Week 1 Flashcards
Financial planners help clients to:
Make informed decisions about their money
Develop a sound financial plan
Use their money to best advantage
Select financial products to suit their needs
Understand risk
Why the Increased Focus
Deregulation of the Australian financial system
New investment opportunities
Increased legislative complexity
Ageing population
Financial Advising Process
Gather qualitative and quantitative data
Identify the client’s goals
Identify financial problems, ie set priorities, decide on trade-offs and opportunity costs
Prepare written report
Implement the agreed-upon plan
Review, revise and maintain the personal finance plan
Financial Planning Association of Australia (FPA)
Governing Certified Financial Planners (CFP)
General Standards:
General Standards:
- Client first
- Integrity
- Objectivity
- Competency
- Fairness
- Diligence
- Professionalism
- Confidentiality
6 Steps for Financial Planning
Gather client data
Establish goals and objectives
Analyse and evaluate the client’s financial status
Develop and present financial planning recommendations and / or alternatives
Implement the financial planning recommendations
Periodically monitor and review the plan
Gather client data
Importance of client fact finder
Importance of establishing the relationship
Goal setting
Goals will change over time and through different stages of life: Goals need to be specific and include a set time frame relating to both personal and financial nature short term (1- 2 years) medium term (2 - 5 years) long term (5 or more years)
The importance of lifestyle planning
Includes consideration of the chosen or desired lifestyle
A financial plan is unlikely to be successful in the long term if lifestyle considerations are ignored
Life cycle theory
needs and wants will change during a persons life cycle
unmarried working individual working married couple with no children couple with children and mortgage couple with no dependent children retired couple
Risk profiling
Financial planners have an obligation to assess client’s tolerance to risk in developing appropriate strategies and plans
Risk is concerned with establishing a person’s attitude to a loss in the value of their investments
Usually based on questions established in client fact finder
The two extremes are the conservative investor and the aggressive investor
Financial planners must ‘know their client’
Financial planners must ‘know their client’
Investment risk/security of capital
Income requirements
Liquidity requirements
Purpose of Asset Allocation
WHY? Clients needs, Clients comfort level Construction of Portfolio Optimal Portfolio Compliance & Legal requirement Ongoing Relationship & business
Need to understand risk profile of client: High risk taker, Low or conservative risk taker Medium risk taker, Risk averse.
How do we explain risk?
A major part of financial planners job is managing risk. How do you communicate risk to clients? Education Experience Booklets Plan appendices Discussion Risk Profile questionnaire What is the clients current understanding?
Understanding Risk (types of risk)
Mismatch risk
Inflation risk
Inflation rate risk: 2 aspects
Market risk
Market timing risk
Lack of diversification risk
Currency risk
Liquidity Risk
Credit risk
Legislative risk
Gearing risk
Mismatch risk
Mismatching of a person’s objectives, investments and time frame
Inflation risk
Real value of investments may be eroded over time
Capital growth will help guard against the impact of inflation
Interest rate risk: 2 aspects
Reinvestment risk
- When fixed assets mature, must reconsider current interest rates
-Market volatility
If fixed-rate investments are sold in an emergency situation, full value of investment will not be realised
Market risk
All markets have ups and downs
Some markets are more volatile than others
Market timing risk
Very difficult to choose when to get into the market and when to get out
Lack of diversification risk
Diversification reduces the overall risk of an investment portfolio
Investment portfolio should be diversified across a range of asset classes
Currency risk
Applies if investments are valued on foreign currencies
Value of investment may rise or fall
Liquidity risk
Always important to have access to cash for emergency purposes
Redeeming investments may be an expensive alternative
Credit risk
Applies to investments such as term deposits, debentures, mortgages and bonds
Legislative risk
Governments can make changes to current laws and regulations
Change in the rules may have either a favourable or unfavourable effect on investor’s previous decision
Gearing risk
If an investor borrows money to invest, loan must be repaid, even if the investment falls in value
Main Regulators
5 key bodies
APRA
RBA
ACCC
ASIC
ATO
Regulations and controls include:
Acts of parliament (Corporations Amendment (Financial Advice) Regulation 2015 - modified best interest duty for advice). Common law Statutory complaints resolution scheme Industry reform mechanisms Powers of ASIC
Financial Services Reform Act (FSRA) 2001
Objectives are to:
Promote confident and informed decision making by consumers of financial products and services
Reduce systematic risk and provide fair and effective clearing and settling facilities
Various licensing regimes including Australian Financial Services Licence (AFSL)
Corporations Act 2001
Licensing regime in the financial products and financial services advice industry which defines the capacity in which a person can provide advice
Authorised representatives:
Principals must hold an Australian financial services licence (AFSL) issued by ASIC
Principals must keep a register of their authorised representatives
Financial Services Reform Act (FSRA) 2001
Provides single regulatory regime for:
Financial services
Financial products
Financial markets
Clearing and settling facilities
Administered by ASIC
Disclosure requirements: Retail clients
Point of sale disclosure
Ongoing disclosure and periodic reporting
Advertising requirements
Obligation to provide confirmation of transactions
Disclosure documents
Financial Services Guide
Statement of Advice
Act in the best interest of the Client– Corporation Act section 961 B.
