overview of the financial planning industry

Question 1

Financial planning is the process that takes into account the client’s

Answer 1

personality
financial status
socioeconomic and legal environments

Question 2

list professionals who provide financial advice

Answer 2

financial advisers
stockbrokers
personal and financial bankers
accountants
customer service staff at insurance companies
employees at supper funds
insurance advisers
robo-advice

Question 3

list the areas of financial advice

Answer 3

taxation
estate planning
trusts
home ownership
investments
debt
risk management
social security benefits
annuities

Question 4

list the 6-step process that financial advisers must follow to achieve their clients’ goals

Answer 4

1. Establishing and defining the client–planner relationship (service offered, remuneration details).
2. Gathering client data (income, debt, assets, liabilities, risk tolerance) and identifying client goals (short-, medium- and long-term).
3. Analysing data and identifying financial issues.
4. Developing and preparing a plan (recommendations).
5. Implementing a plan.
6. Monitoring and reviewing the plan (in line with economic and lifestyle changes).

Question 5

Over the past decade, there has been an increasing demand for the services of financial planners. This increase in demand has come about because of a number of factors:

Answer 5

Government policy, which places greater responsibility on the individual for their financial wellbeing, and a decrease in government willingness to accept responsibility in the long term.
An increase in the compulsory superannuation guarantee. All employees are obliged to save for their retirement and are becoming more informed about the choices available to them.
An ageing population—a large percentage of the population is concerned with both financial and estate planning issues, particularly Australia’s ‘Baby boomers’ as they approach retirement.
The privatisation of Australian companies and floating of shares has brought thousands of Australian households into the share market, leading to an increasing awareness and the need for continuing advice.
The ever-changing and increasing complexity of government rules as they apply to taxation, social security and superannuation.
The fallout from the 2008–2009 global financial crisis has had a massive impact on the savings plans of many Australians who are facing increasing uncertainty in volatile markets both here and oversea

Question 6

what social factors have impacted the demand for financial planners to assist with accomplishing goal aspirations

Answer 6

longer life expectancy
lower preferred retirement age
longer child- caring responsibilities
increased participation in tertiary education
more single-parent families
larger homes

Question 7

list the stages of development in the financial planning industry

Answer 7

Stage 1: Professional and technical development
Stage 2: Setting out knowledge and skill competencies
Stage 3: Financial Services Reform Act (FSRA)
Stage 4: Introduction to superannuation legislation
Stage 5: Increasing complexity of financial products

Question 8

explain the features of an institutional model

Answer 8

Institutional models can be either aligned or non-aligned to any product manufacturer.
Industry consolidation is leading to more businesses aligned to product manufacturers.

Question 9

explain the features of a self-licensed model

Answer 9

The popularity of SMSF, accounting practices providing financial planning services and the popularity of independent advice is leading the path for more self-licensee models.
Skeptics of the self-licensee model questioned the ability of financial planners to deal with the compliance issues and thorough understanding of the obligations as an Australian financial services licensee (AFSL).

Question 10

explain the features of a fee-for-service model

Answer 10

The fee-for-service model can be based on a fixed or hourly rate per session, or a value may be placed on providing the Statement of Advice (SOA). The fee may be paid up-front or over a pre-determined period of time

Question 11

explain the value advisers create for clients with regards to goal setting

Answer 11

Many people do not have clear financial goals. Sitting down with financial advisers and establishing some realistic targets can be an important first step for many people.

Question 12

explain the value advisers create for clients with regards to budgeting

Answer 12

Reviewing customers’ budgets and establishing a capacity to save is a very useful process that results in clients having savings where nothing was being saved before.

Many people find that they lack the discipline to put money away each month without the discipline of a forced payment into a savings vehicle, whether this be paying off a mortgage or putting money into a savings account at the bank.

Question 13

explain the value advisers create for clients with regards to superannuation

Answer 13

Presently, all Australians are obliged to have contributions of at least 9.5% of their salary made to a superannuation fund. Modelling work indicates that this will not, on its own, give sufficient assets for people to retire on. Depending on earnings and spending patterns there can be scope to make additional contributions to superannuation, as long as their ability to meet short-term needs is covered. The adviser can ensure that customers are maximising their contributions to superannuation.

Question 14

explain the value advisers create for clients with regards to tax

Answer 14

Tax is a very important part of an investment strategy and advisers can ensure that their clients are investing in a tax effective manner.

This can be done through tax effective strategies such as gearing, investing in growth assets and shares, which generate imputation credits.

Question 15

explain the value advisers create for clients with regards to government benefits

Answer 15

For retirees, the interaction between their assets, income and benefit entitlements can be very complex. Advisers can help customers optimise the outcome through their understanding of this interaction.

Question 16

explain the value advisers create for clients with regards to risk profile

Answer 16

People typically are very risk averse. Investments often show a very high bias toward cash and property. Many investors have poorly balanced portfolios with cash and fixed interest, maybe a few shareholdings and an investment property.

This exposes the investor to undiversified investment risk due to the concentrated nature of the portfolio. The adviser can advise customers against participating in ill thought-out risks that might lead to losses that the client cannot bear such as investing in some schemes offering unrealistic returns or risk. This capital protection role can be very important.

Achieving the correct risk profile for clients can result in significantly higher long-term earning than the customer may have obtained on their own

Question 17

explain the value advisers create for clients with regards to diversification

Answer 17

Retail investors are usually insufficiently diversified and as a result are exposed to unsystematic risk, which is not rewarded through increased returns.

Using managed funds or a broad range of investments, advisers can ensure that their clients are appropriately diversified, both by asset class and security. This is a significant benefit for their clients.