Financial Planning and Strategy

| May 19, 2015

Attempt any three (3) of the six (6) questions in Part A) worth 15 marks each (Total 45 marks) and,
One (1) of the two (2) Essay questions in Part B) worth 25 marks

PART A) Short-Answer Questions

This section of the Examination Consists of Six Short-Answer questions of which you should answer only THREE.
You are free to choose whichever three questions you wish.
QUESTION 1 Regulatory Framework of the Financial Planning Industry (Module 1) Total: 15 marks

1    “If a financial adviser is to give appropriate advice, they require a good knowledge of investment methods and strategies.”  Discuss
4 marks
2    The Future of Financial Advice reforms (FOFA) of 2011 sought to decrease the incidence of “client disengagement” as well as the incidence of potential “conflicts of interest.”
Discuss why and how the FOFA reforms of 2011 specifically addressed these two issues.
4 marks

3    Explain three (3) potential impacts of the provision of financial advice being inappropriate to a client’s needs and at odds with their risk tolerance.
3 marks
4    “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.
4 marks

QUESTION 2 Financial Statements and other Financial Planning Tools (Module 2) Total: 15 marks

1.    Analyse personal financial goals, in relation to:
a)    the client’s personal situation and stage of life cycle;
b)    the client’s flexibility;
c)    inflation considerations; and
d)    goal dates

4 marks

2.    Describe how the budgeting process may not necessarily help an individual to achieve personal financial goals.
3 marks

3.    Outline the concept of a household’s gearing ratio and discuss some of the principal items that are likely to form part of this measure.
4 marks
4.    To what extent is a ratio analysis of a person’s financial position likely to lead to a mistaken view of their capacity to maximise their retirement savings?
4 marks
QUESTION 3 Insurance (Module 7) Total: 15 marks

Susie, aged 40, is a single parent. She has run her own financial-planning practice for the last 10 years. She divorced five years ago and has sole custody of her two daughters, Eileen, aged eight, and Maxine, aged six.

Both girls attend private schools. Susie currently earns a wage of $450,000 per annum from her business, and the additional costs per annum are listed below:
Wages (four employees) $300,000
Rent $60,000
Insurance $15,000
Consumables $15,000
Utilities $8,000
Marketing $5,000
Research costs $6,000
Telephone $4,000

Susie is the only financial adviser in the business. She employs two para-planners, who are each paid $80,000 per annum; a client services manager, who is paid $100,000 per annum; and a receptionist who is paid $40,000 per annum.
Additionally, Susie purchased a home in Brisbane recently for $500,000 and this is mortgaged to the extent of $300,000. Her other debt amounts to $50,000 on two credit cards. She owns a Lexus sedan valued at $50,000.

In respect of the children, Susie employs a live-in nanny at a cost of $85,000 per annum. This is especially necessary since Maxine was recently diagnosed as suffering from severe autism. It is anticipated that Maxine will require extensive therapy, with costs amounting to $35,000 per annum. The duration of the therapy is unknown at this time.

Given this recent development in her life, Susie decided she needs to undertake a review of all her risks.

At present, she has insurance cover as follows:
Insurance type Value of cover
Professional indemnity $500,000
Building and contents $530,000
Comprehensive car $50,000
Private health insurance —


1.    Complete a risk analysis, identifying for Susie the risks for herself, the family and the business.
(5 marks)
2.    Suggest strategies to mitigate the identified risks.
(8 marks)
3.    In what ways may a poorly designed risk management plan in fact increase the risks faced by those seeking to reduce it?
2 marks

QUESTION 4 Managed Investments (Module 10) Total: 15 marks

You have uncovered the following per-unit information about a certain listed fund:

2012    2013    2014
Ending unit prices ($):
Offer    48.20    66.68    63.78
NTA    45.20     62.47    59.75
Income distributions    2.40     3.10    2.81
Capital gains distributions    1.83     6.26    4.32
Beginning unit prices:
Offer    55.00     46.20    64.68
NTA    51.42    43.20    60.47

1.    Evaluate this fund’s performance from 2012 to 2014, and identify two changes which require further investigation.
5 marks

