Adviser Skills - Study Notes

Adviser Skills - Study Notes - Adviser Skills (940)...

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Unformatted text preview: Adviser Skills (940) DISCLAIMER These materials are issued by Kaplan Education on the understanding that: 1. Kaplan Education and individual contributors are not responsible for the results of any action taken on the basis of information in these materials, nor for any errors or omissions; and 2. Kaplan Education and individual contributors expressly disclaim all and any liability to any person in respect of anything and of the consequences of anything done or omitted to be done by such a person in reliance, whether whole or partial, upon the whole or any part of the contents of these materials; and 3. Kaplan Education and individual contributors do not purport to provide legal or other expert advice in these materials and if legal or other expert advice is required, the services of a competent professional person should be sought. The views expressed by presenters delivering course material by lecture or workshop may not necessarily be those of Kaplan Education. COPYRIGHT © Kaplan Education, 2008. All rights strictly reserved. No part of these materials covered by copyright may be reproduced or copied in any form or by any means (graphic, electronic or mechanical, including photocopying, recording, taping or information retrieval systems) without the written permission of Kaplan Education. Kaplan Education n makes every effort to contact copyright owners and request permission for all copyright material reproduced. However, despite our best efforts, there may be instances where we have been unable to trace or contact copyright holders. If notified, Kaplan Education will ensure full acknowledgement of the use of copyright material. ACKNOWLEDGEMENTS All ASX material is © ASX Limited. All rights reserved. All ASX material is reproduced by the publisher with the permission of ASX Limited. No part of this material may be photocopied, reproduced, stored in a retrieval system, or transmitted in any form or by any means, whether electronic, mechanical or otherwise, without the prior written permission of ASX Limited. Kaplan Education acknowledges the support of Aspect Huntley Pty Ltd, Morningstar, Dow Jones, EBSCO Australia and ProQuest in the development of its course material. Introduction Contents Unit 1: Identifying Client Needs and Objectives Unit 2: Analysing the Situation and Developing Solutions Unit 3: Presenting the SOA and Reaching Agreement Unit 4: Implementing the Solution and Providing Ongoing Service 940.SN1.4 Page A Adviser Skills (940) About this Adviser Skills module This module provides the skills component of the Tier 1 (Diploma level) training and assessment required for individuals who provide personal financial advice to retail clients. It addresses the skills requirements of the ASIC competencies set out in RG 146 in relation to the following units of competence: • Provide Advice in Financial Planning FNSASIC503ZB • Provide Advice in Foreign Exchange FNSASIC503SB • Provide Advice in Managed Investments FNSASIC503TB • Provide Advice in Superannuation FNSASIC503UB • Provide Advice in Derivatives FNSASIC503VB • Provide Advice in Securities FNSASIC503WB • Provide Advice in Life Insurance FNSASIC503XB You are referred to the ASIC website at <www.asic.gov.au> for further information on compliance obligations. Overall program structure The Tier 1 Compliance Program has three components: Generic Knowledge, Specialist Knowledge, and Adviser Skills. This module must be completed in conjunction with the Generic Knowledge and Specialist Knowledge components to achieve a Statement of Attainment for the relevant ASIC unit(s) of competency. Note: The Generic Knowledge and Adviser Skills components only need to be completed once. If you are undertaking more than one advice area you only need to undertake the Specialist Knowledge assessment for each additional advice area. Generic Knowledge A ssessment 40 multiple-choice questions Specialist Knowledge area Adviser Skills Statement of Attainment Assessment Case study assignment Role of experience and prior learning If you have significant industry experience (five years in the past eight years) relevant to the area in which you advise, or you have undertaken recognised programs of study relevant to the advice area, you may request assessment only options in both Knowledge and Skills areas to demonstrate competency. Page B © Kaplan Education Introduction How skills will be assessed The Adviser Skills component will be assessed through a case study assignment for one of the following specialist knowledge areas: financial planning, managed investments, superannuation, derivatives, securities and life insurance. Completion of the assignment meets the skills requirements for all specialist knowledge areas. The case study will provide sufficient information about a client to enable you to formulate a sound Statement of Advice for the client. The skills requirements to be assessed are set out below. Element Performance criteria 1. Establish relationship with client a) b) c) d) 2. Identify clients objectives, needs and financial situation a) b) c) d) 3. Analyse client objective, needs, financial situation and risk profile a) b) c) d) e) 4. Develop appropriate strategies and solutions a) b) c) 940.SN1.4 A range of communication and interpersonal skills are used to establish the knowledge level of client Enquiries in relation to products and services are responded to by explaining the range of products and services available and their relevant fee and charging methodology. Client is informed of the role of the adviser and the licensee/principal responsible for the adviser’s conduct. Familiarity with the procedures for complaints handling and the circumstances in which they should be engaged is demonstrated. A range of communication and interpersonal skills are used to gather clients’ personal, financial and business details. Clients needs are identified by encouraging expression of their objectives and goals (short, medium and long-term goals as relevant to the product). Product risk profile of the client is identified. Clients expectations of cash flow and relevant taxation obligations are obtained. An assessment of client needs is undertaken, utilising all information gathered and taking into account clients product expectations and specific needs. Clients are consulted throughout the analysis for further clarification where necessary. The need for specialist advice is analysed and/or client is referred to appropriate adviser for higher level/specialist advice if required. Product risk profile of the client is assessed and agreed. Understanding of the ASIC identified generic and specialist knowledge relevant to the products being offered, as detailed in the Evidence Guide, is demonstrated. An appropriate strategy to provide for identified needs and outcomes is determined from analysis of products, client risk profile and assessment of clients’ needs. Relevant research, analysis and product modelling is conducted. Appropriate solution (plan, policy or transaction) is drafted for presentation to client. Page C Adviser Skills (940) Element Performance criteria 5. Present appropriate strategies and solutions to the client a) b) c) d) e) 6. Negotiate financial plan/policy/transaction with client a) b) 7. Co-ordinate implementation of agreed plan/policy/transaction a) b) c) 8. Complete and maintain necessary documentation a) b) 9. Provide ongoing service where requested by client a) b) c) Page D Product knowledge appropriate for the service or product offered is demonstrated when presenting the product. The proposed transaction is explained and discussed with the client in a clear and unambiguous way. Relevant details, terms and conditions or product/service are reinforced to client. Impacts and possible risks of the solution are disclosed in a clear and concise manner to the client. Client is provided with written supporting documentation and guided through the key aspects of the documentation. Concerns and/or issues the client has regarding the proposed plan/policy/transaction are discussed and clarified. Confirmation is sought from client that they understand the proposed plan/policy/transaction. The clients’ formal agreement to the proposed plan/policy/transaction is gained. Associated fee and cost structures are clearly explained and confirmation of understanding gained from the client. Time frames for execution and processing are clearly explained and confirmation of understanding gained from the client. Proposal and all other statutory and transactional documents are completed and signed off by the client. Copies of appropriate documentation and the signed agreement are exchanged. Type and form of ongoing service; including reporting on performance and review of plan/policy/transaction is agreed with the client. Fees and costs for ongoing and specifically defined service are clearly explained and confirmation of understanding gained from the client. Ongoing service is provided as required. © Kaplan Education • • • 940.SN1.4 • FNSCOMP501B Comply with financial services legislation, industry and professional codes of practice Page E FNSASIC503XB FNSICADV501B Provide appropriate services, advice and products to clients • • • • FNSASIC503WB • • • • • • FNSASIC503VB FNSFMKT503B Advise clients on financial risk • FNSICCUS507B Record and implement client instructions • • • FNSASIC503UB • • FNSICPRO502B Conduct research to support recommendations • • FNSASIC503TB FNSFMKT502B Analyse financial market products for client • FNSICADV502B Provide appropriate and timely information to clients FNSASIC503SB • FNSASIC503ZB FNSICCUS506B Determine client requirements and expectations Units of competency This module also addresses the requirements for the following prerequisite industry competencies. Prerequisites for this unit Introduction Page F • • • • • FNSFPLN502B Conduct financial planning analysis and research FNSFPLN503B Develop and prepare financial plan FNSFPLN504B Implement financial plan FNSFPLN505B Review financial plan and provide ongoing service FNSASIC503ZB FNSFPLN501B Comply with financial planning practice, ethical and operational guidelines and regulations Units of competency Adviser Skills (940) FNSASIC503SB FNSASIC503TB FNSASIC503UB FNSASIC503VB FNSASIC503WB © Kaplan Education FNSASIC503XB Introduction Recognition of competence In addition to the assessment requirements for the Adviser Skills component, you will also need to satisfy the Generic Knowledge and Specialist Knowledge requirements to receive a Statement of Attainment for the each of the ASIC competencies set out in RG 146. Pathway to qualifications The Tier 1 competencies identified on your Statement of Attainment will be recognised for advanced standing to FNS50804 Diploma of Financial Services (Financial Planning). Getting the most from these resources This module has been designed for as a self-study resource to prepare candidates for the Adviser Skills assignment. It also provides a reference for the practical application of concepts and principles in the workplace. Administrative queries For information about logins, assignment submission, results or program information contact: Student Advice Centre Australia Tel: 1300 135 798 (free call) info@kaplan.edu.au 940.SN1.4 International Tel: +61 2 8248 6799 info@kaplan.edu.au Page G Adviser Skills (940) Notes ___________________________________________________________________________ ___________________________________________________________________________ ___________________________________________________________________________ ___________________________________________________________________________ ___________________________________________________________________________ ___________________________________________________________________________ ___________________________________________________________________________ ___________________________________________________________________________ ___________________________________________________________________________ ___________________________________________________________________________ ___________________________________________________________________________ ___________________________________________________________________________ ___________________________________________________________________________ ___________________________________________________________________________ ___________________________________________________________________________ ___________________________________________________________________________ ___________________________________________________________________________ ___________________________________________________________________________ ___________________________________________________________________________ ___________________________________________________________________________ ___________________________________________________________________________ ___________________________________________________________________________ ___________________________________________________________________________ ___________________________________________________________________________ ___________________________________________________________________________ ___________________________________________________________________________ ___________________________________________________________________________ ___________________________________________________________________________ ___________________________________________________________________________ Page H © Kaplan Education Unit 1 Identifying Client Needs and Objectives Unit 1: Identifying Client Needs and Objectives Contents Preview 1–2 About this unit ............................................................................................1 – 2 Unit objectives.............................................................................................1 – 2 1 Providing financial advice — the process 2 Who is my client? 1–4 2.1 Client perceptions of service ...............................................................1 – 5 3 Communication in the advising process 1–5 3.1 Verbal and non-verbal communication...............................................1 – 5 3.2 Listening skills ....................................................................................1 – 6 3.3 Questioning skills ...............................................................................1 – 6 3.4 The initial contact...............................................................................1 – 7 3.5 Solving problems and misunderstandings ...........................................1 – 7 3.6 Formal dispute resolution...................................................................1 – 8 3.7 Effective relationships through communication — a summary ...........1 – 8 4 Financial advice needs 1–9 4.1 Investment advice ...............................................................................1 – 9 4.2 Insurance advice .................................................................................1 – 9 4.3 Retirement advice ...............................................................................1 – 10 4.4 Estate planning ...................................................................................1 – 10 4.5 Business financial advice.....................................................................1 – 10 5 Initial client contact 1 – 11 5.1 Information you can gather at the initial contact................................1 – 11 5.2 Refining your technique .....................................................................1 – 11 5.3 The client’s privacy.............................................................................1 – 12 5.4 Using a collection form.......................................................................1 – 13 5.5 Sample financial fact finder — preliminary details .............................1 – 14 5.6 The first face-to-face meeting .............................................................1 14 5.7 Financial services guide (FSG) ............................................................1 – 15 6 Collecting data and identifying client needs 1 – 17 6.1 Quantitative and qualitative data .......................................................1 – 17 6.2 Other sources of client information ....................................................1 – 18 6.3 Points to remember.............................................................................1 – 18 6.4 Establishing client objectives and needs ..............................................1 – 19 6.5 Construct a timeline ...........................................................................1 – 19 6.6 Client investment style........................................................................1 – 19 6.7 Financial fact finder — sample form...................................................1 – 21 7 1 1–3 Risk profiling 1 – 29 7.1 Understanding risk .............................................................................1 – 29 7.2 Your client’s understanding of investment risk...................................1 – 30 7.3 Investment products and risk..............................................................1 – 30 7.4 Risk diagnostic tools...........................................................................1 – 31 7.5 Risk categories....................................................................................1 – 32 7.6 Financial fact finder............................................................................1 – 33 Checklist Appendices 940.SN1.4 1 – 34 1 – 34 Page 1 – 1 Adviser Skills (940) Preview About this unit This unit looks at the financial advising process. It begins by outlining key communication skills, and then discusses initial client contact, data collection and the identification of client needs. The unit concludes with an examination of risk profiling. Unit objectives At the end of this unit you should be able to: identify your client’s expectations use the communications process to establish a business relationship with your clients solve problems and misunderstandings manage the initial client contact gather client data to help identify needs and objectives use a data gathering tool. Page 1 – 2 © Kaplan Education Unit 1: Identifying Client Needs and Objectives 1 Providing financial advice — the process The financial advising process, illustrated in Figure 1, can be viewed as a series of logical steps each requiring the application of a wide range of skills and knowledge on the part of the adviser. One of the most critical skills is communication. Establishing and maintaining a high level of constructive communication with your client is a component of all the steps of the process, although some steps emphasise communication more than others. 1 Also important in each of the steps is your application of the knowledge you have gained, and will continue to gain, during this course, in your workplace, from colleagues and other contacts, and from your reading and research. F I G U RE 1 : The financial advising process Identifying clients’ needs & objectives Implement the plan & provide on-going service The financial advising process Analyse the situation & develop solutions Present the plan & reach agreement In this and following units, these steps will be introduced in generic terms. As you progress in your course, the same steps will be used with emphasis on the particular product or products that are the subject of the module. In this way you will progressively build your bank of knowledge while reinforcing and refining your advising skills. 