Financial Planning Key Points

Personal Financial Planning

Introduction to Financial Planning

  • Personal financial planning is a growing area, traditionally handled by accountants and legal professionals.
  • Demand has increased, especially for retirement planning.
  • Financial planners help clients make informed decisions, develop financial plans, use money effectively, select suitable products, and understand risk.

Increased Focus on Financial Planning

  • Deregulation of the financial system.
  • New investment opportunities.
  • Increased legislative complexity.
  • Ageing population.
  • Decline in capital guaranteed investments.
  • Government shift toward self-reliance.
  • Promotion of risk-sharing investments.
  • More individuals owning shares.
  • Global market influence.

Steps for Financial Planning

  1. Gather client data.
  2. Establish goals and objectives.
  3. Analyse financial status.
  4. Develop recommendations and alternatives.
  5. Implement recommendations.
  6. Monitor and review the plan.

Importance of Lifestyle Planning

  • Considers chosen lifestyle.
  • Financial plan success depends on lifestyle considerations.
  • Life cycle theory: Needs change over time (e.g., unmarried, married, with children, retired).

Risk Profiling

  • Assess client's risk tolerance.
  • Risk is about attitude to investment loss.
  • Based on client information.
  • Extremes: conservative vs. aggressive investor.
  • Financial planners must 'know their client'.

Purpose of Asset Allocation

  • Understand client risk profile: High, low, medium, risk-averse.
  • Importance:
    • Client needs and comfort level
    • Portfolio construction
    • Compliance & legal requirements
    • Ongoing relationship

Explaining Risk

  • Educate clients on risk through:
    • Education and Experience
    • Booklets and Plan appendices
    • Discussion and Risk Profile questionnaire
    • Assess client's understanding.

Understanding Risk Types

  • Mismatch risk: Mismatching objectives, investments, and time frame.
  • Inflation risk: Investments eroded over time; capital growth helps.
  • Interest rate risk:
    • Reinvestment risk: Changing rates when assets mature.
    • Market volatility: Selling fixed-rate investments may not realize full value.
  • Market risk: Markets fluctuate; some are more volatile.
  • Market timing risk: Difficult to time market entry and exit.
  • Lack of diversification risk: Diversification reduces risk.
  • Currency risk: Investments in foreign currencies fluctuate.
  • Liquidity risk: Need cash for emergencies.
  • Credit risk: Applies to term deposits, debentures, etc.
  • Legislative risk: Changes in laws affect investments.
  • Gearing risk: Borrowing to invest requires loan repayment regardless of investment value.

Main Regulators in Australia

  • APRA, RBA, ACCC, ASIC, ATO

Regulatory Framework

  • Includes:
    • Acts of parliament
    • Common law
    • Statutory complaints resolution
    • Industry reform
    • ASIC powers

Financial Services Reform Act (FSRA) 2001

  • Objectives:
    • Promote informed decisions
    • Reduce systematic risk
  • Licensing: Australian Financial Services Licence (AFSL)

Corporations Act 2001

  • Defines advice capacity.
  • Authorised representatives:
    • Principals hold AFSL from ASIC.
    • Principals maintain a register.
  • Licensee obligation to monitor representatives.
  • Representatives must be trained and competent.
  • Defines financial service provision.
  • Distinguishes retail and wholesale clients.

Financial Services Reform Act (FSRA) 2001

  • Single regulatory regime for:
    • Financial services, products, markets, clearing.
  • Administered by ASIC.

Disclosure Requirements: Retail Clients

  • Point of sale disclosure.
  • Ongoing disclosure.
  • Advertising requirements.
  • Transaction confirmation.

Disclosure Documents

  • Financial Services Guide (FSG):
    • Adviser and company details.
    • Products advised on.
    • Remuneration details.
    • Complaints resolution information.
    • Authorisation statement.
  • Must be provided upfront unless client already has one or product is a market-traded derivative.

Statement of Advice (SOA)

  • Includes:
    • Advice basis
    • Fees and commissions
    • Warnings for incomplete information
    • Details of product replacement
  • Must be provided before further service.
  • Act in client's best interest (Corporations Act section 961 B).

Writing a Statement of Advice (SOA)

  • Include:
    • Covering Letter, Cover Page, Executive Summary, Current Situation, Risk Profile, Strategy recommendations, Plan Review, Disclosures, Implementation, Authority to proceed, Projections, Appendices-General Info (Superannuation, Income streams, Investment Portfolio, Social Security, Asset Allocation, Risk management, Estate Planning)

Product Disclosure Statement (PDS)

  • Prepared by product issuer.
  • Details:
    • Financial services product details.
    • Risks, fees, charges, taxation.

Future of Financial Advice (FOFA) Regime

  • Purpose:
    • Best Interest Duty.
    • Opt in/Opt Out.
    • Fee Disclosure.
    • Ban On Conflicted Remuneration.
    • Ban on Soft Dollar Benefits.
    • Scale Advice.

Financial Planning Association of Australia (FPA)

  • Governs Certified Financial Planners (CFP).
  • General Standards:
    • Client first, Integrity, Objectivity, Competency, Fairness, Diligence, Professionalism, Confidentiality

Analysing a Client’s Financial Position

  • Determine how goals will be achieved (budgeting).
    • Balance sheet (assets and liabilities).
    • Cash budget (income and expenditure).
    • Savings = income – expenditure.

Financial Statements

Indicate two main financial statement for financial planning.

  • Personal Cash Flow Statement
  • Personal Balance Sheet

Using Financial Ratios

  • Solvency Ratio = (Net worth / Total assets) x 100
  • Liquidity Ratio = (Liquid assets / Current debt) x 100
    *Note: Liquid Assets are easily converted to cash. Current Debt is repaid within 1 year.
  • Savings Ratio = (Savings / Net income) x 100
  • Monthly Debt Service Ratio = (Annual debt commitments/12 mths) / (Annual net income/12 mths) x 100

Factors Affecting Financial Planning

  • Economy (domestic and international).
  • Political system.
  • Social environment.
  • Business cycles.

Features of the Economic Environment

Four Stages in the Business Cycle

  1. Boom or expansion
  2. Contraction
  3. Recession/Trough
  4. Recovery

Historical Influences on the Business Cycle from 2000

Economic Changes

  • 2000 - GST Implementation
  • 2001 - World Trade Center Attack
  • 2008 - Global Financial Crisis
  • 2009 - Rudd Stimulus Package
  • 2011 - Queensland Floods
  • 2019-2020 - Bushfire Crisis
  • 2020 - COVID-19 Pandemic
  • 2022 - Russia-Ukraine War

Lessons for Investors and Financial Planners

  • Be aware of:
    • market cycles
    • risks accompanying high returns
    • benefits of diversification
    • underlying portfolio of investment products
    • scams
    • need to review investments