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principles of financial planning > financial advice scopes > Flashcards

financial advice scopes Flashcards

1
Q

what is cashflow?

A

Cash flow is the movement of money in and out of possession through income and expenditure

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2
Q

_______ is where you have more money coming in than going out, resulting in savings.

A

positive

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3
Q

Negative cash flow is where

A

outflows are higher than inflows in a given period

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4
Q

The first step in managing cash flow is

A

development of an accurate budget.

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5
Q

immediate results of active cash flow management is

A

the creation of a regular savings plan, active investments and the ability to implement other financial planning strategies.

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6
Q

Effective cash flow management indicates an ongoing ability to generate and use cash for

A

a business, keeping up with debt, borrow money at times and greater protection against loan defaults.

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7
Q

list the benefits of strong cash flow

A
  • provides comfort and capabilities to invest in growth for a business
  • makes businesses more appealing to lenders
  • favourable credit terms to attract new buyers
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8
Q

what cashflow management services do advisers provide to retail clients?

A

budget planning, setting and achieving savings goals, accessing and controlling cash flow of clients, and categorising and ongoing monitoring and review of strategies.

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9
Q

what cashflow management services do advisers provide to small businesses

A

Financial advisers with experience in small business can help small businesses manage accounts receivable, payment terms for suppliers, budgeting and management reporting.

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10
Q

Anyone who wants to engage in credit activities (including lenders, lessors and brokers) must be

A

licensed with ASIC or be a representative of someone who is licensed

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11
Q

The law also states that credit providers must not enter into a contract with you that is unsuitable, such as

A

a loan you can’t repay without suffering hardship or a contract that doesn’t meet your requirements and objectives.

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12
Q

By law the credit provider must:

A

make reasonable inquiries about your financial situation, requirements and objectives

take reasonable steps to verify your financial situation

decide whether the credit contract you are asking for is ‘not unsuitable’ for you.

Credit assistance providers must make a preliminary assessment and credit providers must make a final assessment that the credit contract you are applying for is ‘not unsuitable’ for you before they offer you credit

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13
Q

what information must a credit guide contain?

A

their licence number

contact details

fees and charges

details of your right to complain or a written contact details to access their External Dispute Resolution Scheme (EDR)

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14
Q

. Effects of a debt management strategy can result in

A

debt consolidation, release of equity and further investment, paying of debts quicker, consideration of an offset account, redraw facility, variable and fixed rate features and interest-only facility.

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15
Q

what are the Debt advice issues that will impact over time

A

loan consolidation
additional repayment
reduction of inefficient debt

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16
Q

what are the benefits of loan consolidation

A

Loan consolidation will save interest where new repayments and loan terms are at least equal to total current loan repayments and loan terms.

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17
Q

what is the drawback of loan consolidation

A

Otherwise, someone may convert short-term debts into longer-term debts and pay more interest in the long run

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18
Q

Thus, an effective debt management strategy is to take advantage of ________ accounts and the ______ period on credit cards.

A

mortgage offset

interest-free

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19
Q

The benefit of the additional lump sum payments strategy is…

A

earning an after-tax return equivalent to the loan interest rate.

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20
Q

If clients have investment loans, there is an advantage in making additional repayments into an offset account rather than:

A

making the repayments directly into the investment loan.

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21
Q

By accelerating the reduction of inefficient debt, clients can:

A

reduce total interest payments and reduce the duration of inefficient debts

increase the equity in their home, which can be potentially used as security to borrow for investment purposes later on

potentially obtain more cash flow at the end of the loan term that can either be used to repay other debts or to make additional investments

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22
Q

how is credit card interest calculated

A

The interest of a credit card is calculated on a daily basis using the APR (Annual Percentage Rate) rate – multiplied against the amount outstanding on the card. This is summed up each month and added as a charge.

Daily Rate (%) x Average Daily Balance x Number of Days In Month

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23
Q

what are the 4 types of interest rates that apply to credit cards?

A

purchase rate

cash advance rate

balance transfer rate

introductory interest rate

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24
Q

explain the purchase rate

A

This rate is applied to new purchases made on your credit card and is e most commonly referred to interest rate.

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25
Q

explain the cash advance rate

A

This rate of interest is applied to cash advance transactions and has an APR that is typically higher than the purchase rate (usually around 21% p.a.)