940.SN1.4 Page 1 – 3 Adviser Skills (940) 2 Who is my client? Before you can start to think about financial products and strategies, you need to know your client — to get into their world and understand their financial goals, circumstances and the degree of risk they are comfortable with. It is more than likely that your clients will come from a variety of backgrounds, with a range of previous financial experience, objectives, needs and pre-conceived ideas. No one approach or solution will meet the needs of all your clients, and your own ideas and preferences may not sit comfortably with all your clients. Skilled advisers can quickly establish rapport and a free flow of information with their customers. With an open mind on your part, this open communication will lead to real understanding of your client’s needs. Before looking at strategies you can use to establish rapport and open communication, let’s first look at what clients want from an adviser. IN PRACTICE What do clients want? Think about yourself as a client of any service provider. What are the main things you expect from that person in your business or professional relationship? Chances are the issues you identify can be grouped into the following client expectations: Clients expect ... For example ... Reliability • When a commitment is made, it happens, as promised. • The provider follows up to ensure client needs are met. • Appointments are kept. If the provider is going to be late they let the client know. Responsiveness • When a client leaves a message the provider returns the call as soon as possible. • When a client asks for something, they get it on time. Quality of service and product • The provider delivers the best service they can for the client. Positive, friendly working relationship • The provider genuinely cares about the client and their needs. • Products recommended are of high quality and the most appropriate to the client’s needs. • The provider makes an effort to find out the client’s needs. • The provider is always friendly and makes an effort to develop a positive working relationship, even in difficult circumstances. Credibility • The client has confidence in the provider because they project an image that says, ‘I know my area of work. If I don’t know something, I will find out or refer you to a good alternative provider.’ • The provider projects a credible, professional image of themselves and their team. Achievement Page 1 – 4 • The ability to deliver on agreed outcomes. © Kaplan Education Unit 1: Identifying Client Needs and Objectives 2.1 Client perceptions of service Client satisfaction is not simply a measure of how good a service is relative to the fee that is charged. Client satisfaction is really about their expectations and how they perceive those expectations have or have not been met. An approach to consider is to use every contact and communication with your client to set expectations at appropriate levels and to reinforce their perception of the service they are receiving. 3 1 Communication in the advising process In your dealings with people, everything you do, or do not do, influences the other party. This includes your words and silences, your activity and inactivity. By developing skills in communication you are able to: • read the hidden meaning in clients’ verbal and non-verbal signals • convey information, empathy and a desire to help meet your clients’ needs. An effective communicator has excellent observation and listening skills. 3.1 Verbal and non-verbal communication When we communicate face to face we use both verbal and non-verbal communication skills. Verbal communication has several levels: • the literal meaning of what is being said • what the speaker thinks is being said • what the listener thinks is being said. At times the listener has to ‘read between the lines’ to understand what the speaker really means. With your own verbal communication, you should use clear language suited to the particular client. It should be free of jargon and ambiguity. Your verbal communication should align with your non-verbal communication. Non-verbal communication can aid you in understanding what your client really means as well as helping you to express yourself and confirm what you are saying. Non-verbal communication includes: • tone of voice and where the speaker places the emphasis • pitch, volume and timing • voice reflexes such as coughing, giggling and sighing. Body language is another form of non-verbal communication and includes: • posture • gestures and body movements • appearance (grooming and clothing) • facial expressions and eye contact. 940.SN1.4 Page 1 – 5 Adviser Skills (940) 3.2 Listening skills The effective communicator recognises that both talking and listening are equally important in verbal communication. Because we can think faster than we can talk, we tend to be thinking up the next thing to say instead of really listening to what the other person is saying, and trying to understand their needs. Other barriers to understanding what the other person is really saying and what they really need are: • personal bias — just not liking the other person • assumptions and false conclusions • hearing what we want to hear • pre-judging the problem or the solution • talking too much • a mind closed to alternatives and other opinions • fear of being wrong • jargon. By developing sound listening skills we are aiding effective communication and relationship-building by: • showing interest in what the other person is saying • understanding what is being said. Feedback lets the other person know we are interested and invites them to continue. It can be: • non-verbal (e.g. a friendly smile, head nod, eye contact) • verbal (e.g. ‘I see’, ‘Go on’, ‘Is that right?’) Active listening is used to obtain more information and to ‘drill down’ for the real need. It involves: • showing that you are interested • remaining neutral • using questioning and summarising techniques to show you understand and confirm your understanding. 3.3 Questioning skills Questions are tools you can use to help you obtain information, build rapport and confirm understanding. Open-ended questions seek to open up the communication. Open ended questions start with words like: ‘How ......?’ ‘What .......?’. Key points about open-ended questions: • use to uncover the other person’s real view or problem • use to uncover underlying feelings • let the other person know that you are interested, and so boost their self-esteem • allow the other person to finish what they are saying, and completely express themselves • hold back the urge to respond quickly and cut them off • use them to identify common ground. Page 1 – 6 © Kaplan Education Unit 1: Identifying Client Needs and Objectives Reflective questions build rapport and show empathy. Reflective questions often start with: ‘So you feel that ....?’, ‘So this experience has left you feeling ....?’ Key points about using reflective questions: • show that you really understand and care • listen for key words and underlying feelings 1 • ‘mirror back’ and summarise key words and feelings • do not be judgemental. Closed questions call for a ‘Yes’ or ‘No’ answer. They serve to confirm information and understanding. 3.4 The initial contact More likely than not the first contact you have with a new client will be by phone. As we have seen, non-verbal communication forms a large part of the successful communication process. Once visual clues and eye contact have been removed, communication and real understanding can be difficult. Do not, however, overlook the impact of facial expression, even on the phone. If you speak with a smile on you face it can be heard. Try it for yourself. Choice of language on the phone is important. Tone is important but, if the words are wrong even a ‘smiling tone’ won’t bring understanding. If you are the initiator of the phone call be aware that your call might be intrusive at that particular time. Briefly introduce yourself and state the reason for your call, then ask if it is a good time to talk or if you should call back. Once you establish rapport at this initial contact, you can start to establish the clients’ needs. 3.5 Solving problems and misunderstandings Complaints, problems and misunderstanding arise even in the best client/adviser relationships. If handled correctly problems can be turned around and be used to enhance the relationship. With few exceptions, clients will feel even more comfortable with you as an adviser if you can satisfactorily resolve a problem situation. Here are a few simple guidelines to keep in mind when dealing with these situations: • listen, and show that you are listening • involve the client in defining the problem • deal with feelings first • uncover the facts • take notes and summarise. Write possible actions for you and the client to take • show that you have not only heard, but understood — summarise both the facts and the feelings • recommend or take action. Present solutions — tell the client what will happen — set timeframes • follow-up. Take action and let the client know what is happening. 940.SN1.4 Page 1 – 7 Adviser Skills (940) 3.6 Formal dispute resolution If your attempts to resolve a complaint or dispute with your client fails, your organisation must have a formal dispute resolution process in place. This is a legal obligation and the process must be approved by ASIC. Dispute resolution systems must consist of: • an internal dispute resolution procedure that complies with standards made or approved by ASIC under the Corporations Regulations (including Australian Standard AS 4269 1995) • membership of an ASIC approved external dispute resolution (EDR) scheme. Internal procedures must be able to deal with all complaints made by retail clients concerning financial services covered by the licence. External procedures must also be able to deal with such complaints, with the exception of complaints covered by the Superannuation Complaints Tribunal. RG 165 requires licensees to ensure their internal dispute resolution procedures are transparent and accessible to employees and clients. All staff must have a copy of these procedures. The financial services guide given to clients must contain a simple and easy-to-use guide explaining the procedures. IN PRACTICE Dispute resolution Think about your current workplace. Briefly describe your internal dispute resolution process. To which external dispute resolution scheme does your licensee subscribe? 3.7 Effective relationships through communication — a summary Following are some key points to keep in mind when establishing and maintaining client relationships: 1. Send messages that are: • non judgemental • honest • open • direct 2. Listen • show interest • show understanding • just listen! 3. Respond in a way which is: • respectful • raises the client’s self-esteem • seeks contribution from the client 4. Solve problems in a collaborative way. Page 1 – 8 © Kaplan Education Unit 1: Identifying Client Needs and Objectives 4 Financial advice needs Clients can have a wide range of financial needs that you will learn more about as you progress in the course and during your work. For the purpose of this module we will categorise client needs under the following headings: • investment advice 1 • insurance advice • retirement advice • estate planning • business financial advice. Following is a brief explanation of each of these categories. 4.1 Investment advice Investment advice is the advice provided on financial assets, such as: • cash deposits • term deposits • debentures • government bonds • shares • derivatives • managed unit trusts • managed investment schemes • insurance investment products, such as investment bonds, superannuation bonds and annuities. Investment advice takes into account your client’s goals and investment preferences so that you can develop a portfolio that places their funds in a range of investments, providing different degrees of income and growth. Investment advice seeks to maximise returns after tax and allowing for inflation. Investment advice could also include advice on savings, and whether it would be appropriate for your client to borrow in order to invest. 4.2 Insurance advice Insurance advice includes life and general insurance. Life insurance advice involves an assessment of the impact that your client’s death or disability might have on their dependents. Once an assessment is complete, you can recommend different products that provide a lump sum or regular income in the event of the insured event. General insurance advice includes advice on policies which cover, for example, building, household contents, public risk, motor car and private health benefits. 940.SN1.4 Page 1 – 9 Adviser Skills (940) 4.3 Retirement advice Retirement funding Retirement funding advice is investment advice for the purpose of creating a lump sum large enough to provide income for your clients and dependants after they retire. When most people think of retirement income funding, they think of superannuation, but retirement funding is not limited to this investment vehicle, and you should also consider a client’s other assets. Retirement income Retirement income advice is about maximising the income from your client’s assets. This income would be obtained from their investment portfolio. It also could include structuring your client’s assets and income to obtain government benefits, if they are available. 4.4 Estate planning Comprehensive financial advice should include estate planning. Estate planning is the appropriate transfer of ownership of personal assets at the time of death to the beneficiaries selected by your client. Estate planning issues include: • the preparation of a will • the use of powers of attorney • the establishment of testamentary trusts • the selection of beneficiaries for superannuation savings. Estate planning includes advice on how assets can be distributed in a tax effective manner. For example, superannuation lump sums are paid tax free to dependants, but if paid to a non-dependant, taxes will apply. While you can make recommendations with regard to the will, the drafting and execution should be left to a qualified legal practitioner. 4.5 Business financial advice As a financial adviser you can provide advice for business, as businesses also need to maximise benefits from their financial assets. Business owners need to consider the loss of profits in the event of the death or disability of one or more key individuals, and how they will fund any succession plans for the business in the event of the death of one of the owners. Here we have briefly covered the main areas of advice that might be sought by your clients. Page 1 – 10 © Kaplan Education Unit 1: Identifying Client Needs and Objectives 5 Initial client contact 5.1 Information you can gather at the initial contact At the initial contact, you can ask questions to obtain some background information before your face-to-face meeting. Questions might include: 1 • Is the client single or in a partnership? If they have a partner, suggest that the partner also attend the meeting. • Are they employed? • Do they have children? • What do they aim to achieve from the financial advice you can offer? Prior to the meeting you might provide the client with a list of items or information to bring to the meeting. This could include: • planned budget • superannuation details • list of assets and liabilities • income and expenses details. You could also suggest some questions the client could consider and discuss with their partner, if they have one, such as: • short-term, medium-term and long-term objectives • any planned capital expenditures such as a holiday, home renovations, courses to study. The key is to encourage the client to come to the meeting as prepared as possible. That way the actual client meeting will be more productive. 5.2 Refining your technique There is obviously a limit to how much information you can ask for during the first contact, especially if it is over the phone. Over time, you will refine your techniques for data collection before and during the initial face-to-face interview. For example you might: • send out a fact finder, either as a standard form or one specific to your client • provide a list of specific information your client should gather and bring to the meeting • choose to leave everything until the first face-to-face meeting. Think about yourself as a client. How would you prefer to provide personal and financial information? Would the information be available immediately or would you need time to gather it? 940.SN1.4 Page 1 – 11 Adviser Skills (940) 5.3 The client’s privacy Privacy Amendment (Private Sector) Act 2000 The collection and use of personal information is vital to the financial planning process. Compliance with privacy legislation within the industry was considered best practice even before the extension of the law to cover smaller business operations. Basic requirements of the scheme are documentation of compliance policies and procedures and training for financial advisers and staff who handle personal information. Important considerations for financial advisers include: • the need to disclose the use of personal information to all involved parties (particularly spouses) • allowing clients access to all personal information held about them • referral procedures that ensure client approval has been obtained for referral. IN PRACTICE Case study — Initial contact Christopher Crane rings you. He was given your name and phone number by a friend — an existing client. Christopher explains that he and his wife, Christine, recently inherited some money and have been making plans for the next five years or so. They would like some financial help. They are not sure how they should save to pay for the expenses involved in what they are planning, even though they think that the inherited money will be enough to cover costs. What do you say to Christopher? What do you know already? What are some suitable and relevant questions you could ask at this stage? There are some obvious questions you can ask and some helpful things you can suggest. You already know that the client is married and wants to finance something over the next five-years. You could ask some friendly preliminary questions without asking for too much financial detail at this first contact. The conversation might go like this: You: Do you mind if I ask you a little bit about Christine and yourself? Christopher: No. Go ahead. You: Do you have children, Christopher? Christopher: Yes, we have two children. Kate and Tom. You: And how old are they? I’m only asking because their ages will have an effect on your financial needs. Christopher: Kate is 12 and Tom is 10. You: Thanks. Now, we’ll need to look at your and Christine’s financial situation to put together the best plan for your needs. Is Christine working? Christopher: Yes, she is. You: OK. You go on to explain to Christopher that you need to compile a full financial profile in order to help them. You need to know what they own and what they owe. You also need to know their income and roughly what they need for living and other expenses. Page 1 – 12 © Kaplan Education Unit 1: Identifying Client Needs and Objectives What could you tell Christopher now? What would you suggest as the next step to take if Christopher wants to proceed? You tell Christopher a bit about the financial planning process and why you need to have the information. You stress that although you work for a licensee ⎯ a person authorised by the government to deal in financial products — any information he gives you will be treated confidentially and only used to provide his family with financial advice that you consider meets their requirements. 1 The conversation goes on: Christopher: Thanks. I understand. Where do we go from here? You: Well, I suggest we all get together to fill in some more of the details I need. What time is best for you? Christopher: Anytime really. We can both adjust our commitment to make the time to see you. You: How about next Wednesday then? Christopher: That’s fine with me and I’ll confirm it with Christine. You: Great. In the mean time I’ll write to you confirming what we have discussed and send you a checklist of the sort of information I need. You may not have all the information readily to hand, and might want to talk about some of the details with Christine before we get together. Are there any questions you’d like to ask me now? Christopher: No that’s all fine. See you on Wednesday. Before Christopher goes you confirm the time, date and place of the meeting. Also, you confirm their address and phone numbers. What should you do now to start your ‘paper trail’? After the initial conversation, make a file note including date, names, and the name of the person who referred Christopher to you. This is the start of your ‘paper trail’. Finally, write to Christopher and Christine, as promised, and include a list of the information they need to get together before the meeting. 5.4 Using a collection form An effective way of collecting information on your client is by using a form designed for the purpose, such as the Financial Fact Finder in Appendix 1. Some advisers send a copy of a document like this to their clients before the first face-to-face interview. This ensures that all required information is available at the time of meeting. If you are providing limited advice this is not likely to be necessary. Ensure that the collection form you use clearly sets out the information required, and provides space for both you and your client to make notes. After the initial contact with Christopher, you could note the following details on the fact finder: 940.SN1.4 Page 1 – 13 Adviser Skills (940) 5.5 Sample financial fact finder — preliminary details Personal details Customer Spouse/Partner Title Mr Mrs Surname Crane Crane Given & preferred names Christopher Christine Home address 123 Glenwood Close, Merryville 8790 123 Glenwood Close, Merryville 8790 (02) 9999 9999 (02) 9999 9999 Business address Contact phone Date of birth Sex Smoker x Male Female Male Yes No Yes x Female No Expected retirement age Dependants (children or other) Name Date of birth Sex 1991 Occupation F 1993 School M Source: Multi-Agent Regulatory Group (MARG) We reproduce the full financial fact finder from MARG in Appendix 1.1. 