© 2008 Reed International Books Australia Pty Limited trading as LexisNexis

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© 2009 Reed International Books Australia Pty Limited trading as LexisNexis: Ancillary for Financial Planning in Australia, 3rd ed., by Taylor, Juchau, Houterman

Financial Planning in Australia

CHAPTER 1 — THE FINANCIAL PLANNING ENVIRONMENT

Solutions to Questions

Question 1

1. Recovery — expansion period — unemployment decreasing, interest rate declining,

economic growth, upward movement.
2. Boom — peak period — low unemployment, low interest rates. High economic
growth, normally buoyant property market.
3. Contraction — downswing — unemployment rates begin to increase, interest rates
rise.
4. Recession — trough or depression — high unemployment, high interest rates.
Negative economic growth for more than two successive periods.

Discuss the following issues:

Depending on where in the cycle we are will affect the types of investments to be
recommended. Additionally, the advisor needs to be aware of the effect of the business cycle
on an individual’s circumstances, such as high interest rates, therefore lower disposable
income; instability in employment, hence possible redundancy; higher cost of living etc.

Question 2

A discussion should include the advisor being aware of the impact of economic variables
such as:

• interest rates;
• inflation;
• unemployment;
• government policy;
• global economy.
All these factors impact on investment portfolios and, ultimately, the risk tolerance of the
client.

Question 3

Financial planning is a holistic process of understanding the goals and objectives of the client
and making recommendations as to how these goals might be achieved. It includes the

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 personal, financial and psychological goals of the client in both the short, medium and long
term.

Other disciplines concentrate on only one or two aspects of clients’ needs, not taking into
© 2009 Reed International Books Australia Pty Limited trading as LexisNexis: Ancillary for Financial Planning in Australia, 3rd ed., by Taylor, Juchau, Houterman

account all aspects of a client’s situation. In this sense financial planning has a far broader
scope in meeting the client’s needs.

Question 4

Discussion should include:

• global economic growth — effect on trade — balance of trade figures;

• war — depresses share markets initially — high risk;
• political strife with trading partners;
• global interest rates and their impact.

Question 5

Any discussion should include recent ABS statistics indicating Australia’s poor savings
record. Refer to FPA study on savings in Australia. Comparison of savings rate compared to
OECD countries rates Australia amongst the worst savers.

Question 6

Issues include:

• declining birth rate:

• ageing population;
• fewer taxpayers to support social security budget;
• higher health costs associated with ageing population;
• people are living longer — pressure on retirement care;
• constant immigration intake;
• government initiatives;
o introduction of Superannuation Guarantee;
o attractive concessional rate of tax for both superannuation fund income and
individual contributions;
o increase pensionable age to 65 years;
o increase age for superannuation contributions to 75 years;
o family social security allowances to support young families — eg, Baby Bonus
scheme;
o Private Health Care Rebate to encourage private health insurance.

Question 7

The major players are:

1 The regulators — ASIC — fiduciary duty

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 • prudential duty — APRA;
• other regulators — ACCC, ATO.

ASIC is the major regulator for this industry. It:

© 2009 Reed International Books Australia Pty Limited trading as LexisNexis: Ancillary for Financial Planning in Australia, 3rd ed., by Taylor, Juchau, Houterman

• administers the Financial Services Reform Act and Corporations Law as it

relates to the financial services industry;
• acts as the single licensing regime for the industry; releases policy statements
to enunciate the Law, eg, PS 122 Know Your Client (subsumed into FSRA),
PS 146 Educational Competencies of Authorised Representatives;
• acts to protect the client from poor advice.

2 The client — major player — seeking advice on a variety of important issues

including:

• fees for advice;

• conflict resolution;
• investment selection;
• insurance and risk management;
• estate planning;
• retirement issues, and many other issues.

3 The advisor — provides financial advice. This includes:

• data collection;
• identify client’s goals and objectives;
• analysis of client’s situation;
• write comprehensive financial plan;
• recommendations of strategies to be used to meet client’s needs;
• implementation of strategies;
• monitor and review the plan.

Question 8

Any discussion should include:

• larger size cohort than would be the norm for an age group;
• greater political influence as a group;
• better educated;
• more assets;
• higher purchasing power.

Question 9

There are three major professional bodies:

1. Financial Planning Association

2. CPA Australia

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 3. Institute Of Chartered Accountants in Australia

Refer to pp 12–14.
© 2009 Reed International Books Australia Pty Limited trading as LexisNexis: Ancillary for Financial Planning in Australia, 3rd ed., by Taylor, Juchau, Houterman

Question 10

Any discussion should include:

1. volatility in global markets;

2. sub-prime issues in the United States;
3. global financial meltdown;
4. global credit crisis.

All of these have impacted on the Australian share market and financial institutions which:

(a) were exposed to global companies such as Lehmann Brothers;

(b) have experienced increase costs of global borrowing due to risks perceived globally in
raising funds.

Also, RBA efforts to control inflation in late 2007 and 2008 magnified the financial crisis
which impacted in September 2008.

Question 11

Some issues raised should include:

1. global financial crisis;

2. global recession;
3. increase in the cost of global funds;
4. reaction on world share markets;
5. corporate collapses, especially in the finance sector.

What are the government objectives?

1. employment rates;
2. inflationary pressures;
3. moderation of interest rates.

Monetary policy has been used as a stimulus to increase money supply to reduce the impact
of recessionary pressures. This occurs through reduction in official interest rates. By the end
of 2008 this had limited impact as the global economy continues into a recessionary phase.
To some extent Australia has been temporarily, at least, spared the worst of the current
global crisis and only time will determine whether both the monetary and fiscal policy of
government has provided sufficient stimulus to increase confidence.

