ratio (LVR)
The loan-to-valuation ratio (LVR) tells you how much of the value of an asset is
covered by loan money. This ratio is a key risk factor when assessing whether
to lend money to someone.
A high loan-to-valuation ratio means that a mortgage fund is more vulnerable
to changing market conditions, such as a downturn in the property market.
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Therefore, the risk of losing your money could be higher.
Benchmark 7: Distributions
‘Distributions’ are payments you receive from the mortgage fund during the
year. These payments could come from:
 income received (for example, interest from borrowers), and/or
 other borrowing by the fund or selling off assets.
Some mortgage funds promise to pay you a regular distribution regardless of
whether the fund actually receives the expected income. Other mortgage
funds only pay you regular distributions if the fund earns enough interest from
borrowers and other investments during a particular period.
If a mortgage fund pays distributions from sources other than income received,
this could be unsustainable. This is important if you are depending on
distributions from the mortgage fund for regular income.
Benchmark 8: Withdrawing from the fund
Most contributory mortgage funds only offer you the right to withdraw from
the fund when the particular mortgage you have invested in matures. On the
other hand, most pooled mortgage funds say that you can withdraw from the
fund at short notice. Either way, it might take a while (for example, as long as
12 months) to get your money back. Before you invest, make sure you can wait
this long.
If a mortgage fund’s policy is to re-invest your money and you don’t withdraw
it before it’s rolled over, your money might be tied up for longer than you
planned.
A ‘fixed unit price’ might not remain fixed under certain circumstances. This
could mean you won’t get back the money you expect when you withdraw
from a mortgage fund if the value of the fund’s assets falls.
Source asic.gov.au
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Internet References and further reading
www.Colonial First State.com.au
www.Morning Star.com.au
www.Coin.com.au
www.Xplan.com.au
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Chapter 10 - Fees and Costs
 (up front or Deferred )
 Management Expense Ratio
 Trail Commission
 Transaction Cost
 Adviser fee
 Selecting funds with no or low fees
Disclosure of Fees:
 Investment - i.e. name of recommended investment
 Owner – name of client investing
 Investment ($) – amount of funds for noted investment;
 Entry Fee – dollar fee payable for entry
 Ongoing Fee this is the MER of the recommended fund expressed in
percentage terms but disclosed in dollars $
 Other Fees ($) – this the administration fee of the fund;
 Exit Fee (%) – this is the exit fee percentage payable (Please note for EF
funds this will be 0);
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How much Commission will and your Licensee will receive
This section outlines the commission payable to FP / Licensee.
 Investment - i.e. name of recommended investment;
 Owner – name of client investing;
 Investment ($) – amount of funds for noted investment;
 Maximum Planner/ Licensee
 Upfront commission ($) – amount of initial commission payable on the
recommended investment;
 Maximum Licensee Ongoing commission ($) - amount of ongoing
commission payable on the recommended investment.
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Chapter 11 - Redeeming your Managed Funds
Selling or redeeming your managed investment units
When you want to exit from a fund, you redeem your units through the fund
manager. This means the fund manager pays you out for your units at the
current market value. Make sure you know what this rate is before you
redeem your units.
Your financial planner, or the fund manager, will give you a redemption form,
which you fill in and send to the fund manager. In some cases, for example
cash management trusts, the fund manager will accept telephone instructions
to redeem your investments.
Keep in mind you may have to pay an exit fee when you redeem your units.
Only managed funds which are listed on a public market, such as the Australian
Securities Exchange (ASX) are bought and sold on the exchange. You can sell
these units in the same way you sell shares, through a stockbroker.
Alternatively, your financial planner can arrange this for you.
Your ability to withdraw from the fund will depend on the particular managed
fund you invest in. For example:



Most contributory mortgage funds only offer you the right to withdraw
from the fund when the particular mortgage fund you have invested in
matures.
Most pooled mortgage funds say that you can withdraw from the fund
at short notice (although it might take as long as 12 months before you
get your money back).
Most unlisted property trusts do not offer withdrawal rights at all (that
is, you can't take your money out before the trust ends).
Managed funds might impose conditions on your withdrawal rights (for
example, they might freeze withdrawals if they don't have enough cash to pay
them). If other investors want their money back at the same time as you, there
might be a cap on the number of units you can cash out.
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Chaper 12 - Types of Risks
Readings
Financial Planning in Australia 5th Edition