5.6 The first face-to-face meeting If the initial contact with your potential client has been successful, your next meeting will probably be face-to-face. At this meeting communication skills are even more crucial than at the initial contact. If they like you and what you have to say, you will probably have a new client, if not, that will be the end of the matter. You must do your best at this meeting to make your potential client feel comfortable. Establishing rapport Establishing rapport begins immediately. If you are late for the meeting or keep your client waiting, they might feel that you do not consider their business is important. Building rapport can be helped by: • introducing yourself to the client in a warm and friendly manner — smile • maintaining eye contact with the client — but don’t stare • using suitable body language — lean forward slightly when speaking with the client • observing and responding to your client’s body language. Page 1 – 14 © Kaplan Education Unit 1: Identifying Client Needs and Objectives Early in the meeting you should let you client know about: • the steps involved in the financial advisory process • your role and your capacity to do the job. Where should the first meeting be held? There are no hard and fast rules about where meetings with clients should be held. It is more likely that the meeting will be held in your office, where formal documents and investment information are readily accessible and can be immediately given to your client. 1 There will be times, however, when a client’s circumstances mean that you meet at their home. For example, a married couple with young children may not be able to arrange a trip to your office. Occasionally it may be necessary to meet your client at their own office if they want advice but are too busy to travel. In any situation, it is up to you to be punctual, polite, informative and well armed with financial services information. How long should the meeting be? Keep the meeting as short as possible and relevant to the information needed. Assess your client’s attitudes and expectations as you move through the meeting. 5.7 Financial services guide (FSG) As discussed earlier in the module it is important that you comply with all disclosure requirements and provide the client with disclosure documents when required. The first disclosure document you need to give your client is the financial services guide (FSG). The FSG must contain specific, up-to-date information including the following statements and information: • your name and contact details • any special instructions about how your client may provide you with instructions • the name and contact details of your authorising licensee • a statement that you are the authorised representative of that licensee • the kinds of financial services and financial products you can offer as a representative of the licensee • for whom the licensee acts when providing those services • the remuneration, commission and benefits you and the licensee will receive • any relationships between you, or your licensee, and the issuer of any financial products that might influence your recommendations • information about the licensee’s dispute resolution system • confirmation that you are authorised by your licensee to distribute the FSG • the date. Additional information may be included in the FSG, such as: • further explanation of your client’s rights • the relationship between you and your licensee • information relating to specific product characteristics or risks. 940.SN1.4 Page 1 – 15 Adviser Skills (940) IN PRACTICE Case study — Initial face-to-face meeting Wednesday comes and your receptionist announces that Christopher and Christine have arrived. What can you do and say to your clients to make them feel welcome and to start to build rapport? You go out to the reception area and greet them both — shake hands, smile and make eye contact. ‘I’m glad that you could both make it. Please come into my office.’ You ask Christopher and Christine to sit down. Note: If possible, try not to have a desk between you and your clients. This can act as a barrier to the rapport you are trying to establish. Give both Christopher and Christine your business card. Break the ice with some small talk. For example: ‘What’s the weather like outside? Still raining?’ ‘Did you have any problems finding the building?’ ‘How’s the traffic now? Did they clear that accident in Harris Street?’ No more than a couple of minutes on this track is enough before getting down to business. What must you do and explain at this stage? At this stage you give them your financial services guide (FSG). Point out the various items, particularly whether your advice will be limited in any way, and explain your fee structure. Watch them carefully to see if there are any signs of doubt and ask them if there is anything they do not understand. During this interview with your clients your communication skills are crucial. You have already started the rapport building process by greeting your clients, introducing yourself and breaking the ice with some small talk. Carry on the rapport building process by: • using clear, simple language • maintaining eye contact with your clients • understanding your client’s body language and using appropriate body language yourself. Ensure, by questioning and observation, that your clients understand: • what is involved in the financial planning process • your role and capacity. What else can you use this first face-to-face contact for to help you better understand your clients and to help you communicate at their level? You can use this first meeting to establish your clients’ background, previous financial experience and level of financial sophistication. These are all relevant issues when it comes to developing an investment strategy and when communicating your recommendations in the statement of advice. Page 1 – 16 © Kaplan Education Unit 1: Identifying Client Needs and Objectives 6 Collecting data and identifying client needs After you have established rapport with your client and they decide to take the next step in the process, you need to gather information about them and their circumstances. According to ASIC Regulatory Guide RG146.127, you must: • collect personal, financial and business details 1 • collect information concerning the client’s risk profile • determine cash flows (required and projected) • identify relevant tax obligations. Prior to offering full advice, you must collect sufficient additional data to determine your client’s current financial position, including: • business or work situation • income • expenses • assets and liabilities • cash • existing investments • insurance cover • superannuation savings • commitments (e.g. home mortgage, personal loans, credit cards) • timing of cash flows. Even if the advice only concerns deposit-taking products, or a limited range of insurance products, the information you collect must still be sufficient to ensure the product you recommend is appropriate to the need. 6.1 Quantitative and qualitative data Data is usually classified as either quantitative or qualitative. You need to collect both types of data to form a complete profile of your client and be able to determine solutions that will truly meet their needs. Quantitative data Quantitative data is the factual information regarding a client’s financial situation. When full advice is being sought the following information is required: • personal details such as the client’s birth date, marital situation, and occupation • income and its source • income requirements (normal expenses to pay for lifestyle) • taxation levels • one-off expenses, such as a planned vacation or a new car • investments and savings • level of insurance cover • level of superannuation savings • value of assets • level of debts. 940.SN1.4 Page 1 – 17 Adviser Skills (940) From the information you collect, you can construct a balance sheet and a budget. This can be done simply, by using a financial calculator or spreadsheet. You might have access to sophisticated computer programs to prepare more complex projections. Bear in mind that such programs are only tools and you still need to understand the underlying formulae and assumptions to be able to understand and interpret the data produced. Qualitative data Qualitative data is harder to gather and interpret than quantitative data because much of it is not tangible. Qualitative data has to do with such things as attitudes, opinions and preferences. Before you can make any recommendations, it is important that you know something of your client’s social and personal circumstances. Knowing their objectives, lifestyle, social background and level of risk tolerance can help you make appropriate recommendations. Some attitudes might include: • social security benefits are a right rather than a safety net • lump sums are the best way to take superannuation • taxation must be minimised at all costs • financial planning is only for the rich. 6.2 Other sources of client information Clients may have other specialist advisers such as tax agents, accountants and lawyers. These people should be invited to attend meetings if your client would like them present. While highly trained, these professionals tend to focus on their own area of expertise, and will not attempt to provide an overall financial analysis of their clients’ needs, nor develop a systematic financial plan. Although they are usually not licensed to offer detailed financial advice, their knowledge of your clients’ affairs can be very helpful. 6.3 Points to remember • If your client is in a relationship, the other partner should be included, if possible. • Your client should restate their financial objectives and discuss them with you faceto-face. In this way you will gain valuable information about what your client expects from your recommendations. • You must inform your client of the extent and limitations of the advice that you can provide. You should also clearly explain and disclose all fees and commissions in dollar terms. • Listen carefully to your client to ensure you fully understand their situation prior to recommending a solution. • Confirm your data collection results, as your client might have forgotten an important element. Page 1 – 18 © Kaplan Education Unit 1: Identifying Client Needs and Objectives 6.4 Establishing client objectives and needs The next part of the data collection process involves establishing your clients’ personal objectives and lifestyle goals. Careful questioning may be needed, as many people have difficulty expressing their financial goals. You should make a written record of this information before making any recommendations. 1 All of this information is essential before you have a reasonable basis for your recommendations under the ‘know your client’ rule. IN PRACTICE Collecting information Consider your communication skills and the following points. How can you prevent a fact-finding interview from becoming boring? What are three things you can do to ensure that you and your client are engaged in true dialogue? How can you take notes without it seeming obtrusive? 6.5 Construct a timeline You should ask your client to consider both short-term and long-term financial goals. While it may be a difficult subject to raise, your client should also make plans for the transfer of assets after their death. With this information, you can use a timeline to put the client’s cash needs into perspective (see Figure 2). F I G U RE 2 : Timeline of cash needs Long-term savings Income $10,000 Trip next year $20,000 New car in two years $450,000 Total in five years Retirement requirements $20,000 p.a. Retirement income This timeline can then be overlaid onto a cash flow analysis to see where funding falls short. 6.6 Client investment style You also need to identify the investment style of your client and use this information as a guide in the selection of appropriate products. This will help you to determine issues such as the following: • Is the client more likely to be a passive or active investor? • What level of detail does the client want? • What are their expectations of client service? • How involved do they want to be in the decision-making process? • Do they want to learn more about investing and the markets? 940.SN1.4 Page 1 – 19 Adviser Skills (940) In the process of data collection, ask the client to confirm that the information you are gathering and the assumptions you are making are accurate. Client sign-off and retaining documents on file, offers some protection if problems occur in the future. IN PRACTICE Case study ⎯ Data collection From your meeting with Christopher and Christine and from written information they have given you, you now have the following information about their current financial and personal situation: • Christopher is aged 45 and Christine is aged 40; they are married and have two children, Kate age 12 and Tom age 10. • Christopher is employed as a foreign exchange dealer on an annual base salary of $70,000 ($49,244 after tax and the Medicare levy). His employer superannuation contributions are 9% ($6300 p.a.). His total superannuation balance is $80,000. • Christine is employed as an administration manager also earning an annual base salary of $70,000 ($49,244 after tax and the Medicare levy). Her employer superannuation contributions are 9% ($6300 p.a.). Her total superannuation balance is $50,000. • Their home and effects are valued at $580,000. • They currently have $250,000, just inherited from Aunt Jayne’s estate, in a cash management trust and $8000 in a cash deposit account. • They would like to set aside $20,000 for emergency funds — this is a high priority. • They both currently have income protection, life insurance and trauma cover with their respective employment arrangements. • They have a $200,000 mortgage and repay $1500 per month. • Christopher and Christine have private health insurance which costs them $200 per month. • Rates cost them $211 per month. • They spend $2700 per month on household expenses, including transport. • Other expenses such as entertainment, education and holidays amount to $1550 per month. • They have current wills. Christopher and Christine want to explore the following issues: • Should they be investing more money in superannuation? • Should they be investing their money in non-superannuation? • Should they invest in direct shares or alternatively in managed funds? • Can they reduce their taxation obligations? • They have a five-year plan that includes the following goals: – a family holiday to America for two weeks – home renovations. Page 1 – 20 © Kaplan Education Unit 1: Identifying Client Needs and Objectives 6.7 Financial fact finder — sample form Employment details Customer Spouse/Partner 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 Other Sole proprietor Partnership Sole proprietor Partnership Private company Business status 1 Trust Private company Trust Any other person to be contacted? e.g. accountant, bank, solicitor, etc. Income and expenditure Usual monthly income Customer Spouse/Partner Total monthly income (after tax & Medicare levy) *(include salary, wages, rents, investments, pensions, social security etc.) Total annual household income (for both parties) Total $ Monthly expense Household (e.g. rent, mortgage, food, clothing, electricity/gas/telephone) Transport and health (e.g. travel, car repayments, registration, medical fund) Other expenses (e.g. other loan repayments, credit cards, superannuation, insurances, education, entertainment) Total monthly expenses $ Total annual household expenses (for both parties) Surplus/shortfall (income less expenditure) Total $ Actual savings — annual 940.SN1.4 Total $ Total $ Page 1 – 21 Adviser Skills (940) Your investment preferences 1. In any investment planning, are there any investments you wish to avoid? 2. In any investment planning, are there any investments you would prefer? Do you have a will? Yes No Current investments Investment type Company Purchase date Units held/fixed rate Current value Owner Notes Page 1 – 22 © Kaplan Education Unit 1: Identifying Client Needs and Objectives Superannuation details Estimated retirement value Personal super member Policy type Company Policy No. Annual premium Current value High rate Low rate 1 Employer super Customer Spouse/Partner Fund name Date of joining fund Type of fund Accumulation Accumulation Defined benefit Pension Lump sum Pension Lump sum By employer Contribution (e.g. 5% of salary) Defined benefit By self By employer By self Yes No Current retirement value $ $ Estimated retirement value $ $ Is there provision for you to top up or salary sacrifice? Yes No Insurances: death, permanent disablement and trauma (include cover for all super funds) Life insured R’ship to customer Company Policy No. Type of benefit Benefit amount Annual premium Benefit amount Annual premium Insurances: income replacement and business overheads (include cover for all super funds) Life insured 940.SN1.4 R’ship to customer Company Policy No. Type of benefit Page 1 – 23 Adviser Skills (940) Net worth, savings and priorities Net worth Assets Liquid: cash, shares, bonds etc. Total $ Non-liquid: business, properties, home, furniture, car, superannuation etc. Total $ Other: jewellery, antiques, etc. Total $ Total household assets (for both parties) Total $ Liabilities Short-term: personal loan, credit card, tax liability, hire purchase, leases etc. Total $ Share equity loan Total $ Long-term: mortgages, other Total $ Total household liabilities (for both parties) Total $ Net worth (assets less liabilities) Total $ Do you expect any significant change in assets or liabilities in the next year? Savings Saving goals Amount needed When Personal priorities Rank personal priorities in order of importance, e.g. 1 = highest. Rank Details Protect income against sickness or accident Protect family and/or assets in the event of death Provide against serious illness or trauma Plan for retirement Save for short term (deposit for home, overseas holiday) Save for medium term (early mortgage repayment, children’s education) Others (describe) Source: Multi-Agent Regulatory Group (MARG). Page 1 – 24 © Kaplan Education Unit 1: Identifying Client Needs and Objectives At this stage of the contact, your Financial Fact Finder for Christopher and Christine should look something like this: Employment details Customer Occupation Employment status Spouse/Partner FX Dealer Administration manager Self-employed x x Employee Self-employed Not employed Pensioner Not employed Pensioner Permanent Part time Permanent Part time Casual Contractor Casual Contractor Other Business status 1 Employee Other Sole proprietor Partnership Sole proprietor Partnership Private company Trust Private company Trust Any other person to be contacted? e.g. accountant, bank, solicitor, etc. Income and expenditure Usual monthly income Customer Spouse/Partner Total monthly income (after tax & Medicare levy) $4103 $4103 *(include salary, wages, rents, investments, pensions, social security etc.) Total annual household income (for both parties) Total $ 98,472 Monthly expense Household (e.g. rent, mortgage, food, clothing, electricity/gas/telephone) $1711 Transport & health (e.g. travel, car repayments, registration, medical fund) $2900 Other expenses (e.g. other loan repayments, credit cards, superannuation, insurances, education, entertainment) $1550 Total monthly expenses $6161 $ Total annual household expenses (for both parties) Total $ Surplus/shortfall (income less expenditure) Total $ Actual savings — annual Total $ 940.SN1.4 73,932 24,540 Page 1 – 25 Adviser Skills (940) Your investment preferences 1. In any investment planning, are there any investments you wish to avoid? 