Financial Planning For The Client Assessment Answer

Answer:

Executive summary

This report is related with the financial planning of the client- Mr Mitch and his wife Jill. Initially client profile will be stated which will include client details, goals and objectives and current financial situation. It will include comprehensive cash flow statement, detailed tax calculations, and a balance sheet based on the couple’s existing situation. Then Risk profile and investment strategy will be stated. For this purpose interview will be conducted so that risk profile can be created. Further investment recommendation will be stated which will determine one appropriate managed fund under each of the following 4 assets classes: Australian fixed interest; Australian property; Australian equity & International equity. On the basis of that recommended strategies will be stated.

Personal profile

Client Details

PERSONAL LIFE

 

Relation

Age

Mitch

Self

30

Jill

Wife

28

Tessa

Kid

6

Matthew

Kid

3

School Age

 

10

School Cost

 

12000

 


Assets

Type

Value

Home

Joint</p>

650000

Contents

Joint

80000

Cars

Joint

60000

Savings- Cash

Mitch

12000

Savings- Shares *

Mitch

25000

Superannuation Balance

Mitch

20000

Superannuation Balance

Jill

40000

TOTAL

 

887000

Liabilities

 

 

Home Mortgage **

 

420000

Car Loan***

 

15000

Credit Card-Avg Monthly Bal

 

4000

TOTAL

 

439000

 

Savings- Shares *

 

 

 

Shares Cost Price

 

30000

 

Purchase Year

 

2012

 

Home Mortgage **

   

 

Var Interest Rate

 

5.50%

 

Monthly Repayment

 

3100

 

No of years

 

18

216

Car Loan ***

   

 

Var Interest Rate

 

6.60%

 

Monthly Repayment

 

302

 

No of years

 

5

60

 

 

Home Mortgage

Car Loan

Monthly Payment

 

-3067

-294

 

 

 

 

 

Income

per annum

Salary

40000

 

Net profit from business

130000

 

Bank Interest

120

 

Fully Franked Dividends

500

 

 

170620

 

Payments

 

 

Living Expenses

40000

 

Mortgage and Loan Repayments

40824

 

Private health insurance

3200

 

Professional Membership fees

 

 

-Mitch

700

 

-Jill

800

 

Travel Expenses for work

 

 

-Jill

400

 

Tax preparation (50/50)

2000

 

Donations (50/50)

1500

 

Holidays and entertainment

10000

 

 

99424

 

Superannuation  Accounts

 

 

Mitch

 

 

-Net wealth superannuation account

20000

4 years

-- invested in conservative option

 

 

--includes death and TPD cover for 50000

 

 

 

 

 

Jill

 

 

-Net wealth superannuation account

30000

 

-- invested in conservative option

 

 

--includes death and TPD cover for 50000

 

 

- Legal Super Industry Super Fund

5000

 

--invested 20% in shares and 80% in cash

 

 

- ABC Super Fund

5000

 

--invested 100% in cash

 

 

(Mca.gov, 2016)

Goals and Objectives

  • The couple wants to reduce their debt obligations as soon as possible.
  • Investments done must be revised so that tax liabilities can be reduced.
  • They want the best way to create wealth for retirement planning, from now onwards.
  • They want to rationalise their superannuation funds.
  • To achieve a well- diversified portfolio within their superannuation investments based on their risk appetite.
  • After 2 years, they want to fund a holiday for the family to America which will cost them $12,000.
  • They want to plan an education fund to place Tessa in a private school, when she turns 11 years.