Mismatch

Currency

Inflation

Liquidity

Interest Rate

Credit

Market

Legislative

Timing

Inadequate Diversification
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Measuring Performance
Further Reading
Financial Planning in Australia
Sources of Return
Income Distribution
Capital Gains
Unrealised Capital Gains
Future Performance
Measures of Return
Reinvestment of Dividends and Capital Gains
Long term returns
Page 298
Returns on Listed Funds
Risk
Holding Period Return
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Chapter 13 - Investing in Shares
Readings
Financial Planning In Australia
Page 194
Page 197
Page 198
Page 199
Objectives in Investing
Ways to invest
What are shares?
Preference Shares
Convertible Notes
Derivatives
Options
Futures
Page 205 - 206
Holding Period Return
Page 206
Internal Rate of Return
Page 206
Yield for a single cash flow
Page 211
Investing in Shares
Page 212
Dividend Yield
Page 221
PE ratio
Page 212
Return on original Investment
Page 215
Types of Shares
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Chapter 14 - Bonds and Other Investments
Readings
Financial Planning in Australia
Page 224
Why Invest in Bonds
Characteristics of Bonds
Page 225 to 230
The Bond Market
Page 230 to 231
Present Value
Page 231 to 232 Future Value
Page 463
Deposit Bonds and what are they.
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Chapter 15 - Direct Property Ownership
Readings
Financial Planning in Australia
Page 469
Direct Property Investment
Page 470
Listed Property Trusts
Syndicates
Pages 470 to 471 Advantages and Disadvantages of Direct Property
Investment
Residential Home Ownership
Readings
Page 456
Residential Property
Page 457
Commercial Property
Page 457
Housing Prices and affordability
Page 459
Tax on Home Purchases / Stamp Duty
Page 464
Mortgages
Page 465
Rent or Buy
Page 466
Housing in Retirement
Page 466
Reverse Mortgages
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Chapter 16 - Borrowing to Invest

