Week 1 - Financial Planning Process Flashcards
The main reasons for the growing importance of personal financial planning include:
Personal financial planning is increasing in importance for a number of reasons, including:
- Increase in wealth (but also the increase in indebtedness)
- Increase in longevity
- Restrictions on accessing to the age pension and other social security payments
- Compulsory superannuation
- The need to manage risk
In summary, the major reason for the increased importance of personal financial planning is the transfer of risk for providing for one’s old age from the government (age pensions) and employers (defined benefit superannuation schemes) to individuals.
life cycle theory of consumption and saving
It is theorised that higher incomes in working life is saved in the form of assets to match the lack of income in retirement. However, the theory of saving sufficient funds to meet retirement expenditure is not always put into practice.
Thus, in the context of life cycle theory, PFP is about managing income, expenditure and savings to meet both short-term and long-term financial objectives.
Evolution of financial planning
Since the 1980’s, numerous changes to tax, social security and superannuation laws, as well as various financial product developments, has resulted in increasing numbers of people seeking personal financial advice to better their personal financial situation – which in turn contributed to the continued development of the financial planning industry.
Corporations Act 2001 includes
The main area of the Corporations Act affecting financial planners is the provision of financial products or financial advice to the public.
- Licensing regime in the financial products and financial services advice industry which defines the capacity in which a person can provide advice
- Licensing regime for the provision of financial services and products.
- Rights and obligations of the licensees in the appointment of authorised representatives
- definition of financial products, financial services, retail and wholesale clients.
Financial Services Reform Act (FSRA) 2001
and
Australian Financial Services Licence
Authorised representatives:
Principals must hold an Australian financial services licence (AFSL) issued by ASIC
Principals must keep a register of their authorised representatives
Tier 1 – Personal Advice
Tier 2 – General Advice
ASIC Role
It is the role of ASIC to ensure practitioners comply with legal requirements governing the financial planning industry. ASIC’s role is to implement the legislation.
- ASIC administers laws that protect consumers in financial products and services and corporate markets
- ASIC contributes to Australia’s economic reputation and wellbeing by ensuring that Australia’s financial markets are fair and transparent, supported by confident and informed investors and consumers
- ASIC monitors disclosure of all forms of remuneration received by licensees or their representatives
- ASIC has the power to revoke or suspend a license or ban a person from providing financial services
Disclosure requirements
The main disclosure documents as per the FSRA are:
- Financial services guide (FSG) - describes a range of services, how fees are charged, dispute resolution etc. Given prior to the provision of advice.
- Statement of Advice (SOA) – more on this in a minute
- Product disclosure statement (PDS) – all financial products must provide a detailed PDS as per ASIC requirements
Statement of Advice
The purpose of an SOA is to communicate advice and recommendations concerning the financial affairs of a client. A financial planner must provide the client with a written statement of advice (SOA) at the same time as, or as soon as practicable after, the advice is provided
When is a SOA not required?
when providing personal advice to clients having a small amount of funds to invest (S 946AA) (< $15,000)
where the advice does not involve the purchase of a financial product and where the entity providing the advice does not receive any remuneration
when providing further advice to a client. In such cases, the financial adviser can provide an alternative advice document to the client known as a record of advice (ROA)
Types of Statement of Advice
- No advice: A document signed by a client stating that no advice was given by a planner in respect of a transaction
- Limited/Scaled Advice: personal advice that is limited in scope, either by being in response to a limited range of issues or by addressing a specific area of the investor’s needs.
- Comprehensive advice: Incorporates all six steps of the financial planning process, SOA takes into consideration all aspects of the clients personal circumstances and situation
The Six Steps of the Financial Planning Process
Step 1 Gather client information: Gather all relevant information, both financial and non-financial information through data collection forms and questionnaires
Step 2 Establish financial goals and objectives: Identify and establish goals for the client. Assist the client in quantifying and prioritising competing goals
Step 3 Analyse data and identify financial issues: identify the strengths and weaknesses of the client’s financial situation as it affects the ability of the client to achieve their goals and objectives
Step 4 Prepare and develop the SOA: Develop a set of recommendations and strategies that are tailored to the client’s specific requirements
Step 5 Implement the agreed-upon recommendations: Put in place an agreed plan of action to determine how the recommendations are to be implemented and who is to perform the actions
Step 6 Review and revise the SOA: Evaluate and review the plan at regular intervals to ensure that the recommendations remain appropriate for the client. Review changes in the client’s circumstances