2.    Briefly explain why the unit price of a listed managed fund is less likely to change on a regular basis, compared to an unlisted fund.
3 marks

3.    Discuss the importance of diversification and professional management in a managed fund and suggest whether this is more likely to be achieved than with direct investment.
3 marks

4.    Apart from the information listed in the table at the start of Question 4, what information should be reviewed when examining a managed fund’s investment performance?
4 marks

QUESTION 5 Superannuation (Module 11) Total: 15 marks

Rachael, who is 35, has sought your advice about her superannuation planning. She is currently self-employed as a landscape gardener and earns about $80 000 annually before tax. Rachael has a de facto, Wilhelm, who is on leave from work at the moment to look after their two-year-old child. Wilhelm will return to work as soon as the child commences school.

Over the years, Rachael has been a member of a number of superannuation funds. She is currently a member of four funds. Her employers have made contributions or she has made contributions herself.


1.    Rachael would like to know:
i.    what she should do about her superannuation;
ii.    whether she can contribute to a superannuation fund; and
iii.    the types of contribution she can make to the superannuation fund.

7    marks
2.    Term Life Insurance purchased within superannuation has some benefits as well as some negative impacts for the individual.
Describe and explain two (2) advantages and two (2) disadvantages of using superannuation to purchase Term Life Insurance.
5 marks

3.    Distinguish between direct and indirect superannuation fees.  In the longer term which fees are likely to have the most impact on the amount accumulated and what can the individual do to minimize this?
3 marks

QUESTION 6 Investment portfolio structure, and retirement planning
(Module 12) Total: 15 marks

1    Hilary Nixon is 52 years of age and is in the process of finalising her estate planning requirements and is seeking to make her will as simple as possible whilst taking advantage of any concessions available in the relevant taxation laws.
Unfortunately Hilary has a serious illness which has required her to recently finish work and it is unlikely that she will live beyond the end of the current year. She is happily married to Ben (54 years of age) and has 2 adult children, Alice and Marty (29 and 27 years of age), who are both financially independent.

Hilary presently has the following assets (estate and non-estate) in her own name:
Detail    Amount ($)
Shares in listed companies    1,900,000
Superannuation allocated as:
Tax free component       500,000
Taxable component    1,300,000
Total superannuation    1,800,000

Hilary has decided to allocate her total assets in the event of her death
in the following proportions:
Name    Proportion (%)
Ben    50
Alice    25
Marty    25

As Ben has always had an interest in shares Hilary had thought that perhaps she will allocate her husband the total of the shares she owns in specie and each of the 2 children 50% of the superannuation balance.  Hilary wishes to have her requests documented in a formal will. Hilary has approached you for comment as to whether this is the most appropriate allocation of assets.

i)    Provide some comments to Hilary as to whether her request is appropriate to be documented in her will.
2 marks

ii)    Calculate the after-tax cash flows available to each member of the Nixon family should Hilary pass away.  Assume that the above assets are distributed to the family members in specie, in accordance with her request. Ignore the effects of the Medicare levy in your calculations.

10 marks
2    What is a testamentary trust and under what circumstances would a client be well advised to create one?
3 marks

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.

Each of the 2 questions is of the same value: 25 marks.
Your essay answer should be no longer than 1,000 words.

QUESTION 1 Total: 25 marks
Assess the merit of the ‘know your product/know your client’ rule in terms of obtaining best practice from those operating as Financial Planners (your answer may argue from a purely theoretical point of view or it may also consider the rule’s likely effect in practice).

QUESTION 2 Total: 25 marks

“A recent survey of the Financial Planning Industry showed a lack of trust with only 28 per cent of people rating financial planners “very high” or “high” for ethics and honesty.  Low standards of education have also contributed to the low ethics in the industry.  Of the 18,000 planners in Australia, only 5500 are certified practicing planners. Too many advisers have low levels of education and are not members of a professional body.”

In order to improve the community’s confidence in Financial Planners it is necessary for industry regulators to find solutions other than tighter legislative controls.



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