Is the risk of the strategy understood

Is the client investor profile appropriate

Is there adequate cash flow to support the plan

Is there discussion of cash flow protection

Is there a projection of income and cash flow from the strategy

Has there been correct taxation treatment of income

Has the risk of rising interest rates been assessed via a sensitivity
analysis

Are the assumptions provided reasonable
Borrowing money to reduce your tax
How it works
Borrowing money is usually how people get a tax deduction on investment
schemes.
You borrow money to buy an asset that produces an income. The interest you
pay is deducted from your assessable income and you pay less tax. Some
schemes suggest you pay the interest in advance to get the total tax break
immediately rather than piecemeal.
Borrowing is often called 'gearing'. Borrowing can work but you must
understand it and know what you will do if something goes wrong.
Borrowing and How safe is it?
Borrowing money makes things go faster. You can make money faster,
however you can also lose it faster. If your investment increases in value, your
returns will be larger because you invested someone else's money as well as
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your own. But if your investment loses value, your losses will be even greater.
You will still owe what you borrowed and you will have to make up the
difference out of money you never intended to invest.
Before you sign anything, consider: what you will do if you lose your job or
your income? How will you pay the interest on the loan? If you cannot pay, the
lender may be able to sell all your investments, possibly your home and
anything else you own.
You also need to be extra careful about the conditions of your loan. Some loan
agreements allow the lender to demand the money back 'on demand', which
really means straight away whenever the lender wants. What will you do if
they demand the money back at an inconvenient moment?
Usually you will have to give the lender a mortgage or other form of security
over your home or some other valuable asset. Make sure you understand
exactly how much you owe and exactly what security you have offered.
'Margin loans' allow you to borrow money up to a certain amount of the value
of your investments (called the 'margin'). If the value falls below the agreed
margin, you have to make up the difference or the lender may sell your
investments. Margin loans mean you can be forced to top up or sell just when
you don't want to. Many people have lost money through margin lending.
What are the returns?
When you borrow money, you must remember that the cost of the interest,
application fees and other charges for the loan all reduce the returns from
your investment. Make sure you know the full cost of borrowing over the
entire period of your loan.
Investments that promise high returns usually make a lot of very hopeful
assumptions about the future. When you have interest to pay as well, you are
putting a lot of faith in those assumptions. Are you comfortable about that?
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Some companies offer schemes for buying shares that promise you will get all
the gains but none of the losses if the shares go down in value. You should
check the documents very carefully. You do end up paying for the guarantee
through a higher interest rate or some other device. You should also
remember that even if you do get your original money back, you have still paid
interest in the meantime on what you borrowed. So you have lost money - not
all your money, but some of it.
What are the other costs?
Loans usually cost money to set up. Application fees, valuation fees, account
keeping fees. Sometimes the salesperson will also get commission for setting
up the loan with you. You should find out about all these fees and about any
commissions.
You also need to check about repaying the loan. Will there be extra costs if you
decide to repay the loan early, or make extra payments as you go along?
Sales pressure
Tax schemes are usually sold as the end of the financial year approaches. You
feel in a hurry to do something about your tax. This is very dangerous because
you may not give yourself enough time to investigate properly. On top of that,
the salesperson may try to put pressure on you to act quickly. Please resist
pressure selling, especially if you are borrowing money.
Good financial planning advice will take into account any taxation and social
security issues relevant to your circumstances.
Talk to your accountant/financial adviser particularly if you are thinking of:
 investing to reduce your tax
 borrowing money to reduce your tax
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Chapter 17 - Taxation
Managed Investments are usually structured to pay no tax in their own right.
This means that any tax consequences usually flow to the owner of the
investment – i.e. the individual(s) or other entity.
Hence managed investments cannot, in their own right be utilized as vehicles
for tax minimization and due care should be taken in relation to ownership
structures.
Due care also needs to be taken in relation to the advertised returns or
performance figures published by a managed investment. For instance if
Managed Investment A, which is an Australian Share base investment, claims
to have returned 35% over the past year and Managed Investment B, which is
also an Australian Share base investment returns 30%, this does not
necessarily mean that Fund A has outperformed Fund B. You need to look at
the “turnover” of the shares in these two funds over the past 12 months. For
instance, if Fund A achieved the 35% return as a result of selling or “turning
over” 100% of its portfolio over the past 12 months, then the entire 35% may
be assessable as capital gain in the hands of the investor. On the other hand, if
Fund B achieved the 30% return and only “turned over” 15% of its portfolio,
then only 15% of the applicable return could be assessed for capital gains
purposes. In effect, the after tax return of Fund B could be superior to that of
Fund B!
A Word about Tax Evasion
Some people make the disastrous mistake of trying to evade tax or hide assets
or income which may affect their social security entitlements. Some people ask
their advisers to help them do this. No reputable adviser will assist you in this
kind of illegal activity.
The risks are:
1 You may end up in jail or paying a fine
If you are caught, you may end up going to jail or paying a fine, as well as
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penalty tax or losing any advantage you gained.
2 You are setting yourself up to be swindled
Just remember that if someone is crooked enough to help you evade tax, then
they are definitely crooked enough to rip you off as well.
Most schemes aimed at evading tax involve deliberately hiding assets or
income, and giving someone else a large degree of power over your money.
This means there may be no paper trail to link you to the assets or income if
you want to claim them as your own. It is all too easy for a crook to siphon off
your money and leave you none the wiser or with no evidence to show you
have been swindled.
If you mess around with illegal activities and lose your money, you might be
too frightened or embarrassed to complain.
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Chapter 18 - Regulation
Prudential regulation
The Wallis Committee recommended that financial system regulation should
be organised on a functional basis. By this, it meant there should be dedicated
agencies responsible for each of:

the stability of the financial system as a whole and the payments system
the Reserve Bank (RBA);

Overseeing competition in the financial system – i.e.. the Australian
Competition and Consumer Commission;

promoting efficient and fair conduct in financial markets, including
disclosure about financial products and consumer protection
arrangements – this is ASIC; and

Prudential regulation of Financial Institutions – which is where APRA fits
in.
APRA 2
Came into being on 1 July 1998 and its role was best described by the CEO,
Graeme Thompson as this:
“A prudential regulator like APRA has two main roles. One is indicated by the
name itself – to encourage and promote prudent behaviour by regulated
financial institutions so as to reduce the likelihood that they will be unable to
meet their obligations to the people who put money with them. In other words,
we try to ensure that banks can repay their depositors that insurance
companies meet their commitments to policyholders, and so on”.
Definition within Macquarie Dictionary - "Prudent" ".... Wise..."
2
APRA web
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A superannuation funds are a Trust there must be a trustee (or more than one)
of the fund who invests the funds for the members giving due consideration
the members of that fund”.
The trustee of the superannuation fund will usually engage asset consultants
to manage the investments of the fund. This is the case for large industry funds
and may also be engaged by small “family” superannuation funds. These small
family funds are often a self managed super fund.
ASIC
The Australian Securities and Investments Commission is another government
organisation responsible for consumer protection and market integrity. In the
superannuation industry, this means ensuring consumers receive adequate
information to make informed decisions about the superannuation products
and services on offer. ASIC may also prohibit people or organisations from
providing superannuation products and advice where the information is found
to be misleading.3
Find out more about ASIC’S consumer role at FIDO, the website for consumers
and investors at www.asic.gov.au
3
Financial Planning in Australia p. 523
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The Australian Securities and Investments Commission Act 2001 requires
ASIC to