Product Disclosure Statement
Financial Services Guide
Contains
all the contact details of the adviser and the company they represent,
the types of products that the adviser can advise on,
any details of remuneration, trailing commission, other benefits and third party relationships,
details of the internal and external complaints resolution schemes
an authorisation statement from the principals of the firm
Must be clearly labelled
Must be provided at the outset of dealings with a retail client, unless
The client already has an FSG
The product is a market-traded derivative
Statement of Advice
Contains
the advice,
the basis on which it was given,
information about the fees, commissions or association that might affect the advice,
any warning if the advice is based on incomplete information
details of one product replacing another
Must be provided as soon as practicable and before any further financial service is carried out
i.e. must be given before a client commits to any strategy or signs up for any investment or risk management product
Act in the best interest of the Client– Corporation Act section 961 B.
identify the objectives, financial situation and needs of the client
investigation into the financial products that might achieve those of the objectives
based all judgements in advising the client on the client’s relevant circumstances;
Product Disclosure Statement
Prepared by the product issuer and is similar to a prospectus
Contains
full details of the financial services product being offered
the risks associated with the product
fees and charges
taxation implications
any other information that may influence the client’s decision
Future Financial Advice(FOFA) Regime
: Implications for advisers/Clients/Industry
Best Interest Duty (interest of clients) Opt in/ Opt Out Fee Disclosure Ban On Conflicted Remuneration Ban on Soft Dollar Benefits (extra bonus) Scale Advice (limited)
Analysing a client’s financial position
Having set financial goals, need to determine how they’ll be achieved - (ie budgeting)
Balance sheet (assets and liabilities)
Cash budget (income and expenditure)
Income includes salary, wages, interest, profits, bonuses, fees charged, dividends, distributions, social security pensions or allowances, other earnings
Expenditure includes food, clothing, gas, electricity, rent, interest on loans, rates, entertainment, holidays, education, pay television, telephones, other expenses
Savings = income – expenditure
Assets – Liabilities =
Net worth
Solvency Ratio
NET WORTH/TOTAL ASSETS
= 68.28%
This means that the Smiths’ family assets would need to fall by 68.28% for their ownership of their assets to fall to zero.
Liquid Assets
Those that can be converted easily to cash and bought with the intention to convert to cash.
E.g. Cash and short term investments.
Shares, Funds and Superannuation are not liquid assets
Current Debt
Debt that should be repaid within 1 year.
E.g. Credit cards and short term loans.
Mortgages and large loans are not current debts
Liquidity Ratio
LIQUID ASSETS/CURRENT DEBT
= 4.76%
* Annual debt repayment plus credit card debt
This shows the percentage of liquid assets to cover current. Multiply by 12 to show how many months of debt could be funded if income ceased and liquid assets were needed to meet current debt obligations. .0476*12= .5712 or half a month.
Savings Ratio
SAVINGS/NET INCOME
Savings expressed as percentage of total income. It is likely that the savings ratio will be low for a young couple with small children and also for an elderly couple.
MONTHLY DEBT SERVICE RATIO
ANNUAL DEBT COMMITMENTS/12 MONTHS
DIVIDED BY
ABBUAL NET INCOME/12 MONTHS
This ratio can be used to indicate the effect of a particular course of action
Factors affecting financial planning
Important to remember that many key players in the
market place can affect the outcomes of a financial plan
the economy -domestic and international -business cycles political system social environment
Cannot establish a financial plan and investment strategy in isolation
Features Of The Economic Environment
Four Stages in the Business Cycle
BOOM OR EXPANSION
CONTRACTION
RECESSION/TROUGH
RECOVERY
BOOM OR EXPANSION
Employment and economic growth are high
Increase in inflation is cause for concern
CONTRACTION
Economic growth starts to slow
Sales begin to fall
Unemployment starts to rise
RECESSION/TROUGH
High unemployment
Low (and possibly negative) economic growth
RECOVERY
Unemployment begins to fall
Economic growth starts to rise
Lessons for Investors and Financial Planners
Be aware of:
market cycles risks accompanying high returns benefits of diversification underlying portfolio of investment products scams need to review investments
