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Personal Wealth Management > Week 1 > Flashcards

Week 1 Flashcards

1
Q

Financial planners help clients to:

A

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

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2
Q

Why the Increased Focus

A

Deregulation of the Australian financial system
New investment opportunities
Increased legislative complexity
Ageing population

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3
Q

Financial Advising Process

A

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

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4
Q

Financial Planning Association of Australia (FPA)

A

Governing Certified Financial Planners (CFP)

General Standards:

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5
Q

General Standards:

A
  1. Client first
  2. Integrity
  3. Objectivity
  4. Competency
  5. Fairness
  6. Diligence
  7. Professionalism
  8. Confidentiality
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6
Q

6 Steps for Financial Planning

A

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

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7
Q

Gather client data

A

Importance of client fact finder

Importance of establishing the relationship

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8
Q

Goal setting

A 
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)
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9
Q

The importance of lifestyle planning

A

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

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10
Q

Life cycle theory

A

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
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11
Q

Risk profiling

A

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’

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12
Q

Financial planners must ‘know their client’

A

Investment risk/security of capital
Income requirements
Liquidity requirements

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13
Q

Purpose of Asset Allocation

A 
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.
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14
Q

How do we explain risk?

A 
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?
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15
Q

Understanding Risk (types of risk)

A

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

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16
Q

Mismatch risk

A

Mismatching of a person’s objectives, investments and time frame

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17
Q

Inflation risk

A

Real value of investments may be eroded over time

Capital growth will help guard against the impact of inflation

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18
Q

Interest rate risk: 2 aspects

A

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

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19
Q

Market risk

A

All markets have ups and downs

Some markets are more volatile than others

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20
Q

Market timing risk

A

Very difficult to choose when to get into the market and when to get out

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21
Q

Lack of diversification risk

A

Diversification reduces the overall risk of an investment portfolio
Investment portfolio should be diversified across a range of asset classes

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22
Q

Currency risk

A

Applies if investments are valued on foreign currencies

Value of investment may rise or fall

23
Q

Liquidity risk

A

Always important to have access to cash for emergency purposes
Redeeming investments may be an expensive alternative

24
Q

Credit risk

A

Applies to investments such as term deposits, debentures, mortgages and bonds

25
Q

Legislative risk

A

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

26
Q

Gearing risk

A

If an investor borrows money to invest, loan must be repaid, even if the investment falls in value

27
Q

Main Regulators

5 key bodies

A

APRA

RBA

ACCC

ASIC

ATO

28
Q

Regulations and controls include:

A 
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
29
Q

Financial Services Reform Act (FSRA) 2001

A

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)

30
Q

Corporations Act 2001

A

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

31
Q

Financial Services Reform Act (FSRA) 2001

Provides single regulatory regime for:

A

Financial services
Financial products
Financial markets
Clearing and settling facilities

Administered by ASIC

32
Q

Disclosure requirements: Retail clients

A

Point of sale disclosure

Ongoing disclosure and periodic reporting

Advertising requirements

Obligation to provide confirmation of transactions

33
Q

Disclosure documents

A

Financial Services Guide

Statement of Advice

Act in the best interest of the Client– Corporation Act section 961 B.

Product Disclosure Statement

34
Q

Financial Services Guide

A

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

35
Q

Statement of Advice

A

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

36
Q

Act in the best interest of the Client– Corporation Act section 961 B.

A

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;

37
Q

Product Disclosure Statement

A

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

38
Q

Future Financial Advice(FOFA) Regime

A

: 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)
39
Q

Analysing a client’s financial position

A

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

40
Q

Assets – Liabilities =

A

Net worth

41
Q

Solvency Ratio

A

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.

42
Q

Liquid Assets

A

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

43
Q

Current Debt

A

Debt that should be repaid within 1 year.
E.g. Credit cards and short term loans.
Mortgages and large loans are not current debts

44
Q

Liquidity Ratio

A

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.

45
Q

Savings Ratio

A

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.

46
Q

MONTHLY DEBT SERVICE RATIO

A

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

47
Q

Factors affecting financial planning

A

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

48
Q

Features Of The Economic Environment

Four Stages in the Business Cycle

A

BOOM OR EXPANSION

CONTRACTION

RECESSION/TROUGH

RECOVERY

49
Q

BOOM OR EXPANSION

A

Employment and economic growth are high

Increase in inflation is cause for concern

50
Q

CONTRACTION

A

Economic growth starts to slow
Sales begin to fall
Unemployment starts to rise

51
Q

RECESSION/TROUGH

A

High unemployment

Low (and possibly negative) economic growth

52
Q

RECOVERY

A

Unemployment begins to fall

Economic growth starts to rise

53
Q

Lessons for Investors and Financial Planners

Be aware of:

A 
market cycles
risks accompanying high returns
benefits of diversification
underlying portfolio of investment products
scams
need to review investments

Personal Wealth Management (11 decks)

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