uphold the law uniformly, effectively and quickly
promote confident and informed participation by investors and
consumers in the financial system
make information about companies and other bodies available to the
public
Improve the performance of the financial system and the entities within
it.
Who does ASIC regulate?
ASIC regulates Australian companies, financial markets, financial services
organisations and professionals who deal and advise in investments,
superannuation, insurance, deposit taking and credit.
Australian Taxation Office ATO
The ATO has a number of roles in relation to superannuation, including
traditional revenue collection for superannuation funds under the income tax
legislation. In addition, it has responsibility for supervision of the operation of
self managed superannuation funds.
Superannuation Complaints Tribunal (SCT)
The Superannuation Complaints Tribunal was established by the
Superannuation (Resolution of Complaints) Act 1993 (Cwlth) (the SRC Act). The
Tribunal commenced operation on 1 July 1994.
The SCT is an independent body set up by the government to deal with
complaints regarding superannuation funds. The tribunal tries to bring about a
resolution by conciliation but where that is not possible it will make a ruling.
There is no cost for lodging a complaint with the SCT. However, you must first
make the complaint with the trustee of your superannuation fund and they
have 90 days in which to give you a response.
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Financial Ombudsman Service (FOS)
Independent dispute resolution services for the vast majority of Australian
banking, insurance and investment disputes are now available under one roof.
On 1 July 2008, the Banking & Financial Services Ombudsman (BFSO), Financial
Industry Complaints Service (FICS) and Insurance Ombudsman Service (IOS)
merged to form the national Financial Ombudsman Service. The Credit Union
Dispute Resolution Centre (CUDRC) and Insurance Brokers Disputes Limited
(IBD) became, respectively, the Mutual’s and Insurance Broking divisions of the
Financial Ombudsman Service on 1 January 2009. Financial Ombudsman
Service dispute resolution services are free to consumers.
This independent umpire provides free, fair and accessible dispute resolution
for consumers and some small businesses unable to resolve a dispute directly
with their financial services provider. External dispute resolution processes can
help to resolve disputes through negotiation or conciliation as an alternative to
court proceedings and can make decisions which are binding on participating
financial services providers.
The Financial Ombudsman Service helps to increase public awareness and
access to external dispute resolution processes for consumers by providing a
single national service for banking, insurance and investment disputes in
Australia. Membership of the Financial Ombudsman Service is open to any
financial services provider carrying on business in Australia.
Financial Ombudsman Service independent dispute resolution processes cover
complaints about financial services including banking, credit, loans, general
insurance, life insurance, financial planning, investments, stock broking,
managed funds and pooled superannuation trusts. The merging of separate
schemes to establish the Financial Ombudsman Service follows calls for greater
accessibility and public awareness. Merging of these schemes enables efficient
use of resources, cross-fertilisation of expertise and more accessible dispute
resolution processes.
Current rules for dispute resolution processes will continue during a 12 to 18
month transition period, while the Financial Ombudsman Service conducts an
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exhaustive national Terms of Reference Consultation to establish a single set of
rules, procedures and definitions for financial services disputes in Australia by
1 January 2010.
The Financial Ombudsman Service can be contacted nationally on 1300 78 08
08.
SOURCE Financial Ombudsman Service - "About US" June 2009
http://www.fos.org.au/centric/home_page/about_us.jsp
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Regulation - Anti Money Laundering
Anti-Money Laundering and Counter-Terrorism Financing Act 2006
The Anti-Money Laundering and Counter-Terrorism Financing Act 2006
(AML/CTF Act) received Royal Assent on 12 December 2006.
The AML/CTF Act forms part of a legislative package that will implement the
first tranche of reforms to Australia's AML/CTF regulatory regime.
Background
The reforms are a major step towards:
 enabling Australia's financial sector to maintain international business
relationships
 preventing and detecting money laundering and terrorism financing by
meeting the needs of law enforcement agencies for targeted
information about possible criminal activity and
 bringing Australia into line with international standards, including
standards set by the Financial Action Task Force (FATF).
About the AML/CTF Act
The AML/CTF Act covers the financial sector, gambling sector, bullion
dealers and other professionals or businesses ('reporting entities') that
provide particular 'designated services'.
The AML/CTF Act will be implemented in stages. The commencement dates
of some obligations are a day, 6 months, 12 months and 24 months after
Royal Assent. This will allow industry to develop necessary systems in the
most cost efficient way.
The AML/CTF Act imposes a number of obligations on reporting entities
when they provide designated services.
These obligations, and the dates on which they come into effect, include:


