Financial Planning Assignment for MAF-255

Assessment – Limited Scope Statement of Advice

Case Scenario: Luke and Kelly Hubbard - Financial Planning

Financial Planner (FP): Luke and Kelly, thanks for coming in. I understand that you have just purchased a new home and are interested in putting together a financial plan.

Luke: That’s correct. We bought a new house about three months ago in Chelsea in Victoria. We move in tomorrow – the last day of June 2015 – we can’t wait.

FP: Congratulations – buying a home is usually the first step to wealth creation so now is a good time to assess your current financial position and to make some plans for the future.

Kelly: I must say that I am nervous about making plans for the future – so many things can change and upset the best laid plans, as they say.

FP: True but my philosophy is that a plan is much better than no plan and plans can always be updated and changed to meet new circumstances. Tell me a bit more about this house purchase.

Luke: Well the house cost $525,000. We have had to borrow $380,000. Our mortgage broker suggested that we split the loan into two. So we have a $250,000 fixed rate loan. The rate is 6.25% fixed for the first two years. The loan itself is a 25 year loan. Repayments are monthly. We wanted to fix the loan for five or ten years however our broker suggested that we initially only fix for two years. I’m still not sure if we have done the right thing. What are the advantages and disadvantages of fixing an interestrate for a shorter or longer period?

FP: Well there are a number of factors to consider when deciding on the fixed term for a loan. Rather than answer that now let me make a list of questions you want answered and I will include my answers in my report to you. What about the other $130,000 – did you borrow that a variable rate?

Kelly: Yes. It is a variable rate, 25 year loan with monthly repayments. Thanks to the last official interest rate cut the annual rate is now 4.9%.

FP: Can you tell me a bit more about your jobs and how much you earn?

Luke: I work as a lawyer for a Melbourne based legal firm. My salary package is $93,075 and this includes the standard superannuation guarantee contribution. In the last five years my salary has gone up by about 4% per annum and I think this rate of increase is likely to continue for the foreseeable future.

Kelly: I used to work as a graphic designer and web developer. Now I work from home running an online clothing business. I do have a business plan. Last financial year I had a taxable income of $57,000. My business plan projects that this income will increase by about 6% per annum. As I said earlier I get nervous about plans because so many things change but so far so good.

FP: Kelly what about contributions to superannuation.

Kelly: None I’m afraid. I do have about $10,000 in superannuation left over from my graphic designer/web developer days. I’ve never quite seen the point of locking your money away in superannuation for 30 years particularly when there are bills to pay and a house to buy.
FP: Whilst we are on the subject of superannuation Luke how much do you have in super? Luke: (Luke hands over his last superannuation statement which shows he has a balance of $56,230).

FP: Besides your house and your superannuation what other assets do you have?

Kelly: I inherited a parcel of 1000 CBA shares back in 2007 when my Uncle passed away. Back then they were valued at $56.93. I sold 500 of the shares at $92.40 on the February 9 this year to help with the purchase of the house. I still have the other 500. I guess I am going to have to pay some capital gains tax on the sale. Capital gains tax has me very confused and whilst on the subject of confusion, franking credits have me completely bamboozled. Can you give a simple and straight forward explanation – maybe an example might help.

FP: Let me add that explanation to my list.

Luke: I have suggested to Kelly that she should sell the remaining 500 CBA shares – the stock market is very volatile at the moment. What goes up must come down. I think she would be much better off putting the money in a term deposit – at least there we know it is safe and we can work out what rate of return we are getting. What do you think?

FP: I think my list just got longer.

Kelly: Besides the 500 CBA shares we have left we also have two cars worth about $32,000 in total. We also have $50,000 in a bank term deposit which is in Luke’s name and which pays 3.25% interest, and a bank transaction account in joint names which has $27,000 and which pays zero percent interest.

FP: Do you have any gold, jewellery, family heirlooms?

Luke: Not really, other than about $40,000 in house contents - that’s about it really.

FP: What about your living expenses – do you budget your living expenses?

Luke: Yes we do. To save some time I prepared this list of living expenses for 2014/15 last week. I was surprised as to where our money actually goes. (At this point Luke hands over a copy of the living expenses. See the excel spreadsheet template provided.)

FP: OK what about what you owe? I know that you have a $380,000 mortgage. Any other debts?

Luke: We both have credits cards. I have a Visa card with about $20,000 owing and Kelly has a Myers card with about $6,000 owing.

FP: Do you know what rate of interest you are paying on these cards?

Kelly: Not really – I know we should – they are just so convenient. We never really pay them off – with the interest, our payments and new purchases each month the balance owing stays fairly constant – although I have noticed the balance owing creeping up a bit each year.

FP: There are more questions that I need to ask but maybe just one more for now – do you have any personal risk insurance policies?

Kelly: Well we have health insurance if that is what you mean. I guess we also have some life insurance through our superannuation funds. The superannuation funds keep sending us letters asking us if we want to buy additional units of life insurance, whatever that means, but we just throw them in the bin. So no, we don’t have much in the way of life insurance and we don’t have any other personal risk insurance policies.