2. In any investment planning, are there any investments you would prefer? Do you have a will? Yes x No Current investments Investment type Units held/fixed rate Current value Owner Cash management trust $250,000 Joint Cash deposit account $8,000 Joint Company Purchase date Notes Should they invest more money in superannuation or non-superannuation? If non-superannuation, should they invest in shares or in managed funds? They want to minimise tax Want to retire at age 60 (Christopher) and 55 (Christine) Page 1 – 26 © Kaplan Education Unit 1: Identifying Client Needs and Objectives Superannuation details Estimated retirement value Personal super Member Policy type Company Policy No. Annual premium Current value High rate Low rate 1 Employer Super Customer Spouse/Partner Fund name Date of joining fund Type of fund x Accumulation Defined benefit x Pension Lump Sum By employer By self Accumulation Pension Contribution (e.g. 5% of salary) 9% Current retirement value $80,000 Estimated retirement value $ Lump sum $50,000 $ Is there provision for you to top up or salary sacrifice? Yes 9% By employer Defined benefit No Yes By self No Insurances: death, permanent disablement and trauma (include cover for all super funds) Life insured Christopher R’ship to customer Company Policy No. Type of benefit Annual premium Death Partner Benefit Amount Trauma Partner Annual premium Death Self Christine Self Benefit amount Trauma Insurances: income replacement and business overheads (include cover for all super funds) Life insured R’ship to customer Company Policy No. Type of benefit Christopher Self Income protection Christine Partner Income protection 940.SN1.4 Page 1 – 27 Adviser Skills (940) Net worth, savings and priorities Net worth Assets Liquid: cash, shares, bonds etc. Total $ 258,000 Non-liquid: business, properties, home, furniture, car, superannuation, etc. Total $ 710,000 Other: jewellery, antiques, etc. Total $ Total household assets (for both parties) Total $ 968,000 Long-term: mortgages, other Total $ 200,000 Total household liabilities (for both parties) Total $ 200,000 Net worth (assets less liabilities) Total $ 768,000 Liabilities Do you expect any significant change in assets or liabilities in the next year? Savings Saving goals Amount needed Emergency fund When $20,000 Holiday Within 5 years Renovations Within 5 years Personal priorities Rank personal priorities in order of importance, e.g. 1 = highest. Rank Details 2 Holiday, renovations 1 Emergency fund Protect income against sickness or accident Protect family and/or assets in the event of death Provide against serious illness or trauma Plan for retirement Save for short term (deposit for home, overseas holiday) Save for medium term (early mortgage repayment, children’s education) Others (describe) Source: Multi-Agent Regulatory Group (MARG). Page 1 – 28 © Kaplan Education Unit 1: Identifying Client Needs and Objectives IN PRACTICE Information gathering For this activity you will need the help of a colleague or friend. Set up a meeting with the person to discuss and gather information on their financial and personal situation. Note: As the information is personal, the person may not wish to disclose their real situation. For the sake of the activity they can construct whatever financial and personal profile they like. The emphasis of the activity is the process and skills you use to gather and document the information, not the information itself. 1 You can select the way you gather the information. For example, you might like to give the person a copy of a Financial Fact Finder and have them complete it before you meet, or complete the Financial Fact Finder as you talk with them. 7 Risk profiling An important step in data collection before the development of financial advice is the development of a ‘risk profile’ of your client. Before moving on to discuss risk profiling in more detail, lets first define what we mean by ‘risk’. 7.1 Understanding risk Experts in risk management generally talk about two types of risk: • pure risk, and • speculative risk. Pure risks can be broken down into these categories: 1. Personal risks: these are risks associated with the individual person and cover areas such as death and disability. 2. Property risks: these have to do with the destruction of or damage to property. 3. Liability risks: these risks concern loss or damage to a third party (a third party is anyone else apart from the insured person and the insurer). 4. Non-performance risks: this is where one party agrees to do something but does not do it, and, as a result, another party suffers a financial loss. Pure risks can usually be covered by insurance. Speculative risk is normally associated with investments. It is the risk that we might lose the money we have invested or not receive the return we expected. This part of the unit provides an overview of speculative risk, what it means to your clients and how you can assess your clients’ tolerance to investment risk. 940.SN1.4 Page 1 – 29 Adviser Skills (940) 7.2 Your client’s understanding of investment risk Risk is often thought of as the ability to recover total investment capital at any point in the future. In reality, the concept of investment risk goes much further and includes the degree to which investment returns will fluctuate or vary. In your explanation of investment risk, it is important to ensure that your client understands the elements of risk involved in any proposed investment strategy. A basic but sometimes overlooked point is that higher returns are generally associated with higher risk investments. Lower risk investments generally offer lower returns. This is sometimes referred to as the ‘risk-reward tradeoff’. 7.3 Investment products and risk When considering or recommending products, clients must be made aware of the level of risk associated with those products. Figure 3 provides a simple illustration of how various investment products can be ranked according to their potential risk. F I G U RE 3 : Investment products ranked by risk Most risky seed capital options, futures, high gearing specially taxed agricultural gearing commodities and resources venture capital, collectibles direct equity and property managed equity and property superannuation and rollovers fixed interest investments personal finance, mortgage personal loans home, car, furniture, property insurance personal insurance bank and bank-backed savings Least risky Page 1 – 30 © Kaplan Education Unit 1: Identifying Client Needs and Objectives 7.4 Risk diagnostic tools There are a number of tools available to you to help assess your client risk tolerance. These include: • questionnaires • psychometric testing • on-line tools. 1 Questionnaires Diagnostic questionnaires are available to help you assess your client risk profile. They can range from half a dozen multi-choice questions to complex questionnaires. A risk profile data collection form can be found in Appendix 1.2. IN PRACTICE Explore your own risk tolerance Complete two or more of the diagnostic tools mentioned, or others you have access to, and note the results. Which tools did you use? Did they all produce the same result or do they differ? If they differ, why? Are the differences significant? Note your answers and any other comments about the activity below. Psychometric testing Psychometric testing is any method, whether in the form of a questionnaire or behavioural study, that assesses an individual’s psychological profile. In the context of financial advising, a psychometric test assesses a client’s psychological acceptance of risk in pursuit of an investment objective. Many financial advisers already use simple psychometric tests. Some financial advisory organisations have either developed their own psychometric tests or adopted proprietary products and systems. Psychometric testing and your obligations Psychometric testing has been available for some time and, despite initial setbacks, its popularity has increased. Financial advisers should, however, be cautious when using these products because the ‘know your client’ rule requires more of a financial adviser than merely conducting a test. The danger with over-reliance on any risk-profiling tool comes with assuming that if your client can cope with risk, that risk should be taken. A sensible approach would involve both psychometric testing and an analysis of your client’s circumstances. For example, even if your client is psychologically accepting of risk-taking, their personal circumstances may not allow it, in which case a low-risk strategy would make the most sense. 940.SN1.4 Page 1 – 31 Adviser Skills (940) ONLINE RESEARCH There are a number of on-line resources that you can use for assessing your client’s risk tolerance. Examples are: • Moneymax®. This is a system that focuses on the personality profile of the client, and contains nine different categories of clients (<www.moneysolutions.com.au>). • FinaMetrica. This is an internet-based risk tolerance tool that is an extension of the client questionnaire. The program asks a series of multiple-choice questions and then provides an analysis of the risk profile (<www.risk-profiling.com>). 7.5 Risk categories After gathering data on your client’s risk tolerance, it is important to come to some conclusions about their tolerance to risk in order to formulate your strategy. In very broad terms, clients can be grouped into the following risk categories: Category Definition highly conservative highly averse to risk conservative reasonably averse risk balanced a neutral approach to risk — will tolerate a degree of risk high growth tolerant to risk to achieve objectives speculative a seeker of risk in return for higher gains This is a rather arbitrary way to categorise people. Some clients might disagree with the classifications, and there is overlap between categories. Some clients might want to invest in a range of products with varying levels of risk. Others might want to invest only in products in one risk category. Although difficult at times, it is important that you understand your client’s attitude to risk as well as possible. Effective use of your communication skills —questioning and listening — will help you to gain this understanding. The importance of risk profiling cannot be overstated. During audits, ASIC may ask, ‘How did you assess the client’s attitudes towards risk?’ With a formal risk tolerance assessment, agreed and signed, you are able to provide ASIC with proof of agreement. When the client accepts a recommendation, the documentation should always include a signed copy for the client file. Profiling couples In a situation involving a couple, both parties must be comfortable with their risk profiles. If risk profiles differ greatly, split portfolios may be the answer. Even if there are small differences between risk profiles, this needs to be accounted for in the overall risk profiling and in the recommended strategy. Page 1 – 32 © Kaplan Education Unit 1: Identifying Client Needs and Objectives IN PRACTICE Case study — Risk tolerance data Christopher and Christine have told you that they each have their superannuation savings in balanced funds with approximately 60% in growth assets. They also hold shares, geared to about 50%. You take this as a sign that they have a balanced approach to investment risk, at least as far as their superannuation is concerned. 1 Just to make sure, what should you do to make sure Christopher and Christine appreciate the concept and importance of understanding their risk tolerance? You should explain the concept of risk as you understand it. Explain that there are different types of investments and that there are fluctuations in the way those different investments behave. This is important because you note that in their questionnaire form they indicated a desire for tax relief — not the ideal incentive for true investment — as well as some concern for easy access to savings. Ask some questions that help you estimate more clearly their attitude to investment risk. 7.6 Financial fact finder At this stage, the Investment Objectives section of Christopher and Christine’s Financial Fact Finder looks like this: Sample financial fact finder — investment objectives Your attitude to risk Place an X on the scale below. People make investment decisions based on time, performance of an investment and the risk they are prepared to accept. You should consider that short-term capital losses might be a consequence of aiming for higher, longer term returns. The higher the return, the higher the risk. Low risk, low return High risk, high return X 1 2 3 4 Your concerns. Mark each dotted line with a number: Not concerned: 1 Slightly concerned: 2 Concerned: 3 Very concerned: 4 …3… Keep pace with inflation …3… Legal, logical appropriate tax relief …2… Easy access to your cash …2… Income from your investment each year …2… Easy to manage in progress …3… Capital growth Source: Multi-Agent Regulatory Group (MARG). In the next unit of the module you will look at analysing the data you have gathered. 940.SN1.4 Page 1 – 33 Adviser Skills (940) Checklist Below is a checklist of the main points covered by this unit. Use this to check your learning. The financial advising process involves: • identifying client needs and objectives • analysing the situation and developing solutions • presenting the plan and reaching agreement • implementing the plan and providing ongoing service. You should use every contact with your client to set appropriate service expectation levels and reinforce their perception of the service being delivered. Establishing effective communication with your client is the key to understanding the financial situation, needs and wants, and the first step in helping them achieve the outcomes they seek. Problems and complaints should be dealt with in a constructive way and with the knowledge that, if managed correctly, they can strengthen the client/adviser relationship. Clients can have a wide variety of financial needs. Some of the main ones are: • investment advice • insurance advice • retirement advice • estate planning advice • business financial advice. A financial services guide must be given to your client at an early stage. To fully understand your clients’ financial circumstances and provide appropriate advice you must collect information about their: • personal, financial and business details • risk profile • required and projected cash flows • tax obligations. Critical to providing advice appropriate to your clients’ needs is an understanding of their risk profile and investment style. Appendices Appendix 1.1 Appendix 1.2 Risk Profile Data Collection form Appendix 1.3 Risk Profile Appendix 1.4 Page 1 – 34 Financial Fact Finder Investment Risk Profile © Kaplan Education Appendices 1.1 Financial Fact Finder 1.2 Risk Profile Data Collection form 1.3 Risk Profile 1.4 Investment Risk Profile Appendix 1.1 The attached Financial Fact Finder has been provided to assist you to gather sufficient information about your client to ensure that the financial advice you provide meets their personal objectives. Please note that the Financial Fact Finder provided is one example of the type of tool that may be used in the workplace. A variety of tools can be used for this purpose. If a client does not disclose information or it is not available you should note this on the Financial Fact Finder. If there are sections in the Financial Fact Finder which are not relevant to your client you should strike out those sections. Financial Fact Finder Source: Adapted from Multi-Agent Regulatory Group (MARG). Personal details Client Spouse/Partner Title Surname Given & preferred names Home address Business address Contact phone Date of birth Sex Male Female Male Female Smoker Yes No Yes No Expected retirement age Dependants (children or other) Name Date of birth Sex School Page 1 of 8 Occupation Employment details, income and expenditure Employment details Client Spouse/Partner Occupation Self-employed Employee Self-employed Employee Not employed Pensioner Not employed Pensioner Permanent Part time Permanent Part time Casual Employment status Contractor Casual Contractor Other Business status Other Sole proprietor Partnership Sole proprietor Partnership Private company Trust Private company Trust Notes Employment security is an integral part of the planning process and should be taken into consideration. Any other persons to be contacted eg. accountant, bank, solicitor, etc.? Income and expenditure Usual monthly income Client Spouse/Partner Total income* (after tax) $ $ *(include salary, wages, rents, investments, pensions, social security etc.) Total household income (for both parties) Monthly expenses Total $ Client Spouse/Partner Household (eg. rent, mortgage, food, clothing, electricity/gas/telephone) Transport & health (eg. travel, car repayments, registration, medical fund) Other expenses (eg. other loan repayments, credit cards, superannuation, insurances, education, entertainment) Total expenses $ $ Total household expenses (for both parties) Total $ Surplus/Shortfall (income less expenditure) Total $ Actual savings Total $ Do you expect any significant change in income or expenses in the next year? Page 2 of 8 Objectives and current investments Investment objectives Your attitude to risk: Place an X on the scale. People make investment decisions based on time, performance of an investment and the risk they are prepared to accept. You should consider that short-term capital losses might be a consequence of aiming for higher, longer term returns. The higher the return, the higher the risk Low risk, low return High risk, high return | 2 1 | 3 4 Your concerns: Mark each dotted line with a number from 1 to 4: Not concerned: 1 Slightly concerned: 2 Concerned: 3 Very concerned: 4 …….. Keep pace with inflation …….. Legal, logical and appropriate tax relief …….. Easy access to your cash …….. Income from your investment each year …….. Easy to manage in progress …….. Capital growth Your investment preferences: 1. In any investment planning, are there any investments you wish to avoid? 2. In any investment planning, are there any investments you would prefer? Do you have a will? Yes No Page 3 of 8 Current investments Investment type Company Purchase date Units held/Fixed rate Current value Owner High rate Low rate Notes Superannuation, rollovers and insurances Superannuation details Estimated retirement value Personal super Member Policy type Employer Super Company Policy No. Annual premium Client Current value Spouse/Partner Fund name Date of joining fund Type of fund Accumulation Accumulation Defined benefit Pension Lump sum Pension Lump sum By employer Contribution (eg. 5% of salary) Defined benefit By yourself By employer By yourself Yes No Current retirement value $ $ Estimated retirement value $ $ Is there provision for you to top up or salary sacrifice? Yes No Page 4 of 8 Rollovers Customer Spouse/Partner Current value of all rollovers Current value of rollovers (made prior to 15/2/90) Benefits paid out in cash since 15/2/90 Date $ Date $ Date $ Date $ Pre 1/7/83 component Post 30/6/83 component Undeducted contributions Post 30/6/94 invalidity component Concessional contributions Insurances: Death, permanent disablement and trauma (include cover for all super funds) Life insured R’ship to customer Company Policy No. Type of benefit Benefit amount Annual premium Type of benefit Benefit amount Annual premium Insurances: Income replacement and business overheads (include cover for all super funds) Life insured R’ship to customer Company Policy No. Page 5 of 8 Net worth, savings and priorities Net worth Assets Liquid: cash, shares, bonds, etc. Total $ Non-liquid: business, properties, home, furniture, car, etc. Total $ Other: jewellery, antiques, etc. Total $ Total household assets (for both parties) Total $ Liabilities Short-term: personal loan, credit card, tax liability, hire purchase, leases, etc. Total $ Long-term: mortgages, other Total $ Total household liabilities (for both parties) Total $ Net worth (assets less liabilities) Total $ Do you expect any significant change in assets or liabilities in the next year? Savings Saving goals Amount needed When Personal priorities Rank personal priorities in order of importance, eg. 1= highest. Rank Protect income against sickness or accident Protect family and/or assets in the event of death Provide against serious illness or trauma Plan for retirement Save for short term (deposit for home, overseas holiday) Save for medium term (early mortgage repayment) children’s education) Others (describe) Page 6 of 8 Details Future needs Insurance needs — Disability Client Spouse/Partner Gross annual income (before tax) Less business expenses Net annual income (before tax) Maximum allowable annual benefit (75% of net annual income) Monthly benefit (ie. divide annual benefit by 12) Less existing insurance Insured monthly benefit shortfall (before tax) Note 1. Gross income is the total of earned income, ie. before-tax earnings derived from personal exertion, including salary, fees, commission, bonuses, fringe benefits or similar payments that would cease on disablement. Note 2. Business expenses are expenses incurred by you in the process of earning income from your profession, business or partnership. Insurance needs — Life and retirement Client Final expenses fund (debts, expenses, legals, medicals, emergencies, funeral fees) Mortgage discharge Education — amount to pay education fees for your children Trauma needs — fund to cover out-of-pocket health care costs (eg. excess over health insurance, medications, physiotherapy, etc.) Additional expenses of a permanent nature (wheelchairs, home alterations, etc.) Income: 1. Income for your spouse/partner 2. Income for your children Retirement income Additional income: income protection only covers 75%, would you need extra? Total funds required Less cash available or assets that can be readily cashed Shortfall/surplus Page 7 of 8 Spouse/Partner Acknowledgment The information provided in this Financial Fact Finder is complete and accurate to the best of my knowledge. I understand that advice provided without the completion of a Financial Fact Finder, or following a partial or inaccurate completion, may not be appropriate to my needs. I acknowledge that the Adviser has provided me with the completed Financial Fact Finder, signed by me. Customer(s) signature(s) Adviser’s name Adviser’s signature Date Page 8 of 8 Appendix 1.2 Risk Profile Data Collection Form There are many questionnaire forms available that have been designed to guide the adviser in their attempts to assess a client’s risk profile. MARG Financial Fact Finder Your attitude to risk Place an X on the scale. People make investment decisions based on time, performance of an investment and the risk they are prepared to accept. You should consider that short term capital losses might be a consequence of aiming for higher, longer term returns. The higher the return, the higher the risk. Low risk, low return High risk, high return | 1 | 2 3 4 Your concerns. Mark each dotted line with a number: Not concerned:1 Slightly concerned:2 ……..Keep pace with inflation ……..Easy access to your cash ……..Easy to manage in progress Concerned:3 Very concerned:4 …….. Legal, logical appropriate tax relief …….. Income from your investment each year …….. Capital growth Your investment preferences 1. In any investment planning, are there any investments you wish to avoid? 