customer identification and verification of identity - 12 months after
Royal Assent
record-keeping - in various stages, a day, 6 months and 12 months after
Royal Assent and
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

establishing and maintaining an AML/CTF program - 12 months after
Royal Assent
ongoing customer due diligence and reporting (suspicious matters,
threshold transactions and international funds transfer instructions) - 24
months after Royal Assent
The AML/CTF Act will implement a risk-based approach to regulation.
Reporting entities will determine the way in which they meet their obligations
based on their assessment of the risk of whether providing a designated
service to a customer may facilitate money laundering or terrorism financing.
Under the AML/CTF Act, AUSTRAC will continue its role as Australia's financial
intelligence unit. Importantly, AUSTRAC will have an expanded role as the
national AML/CTF regulator with supervisory, monitoring and enforcement
functions over a diverse range of business sectors.
On 13 July 2007, the Attorney-General's Department released draft provisions
setting out designated services which will be covered by the second tranche of
the AML/CTF legislation.
Sectors which will be affected by the second tranche legislation are:
 real estate agents in relation to buying and selling of real estate
 dealers in precious metals and stones engaged in transactions above a
designated threshold
 lawyers, notaries, other independent legal professionals and
accountants when preparing for or carrying out certain transactions
 trust and company service providers when they prepare for or carry out
for a client the transactions listed in the Glossary to the FATF
Recommendations.
The draft provisions (as per document below) were released for public
comment by 7 September 2007 (the original closing date of 10 August 2007
was changed).
AML/CTF Regulations
On 30 January 2008, the Anti-Money Laundering and Counter-Terrorism
Financing Regulations 2008 were registered. These Regulations amend the
AML/CTF Act, resolving an unintended exemption in the Act by ensuring that
managed investment schemes are captured in the legislation.
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Identifying agents of customers
Who needs to be identified when a reporting entity provides a designated
service to a customer through the customer's agent?
Under the Anti-Money Laundering and Counter-Terrorism Financing Act 2006
(AML/CTF Act) a reporting entity must identify a customer before providing
them with a designated service. Where an agent is acting on behalf of a
customer, a reporting entity is required to identify both the agent and the
customer.
Parts 4.2-4.7 of the Anti-Money Laundering and Counter-Terrorism Financing
Rules Instrument 2007 (No. 1) (AML/CTF Rules) outline the customer
identification procedures that reporting entities must comply with in relation
to the customer.
Part 4.11 of the AML/CTF Rules outlines the identification requirements that
reporting entities must comply with in relation to agents of customers.
Where the customer is an individual
Paragraphs 4.11.2-4.11.4 of the AML/CTF Rules apply when a customer who is
an individual appoints an agent to act on their behalf.
Where the agent is an individual, the agent will need to be identified in
accordance with paragraphs 4.11.2-4.11.4 of the AML/CTF Rules.
Where the agent is not an individual (such as a company), it will act through an
individual - for example, an employee or director. In these circumstances, it is
the individual who will need to be identified in accordance with paragraphs
4.11.2-4.11.4 of the AML/CTF Rules.
Where the customer is not an individual
Paragraphs 4.11.5-4.11.8 of the AML/CTF Rules apply when a customer that is
not acting as an individual (for example, a company), appoints an agent to act
on its behalf.
Where the agent is an individual, the agent will need to be identified in
accordance with paragraphs 4.11.5-4.11.8 of the AML/CTF Rules.
Where the agent is not an individual (such as a company), it will act through an
individual - for example, an employee or director. In these circumstances, it is
the individual who will need to be identified in accordance with paragraphs
4.11.5-4.11.8 of the AML/CTF Rules.
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Where the customer is not an individual and has appointed a verifying officer
Paragraphs 4.11.9-4.11.13 of the AML/CTF Rules apply when a customer that is
not acting as an individual (for example, a company), appoints a verifying
officer to identify its agents. Under paragraph 4.11.12 of the AML/CTF Rules,
the verifying officer must collect certain information about the customer's
agents including their name, position and level of authorisation.
For a reporting entity to rely on customer identification carried out by the
verifying officer, the reporting entity must:
 carry out the applicable customer identification procedure in respect of
the verifying officer; and
 obtain the full name of the agent and a copy of the agent's signature
from the verifying officer.
Must a reporting entity obtain evidence of the customer's authorisation
before dealing with an agent?
Under Part 4.11 of the AML/CTF Rules, where a reporting entity provides a
