Reference no: EM132151839

Financial Planning and Strategies Assignment -

Attempt any three of the four questions in Part A and one of the two Essay questions in Part B.

PART A) Short-Answer Questions

This section of the Examination Consists of Four Short-Answer questions of which you should answer only THREE. You are free to choose whichever three questions you wish.

QUESTION 1 -

REQUIRED:

a) You know that the common law has generally decided that a financial adviser would owe his or her clients a duty of care and that the FOFA legislation includes a requirement to act in the client's best interests. How might working for a financial-planning group that has a very limited approved product list be in breach of both the common law and the FOFA legislation?

b) "A Financial Planning Licensee striving for excellence in their fiduciary duty has decided to set a maximum limit of gearing for all client financial plans they construct." Comment on the merit of taking such an approach.

c) The AFSL holder has a number of management responsibilities, particularly compliance management. Select two of these compliance responsibilities and discuss how they impact on a financial adviser's role.

d) To what extent does the client hold a responsibility for the success of their financial plan?

QUESTION 2 -

In 2008, Lucinda Carter, a retired 64-year-old, divorced her husband of 42 years. As part of the property settlement, the family home was sold and Lucinda's share was approximately $450 000. In addition to this amount the remainder of the property settlement amounted to an additional $550 000. Her total settlement hence amounted to $1 000 000. Since she was going through a difficult adjustment, she decided to rent a unit in Kangaroo Point on a six-month lease but she always intended to buy a unit in the near future.

Lucinda went to see a friend Marilyn who was a financial planner to get advice as to how to invest the funds to secure a comfortable retirement. She made it clear to Marilyn that her priorities were income and to make the money work for her. In her initial interview with Marilyn, Lucinda indicated that she intended to buy a property in the next 12 months.

On the basis of their conversations, Marilyn assessed Lucinda to be a growth investor and recommended the following investments.

Allocated pension (1) $350 000

Allocated pension (2) $400 000

Bank shares $80 000

Unlisted property trust $90 000

Managed Australian share fund $65 000

Bank account $15 000

In mid-2008, Lucinda became concerned about the market fluctuation and the rapid deterioration in the economy. She decided it was time to buy a property to live in and approached Marilyn for the funds. Lucinda was shocked when Marilyn told her that it would take weeks to make the funds available as one of the allocated pensions would now need to be commuted to a lump sum. In panic mode, Lucinda purchased a unit for $380 000 in August 2008. As the global financial crisis worsened, Lucinda found her income declining drastically, the unlisted property trust was frozen and the value of the shares she held plummeted in value. Lucinda now found her overall remaining capital had fallen by $250 000. She now had insufficient funds to provide sufficient income for her everyday needs and was forced to apply for the Age Pension.

REQUIRED:

a) Review this case study, especially in relation to Lucinda's risk assessment and the suitability of the investments chosen given her situation. Discuss what risk profile should have been assigned to Lucinda and, if this had occurred, how might the outcome have been different for Lucinda. Justify your answer.

b) Explain the risks associated with risk profiling tools and what, if anything, can be done to obtain a better understanding of the client's risk tolerance.

QUESTION 3 -

Emily Harrison is 30 years old and is an accountant with an annual gross income of $120,000. Her husband Malcolm Harrison is 32 years old and self employed as a landscape gardener. He earns approximately $150,000 per annum. Both work full-time and utilise childcare for their two children, aged one and four. Both children will attend the local public school. The family's living expenses are $3,000 per month, which covers all their immediate needs. In addition, each parent requires $250 each per month and the children require $220 each per month; child care amounts to $350 per week per child until each child is of school age and then it is expected to drop to $100 per week for each child for after-school care. The children are expected to be dependent until they reach 21 years. Once the children are no longer dependent, living expenses are anticipated to fall to $2,000 per month.

Emily and Malcolm recently purchased their own home, valued at $650,000, but still have a mortgage of $350,000. Both Emily and Malcolm have credit cards - the total balance is $18,000.

They would also like to fund their children's university education, expected to be $30,000 per child.

Emily has superannuation with insurance worth $250,000, and Malcolm has $75,000 in his superannuation account.

Calculate the level of term life cover needed for Emily and Malcolm, using both the multiple and the needs analysis approaches. Assume the following: funeral costs $10,000, final medical costs $15,000, legal costs $5,000 and required emergency funding $25,000. The investment rate is 5% per annum.

Show all workings. (Assume that both Emily and Malcolm will need to be provided for till age expectancy of 82 years.)

REQUIRED:

a) You have been asked to advise on the amount of life insurance cover that should be provided for the Harrison family.

b) You have advised the Harrisons of the amount of insurance cover they need. They find it hard to believe that such a large amount is needed. They say that, by insuring for a lower amount and investing the funds, the required amount could be achieved. Explain to them the problem with this approach.

QUESTION 4 -

Bruce works with the local council as a leisure services manager. He is aged 42, married with two young children and earns a salary of $75 000 p.a. Bruce's wife is not currently employed. Bruce would like to start investing into quality investments outside of his superannuation account to fund his children's education, to pay for a home extension that will be required in the next few years as the children get older, and to put some money aside to support his retirement.

Bruce believes he has a moderate risk profile. He has little investment experience and is busy with his job and family. He does not have much of an interest in managing his finances. He is prepared to take on some risk in order to chase higher returns but would not want to borrow or invest into high-risk products. He owns a few shares in the Commonwealth Bank and has $10 000 in a cash account.

Bruce will shortly inherit a small investment portfolio from his grandmother consisting of $30 000 cash and $40 000 in three managed funds as follows:

Australian Share Index Fund $20 000	(MER 2.5%)
Australian Bond Fund $10 000	(MER 1.6%)
Australian Infrastructure Fund $10 000	(MER 2.7%)

Bruce is looking to sell all three managed funds and invest the money into a share portfolio. He doesn't know anything about managed funds but believes he has the ability to successfully select and trade in ASX-listed shares in order to make reasonable gains.

REQUIRED:

a) Would you recommend that Bruce sell the three funds in order to trade in direct shares? Explain.

b) What factors should an investor consider before deciding to divest themselves of a particular managed fund?

c) Why have some unlisted property and mortgage managed funds suffered from liquidity problems in the past?

d) Are there reasons why an investor would not simply invest all their funds into the managed fund that has delivered the highest return to investors over the past one year?

PART B) Essay Questions -

This section consists of Two Essay questions of which you should answer only ONE. You are free to choose whichever question you wish.

Your essay answer should be no longer than 1,000 words.

QUESTION 5 -

"Australia's regulatory regime will continue to become more strict with constant bad news relating to the giving of financial advice; for example, with stories coming from the Royal Commission into the Financial Services industry."

Prepare a balanced argument as to whether it is possible to legislate good behaviour and hence good advice.

OR,

QUESTION 5 -

Describe and explain what would be the key features of Best Practice in Financial Planning.