Current financial position

  • Cash flow statement

COMPREHENSIVE CASHFLOW STATEMENT

Income

per annum

Salary

40000

Net profit from business

130000

Bank Interest

120

Fully Franked Dividends

500

TOTAL INCOME

170620

Expenses

 

Living Expenses

40000

Private health insurance

3200

Professional Membership fees

 

-Mitch

700

-Jill

800

Travel Expenses for work

 

-Jill

400

Tax preparation (50/50)

2000

Donations (50/50)

1500

Holidays and entertainment

10000

TOTAL EXPENSES

58600

EBIT(Earnings Before Interest and Taxes)

112020

Interest Expense

14491

PBT (Profit Before Taxes)

97529

Taxes applicable

62529

Net profit

35000

Total Repayments

26333

Cash Profit

8667

(Riskstrategies, 2016)

  • Detailed tax calculations

Earnings of Family

97529

 

 

 

Tax Limits

Rate

Fixed Charge

Amt. Eligible

Tax Applicable

18200

0%

0

18200

0

37000

19%

0

79329

15073

80000

32.50%

3752

60529

23424

180000

37%

17547

17529

24033

TOTAL

 

 

 

62529

(Ato.gov.au, 2016) (Ato.gov.au, 2016) (Exfin.com, 2016)

  • Balance sheet

Assets

Type

Value

Fixed Assets

 

 

Home

Joint

650000

Contents

Joint

80000

Cars

Joint

60000

Net Fixed Assets total

 

790000

Current Assets

 

 

Savings- Cash

Mitch

20667

Cash & Equivalents total

 

20667

Current Investments

 

 

Superannuation Balance

Mitch

20000

Superannuation Balance

Jill

40000

Investments total

 

60000

TOTAL ASSETS

 

870667

Liabilities

 

 

Home Mortgage **

 

420000

Car Loan***

 

15000

TOTAL LONG TERM LIABILITIES

 

435000

Current Liabilities

 

 

Bad Debt- Shares

 

30000

Credit Card- Payables

 

48000

TOTAL CURRENT LIABILITIEs

 

78000

TOTAL LIABILITIES

 

513000

Share Capital/ Equity

 

 

-Mitch

 

118833

-Jill

 

238833

TOTAL EQUITY

 

357667

TOTAL LIABILITIES & EQUITY

 

870667

(free-management-ebooks, 2016)

Risk profile and investment Strategy

Purpose of risk profiling

It is a process through which optimal level in the investment is evaluated. It is the methodology through which required risk and the capacity of the risk along with that tolerance of the risk is examined (riskprofiling, 2016).  It helps in determining the right assets allocation so that proper return can be generated from that (Professionaladviser, 2016). In other words it can be said that it is used for the strategic deployment of the portfolios' resources (Hughes, 2016).

Interview

  1. What is your name?

Mitch

  1. What is your age?

Age 35 years

  1. What is your willingness in terms of financial risk?

According to the interview, respondent's willingness towards the financial risk is moderate in nature that is neither too high nor too less. Since respondent is having nuclear family which includes two children and wife, therefore he is not ready to take high risk.  This question clearly states that willingness towards the financial risk is totally dependent upon the structure of the family and family members' earnings. In the given case, Michael is the only earning member of the family (Telstrasuper, 2016). 

  1. In financial context what is risk?

According to the respondents, risk is the combination of the opportunity and danger which is associated with the instrument of the portfolio. Risk is always associated with the portfolio. Whether market is too god or moderate risk will be there. Therefore it can be said that it is an indispensible part of the investment.

  1. After how many years you will withdraw invested funds from your portfolio?

According to the interview, respondents would like to withdraw funds after 3-5 years.

  1. Can you define holding period for the long term investment?

According to the interview, respondents had a belief that long term investment is for more than 3years. Then only desired return can be obtained from the long term investment (Moss, 2016).

  1. If the share of your portfolio goes down by 40% in a short period of time, then what will be up decision?

According to the response of the respondents, he would like to sell portion of the investment in the market. Portion which is sold out will be invested in other investment which has high return. Portion of the investment will be invested in that source which has stable return. Respondents will not buy more investment because it may be very risky. Holding of the investment is not advisable because in case share goes down by some more percentage then investor has to face huge loss. 