2. In any investment planning, are there any investments you would prefer? Page 1 of 1 Appendix 1.3 Page 1 of 1 Appendix 1.4 Page 1 of 3 Page 2 of 3 Page 3 of 3  Notes ______________________________________________________________________________ ______________________________________________________________________________ ______________________________________________________________________________ ______________________________________________________________________________ ______________________________________________________________________________ ______________________________________________________________________________ ______________________________________________________________________________ ______________________________________________________________________________ ______________________________________________________________________________ ______________________________________________________________________________ ______________________________________________________________________________ ______________________________________________________________________________ ______________________________________________________________________________ ______________________________________________________________________________ ______________________________________________________________________________ ______________________________________________________________________________ ______________________________________________________________________________ ______________________________________________________________________________ ______________________________________________________________________________ ______________________________________________________________________________ ______________________________________________________________________________ ______________________________________________________________________________ ______________________________________________________________________________ ______________________________________________________________________________ ______________________________________________________________________________ ______________________________________________________________________________ ______________________________________________________________________________ ______________________________________________________________________________ Unit 2 Analysing the Situation and Developing Solutions Unit 2: Analysing the Situation and Developing Solutions Contents Preview 2–2 About this unit ............................................................................................2 – 2 Unit objectives.............................................................................................2 – 2 1 2 Analysing client objectives, needs and financial situation 2–3 1.1 Distinguishing needs and objectives....................................................2 – 3 1.2 Common client needs .........................................................................2 – 4 1.3 The client’s assets and income ............................................................2 – 6 1.4 Tools for financial analysis.................................................................2 – 6 1.5 Information gaps ................................................................................2 – 7 1.6 Summary ............................................................................................2 – 10 Developing appropriate strategies and solutions 2 – 10 2.1 Superannuation versus non-superannuation .......................................2 – 11 2.2 Direct shares versus managed funds ...................................................2 – 12 2.3 Buying a home or an investment property ..........................................2 – 13 2.4 Financial product concepts .................................................................2 – 13 2.5 Summarising the strategy....................................................................2 – 17 2.6 Selecting appropriate products ...........................................................2 – 18 2.7 Adviser responsibility .........................................................................2 – 18 Checklist 940.SN1.4 2 2 – 21 Page 2 – 1 Adviser Skills (940) Preview About this unit In the previous unit you began to establish a professional relationship with your client. You gathered important information on their financial needs and goals, and their tolerance to risk. In this unit you will analyse the data you have gathered and develop solutions to meet the client’s needs. Unit objectives At the end of this unit you should be able to: distinguish between needs and objectives identify common client needs to consider when developing a strategy describe the importance of client assets and income in achieving financial goals identify and address information gaps develop appropriate strategies to meet client needs and goals research appropriate products to support strategies. Page 2 – 2 © Kaplan Education Unit 2: Analysing the Situation and Developing Solutions 1 Analysing client objectives, needs and financial situation The analysis of your client’s situation and formulation of appropriate solutions and recommendations involves looking at all the information we have collected so far about your client. Look at the diagram of the client’s world presented in Figure 1 as a reminder of all the factors you may need to consider to understand your clients: F I G U RE 1 : Knowing your client 2 Client attitudes and experience Client facts Tolerance to risk Financial assets Investment preferences Financial liabilities Financial experience Income Expenditure Client goals and objectives The client’s world Retirement Security Age Wealth creation Family State of health Financial protection Some factors are more relevant than others when considering different products or areas of advice. This part of the unit will provide an overview of a range of factors that you need to consider when conducting your analysis and formulating your solutions. 1.1 Distinguishing needs and objectives Client needs and objectives have already been mentioned in this module. In developing suitable recommendations for a client, it is important that we understand the difference between ‘needs’ and ‘objectives’. IN PRACTICE Needs and objectives With colleagues or friends, discuss the difference between ‘needs’ and ‘objectives’. Write down your conclusions and some examples. 1. Needs are ... 2. Examples of needs are ... 3. Objectives are ... 4. Examples of objectives are ... Needs can be defined as basic requirements that must be achieved. For example: • paying the bills • paying taxes • paying rent • maintaining the home. 940.SN1.4 Page 2 – 3 Adviser Skills (940) These needs must be provided with reasonable security (low risk) and minimal volatility (a low degree of variation in income flow). Income projections connected with needs should be conservative and take into account any fees or costs. Objectives can be defined as your client’s desired goals. Goals can change over time and a process to deal with changes needs to be incorporated into your recommended plan, and form part of the ongoing service you offer your client. Examples of financial objectives might include: • to achieve a certain level of income by a certain time • to accumulate a certain level of assets by a certain time. More specific financial objectives might include: • to save a sufficient amount for a deposit on a home within five years • to have enough money put aside to pay for a child’s private education • to have enough superannuation at 60 years of age to generate an income of $50,000 per annum. At times the distinction between needs and objectives can become blurred, and one person’s objective can be another persons need. For example, some people might consider an overseas holiday every year or so an objective, others might consider it a need. 1.2 Common client needs Following are common client needs and some of the factors you should consider when assessing these needs. More information will be provided on these areas when you undertake further modules of the course. Income and expenses When establishing a client’s income needs, their living expenses should be broken down into fixed and variable categories. This differentiation is important, as fixed cost expenses require a component of the investment portfolio to be allocated to provide income on a regular (monthly or quarterly) basis. It is wise to allow for contingencies as clients often underestimate living expenses. The size of this factor will depend on the perception you form of your client’s estimates. If a client is vague or indifferent about their estimates it might be an indication that the contingency component should be significant. Note: There are many different personalities a planner consults to — some clients are logical and structured, others feel (quite accurately) what their current situation is. Some just know, intuitively, exactly what they choose to afford for living and investing. Note also, that your communication and thinking model is unlikely to be exactly the same as your clients. For this reason budgeting expenses is very useful to some clients, but not others. Instead, for those whom budgeting is inappropriate, make sure you document firstly what they know they can save, and secondly, what they can save if ‘motivated’. The amounts will be different. Page 2 – 4 © Kaplan Education Unit 2: Analysing the Situation and Developing Solutions Growth In assessing your client’s objectives, recognise that they generally want the highest return for the lowest risk. Since risk and return are interrelated, a compromise, or balancing of objectives, is required. In many cases, the main reason behind a client’s growth requirements is their desire to provide a hedge against inflation. On the other hand, a client may want to maximise their estate for the benefit of their family. When determining growth needs, the following factors will have a bearing: • Your client’s income. They need to be able to satisfy their immediate needs and have surplus income to invest for future growth. • Your clients risk tolerance. They may be so averse to risk that they will not accept the higher risks associated with growth assets. 2 • Your client’s financial knowledge to date. It is essential to note that many clients’ risk tolerance will change as your education process continues. • Other factors such as your client’s age, lifestyle and concern for inflation may mitigate their need for growth investments. Liquidity and flexibility It is important to recognise the difference between liquidity and flexibility before you can assess the need. Liquidity Investment liquidity (or negotiability) usually refers to the ease or speed with which an investment can be converted back into cash, with little or no loss of value. For example, a share in a major company can be sold and the money made available in a few days. Money from a cash management trust (CMT) can often be obtained on the day. While both options are relatively liquid, of the two, the CMT has more liquidity. Flexibility The ability of an investment to provide differing return characteristics is one aspect of investment flexibility. An example of this is the ‘split trust’ concept. Here investors can switch from one investment class to another, resulting in a change in the investment return characteristics (income to growth, or growth to income). Like a client’s risk profile, the client’s liquidity and flexibility needs are often difficult to quantify. It is important that you achieve a good understanding of your client’s needs in these areas so that money, if needed, can be easily accessed with little, if any, loss by the client. Taxation Taxation factors form a critical part of financial advice but should not be the dominant investment strategy. You must understand the overall tax position of your client, plus the tax structure of available investments. You will find it essential to have a very well grounded understanding of tax basics. You may need to work with your client’s accountant or tax adviser to ensure proper coverage of taxation issues, as you will not legally be able to give specific tax advice. 940.SN1.4 Page 2 – 5 Adviser Skills (940) 1.3 The client’s assets and income What assets and income the client has currently and will have in the future is central to their ability to meet their needs and achieve their objectives. Your analysis and recommendations must take client resources into consideration. Like needs and objectives, financial resources vary from client to client. The two main types of resources are assets and income. Assets Investment resources include existing assets and insurance policies, and future investment assets that may be acquired. Clients in this category could be prospective retirees and those expecting to receive a lump sum of money in the immediate future, such as an inheritance or a redundancy package. Income The other important resource available to clients is present and future income. Income may be available from their job, a superannuation fund, social security pensions or estate income entitlements. These must be included when constructing a plan. You need to determine how to use income generated from existing and future investments. If a client does not require the income to meet immediate needs, it could be reinvested. 1.4 Tools for financial analysis Much of the data you collect has to do with numbers and dollars, both in present day and future values. You need to calculate income needs based on projections of income and inflation as well as other factors. Income projections for various investment products are needed. Calculations of taxation on all types of income, as well as capital gains tax if applicable, must be made. Some calculations and projections may be obtained from specialist advisers and product issuers. Your licensee may have some form of financial modelling tool. Even a standard spreadsheet package on a PC can provide adequate analysis. The key point is that you must have access to suitable tools to carry out the analysis, at the required level. Page 2 – 6 © Kaplan Education Unit 2: Analysing the Situation and Developing Solutions 1.5 Information gaps At this point it is important to note that the stages in the advising process are not necessarily distinctly separate. Neither is the direction of flow necessarily one way. For example, there will be times during the initial fact finding when the client will have to go back to find additional information as a result of your questions. There will also be times, during analysis, when you realise you need to ask more questions. Possible gaps to be filled can include such things as: • a timing uncertainty • quantifying an amount only hinted at or not yet firmed up 2 • an estate planning question. When these situations arise, your advising process develops an internal feedback loop. F I G U RE 2 : Information loop Identify clients needs & objectives Implement the plan & provide ongoing service Analyse the situation & develop solutions Present the plan & reach agreement This situation can arise at any stage of the process. Follow-up questions to your client should not cause concern or embarrassment. Rather they are a sign of the thorough way in which you approach your job. It will cause less distress to fill gaps by asking questions as soon as they arise, rather than waiting until later in the process. Not just data collection So far you can see that your role is not solely about data. There are two sides to a good adviser, relating to: 1. Data collection: accurate documentation and interpretation. 2. Psychological/sociological aspects to advising: we are in many ways ‘financial social workers’, working with human beings who have thoughts and feelings. Never assume anything! Your clients are not machines. It is your job to develop the appropriate people skills so that you can see and hear when clients are being honest with you and themselves. A financial adviser is there to: • listen • filter for the truth (in terms of their needs and objectives) • feedback to them our interpretation or concerns • document that new agreed understanding. 940.SN1.4 Page 2 – 7 Adviser Skills (940) IN PRACTICE Case study — information gaps From your contact with Christopher and Christine so far, you have identified a set of objectives, but you recognise that there are gaps in your information. It is important to identify these gaps and to ask your clients appropriate questions to ensure that you develop a strategy that meets their expectations, and accommodates their needs and objectives. Go back over the information you have collected from Christopher and Christine. What information gaps can you identify? What questions will you need to ask Christopher and Christine? You may have identified the following questions you need to ask Christopher and Christine to clarify their needs: Personal priorities • When are you planning to take your trip? • How much will it cost? • When are the renovations going to start? • How much will the renovations cost? • What are your plans for your children’s education? • How realistic do you feel those priorities are? • Do you have any pre-conceived ideas? Insurance • What is the amount of insurance cover you have? • What is the cost of the insurance cover? • Do you currently feel you have sufficient insurance? • Do you know if you have sufficiently managed your financial risks? The answers to the these questions will help to determine if the insurance arrangements are appropriate for their needs, taking into account their liabilities and their two dependent children. Estate planning • Have you set up enduring powers of attorney to help with managing your affairs? • When were your wills last updated? • Do you understand the needs for these two tools (mentioned above)? The answers will help determine whether or not their estate planning arrangements are appropriate, taking into account their liabilities and their two dependent children. Page 2 – 8 © Kaplan Education Unit 2: Analysing the Situation and Developing Solutions IN PRACTICE Case study — Something missing? Because you have established good rapport with Christopher and Christine, you have no hesitation in picking up the phone and talking to your clients to fill in the missing detail. The conversation might go something like this: You: Hello, Christine. It’s Jim here. How are you keeping? ..... And Christopher and the children? ..... Great! I’ve been going through my notes from our meeting and just needed to ask a few questions to fill in some gaps. Can we talk about that now — you’re not tied up with anything at the moment are you? Christine: No, that’s fine. Ask away. You: When were you planning to go on that family holiday to America? Christine: 2 In about 12 months time. [This is a short-term objective.] You: And when are you likely to do the renovations? Christine: We’re planning for about four to five years time. [This is a medium-term objective.] You: What do you think the trip will cost? Christine: About $20,000. You: And the renovations? Christine: We’re thinking about $30,000. You: Another thing; have you thought about the cost of the children’s’ education? Have you got anything in your budgeted figures for that? Christine: We’ve allowed for that. We’ve estimated about $10,000 a year for each child for tertiary education, based on a three to four year period. Because of that it’s important that we can put our hands on the money when we need it. [This a long-term savings goal.] You: You told me about the insurance cover you both have through work, but do you have house and contents insurance? Christine: Yes, we have good cover on that. You: Good. Do you know the amounts of your life cover, and how much the premiums are? Christine: Not off the top my head, but I can find out. You: If you don’t mind. I can build that into the final plan. There’s one other thing…you said you had wills. When were they last reviewed? Christine: We had a look at them just after Aunt Jayne died. You: OK. They’re pretty well up to date then. Do you have powers of attorney in place? Christine: What’s that about? You: Right — I’ll make a note to explain that to when I see you and Christopher to go through the plan. That should be about… You should now have most, if not all, of the information you need to complete your analysis and develop some solutions for your clients. 