Part C
Question 1
Summary of financial position/net worth
Summary of financial position/net worth
*Home Contents
Question 2 - Part A
*1.5% of taxable income
**Interest is subject to 10% tax rate in Australia
According do Australian tax legislation Australian residents are subject to individual income tax. As Tony’s annual salary is $115,000, he is due to pay $17,547 plus 37c for each $1 over $80,000 for the group of tax payers having income between $80,001 and $180,000. By analogy, tax duties can be calculated for Clare. She receives annual payments of $80,000, thus his tax duty will be $3,572 plus 32.5с for each $1 over $37,000.
Tony’s taxable income includes salary and superannuation taxed at the rate of 15% according to Australian legislation. Clare has three components in her taxable income, namely: salary, investments (interest taxed at 10%), and superannuation taxed at 15% since it does not exceed $15,000 per annum.
Question 2 - Part B
Annual expenses and cashflow
Question 3
What you want to achieve
Here are your primary goals as far as I understand:
Question 4
- A “balanced” investor expects that his or her investments will steadily grow over certain period of time. This type of investor tend take somewhat greater risk to achieve higher interest. However, investment value subject to changes in this case that may result in negative returns.
- A principle of risk and return suggests increase in returns when risk increases. Thus, low-risk securities are associated with return while high level of risk is connected with high returns. According to this principle, investments can potentially bring higher profits if it is at risk of being lost.
- There are several investment strategies depending on the investment goals. For example, day trader pursues the goal to receive capital gain (buy-and-sell). In this case timeframe of investment can range from several seconds to several hours. Buy-and hold investor prefers buying securities for holding and deriving income. In this case timeframe can last for decades. Trading securities subject to volatility – the higher returns, the higher volatility. Volatility measures the risk of changes in investment value. Stock returns should be comparable to the inflation rate because sometimes even good returns can be negated by inflation. Even if stocks give good return it can be sold at loss because of inflation. Thus, returns on stock should be tied to buying power. Assets such as gold or platinum are considered an inflation hedge because of their ability to keep their value high even if their intrinsic value is much lower. Investments in different tools receive different tax treatment. For example, investments in property and shares are more tax favorable. Contributions to superannuation fund are taxed at 15% while marginal tax may exceed 45%. However, there are limitations to the contributions to the superannuation funds while managed funds do not restrict contributions. Therefore, investment strategy should reflect investment objectives and personal expectations.
Question 5
Recommendations - How you get there and why
1) The following strategy is proposed for Mancini’s consideration: invest 40% of cash into Lawson-Dynamic Growth Fund that makes $1,200 and invest 60% of cash into Patterson High Growth Fund Class X ($1,800). These investments are supposed to bring 13-16% annually while investment in superannuation will bring 9.7% (Tony) and 5.5% (Clare) average annually. Higher returns proposed by managed funds will help achieve financial objectives of Mancini family, namely, enhance the process of repaying mortgage.
Average returns for three years (Tony – 9.7%, Clare – 5.5%). There were standard risk profiles chosen for Tony and Clare: growth profile for Tony and conservative profile for Clare while they feel more comfortable with more aggressive options (Tony). Clare was identified as a balanced investor while her superannuation risk profile is conservative.
2) I propose to invest in short-term project to increase returns because long-term investments usually bring lower returns than short-term investments. Besides, short-term can be revised more often that will help invest in the tools that could be more beneficial taking into account up-to-date legislation and changes in government policies. In addition, investment into more risky tools requires more careful investment planning that is more difficult to implement investing in the long-term projects.
3) Managed fund is an investment that allows investors to pool money in investment tools managed by professionals. A managed fund is an indirect method of investment. There are many types of managed funds: property trusts, equity trusts, and insurance bonds. Superannuation fund is also an example of a managed fund. Managed funds can be public and private. Superannuation funds are an example of public entity supported by the government. A superannuation fund guarantees stable investments, but the returns are moderate. Private managed funds offer higher returns, but the risks undertaken by investors are higher as well.
Besides, contributions to the superannuation funds are limited while investments into private managed funds are not limited. In addition, a superannuation fund places certain requirements regarding withdrawals. For example, a person can withdraw his or her money when he or she meets one of the conditions described in superannuation agreement.
As Tony and Clare are comfortable with higher risks profiles, they could be offered to invest in managed funds offering higher returns according to the investment objectives set.