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26
Q

explain the balance transfer rate

A

This rate of interest is charged for balances transferred onto the credit card. It is usually either the purchase rate or the cash advance rate.

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27
Q

what is the introductory rate

A

Many credit cards offer lower interest rates when you first sign up. These rates apply only for a limited amount of time and are often seen as balance transfer offers, such as 0% for nine months.

28
Q

what is the benefits to understanding interest free days

A

Understanding how interest free days works can effectively avoid paying interest

29
Q

how do interest free days work?

A

Each month the bank or issuer allows this certain period of time to the customer to be able to make purchases on their card and then pay the bank back for it before the end of that period. If someone pays the whole amount back, that payer will be entitled to not pay any interest on the credit card.

30
Q

what are the type of loans associated with mortgages?

A

Principal and interest loans.
Interest only loans.
Variable, fixed and split rate home loans.
Making extra payments.
Redraw, offset and line of credit.
Portability.
Bridging loans, loans for building and renovating

31
Q

what categories of investment do financial advisers usually deal with?

A

direct investment (share purchases)

investment inside super

Investment outside super and indirect investment (managed investment)

32
Q

Prior to making any choices on the appropriate investment assets and vehicles for an investor, an adviser needs to consider various factors of a client’s circumstances such as:

A

life cycle and style
health
number of dependents
source of income
job security
level of literacy and financial sophistication, personal balance sheet and cash flow
risk appetite.

33
Q

what are the 4 phases of a clients life-cycle

A
  1. accumulation phase
  2. consolidation phase
  3. drawdown phase
  4. Gifting phase
34
Q

what is the accumulation phase?

A

where often people work very hard in paid employment or in self-employed positions to accumulate wealth. In this phase often earning capacities have not fully matured and financial needs are high making budgeting very important. Many people start children education plans or other styles of investment plans. High levels of debt are usually prevalent in this phase and debt management often needs to be considered. Personal insurances such as income protection insurance, life insurance and total and permanent disability insurance compliment this phase.

35
Q

the consolidation phase is…..

A

this begins which is when a person generally has an ability to save and accumulate a retirement capital base. A higher capacity to earn an income coupled with fewer obligations is typical in this stage. Incomes are higher because work situations are more developed and expenses are fewer by virtue of the fact that children are leaving the house. Generally individuals have a higher level of asset ownership in this phase and issues include structuring affairs in preparation for retirement which include taxation considerations for higher income earners

36
Q

explain the drawdown phase

A

is when the person has retired and is now using up some of the assets that were accumulated to fund their retirement. Consideration of the most appropriate way to produce passive income from accumulated retirement capital becomes important along with ensuring that estate planning affairs are met. Managing cash flow and budgets are important to ensure the longevity of the capital.

37
Q

the gifting phase is….

A

where a person starts to age and consideration needs to be made about how much assets should be preserved to pass onto relatives compared to being used for lifestyle and living needs. In this phase there is a greater emphasis on ensuring a power of attorney is organised and wills are adequately prepared.

38
Q

When working with clients and determining an investment strategy, one of the most important aspects is determining their…

A

Risk profile

39
Q

A _______ is used to determine how much risk is appropriate for a client’s investment plan by determining investment asset allocation for the investment portfolios.

A

risk questionnaire

40
Q

Investment assets can be divided into two possible types:

A

defensive assets and
growth assets

41
Q

give examples of defensive assets

A

savings
fixed interest
government bonds

42
Q

what are growth assets

A

Growth Assets are ones where a real asset is purchased

43
Q

what are some examples of growth assets

A

property investments and equity investments,

44
Q

Expected investment returns can be in the form of:

A

capital growth, and/or
income (such as rent or dividends).

45
Q

what are the advantages and disadvantages of cash as a defensive asset?

A

advantages: The capital is safe relative to other asset classes. Quick access to your money

Disadvantages :No protection from inflation or taxation. Returns tend to be lower than for other assets over time.

46
Q

what are the advantages and disadvantages of fixed income as a defensive asset?

A

advantage: Generally secure – if held to maturity.

Disadvantages: Interest rates can vary and may not keep pace with inflation.
Can be expensive to convert into cash in an emergency.

47
Q

what are the advantages and disadvantages of property as a growth asset?