940.SN1.4 Page 2 – 9 Adviser Skills (940) 1.6 Summary At the end of the data collecting and analysis stages, you should have: • determined the scope of the advice required, including what the client is trying to achieve for short and longer-term goals • assessed your client’s financial strengths and resources • decided which objectives are achievable • analysed the potential of existing assets, and identified available sources of finance, that can be used to achieve your client’s goals. • gained a good understanding of your client’s attitudes towards risk. You should have completed a summary and checklist of any relevant issues, such as: • insurance cover • an up-to-date will • cash flow requirements • valuation of current assets • assessment of current liabilities • short and long-term goals • risk tolerance • basic understanding of financial trade-offs and outcomes (i.e. the risk-return balance). Discuss this summary with your client and confirm it as the basis of your recommendations. 2 Developing appropriate strategies and solutions Your role as a financial adviser is to recommend appropriate strategies to meet your client’s individual needs. The recommended strategy should incorporate: • your client’s short, medium and long-term needs and objectives • your client’s risk profile (including, whether you feel it is possible to achieve their goals from that perspective. If not you will need to discuss the discrepancy). • recommended solutions for your client’s needs and objectives to be achieved, including noting where you feel that these are unrealistic or under ambitious. Although you will provide a recommended strategy, it is your client who makes the final decision to accept or reject the strategy. Therefore, you need to clearly communicate the strategy. Page 2 – 10 © Kaplan Education Unit 2: Analysing the Situation and Developing Solutions Factors to consider when determining the strategy include the following: • income • government assistance • taxation • capital growth • liquidity • investment timeframe • volatility 2 • asset allocation • investment management • risk • estate planning • retirement objectives • insurance • costs. Specific strategies and the impact of the issues mentioned above, as well as others, will be discussed in detail in other modules of the course. As an example of some of the issues involved in strategy development, let’s look at Christopher and Christine and their financial objectives. Christopher and Christine said: • they would like to minimise their tax liability. They have also asked: • if they should be investing more money in superannuation. • if they should be investing their money in non-superannuation (including direct shares). Following are just some of the considerations attached to these issues that should be discussed with the clients. 2.1 Superannuation versus non-superannuation • money is invested for the purpose of funding retirement • funds are not accessible until the client has satisfied conditions of release — generally preserved until they reach preservation age and fully retire • superannuation is a tax-effective investment strategy • contributions can be pre-tax if they use a salary sacrifice employer superannuation contribution up to the allowable age-based contribution limit • undeducted contributions are from after-tax dollars, no contribution tax payable • employer contributions are from pre-tax dollars; contributions tax of 15% is payable compared to (in the case of Christopher and Christine) a marginal tax rate of 48.5% (marginal tax rate plus Medicare levy) • earnings in superannuation are taxed at a maximum rate of 15%. 940.SN1.4 Page 2 – 11 Adviser Skills (940) 2.2 Direct shares versus managed funds Characteristics of managed funds: • small capital outlay required • diversified investment — invested across all different types of asset classes with an emphasis on growth assets (60% plus) • these investments will have a four to five year timeframe • they will pay ongoing management fees (typically 1.5% to 2.5% of funds under management) to have their investments managed by professional investment and fund managers • funds are accessible at any time but there is the risk of capital loss, particularly over the short term, if market movements are not favourable • CGT on growth (after sale) and income tax on distributions each year. Characteristics of direct shares: • small to medium capital outlay required • specific investments in a limited number of different shares • there is a need to choose the composition of the direct share portfolio carefully. The expected future value and earnings growth of the individual shares will need to be analysed • the share portfolio will need to be actively managed and monitored. If there is a fundamental shift in the earnings growth of the shares, decisions need to be made about buying and selling within the share portfolio • they are long-term investments with a five year plus time frame • funds are accessible at any time but there is the risk of capital loss if market movements are not favourable • no ongoing management fees. This money will be free cash flow available to be invested in the market • if share fund management is required, there are listed managed funds available through the stock exchange • easier tax planning both in terms of CGT and dividend imputation credits on income. Page 2 – 12 © Kaplan Education Unit 2: Analysing the Situation and Developing Solutions 2.3 Buying a home or an investment property Characteristics of buying a home: • CGT free if nominated as the primary residence • no tax deductions on expenses for a home (including interest on a loan) • usually a geared investment and the ROI. (return on investment) will be geared up or down depending on which way the price moves • emotional benefits can be considerable. Characteristics of buying an investment property 2 • nearly all expenses are tax deductible or depreciable • not very liquid • long term investment • not diversified • relatively high risk due to gearing (but very similar volatility to Australian and international shares) • high level of gearing (up to 1:10) which means small growth can give high ROI • 7 to 10 year time frame recommended. 2.4 Financial product concepts At this point it is worthwhile considering some basic investment concepts that aid in strategy development. Income vs growth People invest for two basic reasons: 1. To provide income now or sometime in the future 2. To build wealth and provide a hedge against. You need to explain to your clients these two investment outcomes — income and growth. Both can have tax and social security implications. Income is defined as the total money accruing to a person. It includes most payments, such as salary and wages, net business income, rental income, interest and dividends. Growth is defined as an increase in capital value over time. Some investments produce only income, others produce a mix of income and growth, others produce only growth. A major part of your job is to get the balance right between income and growth for your client’s portfolio. In striking this balance, taxation and, possibly, social security benefits, should also be considered. The different stages in people’s lives can also determine whether they require income (retiree) or growth (a younger ‘accumulator’). 940.SN1.4 Page 2 – 13 Adviser Skills (940) The asset classes The main asset classes are: • cash • domestic fixed interest securities (and international fixed interest) • domestic equities (shares) • domestic property (including commercial property — office, industrial, retail or tourism) • international investments (generally shares). A well structured portfolio recommendation will contain the main asset classes and a recommendation as to how much money should be invested in each asset class. Each type of asset has its own characteristics regarding capital growth, income, security, volatility, marketability, liquidity and risk. Following is a brief explanation of each of the main asset classes. Cash Cash in a portfolio is not just notes and coins. It includes assets that can be readily converted to cash with little risk of any capital loss. It can include short-term investments such as government bonds, bank bills and debentures issued by corporations that have a maturity date of less than 90 days. Cash produces income rather than capital growth. It is a low-risk investment, unlikely to decline in value. The main risk with cash is that it is likely to produce lower returns than other asset classes. Fixed interest securities Fixed interest securities earn a set rate of interest over a fixed term or time period. These securities are available for different terms, and interest rates differ with the term. Generally, the longer the term, the greater the risk. Investors lend money to a company, bank or government authority, and interest is paid at a stated rate, at a set time. The capital is usually repayable on a stated date. Fixed interest products provide investors with income. They might also provide capital gains (or losses) when they are traded rather than held until maturity. Rather than buying fixed interest securities directly, retail clients often invest in this asset class through managed investments. Equities (shares) A share is a basic unit of ownership (equity) in a company. The equity capital of a company is divided into shares. For example, the equity capital of a company might be $100,000, and it might be divided into 100,000 shares at $1 each. Shares are one of the primary investments that provide capital growth, income and, in some cases, tax rebates in the form of franking credits. The ownership of a share entitles the holder to a proportionate share of the profits of the company in the form of dividends. Investors usually buy shares because they are viewed as an asset that will produce a growing income stream and will increase in value over time. Page 2 – 14 © Kaplan Education Unit 2: Analysing the Situation and Developing Solutions Over time, the total returns from shares, including income (dividends) and growth (capital appreciation), have been higher than for other asset classes. Over the 20 years 1983–2003 Australian equities have had a very similar return to Sydney residential dwellings (medium price) and a very similar volatility. (Source: Breaking the Habit: Investing beyond property Comsec September 2003.) The volatility of the returns from year to year can also be higher than for other asset classes. Shares generally meet most of the criteria of investment managers who assess investments according to their returns for risk, liquidity, diversification and tax effectiveness. Property Like share investments, an investment in property or real estate is an equity investment involving ownership, variable income and capital growth. 2 Note: Over the longer term (10 years or more), property is generally expected to produce higher returns than fixed interest investments, but lower returns than share investment. Property is also expected to be more volatile than fixed interest and less volatile than shares. Return on all types of property includes capital growth as well as income (or yield). Property has traditionally been regarded as a hedge against inflation, and in the long run has shown investors real returns in most forms. Short-term fluctuations and cycles occur, and the timing decisions of the investor could well depend upon whether the goal is short-term speculation or long-term capital growth. The level of growth, or capital appreciation, varies between property types and locations. The most common types of property available for investment are residential (homes and apartments), commercial, industrial and retail and tourism. An investment in property can be obtained directly through the purchase of land or buildings or indirectly, through an investment in a property trust. The ratio of gearing (borrowing) in property can be particularly high compared to other growth assets. International investments The Australian sharemarket accounts for only about 2% of world sharemarkets, by capitalisation, yet most private investors have little or no investment in international markets. What they do have would usually be through managed funds. Institutional investors are likely to have around 15% of their general portfolio in international investments. Apart from managed funds, there is now more opportunity for retail investors to invest directly in international markets through traditional broking houses and via Internet trading. The main issues involved with investing in international equities are the management of currency risk, lack of local market knowledge and the degree of sophistication of the international market, compared to the market the investor is used to dealing in. 940.SN1.4 Page 2 – 15 Adviser Skills (940) Asset allocation Asset allocation is the process of determining the mix of different asset classes within a portfolio. The objective is to achieve an asset allocation that is the most suitable for your client with regard to their needs and the degree of risk they are willing to accept. Diversification, discussed briefly later in this module and in more detail in subsequent modules, calls for investment across different asset sectors. A fully balanced portfolio worth, say, $150,000 would require an asset allocation similar to the one shown below: Asset allocation as a modelling tool is still only a theory based on the hypothesis that we can reduce risk by not ‘putting all our eggs into one basket’. It is a topic that is regularly debated by economists and financial planners. T ABLE 1: Example of a balanced portfolio Asset class Type of asset Value Percentage of portfolio Australian equities 10 shares at $6750 per holding $67,500 45% Australian fixed interest Would have to be a term deposit $30,000 20% Property* Too small an amount to get direct exposure to the property market $22,500 15% Cash Minimal amount International equities* Not a suitable amount to conveniently buy international equities Total portfolio $7,500 5% $22,500 15% $150,000 100% * Exposure would have to be gained through pooled assets. Risk Risk and risk tolerance play a vital part in deciding on appropriate strategies for your client. Risk has already been discussed earlier in this module and will be discussed in relation to specific investment strategies and asset classes in subsequent modules of this course. Diversification Diversification is a basic ‘rule’ of investment, and is about spreading risk. The concept of business and market cycles and counter-cycles play an important role in diversification. It is important to note that there are few real ‘rules’ in financial planning. It is a young profession and all theories can be debated and rejected if the research and argument is rigorous and well documented. Diversification is a theory which some economists debate is a poor concept as it averages our all the high points (as well as the low). Page 2 – 16 © Kaplan Education Unit 2: Analysing the Situation and Developing Solutions EXAMPLE Equity and bond markets provide a good illustration of the benefits of diversification. Equity and bond markets generally fluctuate against each other, i.e. when the equity market is up, bond markets are down and vice versa. In a portfolio in which funds are invested in both the equity and bond markets, this effect evens out investment returns. The aim of a fund manager is to have consistently good returns, not necessarily the highest in the industry at any one time. Figure 3 illustrates the concept of cycles and counter-cycles. F I G U RE 3 : Counter-cyclical products 2 Counter-cyclical products Business cycle It can be argued that diversification can add elements to a portfolio that will compensate for poor performance in other areas. 2.5 Summarising the strategy Once you have considered all these factors, you should be able to provide a summary of how the strategy will move the clients in the direction they want to go. This summary takes the form of a Strategy Statement. The focus of the Strategy Statement will change depending on which of the two basic life stages your client is at: 1. The accumulation stage: where the Strategy Statement will focus on wealth accumulation and tax management 2. The drawdown stage: where the focus is on wealth preservation and management of income. EXAMPLE Strategy statement An example strategy statement for a client in the accumulation stage (and this could well apply to our case study clients Christopher and Christine) is: ‘Understanding that your goals are early retirement and a desire to be self-funding retirees, the strategy I am recommending seeks to increase your savings through superannuation and, at the same time, start a personal savings program to build wealth outside superannuation. I have reviewed your insurance requirements and recommend that you discuss your needs with an insurance specialist. While I have reviewed your estate planning needs, I recommend that you meet with your solicitor to develop a full estate plan.’ When all of the generic work has been completed and the client approves the strategy, specific investment products will be recommended (and insurance products if you are also an insurance agent). There are two levels of products that need to be considered: • those that are approved by the licensee • the ones that are appropriate for the clients. These two levels of products are discussed next. 940.SN1.4 Page 2 – 17 Adviser Skills (940) 2.6 Selecting appropriate products At some stage of the advising process, either now or after your client has approved the recommended strategy, you will need to identify appropriate products to meet the strategy. You might identify appropriate products by referring to your licensee’s approved product list or conducting your own research. Licensee approved lists Licensees often provide their financial advisers with an approved product list. These lists may have been developed in-house or purchased from an external provider. They contain products which have met certain criteria determined by the licensee or the external providers. An approved list can be very comprehensive or limited to the licensee’s own products. Researching products In order to recommend products that best match your client’s needs you may need to look outside the approved lists and conduct additional research. However, note that you cannot recommend a product if it is not approved by your licensee. Financial product information is available from a variety of sources. On-line publications provide an efficient means of searching for information and obtaining up-to-date data. Many licensees provide their own websites to gather critical information and tools into a single site for the convenience of advisers. The major sources of information include: • financial media, including newspapers and financial and investment magazines • annual reports • brokerage firms • research providers • in-house research • investment information/advisory services • government publications • computerised investment information and tools. 