4) I would recommend to held assets jointly so tax-free threshold could be taken into account or assets could be in the name of Clare because of lower personal income tax rate.
Question 6 Part A
What tee is
* Penalty is paid if the clients decide not to go ahead with the advice
Question 6 Part B
Question 7
Recommendations
- At the present time Tony and Clare have separate wills made before they were married. Tony made a will in 2000 and Clare – in 1999. But, the wills cannot be considered valid because they were made before their marriage and they do not take into account personal circumstances changed. The both are supposed to leave 50% of assets to each other and 50% to their parents in the case of death. The wills should be revised according to the current status of Tony and Clare. The parents of both Tony and Clare are financially independent, thus, they should leave 100% their assets to each other. They should revise their wills after they start a family with children as well.
The risks of not having a valid will in place are as follows: difficulties in making necessary documents ready in case of death of one or both of spouses and additional expenditures in case if any misunderstandings regarding their wills arise.
The main benefit of having a will is ability to control beneficiaries of one’s property. Additional benefits of having a will are as follows: one can bequeath money or assets, create trusts for assets management, appoint trustee and executors for a will, and appoint guardians for minor children. However, superannuation may not be a part of assets. In case of absence of a legal will the law decides how one’s estate is divided after one’s death.
b) Currently, neither Tony nor Clare has general or enduring power of attorney. Power of Attorney (POA) is needed when there is a need to manage financial affairs in case of illness, accident, or absence. POA can be used to relieve oneself of financial paperwork, to have someone handling financial affairs during traveling or absence, and to avoid burdening relatives or friends with the responsibility of handling financial affairs during absence of a person whose interests are represented. There are two types of POA available under Australian law: general POA and enduring POA. General POA is valid if a person has legal capacity, if a person is going to live abroad for a long period or if a person does not want the authority to continue when he or she should lose legal capacity, or in case if a person is drawn up for a specific purpose with general or specific powers. Enduring POA continues to be valid in case of losing legal capacity (illness or disability); empowers an appointed attorney to make decisions related property, health, financial state, and lifestyle; can be activated when necessary or when a person lost legal capacity; allows an appointed attorney to manage one’s affairs when a person is unable to give lawful instructions. I would recommend Tony and Clare either to appoint an attorney, but delay activation or place the responsibility of activating POA with personal doctor in case of disability or illness. The doctor will be responsible for contacting an appointed attorney.
Question 8
- Action/Implementation Plan
Question 9
Dear Mr. and Mrs. Mancini,
I’m writing to tell you about our review service to make sure that it meets your needs. We charge the following initial and ongoing fees:
Below you will find an agreement related ongoing service that should be signed and returned to me. If you have any questions about ongoing service, please, ask me before signing. Please, review Client Agreement outlining understanding between us.
I strongly recommend you to visit your accountant or tax advisor to confirm the impact of my advice on your tax position. You have to consult your accountant before implementing my recommendations. You will have to meet your solicitor to review your wills and discuss your estate planning matters (establishing enduring Power of Attorney). A solicitor can make sure your wills will be carried out in case of death or inability to look after your affairs.
You are currently on the stage of building a family with children and paying off the mortgage. The main concern of this life stage is to maintain the lifestyle of the family while one of the spouses will have to look after minor children and will not have the current level of income.
Taking into account the current circumstances, the primary goals are as follows: overall financial “health check”, paying off the mortgage as soon as possible, and establishing medium-term savings taking into account the current intentions to expand family. Growing retirement savings is not the primary goal for you.
Within the scope of this advice I recommend the following strategy for consideration: invest 40% of free funds available ($3,000 in total) into Lawson-Dynamic Growth Fund ($1,200) and invest 60% of cash into Patterson High Growth Fund Class X ($1,800). This recommendation arises from analysis of risk profiles and analysis of the current investments. Also, income protection can be recommended for Antony Mancini’s income in future when his income will become the only source of paying family bills. Also, you are strongly recommended to revise you wills and Power of Attorney (POA) towards establishing enduring POA.
The following opportunities are proposed within the current financial advice:
You have to be aware that income and growth rates are reasonable, but these are estimated growth rates, so, they cannot be guaranteed. The personal circumstances and the legislation related superannuation, Centerlink, and taxation changing. Therefore, regular review of your financial plan is important to make sure that the strategy outlined is still suitable for you. Thus, the strategy can be revised after consideration of certain regulatory changes and new market opportunities.