designated service to an agent of a customer, the reporting entity has certain
obligations to collect evidence of the customer's authorisation for that agent
to act on their behalf.
Where the agent is acting on behalf of a customer who is an individual and
where information and documentation exists which evidences the customer's
authorisation for that agent to act on their behalf, the reporting entity must
collect it.
Where the agent is acting on behalf of a customer that is not an individual
(such as a company), the reporting entity must collect information and/or
documentary evidence of the customer's authorisation for that agent to act on
its behalf.
Sources http://www.austrac.gov.au/id_agents_of_customers.html
http://www.austrac.gov.au/aml_ctf.html
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764A Specific things that are financial products (subject to
Subdivision D)
(1) Subject to Subdivision D, the following are financial products for the
purposes of this Chapter:
(a) a security;
(b) any of the following in relation to a registered scheme:
(i) an interest in the scheme;
(ii) a legal or equitable right or interest in an interest covered
by subparagraph (i);
(iii) an option to acquire, by way of issue, an interest or right
covered by subparagraph (i) or (ii);
(ba) any of the following in relation to a managed investment
scheme that is not a registered scheme, other than a scheme
(whether or not operated in this jurisdiction) in relation to which
none of paragraphs 601ED(1)(a), (b) and (c) are satisfied:
(i) an interest in the scheme;
(ii) a legal or equitable right or interest in an interest covered
by subparagraph (i);
(iii) an option to acquire, by way of issue, an interest or right
covered by subparagraph (i) or (ii);
(c) a derivative;
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(d) a contract of insurance that is not a life policy, or a sinking fund
policy, within the meaning of the Life Insurance Act 1995 , but
not including such a contract of insurance:
(i) to the extent that it provides for a benefit to be provided
by an association of employees that is an organisation within the meaning of
the Workplace Relations Act 1996 for a member of the organisation or a
dependant of a member; or
(ii) to the extent that it provides for benefits, pensions or
payments described in paragraph 11(3)(c) of the Life Insurance Act 1995 ; or
(iii) to the extent that it provides for the provision of a funeral
benefit; or
(iv) issued by an employer to an employee of the employer;
(e) a life policy, or a sinking fund policy, within the meaning of the
Life Insurance Act 1995 , that is a contract of insurance, but not
including such a policy:
(i) to the extent that it provides for a benefit to be provided
by an association of employees that is an organisation within the meaning of
the Workplace Relations Act 1996 for a member of the organisation or a
dependant of a member; or
(ii) to the extent that it provides for benefits, pensions or
payments described in paragraph 11(3)(c) of the Life Insurance Act 1995 ; or
(iii) to the extent that it provides for the provision of a funeral
benefit; or
(iv) issued by an employer to an employee of the employer;
(f) a life policy, or a sinking fund policy, within the meaning of the
Life Insurance Act 1995 , that is not a contract of insurance, but
not including such a policy:
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(i) to the extent that it provides for a benefit to be provided
by an association of employees that is an organisation within the meaning of
the Workplace Relations Act 1996 for a member of the organisation or a
dependant of a member; or
(ii) to the extent that it provides for benefits, pensions or
payments described in paragraph 11(3)(c) of the Life Insurance Act 1995 ; or
(iii) to the extent that it provides for the provision of a funeral
benefit; or
(iv) issued by an employer to an employee of the employer;
(g) a superannuation interest within the meaning of the
Superannuation Industry (Supervision) Act 1993 ;
(h) an RSA (retirement savings account) within the meaning of the
Retirement Savings Accounts Act 1997 ;
(i) any deposit taking facility made available by an ADI (within the
meaning of the Banking Act 1959 ) in the course of its banking
business (within the meaning of that Act), other than an RSA
(RSAs are covered by paragraph (h));
(j) a debenture, stock or bond issued or proposed to be issued by
a government;
(k) a foreign exchange contract that is not:
(i) a derivative (derivatives are covered by paragraph (c)); or
(ii) a contract to exchange one currency (whether Australian
or not) for another that is to be settled immediately;
(m) anything declared by the regulations to be a financial product
for the purposes of this section.
Note:
Even though something is expressly excluded from one of these
paragraphs, it may still be a financial product (subject to Subdivision D) either
because:
(a)
it is covered by another of these paragraphs; or
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(b)
it is covered by the general definition in Subdivision B.
(2) For the purpose of paragraphs (1)(d), (e) and (f), contract of
insurance includes:
(a) a contract that would ordinarily be regarded as a contract of
