Case study background — George and Rebecca Brown
You work for the financial planning company, Markson and Co, which is a licensed securities dealer and a registered life insurance broker.
Your company specialises in investment and insurance advice but does not provide stockbroking, real estate evaluations and advice, income tax preparation, superannuation fund accounting, superannuation fund administration or the preparation of legal documents such as Wills or trusts.
George Brown is a senior engineer with an international mining company. He has been working for the same company for the last seven years and has been pleased that the company was primarily unaffected by the global financial crisis (GFC). He believes there is potential for further improvement in his salary as well as growth prospects within the company.
Rebecca Brown is working part-time as a paralegal with the same company she worked for prior to having their children, Ruby and Sienna. She has a good relationship with the owners of the firm and does not see any change in her current employment situation for the time being.
Both George and Rebecca are in good health and are non-smokers. They have private health cover for the family.
George and Rebecca have approached you for financial advice.
They advise you that they are confused in regard to their financial situation. This has come about due to conflicting information they have read, which states that although they will be living longer, nearly half of all 40 year olds will die over the next forty years. Further, their children have asked questions about the insurance plan advertisements they have seen on television which has raised concerns as to whether they have adequate insurance cover. Further, they want to make sure their children will be adequately provided for if something were to happen to them.
They also believe they should have surplus income as a back-up. They would like to save any surplus in the most tax effective vehicle for the long term. Both George and Rebecca are concerned that if they have access to these funds they may spend them.
George and Rebecca would like to reduce their mortgage and believe that this could help them to get ahead before they have to pay large school fees. Their current loan has a redraw facility. However; they enjoy their annual holidays and have an active social life, and want to make sure they have income available to continue these activities.
George also advised you that his uncle recently passed away and he has inherited $75,000 cash along with shares valued at $27,000. They have never considered owning shares before but George is keen to understand the share market and perhaps buy some shares. George is prepared to take some risks in order to accumulate wealth quickly. However, Rebecca is more concerned about risk and does not wish to ‘gamble’ any of their funds.
Detailed below are George and Rebecca’s current details.
Personal information
Surname: / Brown / BrownChristian Name: / George / Rebecca
Salutation / Mr / Ms
Age/Date of birth / 28 March 1970 / 17 August 1971
Status / Married / Married
Home address / 4 Pringle Ave, Kensington / 4 Pringle Ave, Kensington
Health / Good / Good
Smoker / No / No
Occupation / Senior Engineer / Paralegal
Employer / Knight & Co. / Ranier and Jackson
Start date / 2004 / 2008
Sick leave currently available / 14 days plus 10 days per annum / 6 days plus 10 days per annum
Retirement age / 60 / 59
Dependants/Family relationships / Sienna (aged 11 years) / Ruby ( aged 8 years)
Professional relationships
Solicitor / Carlie MattiesonTime span of relationship / 10 years
Quality of relationship / Poor
Service provided / Conveyancing for home purchase
Accountant / John Watson
Time span of relationship / 7 years
Quality of relationship / Excellent
Service provided / Annual tax return
Annual income details
Name: / George / RebeccaSalary / $110,000 / $55,000
Cash management account — interest / $375 / $375
Savings account — interest / $88 / $88
Inheritance — interest / $3,750
Dividends (96.7% franked) / $1,750
Notes:
George and Rebecca’s salaries exclude superannuation guarantee (SG) contributions, which are currently paid at 9% per annum.
Annual expenditure
Mortgage / $28,700General living expenses / $45,000
Accountant’s fees / $500
Donations / $1,000
Holidays (annually) / $10,000
Assets and investments
Principal residence / $850,000 / Purchased 6 years ago for $550,000. Outstanding mortgage $300,000 — joint names, variable rate 6.5%Contents / $50,000 / Joint names
Car / $18,000 / Fully paid off — joint names
Cash management account / $15,000 / Cash management account earning 5% p.a. — joint names
Savings account / $5,000 / Everyday savings account earning 3.5% p.a. — joint names
Cash management account — inheritance / $75,000 / Cash management account earning 5% p.a. — George’s name only
ABC Superannuation — George / $190,000 / Invested in a retail fund, balanced option — earns 6% p.a. net of fees and taxes. No beneficiaries or binding nominations specified. The fund accepts salary sacrifice.
SOH Industry Superannuation — Rebecca / $85,000 / Invested in an accumulation industry fund, balanced option — earns 5% p.a. net of fees and taxes. The fund only has a defensive, balanced or high growth options available. There is no untaxed element in the fund. No beneficiaries or binding nominations specified. The fund accepts salary sacrifice.
Share portfolio / $27,000 / Currently earning 6.48% p.a. — 96.7% franked dividends — in George’s name only
Current share portfolio
Number of shares / Company / ASX Code500 / AMP Limited / AMP
1,300 / Insurance Australia Group Limited (formally NRMA) / IAG
400 / Commonwealth Bank Limited / CBA
400 / Telstra Corporation Limited / TLS
Investment objectives
They have rated their investment objectives, using a scale ranging from 1 (not concerned) to 5(very concerned).
George Brown
Income to keep pace with inflation / 2 / Legal, logical and appropriate tax relief / 5Easy access to your capital / 1 / Regular income from your investments / 1
Easy to administer / 3 / Capital growth / 5
Volatility / 2
Rebecca Brown
Income to keep pace with inflation / 2 / Legal, logical and appropriate tax relief / 5Easy access to your capital / 1 / Regular income from your investments / 1
Easy to administer / 4 / Capital growth / 5
Volatility / 4
Estate planning
George and Rebecca have Wills which they quickly wrote using the packages bought from the post office when Ruby was born. They do not have powers of attorney.