The ongoing review had to be undertaken every month aiming to ensure financial discipline and regularity of the payments. The general review will be provided every six months in order to adjust financial goals and cash flow from investing and saving activities. Ongoing review plan will help create an insight for necessary actions, avoid repeating mistakes, identify ineffective activities, assess the usefulness of monitoring, and ensure better evaluation and management of assets and liabilities.
Financial Advisor ______________________
Question 10
Clare and Tony’s life stage
Tony and Clare are young professionals on the stage of creating a family with children and managing career growth. Besides, they are in the process of paying off the debt for their house. This period is associated with concerns related additional expenses connected with saving for education, saving for activities and education for children, and paying off the loan. It is very important to trace the progress of achieving financial goals during this period to stay on track by adjusting spending, saving, and budgeting. Building long-term investments is important, but satisfying the demands of growing family is more preferable.
On this typical life stage they will need policy package destined for families providing best coverage for the parents in addition to their kids offering premium holidays in the near future. They would probably like to receive coverage for their mortgage better than that offered by the standard bank plan. They could be also offered special children’s policies created especially for kids. Also, income protection insurance will be needed in the case when Clare decide stay home rising children and Tony’s salary will become the main income source. The same reasoning can be used when offering health and trauma insurance.
Question 11 – Part A
Additional information needed
a) 1. Exclusions in life insurance package of Tony;
2. Details of private health insurance of Tony and Clare;
3. Information related TPD insurance of both spouses;
4. Information related income protection (Tony).
b) 1. How do you think, what are financial consequences of expanding your family?
2. How your health insurance protects you in case of TPD or critical illness?
3. What is your current private health insurance plan?
4. Could you, please, list exclusions related your life insurance package?
c) 1. Which of financial goals are primary to your mind?
2. In what way your growing your retirement savings can satisfy your medium-term needs?
3. How do you plan to pay off your mortgage as soon as possible investing in superannuation fund?
4. How are you going to pay your bills in case of TPD or critical illness?
Question 11 – Part B
- I will not provide any advice in tax and legal areas because to receive advice regarding tax treatment or the current legislation is not the area of my competence. Specialists in this area will give clients’ more professional advice.
- Specialists’ advice will be needed in the case of changing legislation or market conditions.
- The clients should apply for this advice to their personal accountant (tax advisor), financial broker, and solicitor. Financial brokers will help analyze profitability of the current investments and recommend changing strategy if needed.
Question 12
Part A
- Additional information is needed to identify the best preservation age for Tony and Clare as they are supposed to retire at 58 and 56 respectively.
- Information regarding superannuation policies and legislation can be found at official site of Australian government - http://www.finance.gov.au/superannuation/policy-and-legislation/. This is the primary source of information that does not need to be verified. Tracing legislation regarding superannuation will help manage financials properly. Investment information can be found at Bloomberg site. Information regarding taxation can be provided by tax advisors or accountants. This information can be verified by reading appropriate legislative and normative documents.
- Approximate research task duration is one or two weeks depending on its complexity.
Part B
- It was determined that preservation ages are different from those identified by Mancini’s.
- MoneySmart modeling was used to determine the best preservation ages for Mancini’s. The best preservation age for both spouses is 60.
- The main risk is changing legislation as the period to the retirement is too long. I case of changing legislation related superannuation benefits the family will be at risk of losing money or they will have to work more to be able to receive payments they planned.
- For example, the funds they collected during the whole working life can be devaluated or preservation ages can be extended by the new government.
- The risk can be mitigated by placing temporarily free funds to managed funds, i.e. using a strategy of diversification.
Question 13
Dear Mr. and Mrs. Mancini,
Hereby, I’m representing you SOA that was developed on the basement of the information provided and your application form information.
Please, pay attention to the following items of the current SOA:
initial advice, your financial goals, cost of advice, other points of consideration, investment strategy proposed and recommendations, insurance recommendations, key contacts ongoing service agreement, implementation plan, ongoing advice agreement.
Later I will provide you with the following documents: initial agreement and ongoing advice agreement.
If you have any questions, please, do not hesitate to contact me at:______________________
Financial Advisor ______________________