A

Advantages
Capital value and income should rise with inflation.
Potential for tax benefits.
Emotional security of ‘bricks and mortar’

Disadvantages:
Nit liquid.
Managing tenants can be difficult and costly.
Often involves large sums of capital, significant debt and numerous costs such as legal fees and maintenance expenses.

48
Q

what are the advantages and disadvantages of shares as a growth asset?

A

advantages:
Tend to generate superior long-term returns and growing income.
Potential tax benefits.
Highly liquid – in most cases

Disadvantages
Volatility could lead to losses if forced to sell.
Market slumps can be prolonged.
Skill, experience and/or good advice is often required to make right selections.
Can be difficult for the direct investor to achieve sufficient diversification

49
Q

rank the following asset classes in form of lowest to highest risk
- cash
- fixed interest
- property
- australian shares
- international shares

A
  1. cash
  2. fixed interest
  3. property
  4. australian shares
  5. internatioal shares
50
Q

true or false. the greater the risk of the asset class, the higher the potential returns will be

A

true

51
Q

what are the 5 Investment product options based on Strategic Asset Allocations

A

conservative
conservative balanced
balanced
growth
high growth

52
Q

The growth and strength of Australia’s investment advice market has been underpinned by:

A

mature, large and rapidly expanding financial markets
soundness of banks and an efficient financial system
a strong presence of leading global financial institutions
the development of cutting-edge investment products
a world-class regulatory environment
a universal and mandatory superannuation system
a well-educated, multilingual and productive labour force.

53
Q

Usually the worst kind of debt is:

A

borrowing to fund lifestyle.

54
Q

Indemnity policies determine losses at the time of the claim. True or False?

A

True

55
Q

what is the primary objective of superannuation

A

The primary objective of the superannuation system is to provide income in retirement to substitute or supplement the Age Pension.

56
Q

what makes up the subsidiary objective?

A
  1. Facilitate consumption smoothing over the course of an individual’s life
  2. Help people manage financial risks in retirement
  3. Be fully funded from savings
  4. Be invested in the best interests of superannuation fund members
  5. Alleviate fiscal pressures on Government from the retirement income system
  6. Be simple and efficient, and provide safeguards
57
Q

Some of the government benefits that can be maximised by superannuation advice are:

A

savings that do not have access prior to retirement

tax deductible contributions for the self-employed

lower tax savings

the opportunity to receive the government co-contribution

forced savings for retirement

58
Q

explain the super guarantee

A

the SG is currently 9.5% of an employee’s ordinary time earnings
SG is paid at least four times a year, by the quarterly due dates
super payments must go to a complying super fund – most employees can choose their own fund

59
Q

Super can be taxed at three possible stages:

A

When employer makes a super contribution, and when employee makes before-tax contribution – 15% tax
As super investments grow (tax on earnings only) – 15% tax
If super is withdraw from the funds before anyone turn 60 years of age (different tax rates apply depending on various situation

60
Q

Super can be taxed at three possible stages:

A

When employer makes a super contribution, and when employee makes before-tax contribution – 15% tax
As super investments grow (tax on earnings only) – 15% tax
If super is withdraw from the funds before anyone turn 60 years of age (different tax rates apply depending on various situation

61
Q

how can super be a tax saving strategy?

A

Someone can take the benefit of salary sacrifice to lower before tax income to contribute within super. This action can not only increase super balance but also lower effective tax rates. Moreover, investment earnings within Superannuation is taxed at 15% flat rate. This rate of tax on investment earnings is usually lower than effective tax rates of high income earners

62
Q

what is the key reason behind the popularity of SMSFs

A

high level of control over retail superannuation accounts

63
Q

what are the 6 elements that make a SMSF so appealing to high income earners?

A

Investment choice and control
Investment flexibility
Taxation benefits
Cost advantages
Estate planning
Creditor protection

64
Q

in Australia, income tax is levied at ________ rates

A

progressive

65
Q

what is the medicare levy in australia

A

2%

66
Q

what are the 3 main types of assessable income for individual tax payers

A

personal earnings
business income
capital gains

67
Q

Financial advisers can provide strategic tax advice such as

A

property investment using negative gearing
tax minimisation strategies
planning capital gain tax
superannuation, insurance and investment product related tax
overall tax planning to acquire and dispose assets

principles of financial planning (8 decks)

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