2.7 Adviser responsibility The strategic and product recommendations contained in the initial plan, and in ongoing reviews, must be based on analysis of a large amount of information. As a financial adviser, you have an obligation to synthesise, evaluate and provide well-informed investment advice to your clients. IN PRACTICE Case study — Developing a strategy Detailed, product specific strategies will be developed in the following modules of this course. Here we use the case study situation of Christopher and Christine to present an example of a financial strategy. At this stage of your learning you are not expected to construct a strategy like the one below. It is presented as an example of the type of strategy you should be able to develop after completing your course. Page 2 – 18 © Kaplan Education Unit 2: Analysing the Situation and Developing Solutions Investing in superannuation versus non-superannuation Investing more money in superannuation from pre-tax dollars by way of salary sacrifice can be a highly tax effective strategy. If access to funds is a high priority, then salary sacrifice into superannuation, where the funds may remain frozen for a long time, may not be an appropriate strategy. Alternatively, it may mean that only a small additional amount, not all of surplus funds, is salary sacrificed into superannuation. The following table considers the tax position before and after salary sacrifice of $5000. For simplicity in this example, the calculations are based solely on Christopher and Christine’s base salary. In fact, calculations of income and taxation would need to include the additional income received from the investment of their inheritance. Salary package 2004/05 Base salary Employer superannuation (9%) Salary sacrifice into superannuation (pre-tax dollars) Salary package (before tax) Without salary sacrifice $ 2 With salary sacrifice $ 70,000 65,413 6,300 5,887 – 5,000 76,300 76,300 Less taxes: Income tax, Medicare levy (1.5%) 19,662 17,667 After tax income (base salary – taxes) 50,338 47,746 6,300 10,887 945 – 1,633 – 5,355 9,254 20,607 19,300 Total employer superannuation contributions Less taxes: Superannuation contributions taxes (15%), Superannuation contributions surcharge Net superannuation contribution Total tax payable: (Income tax + Medicare levy + superannuation contributions taxes) In this example, the calculations show the annual tax saving from the salary sacrifice strategy is approximately $1300 each. This strategy would reduce Christopher and Christine’s combined annual nonsuperannuation surplus funds to approximately $20,000. These surplus funds should be used to make additional payments on their mortgage. Their home mortgage is a non-deductible debt so the sooner they pay it off the better. To achieve a diversified portfolio for these clients, some of their excess income can be invested in a monthly savings plan in a diversified managed balanced fund (MBF), with the remainder invested in their cash management trust as an extra cash reserve. 940.SN1.4 Page 2 – 19 Adviser Skills (940) Option A The $250,000 from Christopher and Christine’s inheritance can be split into smaller amounts to match their various cash requirements, with any balance invested according to a financial strategy approved by them as shown in Figure 4. F I G U RE 4 Available funds $250,000 Option A Maintain in CMT: – $20,000 cash reserves – $20,000 family trip OR Option B – $20,000 cash reserves – $20,000 toward home renovations – Save for family trip from mortgage savings Option A Invest $60,000 in two different MBFs with complementary investment styles: – $30,000 home renovations – $30,000 for long-term investment to accommodate the tertiary education of their children OR Option B – Pay off home loan as interest not deductible. $200,000 – Borrow $100,000 to invest in a diversified pool of managed funds secured against home. – Buy a positively geared $350k investment property secured against the home. The remaining $150,000 can be invested to improve investment diversification. For example: • investing in managed investments • investing in superannuation • investing in shares. Option B This would clear their non-deductible debt and save them $1500 per month in mortgage repayments per month. They would then be diversified via a managed fund portfolio of $100,000 (geared) and a positively geared property. The cash flow cost of these two investments (net of tax) would still leave them significant additional cash flow to invest regular contributions into the managed fund or towards holidays and other personal expenses. Page 2 – 20 © Kaplan Education Unit 2: Analysing the Situation and Developing Solutions Checklist Below is a checklist of the main points covered by this unit. Use this checklist to check your learning. ‘Needs’ are the basic things clients’ consider they need in their life. ‘Objectives’ are goals — things the client would like to achieve in their lives. Objectives can change over time. Common client financial needs include: 2 • income • growth • liquidity • flexibility. The two main resources clients’ have at their disposal to meet their needs and achieve their objectives are: • assets • income. Risk profiling is an important part of financial strategy development. When profiling couples it is important to consider and profile both parties. It is sometimes necessary to backtrack to fill in information gap. The strategy you recommend should incorporate your clients’: • short, medium and long-term needs and objectives • risk profile. The main asset classes are: • cash • domestic fixed interest securities • domestic equities (shares) • domestic property • international investments. Asset allocation is the process of determining the mix of different asset classes within a portfolio. Diversity involves spreading risk and takes into consideration the concept of business and economic cycles and counter-cycles. After considering all factors, you should be able to summarise the strategy in a Strategy Statement. You may be able to identify appropriate products to meet an accepted strategy by reference to the licensees approved list or other external research. 940.SN1.4 Page 2 – 21 Adviser Skills (940) Notes ___________________________________________________________________________ ___________________________________________________________________________ ___________________________________________________________________________ ___________________________________________________________________________ ___________________________________________________________________________ ___________________________________________________________________________ ___________________________________________________________________________ ___________________________________________________________________________ ___________________________________________________________________________ ___________________________________________________________________________ ___________________________________________________________________________ ___________________________________________________________________________ ___________________________________________________________________________ ___________________________________________________________________________ ___________________________________________________________________________ ___________________________________________________________________________ ___________________________________________________________________________ ___________________________________________________________________________ ___________________________________________________________________________ ___________________________________________________________________________ ___________________________________________________________________________ ___________________________________________________________________________ ___________________________________________________________________________ ___________________________________________________________________________ ___________________________________________________________________________ ___________________________________________________________________________ ___________________________________________________________________________ ___________________________________________________________________________ ___________________________________________________________________________ Page 2 – 22 © Kaplan Education Unit 3 Presenting the SOA and Reaching Agreement Unit 3: Presenting the SOA and Reaching Agreement Contents Preview 3–2 About this unit ............................................................................................3 – 2 Unit objectives.............................................................................................3 – 2 1 Financial advice 3–3 1.1 Type of advice ....................................................................................3 – 3 1.2 Scope of advice ...................................................................................3 – 3 1.3 Full advice ..........................................................................................3 – 4 1.4 Limited advice ....................................................................................3 – 4 1.5 No advice ...........................................................................................3 – 4 1.6 Scope of advice and SOAs ..................................................................3 – 4 2 Documenting the strategy 3–5 2.1 The statement of advice ......................................................................3 – 5 2.2 A statement of advice is a communication document .........................3 – 6 2.3 A statement of advice is a marketing tool ...........................................3 – 7 2.4 A statement of advice is a ‘legal’ document ........................................3 – 7 2.5 A statement of advice is a story ..........................................................3 – 7 2.6 Constructing the statement of advice..................................................3 – 7 2.7 Suggested model .................................................................................3 – 8 2.8 Suggested content ...............................................................................3 – 8 3 Key points about the SOA 4 Presenting your SOA 3–9 4.1 Checking for understanding ...............................................................3 – 10 4.2 Dealing with client concerns...............................................................3 – 10 4.3 Adjusting the SOA..............................................................................3 – 10 Checklist 940.SN1.4 3 3–9 3 – 12 Page 3 – 1 Adviser Skills (940) Preview About this unit By this stage of the module you have learnt about the importance of establishing and maintaining effective communication with your client — this has helped you identify and work through your client’s financial needs and objectives. You have learned how to then use the information gathered to formulate a strategy to meet those needs and objectives. Now we look at documenting the statement of advice (SOA) and presenting it to your client. This is an important step in confirming the information you have gathered, and the assumptions you have made. It gives your client the opportunity to correct or change any information and to rethink their goals and objectives. Most importantly, the SOA ensures that both you and your client have the same understanding of what is being proposed, the risks involved and the expected outcomes. Unit objectives At the end of this unit you should be able to: outline the possible scope of financial advice construct an SOA comply with ASIC’s requirements regarding the SOA present the SOA to your client check that your client understands the SOA negotiate the SOA with your client. Page 3 – 2 © Kaplan Education Unit 3: Presenting the SOA and Reaching Agreement 1 Financial advice Let’s now move on to explore the type and scope of financial advice you are allowed to give to your clients. 1.1 Type of advice The financial services licence issued by ASIC defines the type and scope of advice that you can give. The licence may be unrestricted or limited to a specific range of financial products. For example, a financial adviser who is RG 146 accredited to provide advice in managed investments, futures and securities markets, cannot advise on insurance products. 3 You may find that you do not have the specialist knowledge needed to satisfy all of your clients’ needs. Many organisations and individuals have a policy of referring clients to other advisers so that all their financial needs can be met, if they are unable to provide all the services needed. Formal arrangements may be in place with other advisers such as spotters’ fees and other incentives to encourage referrals. When commissions or other benefits are involved, the client must be told of these payments. These types of issues are addressed later in the module when we discuss disclosure requirements. Clients might also seek further advice from other professionals such as accountants, solicitors, or property investment consultants. 1.2 Scope of advice The scope of financial advice that you provide can vary from a single communication concerning a specific query or event, to a full financial planning service offering comprehensive and ongoing advice. The following diagram summarises the possible scope of financial advice. F I G U RE 1 Full advice Limited advice – client provides all relevant information – adviser helps client towards personal and financial goals by developing a full financial plan – adviser offers ongoing monitoring and review – adviser restricted to giving advice on specific types of product(s) – different situation where client has not disclosed all relevant information No advice or ‘execution only’ – adviser accepts client decision and only processes documentation – adviser takes no responsibility for appropriateness of decision Clients should receive warnings 940.SN1.4 Page 3 – 3 Adviser Skills (940) 1.3 Full advice Full financial advice generally refers to the process where an adviser helps an individual move towards meeting personal and financial goals through the development and implementation of a full financial plan. A full financial plan includes more than just investment advice and may also cover retirement planning, risk management (insurance), estate planning and taxation and social security planning. Full advice relies on the client providing all relevant financial information and being prepared to carefully review their goals. Advisers offering full financial advice are generally known as financial planners or financial advisers. 1.4 Limited advice The term ‘limited advice’ refers to situations where the adviser is restricted to giving advice on a specific type or types of financial products. This might be because: • the client is only seeking advice on specific products, or • the relevant licence limits the advice that may be given, e.g. a licence may be restricted to advice on managed funds, insurance products, term deposits etc. When giving limited advice, an adviser should give the client a clear warning that this is the case and may refer the client on to another adviser if appropriate. Another example of limited advice would be where a client says: ‘I don’t want advice on foreign investments or government bonds.’ ‘Limited advice’ needs to be distinguished from advice given to clients who have only provided ‘limited information’. Limited client information does not necessarily mean that the adviser can only give ‘limited advice’. 1.5 No advice No advice or ‘execution only’ refers to a situation where the financial adviser is merely accepting the decision of the client and processing documentation. When the financial adviser gives no advice, then no responsibility is taken for the appropriateness of the product decision of the client. Examples of a ‘no advice’ transaction would be where a client drops off a unit trust application for processing at their local bank, or has already made an investment decision before seeing the financial adviser. 1.6 Scope of advice and SOAs Some of the content of the SOA is determined by legal and regulatory requirements. However, much of the content will be determined by the scope of the advice. Download Example Statement of Advice (SOA) for a limited financial advice scenario for a new client: An ASIC guide from the Tier 1 Subject Room, for a clear outline of both of the legal and regulatory requirements, and principles for constructing an SOA. This document provides a guide to constructing an SOA for a limited advice scenario. However, it is important to point out that there is no one ‘right way’ to construct an SOA. SOA structure, content and language will depend on the client’s needs and financial literacy, and the scope of the advice. You can find examples of SOAs in the Tier 1 subject room. In addition, you may have access to SOA templates and software at work. Page 3 – 4 © Kaplan Education Unit 3: Presenting the SOA and Reaching Agreement 2 Documenting the strategy Once you have developed an appropriate strategy for your client, it must be formally documented. The advice is conveyed to the client in the form of a statement of advice (SOA). The SOA is a requirement under the Corporations Act 2001. 2.1 The statement of advice A statement of advice has three key objectives — these are: • Documentation of client information, financial analysis and assessment: including data collection material, asset and liability chart, cash flow analysis, goals and objectives, risk tolerance, investment risk and establishment of the asset allocation to be used in the SOA. Both data collection and data analysis provide the framework upon which the strategy of the SOA can be built. 3 • Deliver the strategy, tactics and products: put forth as recommendations and the products that will carry the recommendations. • Detail the implementation process and evidence compliance: inclusion of mandatory information into the SOA, client agreement to implement the SOA, the costs, and what the client needs to be aware of regarding important information, the recommendations and advice that they have been given. The SOA may or may not be the main means of conveying the advice. If it is not the main means of conveying the advice, it must be given to the client at the same time the advice is given, or as soon as possible thereafter. If the SOA is not given when the advice is provided, the client must be told, verbally, about: • any commission, fee, benefit or advantage which will be received by the adviser in connection with the advice • any other interests of the adviser or an associate, and any associations or relationships between the adviser (or an associate) and a product issuer, that might reasonably be capable of influencing the advice • details of any charges or other consequences incurred by the client if the advice includes a recommendation to replace existing financial products. The statement of advice is evidence that the providing entity has taken into account the client’s relevant personal circumstances and the advice is reasonable having regard to these (s 945A). It also provides the appropriate disclaimers and disclosures in relation to the advice provided. Special note: 940.SN1.4 We recognise that many dealer groups use financial planning software, however it is still important for financial planners to have a practical understanding of how statements of advice are developed. Page 3 – 5 Adviser Skills (940) Content of the statement of advice The content requirements of an SOA are set out in s 947B and 947C of the Corporations Act 2001. The words ‘statement of advice’ must appear somewhere on the cover or at the top of the document. The title ‘statement of advice’ must be used on the cover or at or near the front of the document. It can be abbreviated to ‘SOA’ in the rest of the document (s 947A). It must include (s 947B): (i) name and contact details of the licensee (ii) name and contact details of the representative and that they are an authorised representative of the licensee (iii) a statement setting out the advice (iv) information about the basis on which the advice is given (v) information about remuneration or other benefits which may be received by the representative, related body, employer, director or any associated person that may influence the provision of the advice (vi) information about any interests, associations or relationships that might influence the provision of the advice. The SOA serves a number of purposes, including: • communication • marketing • legal compliance. The SOA provides a story for your client. 