FP: Excellent. I think that is just about everything I need. Do either of you have any questions?

Luke: I am curious about how you can project so far into the future.

AFP: Well I have to use the information you have given me and I need to make assumptions, for example:

• I will assume that the inflation rate is 2.5% per annum
• I will assume that the current tax rates and levels of dividend income remain unchanged for the next five years, and
• that your expenses will rise by inflation, unless there are contracts in place,  which will affect these payments
• I will build a simple model in Excel and if you wish to change any of my assumptions it will be a simple matter of changing a cell or two and seeing what impact it has on the overall outcome.

Luke: That sounds great – I look forward to our next meeting and seeing your report.

Required:

Kelly and Luke are comfortable with their existing estate planning arrangements and also feel well informed on their social security entitlements and are therefore happy for you to exclude these two areas from the SOA you are preparing. They also acknowledge that it is too early to discuss issues related to retirement planning, and do not want the advice to be dominated by superannuation. Your SOA should acknowledge that your advice has been scaled in this way.

• Statement of Current Financial Position as at 30 June 2015. 
• A Cash Flow Statement for 2014/15 using the excel template provided. (We will assume that the surplus cash generated in 2014/5 was used to assist with the purchase of the house). 
• A projected Cash Flow Statement for each of the next 5 financial years i.e. from 2015/16 through to 2019/20 using the excel template provided. Based on the following assumptions:

1. Kelly and Luke basically maintain the same expenditure pattern as before however the costs of owning a home will replace the costs of renting a home.
2. As the cost of items purchased with the credit card increase due to inflation so too will the amount of interest increase e.g. interest on credit card debt will be expected to be $5,356 in 2015/16.
3. All surplus cash will be deposited in the joint bank account. (We recognise that this is not a realistic assumption however we are not asking you to prepare a comprehensive financial plan for the clients).
4. Based on the current level of mortgage repayments how much will be still be owing on the mortgage on the 30th of June 2020?
5. Throughout the interview you have promised to report back to Kelly and Luke on a number of issues – you should report back under the heading ‘Financial planning issues raised during the interview’.   (Maximum of 900 words)
6. If you have done your modelling correctly under 3 above Kelly and Luke should generate a cash surplus. Provide Kelly and Luke with your ‘Top 3’ prioritised recommendations (and justification for those recommendations) for how this cash surplus could be used. Broader advice is not required – this is not a comprehensive financial plan. (Maximum of 900 words)

Please read these instructions carefully:

1. Assignments that do not comply with the submission requirements will not be assessed. This is similar to HND Assignment in terms to quality check purpose.
2. This assignment can be completed as either an individual or a group of 2 or 3 students. You are responsible for forming or joining a group.
3. You may form a group with either or both campus based and cloud located students.
4. All group members receive the same mark. If a group member is inactive, then the active members of the group should remove the inactive member from their group, and notify the inactive member of his/her removal.
5. ONE electronic copy of the assignment per GROUP must be submitted via CloudDeakin by 12 midday on Monday 14 September, 2015. A penalty of one mark per day will be applied for late submissions.
6. If you choose not to submit this assessment you will score zero – the marks cannot be added to the final examination.
7. The page length is limited to 20 pages. This 20 page limit is inclusive any covering letter, table of contents, spreadsheets, and any other appendices, but exclusive of the Student ID and assumptions page as well any pages devoted to references and PDS links. All pages must have a footer which includes the student ID(s) and the page numbering e.g. page 14 of 18. Where a SOA exceeds 20 pages markers will be instructed not to consider any material beyond the 20th page.
8. The main body of the SOA should be produced in a 12 point Calibri font, with a minimum of 1.15 line spacing. This includes financial projections and appendices.  The SOA should have standard 2.5cm left and right and top and bottom margins.
9. The assignment should be directed to the clients, Kelly and Luke, in the first person. The assignment must read as if it were written by one person – if you simply divide up  the  sections  of  the plan  between  the  members  of  the  group  and then  come
10. together briefly at the end to combine the sections into one SOA it is very unlikely that you will be able to prepare the comprehensive and integrated plan required.
11. Wherever possible recommendations must be made on the basis of real products and real prices that you have researched.
12. You can assume that the clients have been provided with a Financial Services Guide (FSG) and the relevant Product Disclosure Statements (PDS). Where you recommend a product/service for which a PDS is available on the web you should reference the relevant URL. 
13. The assignment should have the following structure:

a.      The first page of the submission must include the following information:

i.  The name and student ID of each student that contributed to the assignment.

ii.  A heading ‘Assumptions’. Under this heading you should list all the assumptions that you have made in order to complete the financial plan. These assumptions should not be used to reduce the flexibility of the financial plan. Please note that this information is directed to the marker of the SOA – not the client. The client is not expected to read this first page therefore where these assumptions will affect the clients understanding of the plan they should also be restated in the appropriate section of the plan.

b.      The second page should be a cover letter to your clients.

c.       Page 3 should comprise a table of contents and executive summary.

d.      Pages 4-8 should comprise the completed Client Data Collection file (see CloudDeakin for template).

Page numbering from here on will depend on the number of pages you take to complete each task.

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