insurance even if some of its provisions are not by way of
insurance; and
(b) a contract that includes provisions of insurance in so far as
those provisions are concerned, even if the contract would not
ordinarily be regarded as a contract of insurance.
CORPORATIONS ACT 2001 - SECT 765A - Specific things that are not financial
products
(1) Despite anything in Subdivision B or Subdivision C, the following are
not financial products for the purposes of this Chapter:
(a) an excluded security;
(b) an undertaking by a body corporate to pay money to a related
body corporate;
(c) health insurance provided as part of a health insurance
business (as defined in Division 121 of the Private Health
Insurance Act 2007 );
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(ca) insurance provided as part of a health related business (as
defined by section 131- 15 of that Act) that is conducted through
a health benefits fund (as defined by section 131-10 of that Act);
(d) insurance provided by the Commonwealth;
(e) State insurance or Northern Territory insurance, including
insurance entered into by:
(i) a State or the Northern Territory; and
(ii) some other insurer;
as joint insurers;
(f) insurance entered into by the Export Finance and Insurance
Corporation, other than a short-term insurance contract within
the meaning of the Export Finance and Insurance Corporation
Act 1991 ;
(g) reinsurance;
(h) any of the following:
(i) a credit facility within the meaning of the regulations;
(ii) a facility for making non-cash payments (see
section 763D), if payments made using the facility will all be
debited to a credit facility covered by subparagraph (i);
(i) a facility:
(i) that is an approved RTGS system within the meaning of the
Payment Systems and Netting Act 1998 ; or
(ii) for the transmission and reconciliation of non-cash
payments (see section 763D), and the establishment of final
positions, for settlement through an approved RTGS system within
the meaning of the Payment Systems and Netting Act 1998 ;
(j) a facility that is a designated payment system for the purposes
of the Payment Systems (Regulation) Act 1998 ;
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(k) a facility for the exchange and settlement of non-cash
payments (see section 763D) between providers of non-cash
payment facilities;
(l) a facility that is:
(i) a financial market; or
(ii) a clearing and settlement facility; or
(iii) a payment system operated as part of a clearing and
settlement facility;
(m) a contract to exchange one currency (whether Australian or
not) for another that is to be settled immediately;
(n) so much of an arrangement as is not a derivative because of
paragraph 761D(3)(a);
(p) an arrangement that is not a derivative because of subsection
761D(4);
(q) an interest in a superannuation fund of a kind prescribed by
regulations made for the purposes of this paragraph;
(r) any of the following:
(i) an interest in something that is not a managed investment
scheme because of paragraph (c), (e), (f), (k), (l) or (m) of the
definition of managed investment scheme in section 9;
(ii) a legal or equitable right or interest in an interest covered
by subparagraph (i);
(iii) an option to acquire, by way of issue, an interest or right
covered by subparagraph (i) or (ii);
(s) any of the following in relation to a managed investment
scheme (whether or not operated in this jurisdiction) in relation
to which none of paragraphs 601ED(1)(a), (b) and (c) are
satisfied and that is not a registered scheme:
(i) an interest in the scheme;
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(ii) a legal or equitable right or interest in an interest covered by
subparagraph (i);
(iii) an option to acquire, by way of issue, an interest or right
covered by subparagraph (i) or (ii);
(t) a deposit taking facility that is, or is used for, State banking;
(u) a benefit provided by an association of employees that is an
organisation within the meaning of the Workplace Relations Act
1996 for a member of the organisation or a dependant of a
member;
(v) either of the following:
(i) a contract of insurance; or
(ii) a life policy or a sinking fund policy, within the meaning of the
Life Insurance Act 1995 , that is not a contract of insurance;
issued by an employer to an employee of the employer;
(w) a funeral benefit;
(x) physical equipment or physical infrastructure by which
something else that is a financial product is provided;
(y) a facility, interest or other thing declared by regulations made
for the purposes of this subsection not to be a financial product;
(z) a facility, interest or other thing declared by ASIC under
subsection (2) not to be a financial product.
(2) ASIC may declare that a specified facility, interest or other thing is
not a financial product for the purposes of this Chapter. The declaration
must be in writing and ASIC must publish notice of it in the Gazette .
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CORPORATIONS ACT 2001 - SECT 945A
Requirement to have a reasonable basis for the advice
(1) The providing entity must only provide the advice to the client if:
(a) the providing entity:
(i) determines the relevant personal circumstances in relation
to giving the advice; and