  1. Would you like to invest in an investment which has no value fluctuation, although it might generate low return?

In the interview it was asked form the respondent that in what type of investment he would like to invests. Respondent strongly agrees to the given statement according to which he would like to invest in that investment which has no value fluctuation, although it might generate low return.

Couple’s overall risk profile

According to survey sheet filled by Mr. Mitch and his wife Jill, the client is young, has family with two children and a home. The couple is young and earning with 2 children. The current and future income sources from salary, pensions and other investments of the clients are stable and fairly secure. They have mortgage and also have to cover the childcare costs and small cash balance balances. The client is not entirely familiar with the investment matters. They have a little knowledge of share market and the other investments areas. The client has been into investment for not a very long time which is 3 years only. The investment does not include money spent in buying home and deposits in bank. In the current situation of client, they do need to access the money invested in the 3 to 5 years as they do not see any current emergency arriving. They will access money when their children will start going to the private schools. Apart from the investment, client has already plans to meet short term cash flows and in case of emergency. So the client is planning to keep the money for approximately 3 to 5 years. Mitch and Jill are also interested in tax savings. They understand the fact that some investments will help in tax savings but the benefit of saving the taxes will come with some risk. The couple is ready to take some variability in risk which also includes tax savings. The couple was asked a hypothetical question about the investment that if the client invested $100,000 and due to some bad market conditions, the portfolio drops to $85,000 in a short period, then what will the client would do. The client decided that they will sell a portion of the portfolio to cut the losses and reinvest into more secure investment sectors. Also if the portfolio further falls in   the next 12 months, then the client is willing to hold the investments and sell nothing, expect the market conditions to get better or improve. Hence it can be said that risk portfolio of the client is risk averse in nature. This shows that the client is willing to take the risk but not high risks which may or may not involve the good returns. The client is willing to have a balanced portfolio with spread of investments. They are willing to take the risk of negative return in 1 out of 7 years. This means the client is the balanced investor and has some understanding about the investment market behaviour. The client prefers balance between capital growth and capital security. They are prepared to bear short term risk in order to have long term capital growth.

Investment Recommendations

Based on client’s risk appetite, they have several investment opportunities. As per their objectives of long- term savings for children’s education, they can invest in equity- linked securities. This will give them long- term capital appreciation. Besides that, they want to save their tax payments.  So, for that they can go for debt instruments which will help in tax saving. Following investments are proposed for the client in particular.

  • Australian fixed interest

Mitch should go for Legg Mason Western asset Aus Bd A. It will provide fixed rate of income to the investor. This fixed interest rate instrument has been selected because its growth rate is constantly increasing from 2011 onwards. Income generated over the five years investment is 5.86% (Netwealth, 2016). Growth percentage is 1.12%. Index percentage is 6.54 and category percentage is 5.64. Credit quality of this bond is moderate medium. Standard deviation of the fund is 2.32. Sharpe ratio is 1.67. Beta and alpha of the stock are 0.94 and 0.41 respectively. Average weighted price is 112.31. Minimum initial investment is $30000. Minimum additional investment is $ 5000. Minimum withdrawal is 0 %. Thus it will ensure the stability of the principal and the interest income (Morningstar, 2016).

  • Australian property

In this category investor should go for Black rocked Indexed Aus listed property. It is one of the most popular investments because investor is having full control over the investment (Anz.co.nz, 2016). Several tax benefits are attached with this investment. It is regarded as a tangible investment. Income generated over the five years investment is 5.30%. Growth percentage is 14.71%. Index percentage is 20.85 and category percentage is 19.18. Credit quality of this equity is large growth. This grows faster as compared to the share market. Standard deviation of the fund is 11.18. Sharpe ratio is 1.55. Beta and alpha of the stock are 1 and 0.01 respectively. Minimum initial investment is $500000. Minimum additional investment is NAv. Minimum withdrawal is NAv. Switching is allowed and the distribution frequency is on quarterly basis. (Morningstar , 2016)

