The personal Financial Planning Environment

TOPIC TUTORIAL SOLUTIONS
Topic 1: The personal Financial Planning Environment
Question 1
Need to answer question in terms of the life cycle and the changing needs and risk
profile of a client.
(a) Couple in mid thirties with 3 children
-single income, education expenses, paying off mortgage, need for insurance,
moderate risk profile, little spare cash for investment, long time frame.
-interested in: wealth creation, insurance, debt management
(b) Couple in fifties with no dependent children
-mortgage paid off, less need for insurance, planning for retirement, need for
smaller home, more spare cash for investment, low-moderate risk profile
-interested in: maximising superannuation contributions, estate planning,
wealth creation, retirement planning
Question 2
Need to discuss this question in light of the internationalisation of investment
markets, trading positions and Australia’s relatively minor influence within world
financial markets. Consider overseas impact on:
-stockmarkets
-exchange rates
-imports and exports
-interest rates
-confidence levels
Question 3
(a)
• Recovery/Expansion
• increasing spending, increasing price levels, rising employment
• interest rates fall, (bond prices thereby increase), share prices increase property
prices start to rise
• Boom/Peak
• high employment, faltering business optimism, slackening of business activity,
interest rates starting to increase, higher costs for firms
• interest rates low but start to increase, share prices peak but start to fall, property
prices peaking
• Contraction
• decline in spending, decreasing prices, decreasing wages
• interest rates increasing (bond prices falling), share prices falling, property values
commence to fall.
• Recession/Trough
• low level of investment, excess capacity, high liquidity preference, high
unemployment, interest rates start to fall
• interest rates high but start to fall, share prices bottom out and commence to rise,
property prices low
(b)
Students need to consider which phase of the business cycle they believe the country
is in after taking into consideration such factors as: current interest rates, real estate
values, the state of stock prices, consumer confidence, indicators of the economy.
Australia Unemployment Rate
Source: http://www.tradingeconomics.com/australia/unemployment-rate
Australia Interest Rate
Source: http://www.tradingeconomics.com/australia/interest-rate
Source: http://www.tradingeconomics.com/australia/stock-market
Question 4
License Holder:
-any person who carries on a financial services business needs to hold an
Australian Financial Services License (AFSL). The issuance of an AFSL will
be based on:
-financial solvency and liquidity
-good character
-existence of a strong compliance system
-technological requirements
Authorised representative
-is a person who acts on behalf of a licensed dealer. A representative is
required to hold a “Proper Authority”. This is a statement which has been
signed by the dealer by whom the representative is employed and for whom
the representative acts
Question 5
A client’s attitude to risk will be affected by many factors including:
• their age
• their income generating capacity
• particular assets and asset classes already held
• the value of investments currently held
• the level of their borrowings
• their financial responsibilities
• the time frame.
The risk profile of clients can generally be categorised as conservative, moderate of
aggressive. The particular risk profile of a client will affect the recommendations
provided and thereby impact upon the achievement of goals and objectives. The
recommendations will be affected by such factors such: the types of products
recommended, the need for insurance, the ability to borrow, the need for liquidity etc.
Question 6
(a) Need to firstly ask questions about client’s goals and objectives and risk
profile. Consider short term volatility of the stockmarket and the appropriate
time horizon of an investment into shares
Need to determine whether an investment in the sharemarket is appropriate for
the person. Consider such things as: other investments, health, employment
position, income levels etc.

(b)	An investment property should be considered as a long term investment. The decision to sell should be considered in the light of:

-tax implications
-likely movement in interest rates
-likely growth in property values
Increases in interest rates are usually associated with falls in property values.
Is now the right time to sell? Can John fund the increase in interest rates?
Does an investment into a conservative managed fund suit John’s
circumstances –risk profile, future goals, tax benefits etc.
(c) Need to stress the short-term volatility of the stock market and the time
horizons that should have been discussed with Mary at the time she made the
original investment. If she were to sell out of stocks now, she would crystallise
losses and perhaps move into another sector of the market that was overvalued
and perhaps might fall in the future also (eg. increasing interest rates leading
to a fall in bond prices). However, the client needs to be happy with the overall
investment allocation strategy developed
Question 7
Total assets=
Family home $290,000
Car 35,000
Contents 50,000
Bank deposits 45,000
Debentures 75,000
Managed funds – balanced 40,000
Superannuation funds 420,000
955,000
Debt

Credit card debt Mortgage	$2,000 15,000
17,000
Liquid Assets Bank deposits Current debts Credit card debt Mortgage repayment
45,000
2,000 10,000
12,000
Cash Surplus Income 50000 + 28000 Minus tax 8500 + 2500
78,000 11,000
67,000
Minus Expense	30,000
37,000	(a)
Ratio analysis
(i)	Solvency ratio	total net worth	938,000	= 98.2%
total assets	955,000
(ii)	Liquidity ratio	liquid assets	45,000	=375%
current debts	12,000

Managed funds are excluded from the calculation of liquid assets as although funds
may be realised relatively quickly, losses may be sustained.
Assumption needs to be made as to whether debentures constitute a liquid asset.
Unless debentures are due within immediate 12 month term, assume not a liquid asset.

(iii)	Savings ratio	cash surplus	37,000	=55.22%
income after tax	67,000
(iv)	Debt service ratio	monthly loan repayments	1,000 = 17.91% 5,583
monthly net income

(b) The Finn’s are likely to be at the middle – retirement age judging by the
following:
-reasonably large balance of superannuation
-minimal debt (especially mortgage)
(c) Investment characteristics of a balanced investor
-some concern with return volatility
-concerned with achieving a reasonable rate of return on investments as well as
achieving some capital growth
-invest in a mix of conservative and more aggressive investments (fixed
interest, shares, property, and cash)
-concern with achieving some income inflow
-concern with having access to a reasonable amount of liquidity
-moderate levels of debt outstanding / borrowing

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