(ii) makes reasonable inquiries in relation to those personal
circumstances; and
(b) having regard to information obtained from the client in
relation to those personal circumstances, the providing entity has
given such consideration to, and conducted such investigation of,
the subject matter of the advice as is reasonable in all of the
circumstances; and
(c) the advice is appropriate to the client, having regard to that
consideration and investigation.
Note:
Failure to comply with this subsection is an offence (see subsection
1311(1)).
(2) In any proceedings against an authorised representative of a
financial services licensee for an offence based on subsection (1),
it is a defence if:
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(a) the licensee had provided the authorised representative with
information or instructions about the requirements to be complied
with in relation to the giving of personal advice; and
(b) the representative's failure to comply with subsection (1)
occurred because the representative was acting in reliance on that
information or those instructions; and
(c) the representative's reliance on that information or those
instructions was reasonable
Note:
A defendant bears an evidential burden in relation to the matters in
subsection (2). See subsection 13.3(3) of the Criminal Code .
(3) A financial services licensee must take reasonable steps to ensure
that an authorised representative of the licensee complies with subsection (1).
Regulation & Further Reading
Financial Planning in Australia
Page 88
Attributes off a professional Relationship
Page 96 to 101
Regulatory Structure
Pages 101 to 106
Licence Securities Dealers
Pages 111 to 113
Law of Contract
Pages 113 to 115
Law of Agency
Pages 117
Know your client
Page 118
Know your product
Page 119
Product Research
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Page 134
Privacy ACT 1988(CTH)
http://www.moneysmart.gov.au/ - tips and traps for you and your clients
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Chapter 18 - Providing Financial Advice
The Advice Process
The financial planning process can be broken into 6 steps. These steps may be
broken into “sub – groups”, however, following a six step process is quite
widely accepted.
Step 1: Gather Data
The first step in any advice process is to “know your client”, in fact you are
legally obliged to know your client and to be able to show that you do this is
usually evidenced by a “Financial Fact Find”.
Getting to know your client takes place in an informal and formal way. Firstly,
there is an informal initial chat that gives you some insight into how the client
may feel about the financial planning process. The more formal step is having
the client complete a Financial Fact Find document.
The fact find once completed gives you a document you can keep on file and is
the starting point of the advice process. In reality, clients are generally
reluctant to disclose all of their financial situation and you must warn the
clients from the outset that failure to disclose information can lead to
inappropriate advice.
Step 2: Identify the Client’s Needs
Being able to identify the client’s needs is a combination of factors. The first
thing to do is to ask what it is they would like to achieve from getting financial
advice. Most clients would say that they would like to improve their existing
situation or that they would like to see if they are in fact on the right track
towards providing for their retirement.
An example of a client’s needs is:
“I am age 55 now and I expect to retire at age 60. I need $600 dollars per week
net of any tax. Have I saved enough?”
Step 3: Analyse the client’s financial opposition to identify problems
One problem may be that after you have analysed the client’s position, you
discover that their goals are unrealistic. It is the role of the adviser to explain
how the objectives of the client may need to be modified.
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For example, if a client wishes to retire at 55, they have a life expectancy of
almost 30 years. If they do not have significant financial resources at age 55,
then a comfortable retirement may be difficult to achieve.
Step 4: Prepare written recommendations
It is a requirement of the Corporations Law that, when providing advice to a
client, then it must be in writing.
Step 5: Implementation
Preparing for the presentation of the written recommendation.
Confirming the presentation interview. Presenting the written
recommendation. Client giving you an authority to proceed – signing off the
plan that they agree with the recommendations.
Lodging paperwork and obtaining all necessary signatures and approvals.
Step 6: Review
There will also need to be a review of the plan set at intervals that you have
both agreed on. For example, there may be yearly reviews to look at what has
changed in the investment markets, perhaps no products are available or the
client’s circumstances have changed.
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Other references used within this leaner guide www.apra.gov.au
www.asic.gov.au
www. rba.gov.au
www.austlii.edu.au
http://www.austlii.edu.au/au/legis/cth/consol_act/ca2001172/
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