  • Australian equity

In this category, investor should go for Bennelong Concentrated Australian Eq. Equity is related with the long term investment. It assures high return but it is related with the high risk. Accumulation index return of this is very constant i.e. 1.25%. Quarterly return of the stock is 3.73%. Income generated over the five years investment is 11.52%. Growth percentage is 4.65%. Index percentage is 9.60% and category percentage is 9.35%. Credit quality of this equity is large growth. This grows faster as compared to the share market. Standard deviation of the fund is 13.55. Sharpe ratio is 1.78. Beta and alpha of the stock are 0.92 and 10.29 respectively. Minimum initial investment is $10000. Minimum additional investment is $1000. Minimum withdrawal is $5000. Switching is allowed and the distribution frequency is on semiannual basis. Annual ICR of the bond is 1.09% (Morningstar, 2016).

  • International equity

In this category investor should go for Maple-Brown Abbott Global Listed Infras. Investor should go for international equity because it provides diversified opportunities and reduce risk at optimal level. It provides liquidity and flexibility to the investor. It is one of the best ways to assume the risk of investing in equity linked investments. One will be able to expose to huge risk, ensuring good returns while having a diversified portfolio.Income generated over the three years investment is 6.59%. Growth percentage is 11.18%. Index percentage is 12.32% and category percentage is 13.28%. Credit quality of this equity is medium growth. This grows faster as compared to the share market. Standard deviation of the fund is 8.78. Sharpe ratio is 1.74. Beta and alpha of the stock are 0.58 and 9.78 respectively. Minimum initial investment is $20000. Minimum additional investment is $5000. Minimum withdrawal is $0. Switching is not allowed and the distribution frequency is on quarterly basis. Annual ICR of the bond is 0.98% (Morningstar , 2016).

Recommended Strategies

First of all Mitch should identify the risk.  This will help in describing and recognising the amount of risk that will affect the project's outcome.  In this investor should broadly identify its objectives and goals (continuingprofessionaldevelopment.org, 2016).

Earnings of Family

97529

 

 

 

 

Tax Limits

Rate

Fixed Charge

Amt. Eligible

Tax Applicable

 

18200

0%

0

18200

0

 

37000

19%

0

79329

15073

 

80000

32.50%

3752

60529

23424

 

180000

37%

17547

17529

24033

 

TOTAL

 

 

 

62529

 

After identifying the risk Mitch should analyse the risk deeply.  This will helps in determining the likelihood as well as the consequences of the each risk (litten, 2016).  It will help in gaining knowledge relating to the nature of the risk.  It will examine that how particular risk can affect goals and objectives of an individual.  This information will be useful in describing and building portfolio of the client (CTB, 2016).

Home Mortgage

420000

             

No of years

18

             

Annual repayment

23333

             

Interest Rate

5.50%

             

 

 

Year 1

Year 2

Year 3

Year 4

Year 5

Year 6

Year 7

Opening Mortgage Amount

 

0

396667

373333

350000

326667

303333

280000

Additions

 

420000

0

0

0

0

0

0

Repayment

 

23333

23333

23333

23333

23333

23333

23333

Closing Mortgage Amount

 

396667

373333

350000

326667

303333

280000

256667

Interest cost applicable

 

10908

21175

19892

18608

17325

16042

14758

Total payable

 

34242

44508

43225

41942

40658

39375

38092

Total paid

 

37200

37200

37200

37200

37200

37200

37200

Interest Cost paid

 

13867

13867

13867

13867

13867

13867

13867

Evaluate the risk; this will help in identifying the magnitude of risk. Consequence as well the likelihood will be evaluated through this.  Though this investor can make decision that whether risk is tolerable or it has to be transferred or mitigated. This will help in knowing the volume of the risk and its consequences.