Insurance and risk management
George has three times his salary in term life and total permanent disability (TPD) insurance within his superannuation. He cannot take out any higher cover within this superannuation fund.
Rebecca has $50,000 of life and TPD in her superannuation fund. George and Rebecca do not have income protection or trauma cover.
They have family private hospital cover.
Planning issues
• George and Rebecca are seeking a long-term tax effective investment plan which will provide for them in their retirement.
• George has recently inherited $75,000 from his uncle and would like advice on how to invest these funds to contribute to securing their future.
• George has told you that he understands the risks associated with investing and is willing to invest in riskier securities in order to increase their returns.
• Rebecca is more risk averse. She would like to ensure they do not lose any of their inheritance.
• George and Rebecca’s children currently attend a public school but they would like to send both children to a private school to complete their secondary education.
• George and Rebecca would like to do some renovations to their home, i.e. replacing the old bathroom which they believe will cost approximately $17,500. They are happy to use some of their inheritance to do this and anticipate the work to be done this year.
• Both George and Rebecca are not sure if the current asset allocation used in their superannuation is appropriate and are seeking your advice on determining an asset allocation that they are comfortable with, and will improve the potential to meet their lifestyle and financial objectives. They would also like to know if they are on track to reach their retirement income goal of $60,000 per annum when George reaches age 60.
• Rebecca has been unhappy with the service she receives from her industry fund and the limited number of choices she has for her account. In addition George has been earning better returns every year, even after fees are deducted.
• They wish to have their full insurance needs reviewed.
• George and Rebecca would like to reduce their mortgage and believe that this could help them to get ahead before they have to pay large school fees.
• They expressed concern about the fees that you charge and seek clarification on those fees.
As their financial planner, your task is to prepare a Statement of Advice (SOA) that will include strategies to meet George and Rebecca’s goals.
The project (student to complete)
Section 1 Establish a relationship with the client and identify their objectives, needs and financial situation
Part A
List particular strategies you will use to ensure that the Browns are comfortable with the interview process. (200words)
[insert student response]
Part B
Give details of any legal requirements you need to comply with at the initial stage of your relationship with the clients. (250words)
[insert student response]
Part C
If, at a later stage, George and Rebecca wish to make a complaint about your advice, whatare their options? How much information are you required to give them, initially, about complaints procedures? (150words)
[insert student response]
Part D
Neither of your clients have trauma insurance, and they are unsure about the adequacy of their current level of life and TPD insurance. Prepare a list of questions that you could use during the initial interview to help you determine appropriate levels of cover. You should cover asset preservation, income preservation and future expenditure needs, and the answers to these questions should enable you to complete the risk needs section of the fact finder. (250words)
[insert student response]
Part E
Discuss the benefits and drawbacks of using tools to gather the information required to develop a financial plan for clients as compared to a more casual, conversational style approach. (200words)
[insert student response]
Section 2 Analyse client objectives, needs, financial situation and risk profile to develop appropriate strategies and solutions
Part A
Record the information you have gathered from your clients in the fact finder below. Include the information you obtained from your questions in Section 1 Part D.
Part B
Identify any gaps in your data collection form, as well as any other issues that would need to be followed up with George and Rebecca. (100words)
[insert student response]
Fact finder
Personal and employment details
Personal detailsClient 1 / Client 2
Title
Surname
Given and preferred names
Home address
Business address
Contact phone
Date of birth
Age
Sex / Male / Female / Male / Female
Smoker / Yes / No / Yes / No
Expected retirement age
Dependants (children or other)
Name / Date of birth / Sex / School / Occupation
Employment details
Client 1 / Client 2
Occupation
Employment status / Self employed / Employee / Self employed / Employee
Not employed / Pensioner / Not employed / Pensioner
Permanent / Part time / Permanent / Part time
Casual / Contractor / Casual / Contractor
Other / Government / Other / Government
Business status / Sole proprietor / Partnership / Sole proprietor / Partnership
Private company / Trust / Private company / Trust
Notes
Any other person to be contacted? e.g. accountant, bank, solicitor, etc.
Income, expenditure and net worth
Income and expensesClient 1 / Client 2 / Notes
Income from employment
Salary
Salary sacrifice / (state % if applicable)
Salary after salary sacrifice
Rental income
Unfranked dividends
Franked dividends / (state % return if applicable)
Franking (imputation) credits / (state franking % if applicable)
Interest / (state % return if applicable)
Other income, e.g. taxable benefits
Capital gains <1yr
Capital gains >1yr
Tax-free component of capital gains
Assessable income
Deductible expenses
Rental expenses, repairs etc.
Taxable income
Tax on taxable income / (state tax rates and year applied)
Non-refundable tax offsets (e.g. LITO/SATO)
Medicare levy
Medicare levy surcharge
Franking rebate
Refundable rebates and offsets
Total tax
Income after tax
Notes
Family cash flow
Client 1 / Client 2 / Combined
Income after tax (as calculated above)
Investment expenses
Living expenses
Total expenses
Net cash flow
Assets and liabilities
Asset / Owner / Value / Liabilities / Net value / Notes
Personal assets
Total
Investment assets
Net worth
Liabilities
Loan / Current debt / Percentage deductible / Interest only / Repayment
Total
Goals and objectives
Details / CommentsOther
Estate planning
Do you have a Will? / Yes / No
When was it last updated: / /
Executor’s name and contact details:
Do you have Powers of Attorney? / Yes / No
Attorney’s name and contact details:
Do you have a funeral plan? / Yes / No
Funeral provider and contact details:
Amount paid
Do you have superannuation beneficiaries in place? / Yes / No
Type / Binding / Non-binding
Beneficiary names and contact details:
Current superannuation, rollovers, insurances and investments