Question 12

Issues discussed should include:

1. The impact of five successive interest rate increases in 2007/08 reduces household
disposable income.
2. The increase in world oil prices during the same period.
3. The large value of mortgages and increased interest rates create property slow down
and values of properties reduce drastically.

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 4. Rental crisis ensues with increases in rental costs and reduced number of rental
properties.
5. Increased living costs generally lead to less disposable income and hence a decline in
savings.
© 2009 Reed International Books Australia Pty Limited trading as LexisNexis: Ancillary for Financial Planning in Australia, 3rd ed., by Taylor, Juchau, Houterman

Solutions to Problems

Problem 1

Economists agree that a movement in interest rates is almost a certainty. The only
discussion points are:

• how much;
• what sectors will be most affected.

It is a commonly held view that a 1–2% increase would be a disaster with greater impact than
the high interest rate rises of the 1980s. This is due to the level of borrowings, which for the
average individual represent 130% of income compared to a level of 50% when interest rates
were 17% in the early 1990s. Such a modest increase could trigger a recession with a crash
of the property market. This obviously affects inflation, unemployment in the building industry
and a substantial decline in economic activity.

The ageing population in the next five years will see great changes in the labour force with a
large proportion of individuals retiring, either to be self-funded or supported by social security
payments. Additionally, there will be a huge drain of corporate memory and expertise
currently available to industry.

Additionally, conflict in the Middle East and the Iraq issue may have a dramatic effect on the
US budget with flow-on to the rest of the world.

All these factors influence financial markets and hence what investment portfolios would be
recommended. Additionally, there may be changes in the goals of individuals, resulting in
delaying retirement due to insufficient funds or withdrawal of capital to support everyday
living.

Problem 2

See solution for Problem 1.

Students should research current commentary re interest rates in order to contribute to the
discussion.

Issues may include:

• effect on property market;

• market demand for housing — cities v regional;
• demand for inner city living — investment units — oversupply?;
• occupancy rates in investment properties;
• investor’s cash flow positions;
• pressure on bankruptcy rates;
• booming burden of debt both in value and cost to service;

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 • impact on credit card debt and borrowings generally.
© 2009 Reed International Books Australia Pty Limited trading as LexisNexis: Ancillary for Financial Planning in Australia, 3rd ed., by Taylor, Juchau, Houterman

Problem 3

See example in text. Additionally, examples can be found through internet search. Students
should be encouraged to search out industry FSGs.

Problem 4

Refer to the chapter discussion on the role of the regulator.

FSRA was a result of the recommendations of the Wallis Enquiry, which was designed to
have a single licensing regime and additional consumer protection as its major objectives.
This removed duplication of the compliance burdens when dealers were previously required
to comply with several regulators depending upon what advice and what type of product was
being recommended. Refer to www.asic.gov.au re latest press releases.

Much has been written in the financial press relating to FRSA and its effectiveness. This
problem is intended to give students the opportunity to research this topic area and report
back as to their findings.

Problem 5

1. Discuss two forms of borrowing:

• Negative gearing — see 'Using debt to fund investment' in Chapter 12.

• Margin loans — see 'Margin trading' in Chapter 7.

2. Share markets at the present time are extremely volatile and hence investment returns,
in the short term, are not likely to increase. Financing to invest is risky and hence
Maryanne must consider her risk tolerance.

3. The global economic crisis continues to impact and Maryanne must understand investing
in shares is a long-term proposition.

4. Also, she must consider the cost of using borrowed funds and possible increases in
rates and how this impacts on her finances.

Problem 6

Issues discussed should include:

1. Whether the property is currently valued at $650,000, given the economic crisis and
property values decline.

2. The cost of borrowing and possible changes in interest rates on repayment capacity.

3. The cost of rent versus the cost of buying and the advantages and disadvantages of
each.

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 4. The possible decline in the employment market. If either lose their job, is the mortgage
still affordable.

5. The use of insurance as a risk management tool (mortgage insurance, life insurance
© 2009 Reed International Books Australia Pty Limited trading as LexisNexis: Ancillary for Financial Planning in Australia, 3rd ed., by Taylor, Juchau, Houterman

etc).

6. Can they currently meet their savings objective of $50,000 per year, given the economic
conditions, and is this a sufficient deposit to raise a mortgage of $550,000?

Solution to Case Study 1.1

This case study calls into question the issue of ethics and conflict of interest. Students would
be expected to refer to the FPA website re Code of Ethics and Rules of Professional
Conduct.

Some issues are:

• Both Mary and Peter are clients; hence the advisor has a duty of care to both parties.
• The advisor could do the business and give Mary the advice she requested. (Is there
a problem here?)
• The advisor could tell Peter of Mary’s plans and hence lose Mary’s business.
• The advisor could tell Mary he could not help her due to ethical considerations and
refer either her or both of them to other advisors to seek independent opinions.

The obvious answer is to disassociate yourself from both clients; however, this may be
difficult if these clients represent a large proportion of your funds under management and
hence your income.

Business issues muddy the waters.

Your own ethical beliefs will affect your judgment here and this is different for everyone
depending on your experiences, background and moral code. A major dilemma obviously
exists in such grey areas. Your decision will ultimately affect your professional relationship
with the clients.

Another consideration may be the culture of your firm and their ethical beliefs. To a large
extent, corporate ethics will often override your individual ethics in certain situations.

While the solution may seem obvious, this case highlights the dilemmas facing advisors on a
regular basis. In this case we have not considered the possible litigation that may arise given
the ultimate decision of the advisor.

Solution to Case Study 1.2

There is no specific answer as it will be determined by the issues chosen by the students.
This is a case study to provoke discussion.