Car

15000

         

No of years

5

         

Annual repayment

3000

         

Interest Rate

6.60%

         

 

 

Year 1

Year 2

Year 3

Year 4

Year 5

Opening Loan

 

0

12000

9000

6000

3000

Additions

 

15000

0

0

0

0

Repayment

 

3000

3000

3000

3000

3000

Closing Loan

 

12000

9000

6000

3000

0

Interest cost applicable

 

396

578

413

248

83

Total payable

 

3396

3578

3413

3248

3083

Total paid

 

3624

3624

3624

3624

3624

Interest Cost paid

 

624

624

624

624

624

Treat the risk, last but not the least investor should treat the risk. In this investor should plan the response planning relating to the risk. Selling car: The couple has taken two long- term borrowings- one for the house worth $420,000 for 18 years; and the other is for 2 cars worth $15,000 for 5 years. The family consists of 4 people only. They can adjust with a single car as well. After all, they are incurring transport expenses for work purposes, having two cars. So, even if they sell a car they can adjust conveniently. This will help in reducing the interest obligations to a great extent. First of all, $302 which they are paying as interest on car loan will vanish. Besides that, the amount they retrieve from the sale of a car can be used to repay a part of house loan. So, they can save interest payments here as well.

Monitor the risk: in this investor would assess the investment strategy. It will help in identifying the impact of different strategies on the portfolio of the client. For the given case Mitch's main aim was to mitigate the tax implication. If above stated strategies are followed by the Mitch then its   revised earning of the family will be 50000 instead of 97529 and tax implication will be as follows:

Revised earnings

50000

 

 

 

 

 

       

 

Tax Limits

Rate

Fixed Charge

Amt. Eligible

Tax Applicable

 

18200

0%

0

18200

0

 

37000

19%

0

31800

6042

 

 

       

 

 

       

 

TOTAL

 

 

 

6042

 

Hence it can be said that tax impact has reduced from 62529 to 6042, through recommended strategies.

Bibliography

co.nz. (2016). The benefits of property investment. Retrieved 2016, from The benefits of property investment: https://www.anz.co.nz/personal/home-loans-mortgages/property-investment/investment-benefits/
gov.au. (2016). Individual income tax rates. Retrieved 2016, from Individual income tax rates: https://www.ato.gov.au/rates/individual-income-tax-rates/
gov.au. (2016). Tax tables. Retrieved 2016, from Tax tables: https://www.ato.gov.au/Rates/Tax-tables/
org. (2016). What are the 5 Risk Management Steps in a Sound Risk Management Process? Retrieved 2016, from https://continuingprofessionaldevelopment.org/risk-management-steps-in-risk-management-process/
(2016). Identifying Strategies and Tactics for Reducing Risks.
com. (2016). Current Australian IncomeTax rates. Retrieved 2016, from Current Australian IncomeTax rates: https://www.exfin.com/australian-tax-rates
free-management-ebooks. (2016). Reading a balance sheet .
Hughes, E. A. (2016). What are the pros and cons of risk profiling tools.
litten, D. (2016). Risk Management Strategy.
gov. (2016). Identifying Strategies and Tactics for Reducing Risks.
Morningstar . (2016). BlackRock Indexed Aus Listed Property.
Morningstar . (2016). Maple-Brown Abbott Global Listed Infras.
(2016). Bennelong Concentrated Australian Eq.
(2016). Legg Mason Western Asset Aus Bd A.
Moss, B. (2016). The importance of risk profiling.
(2016). Managed funds . Retrieved 2016, from Managed funds : https://www.netwealth.com.au/nw/fund/CompareFundsAndModels/ManagedFunds
(2016). The importance of risk profiling. Retrieved 2016, from The importance of risk profiling: https://www.professionaladviser.com/professional-adviser/feature/1741045/importance-risk-profiling
(2016). What is Risk Profiling? Retrieved 2016, from What is Risk Profiling?: https://riskprofiling.com/riskprofiling/what-is-risk-profiling
(2016). Risk strategies .
(2016). investor Risk Quesionnaire .

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