PROFESSIONAL ADVICE - © John Wiley and Sons Australia, Ltd 2014 1.2...

Solution Manual to accompany Financial Planning 2 nd

edition Prepared by Gabrielle Parle

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Solution Manual to accompany Financial Planning 2e © John Wiley and Sons Australia, Ltd 2014 1.2

Chapter 1: Personal financial planning

PROFESSIONAL ADVICE

• Prepare a list of questions that you think should be asked of this student to

clarify the meaning of ‘my investment time frame is long term’.

Your list of questions may include:

• Can you say how many years it will be before you need the money?• Would locking your money away for seven years be ‘long term’ to you?• Will you need to get this money out in five years or less?• When do you think you will buy a home?• Will you use this money as the basis for your deposit?• If you invest $20 000 into an investment fund and three weeks later it fell in value to $16 000, how concerned would you be?• You have considered investing in shares. Do you know that shares can go down in value as well as up, not just on a daily basis but over a longer time frame?• Suppose the value of your shares rose to $28 000 in six months. Would you consider selling some, or all, of your portfolio?• Can you explain what you mean by ‘high tolerance to risk’?• If investing in shares, would you invest in four or five different companies or would you invest in a managed share fund?• As part of your investment portfolio, would you consider investing in property trusts to diversify the types of investments across two asset classes?• Instead of trying to achieve a greater return than the market return, would you consider investing in an indexed fund?

• Describe the investment option, or outline a number of investment options, that

you would suggest for this student.

Your suggestions may include:

• a mixture of some short-term investments such as cash and term deposits • a balanced investment fund to provide for greater diversity of asset classes (fixed interest, property, domestic and international shares) and diversification across each investment sector. A balanced fund is associated with a lower level of risk as a result of the spread across asset classes. The recommended time frame for the investment is about five years rather than seven years for a share portfolio.• investment in a selected portfolio of 8–10 shares to be held directly in the student’s name • investment in a diversified share trust, which may include an international shares component • investment in a portfolio of industrial shares and property trusts • investment in indexed funds. Indexed funds have a lower management cost and track the selected index (fixed interest, property securities, domestic and international share indices). The manager does not try and achieve a return greater than the market as reflected by the relevant index. 2 / 4

Chapter 1: Personal Financial Planning

© John Wiley and Sons Australia, Ltd 2014 1.3

PROFESSIONAL APPLICATION QUESTIONS

1.1 A client aged 50 says to you, a junior financial planner, ‘I would like to retire with a comfortable level of income. Can you help me to do that?’ How would you restate the client’s request in more definite terms?

A more definite goal would be: ‘I would like to retire in 15 years time with an after-tax income of $60 000 in today’s dollars’. That is, an objective that contains a defined time frame and a specific dollar amount.

1.2 Prepare a table to summarise the different roles carried out by ASIC, APRA and the ATO.

Regulatory Entity Function Specific Roles ASIC (The Australian Securities and Investments Commission) Operates under the Corporations Act and regulates Australia’s corporate sector, markets and financial services

The ASIC Act 2001 requires ASIC to:

• maintain, facilitate and improve the performance of the financial system and entities in it • promote confident and informed participation by investors and consumers in the financial system • administer the law effectively and with minimal procedural requirements • enforce and give effect to the law APRA (The Australian Prudential Regulation Authority)

Is the prudential regulator of the Australian financial

services industry:

oversees banks, credit unions, building societies, general insurance and reinsurance companies, life insurance, friendly societies, and most members of the superannuation industry. (Currently supervises institutions holding $4 trillion in assets for almost 23 million Australian depositors, policyholders and superannuation fund members) APRA operates under laws determined by the Australian Parliament. Among other things, these laws grant APRA the power to set prudential standards that underpin its supervisory approach towards supervised institutions.

• promotes sound financial and risk management, and good governance in the deposit-taking, insurance and superannuation industries • administers the Superannuation Industry (Supervision) Act, Life Insurance Act and Insurance Act among others.• in the superannuation industry, APRA also administers regulations and operating standards put in place by the Australian Parliament • APRA’s prudential standards set out minimum capital, governance and risk management requirements, which are legally binding 3 / 4

Solution Manual to accompany Financial Planning 2e © John Wiley and Sons Australia, Ltd 2014 1.4 ATO (The Australian Tax Office) Is an agency within the Treasury portfolio and reports to the Treasurer

Aims to achieve confidence in the administration of aspects of Australia’s taxation and superannuation systems

The ATO is the principal revenue collection agency of the Australian Government

• administers major aspects of Australia’s superannuation system (self-managed superannuation funds) • delivers various social and economic benefit and incentive programs • improves ease of compliance and access to benefits • manages non-compliance with the law

1.3 The Superannuation Guarantee is one reason why personal financial planning has increased in importance in recent years.

(a) Why do you think that many people show a low level of interest in their superannuation fund?

Because of the length of time before they can access their money. For a 30 year old it is between 25 and 35 years before they have access. The payments of the regular amounts may seem relatively minor and other more immediate priorities may exist (such as a family). Hence, the long term benefit is far removed from most people’s reality.

(b) Will you make your decision about setting an investment portfolio choice in an accumulation fund or will you leave it to a default choice where the fund manager nominates one portfolio selection such as “conservative” for all members who do not nominate their own selection? Write your opinion about making a choice of investments for your own superannuation fund.

Most people need a level of education and knowledge to understand portfolio differences and the related risks and rewards. People need an understanding of the long term volatility and returns to assist them in their own selection choice.

1.4 Suppose you had a friend who lost his/her job and was unable to pay the electricity account when it was due and the electricity supply was disconnected.How could a financial counsellor assist your friend?

A financial counsellor could assist your friend by:

• Negotiating on your friend’s behalf with the electricity supply company. This could enable immediate re-connection of the electricity supply as well as establishing an on- going payment plan to cover the arrears • in addition the counsellor may also be able to identify and assist your friend in avoiding other potential crises relating to their acute unemployment and current cash shortfall • the counsellor may also be able to assist in drawing up a new personal budget for your friend to help them manage their current situation as well as to optimise the benefits of saving once they gain new employment

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