2.2 A statement of advice is a communication document The SOA is a documented two-way communication. Initially the client, with careful guidance, communicates to the planner their financial resources and expectations. Once the planner knows where the client is now, and where they want to get to, they need to assess what attitudes regarding financial matters will assist or hinder the client in achieving their goals. The financial planner’s role is to help clients test their attitudes and establish their priorities. This can be done through education, working on ‘what if’ scenarios and client assessment tools such as risk tolerance assessments. Where goals and attitudes are changed, this needs to be stated within the SOA. Page 3 – 6 © Kaplan Education Unit 3: Presenting the SOA and Reaching Agreement 2.3 A statement of advice is a marketing tool The SOA is also a marketing document. By that we mean that it must be attractive to the client. Assuming the planner has developed a solid strategy and has identified investment structures and products that will assist the client in meeting their goals, it is important that the communication of these strategies, tactics and products makes a compelling case for the client to agree to implement the SOA. Some of the key attributes of a good SOA are: • logical structure and organisation • clear flow of information • concise treatment of each component • constructive use of charts and graphs • simple language 3 • contains only pertinent information • clearly directed to respective clients • positive attitude • limited use of appendices. 2.4 A statement of advice is a ‘legal’ document An SOA, if agreed to, becomes a legal document that exchanges advice for fees, and as such can be considered part of an overall contractual arrangement. The overall contractual arrangement is the sum of all promises — the financial services guide, verbal statements and agreements and any other separate contracts (client agreements) — made to the client. In addition, because of government’s stated objective to provide consumer protection through regulation, the SOA, when properly constructed, should provide evidence of compliance with some of these regulations. 2.5 A statement of advice is a story A statement of advice is also a story. A story about the client, their past behaviours, what they are doing now and what their future may be like. You, as the planner, must use all of your skills and knowledge to ensure it is a work of fact, not fiction. 2.6 Constructing the statement of advice It is not easy to produce a statement of advice. As you will see, there are a number of components that have to be developed and then cross-referenced and checked. The structure and size of an SOA will vary depending on a number of issues, not the least of which is the complexity of the client’s financial situation and the extent of advice required. While there are no hard and fast rules about the structure and format of the SOA, it must comply with ASIC requirements and the requirements of your licensee. The format presented here is only a suggested model. It is your responsibility to ensure that the SOAs you produce comply with ASIC’s requirements and those of your licensee. 940.SN1.4 Page 3 – 7 Adviser Skills (940) 2.7 Suggested model A suggested model for an SOA, containing three levels of detail, is illustrated in Figure 2, below: F I G U RE 2 : Model SOA Appendices (as required) Body (about 20 pages) Summary (about 3 pages) The exact number of pages required to communicate the information will vary, as discussed earlier. 2.8 Suggested content Suggested content for each section of the SOA is shown below. Summary This section provides a concise summary of: • an overview of the client’s situation • the client’s objectives • strategy and recommendations to achieve the objectives • outcomes expected from adopting the strategy. There should be sufficient detail to allow the client to make a decision. It should be written in clear, unambiguous language, without jargon and appropriate to the level of financial understanding of the client. Body This section may contain similar headings to the Summary. The information is at a greater level of detail and supports the recommendations made. As with the summary, it should be in clear language, appropriate to the level of understanding of the client. Appendices This section should contain any supporting documentation such as, charts, spreadsheets or projections, used in the formulation of the strategy and recommendations, but which are not necessarily essential for the decision-making process. When skilfully linked, these components provide the client with the ability to review the analysis, assess the recommendations, understand the costs and any biases that you may have and appreciate the work that they must do to set their plan in place. Page 3 – 8 © Kaplan Education Unit 3: Presenting the SOA and Reaching Agreement 3 Key points about the SOA Following are some key points to keep in mind when developing your SOA. • The SOA should be viewed as one part of the communication process which began with your initial contact with your client. • The SOA you develop should be unique to your client, and address their individual needs and objectives. Only material relevant to the client should be included. • Remember your client’s ‘world’ and write the SOA from their perspective, not from yours. • Be concise, particularly in your summary. Most clients do not want to read more than they have to in order to understand the advice being given. 3 • Know your client and their level of financial sophistication. Write the SOA at a level they can understand. Do not use jargon and terms they will not understand. • Use plain English. Ensure you: – use language they will understand (again, know your client!) – use short sentences and paragraphs that deal with only one idea – use active voice (e.g. We will issue instructions …’ rather than, ‘Instructions will be issued …’ – be unambiguous in your writing. ONLINE RESEARCH More information on writing in plain English can be found on the Internet or in your library. You can download the document, Plain English at Work from <www.detya.gov.au>. • Avoid false precision when quoting projected amounts. Projections given to the level of cents may give the client the impression they are actual figures rather than estimates. • Format the document in a way that is easy to follow. Have clear headings and enough white space to make it look appealing to the reader. 4 Presenting your SOA When the recommended strategy is presented to the client, you need to be prepared for the eventuality that there might be adjustments required — changes might need to be negotiated. A checklist of what needs to be discussed and highlighted to the client will help you to ensure that the client is in a position to make informed decisions. Also, some more complex situations might require a number of alternative recommended strategies, not just one recommended strategy. If this is required, then an evaluation of each alternative recommended strategy should also be provided to the client, indicating any advantages or disadvantages of each recommended strategy. In all cases, the client has to be made aware of the level of risk relating to each product included in the strategy. The risk proposed has to be appropriate to the client’s risk profile. 940.SN1.4 Page 3 – 9 Adviser Skills (940) 4.1 Checking for understanding IN PRACTICE Checking for understanding You have considered your client, their level of financial understanding, needs and objectives. You have prepared a comprehensive SOA targeted to your client. You have met with your client and presented your SOA. How can you check that they understand your advice and recommendations? Refer to earlier sections of this module that discussed and gave examples of communication skills and techniques. What skills and techniques can you apply to ensure your client has understood the SOA you have presented? There are a number of things you can do to check that your client has understood your plan. For example: Ask questions For example: • Is the summary of your financial goals correct? • Do you think that your risk profile is accurate? • Would you like to discuss the reasoning behind the recommended strategy? Body language Body language might indicate that they don’t like the strategy, or that they don’t understand it. Watch their expression. Do they look worried or puzzled? Are they smiling or frowning? These may be triggers that you should follow up on with further questions. • Is there anything there that you don’t understand? • Is there anything in the SOA that concerns you? 4.2 Dealing with client concerns Take client concerns as a positive sign. It means that they are really considering the proposal and need to feel comfortable with the solution. It is important to acknowledge all concerns. Where a couple is involved, ensure that the concerns and questions of both partners are addressed and not just those of the more vocal partner. Some concerns need to be dealt with in full when they are raised. Others may be addressed by acknowledging them when they are raised and saying that their questions will be addressed later in the interview. Still others may require additional research and this should be explained to the clients. Ensure that you document client concerns and how you deal with them. This will help to make sure all concerns are dealt with and that you have complied with your compliance obligations. 4.3 Adjusting the SOA As we have seen in previous parts of the module, the process of providing financial advice is not always a clear cut, one-way street. After you have presented your plan and checked for understanding, you may need to go back, revise the strategy and adjust the SOA. Page 3 – 10 © Kaplan Education Unit 3: Presenting the SOA and Reaching Agreement IN PRACTICE Adjusting the SOA Consider why adjustments to an SOA might be needed. List the reasons. Even after extensive data gathering and analysis of your clients needs, objectives and financial situation, the first SOA you present may not be totally acceptable to them. There may be any number of reasons for this. For example: • the costs of implementing the recommendation may not be acceptable to your client • after consideration, the client may not be comfortable with the degree of risk involved • although the strategy proposed is acceptable to the client, they may not be comfortable with the products selected 3 • through the discussion surrounding the presentation of the SOA, you may find an important aspect of the client’s situation that has not come to light before. You need to be flexible when dealing with these situations and modify the strategy accordingly. Depending on the reasons and degree to which the recommended solution is unacceptable to the client, you may need to make adjustments to the SOA or revise the strategy to gain your client’s acceptance. IN PRACTICE Case study — Negotiating the SOA You have met with Christopher and Christine and presented your SOA. Now you need to be sure that they understand your recommendations and, importantly, whether they see any problems or have any concerns. Christine: According to this SOA I get $2300 less. How does that happen? Go back and review the SOA that was put together for Christopher and Christine. What would you say to answer Christine’s question? Your response might be something like this: You: That’s right. You do have less cash in hand. But your tax bill has reduced. You have money set aside for your trip, and for the renovations you want to do and the children’s education. You also have easy access to the reserve fund of $20,000 you wanted. Not only that, but you are now building up a bigger superannuation nest egg and paying your mortgage off more quickly. The conversation goes on: Christine: You make it sound good! Are you sure those funds you suggested are OK? You: I’ve done a lot of research and the information I’m giving you to read show the types of funds and fund managers I’ve selected. The mix of investments in each fund matches pretty well the mix in your superannuation funds ⎯ you said you were happy with that. Christopher and Christine are both satisfied. 940.SN1.4 Page 3 – 11 Adviser Skills (940) Checklist Below is a checklist of the main points covered by this unit. Use this checklist to check your learning. A statement of advice (SOA) must be given to you client at the time of giving advice or as soon as possible after the advice is given. The SOA may or may not be the main means of communicating the advice. A suggested model for an SOA incorporates three levels of detail: • summary • body • appendices. The SOA must be clear, succinct and unambiguous. It must be written in plain English and appropriate to your clients’ level of financial understanding and sophistication. You must check that your client understands the content of the SOA using appropriate communication techniques. Take client concerns about the proposed strategy seriously. They are a positive sign of real consideration and should be dealt with appropriately. Be prepared to adjust the SOA to meet client concerns. Page 3 – 12 © Kaplan Education Unit 4 Implementing the Solution and Providing Ongoing Service Unit 4: Implementing the SOA and Providing Ongoing Service Contents Preview 4–2 About this unit ............................................................................................4 – 2 Unit objectives.............................................................................................4 – 2 1 The action plan 4–3 1.1 Client and financial adviser sign-off ...................................................4 – 5 1.2 Implementation schedule ....................................................................4 – 5 1.3 Monitoring implementation ...............................................................4 – 5 1.4 Review................................................................................................4 – 5 2 Ongoing service 4–6 2.1 Importance of ongoing service............................................................4 – 6 2.2 Ongoing review ..................................................................................4 – 6 Checklist 4 – 10 4 940.SN1.4 Page 4 – 1 Adviser Skills (940) Preview About this unit Now that you have presented and, negotiated the statement of advice (SOA) with your clients, it’s time to put the SOA into action — a step just as important as formulating the right SOA in the first place. Without proper implementation a well developed strategy may still fail to achieve the outcomes required. Implementing the SOA however, is not the end of the process. Of equal importance is the need to provide an ongoing service to your clients. Only with regular reviews of your client’s financial situation can you ensure that their needs and objects continue to be met. This unit provides you with an overview of implementation and the provision of ongoing service. Unit objectives At the end of this unit you should be able to: describe the need for an action plan obtain client sign-off implement and monitor the SOA negotiate and agree on ongoing service. Page 4 – 2 © Kaplan Education Unit 4: Implementing the SOA and Providing Ongoing Service 1 The action plan Before taking action to implement your recommendations, it is important that you compile and discuss an implementation action plan with your client, and ensure that they understand it. The communication skills discussed in the early part of this module are also important in this step. The action plan gives your client another chance to review your recommendations. During the review of the action plan, you may need to answer client questions. Check for understanding and satisfaction with your answers. This process also gives you another opportunity to ensure your client fully understands the strategy they are embarking upon. As you and your client work through the action plan you can ask questions to ensure their understanding of each implementation step. Once all questions and issues have been dealt with, you should obtain your client’s written approval to proceed with the implementation of the SOA. Most licensees and planners have standard forms for this, similar to the Authority to Proceed example on the next page. 940.SN1.4 4 Page 4 – 3 Adviser Skills (940) AUTHORITY TO PROCEED We, Mr Christopher Crane and Mrs Christine Crane of 123 Glenwood Close, Merryville 8790 • Have read, understood and retained a copy of the statement of advice (SOA) prepared by (Authorised Representative) of (Licensee) and dated (date). The SOA contains information which accurately summarises our current situation, investments and our financial objectives. • Understand that (Authorised Representative) holds a Proper Authority from (Licensee, [ACN number]) Licensed Dealer in Securities. • Are aware that assumptions have been made in preparing this SOA and understand the basic investment strategy outlined in the SOA. We understand that projections are not guaranteed and that, to the extent available, the inherent investment risks have been explained. • Understand that the contents of this SOA are for our sole use. • Confirm our investment risk to be rated ‘X’ • Have read and understood the Disclosure and Disclaimer sections of the SOA prepared by (Authorised Representative) which details all fees and commissions, and noted that all recommendations are based on current interpretations and regulations. • Have read the section of the SOA on the need for monitoring, advisory and reporting services and understand that we will receive those services from (Licensee) in exchange for an annual fee of ($X) invoiced and payable in arrears and commencing from (date). We understand that, if we wish to cease the implementation of the SOA and/or the receipt of the monitoring, advisory and reporting service, then (Licensee) needs to be informed in writing as soon as possible. We understand that there may still be a liability for some outstanding fees for the ongoing service, as such fees are invoiced (for each appropriate period) in arrears. We further understand that, in the event that we cease to pay for the ongoing service, (Licensee) will be relieved of any responsibility for the monitoring and review of the portfolio from the date of notification. We hereby authorise (Authorised Representative) of (Licensee) to proceed with the implementation of the SOA and the investment recommendations contained within it. ........................................./...../ ............ .........................................../...../.......... Signature Signature Date Date Accepted for an on behalf of (Licensee) Page 4 – 4 .........................................../...../.......... Signature Date © Kaplan Education Unit 4: Implementing the SOA and Providing Ongoing Service 1.1 Client and financial adviser sign-off For the protection of you and your client, it is important that both of you sign off on the SOA. By signing a document such as the sample authority to proceed document, the client is acknowledging that they have, amongst other things, received, read and understood documents such as the financial services guide. The authority to proceed allows you to put in place the actions required to implement the SOA. While not a requirement, some authorities to proceed also include provision for the adviser to sign-off. This reaffirms the conditions under which the advice has been given and the role the planner plays in the process. 1.2 Implementation schedule At this stage a detailed implementation schedule must be developed. This can be difficult, especially if the SOA is complex and there are a number of recommendations to be implemented. 4 1.3 Monitoring implementation Once the implementation process has been put in place you need to carefully monitor each stage of implementation to ensure instructions are carried out as required and at the appropriate time. If it is necessary to work with other professional advisers such as accountants and solicitors, you will need to arrange meetings and set the agenda. Contact with other advisers should only occur after permission has been obtained from your client. Managing the client and any other advisers involved in the process during the implementation period is very important. Plan regular contact with your clients so that they are reassured that implementation is proceeding, as agreed. 1.4 Review Let’s review what has happened with our case study so far. At this stage you have: • given your clients a copy of the SOA • explained the SOA • answered client questions and overcome doubts • obtained and documented final agreement • outlined fees • dealt with the possible need to use outside advisers • ensured a signed copy of the SOA is on file • reminded them that they should see their solicitor to set up powers of attorney • checked that they are satisfied with their levels of insurance • developed and discussed an implementation plan • set up processes to monitor implementation • agreed on regular contact to advise on progress of implementation. The next and final step on the advising process is to discuss and agree on the ongoing service you will provide your clients. 940.SN1.4 Page 4 – 5 Adviser Skills (940) 2 Ongoing service It takes far less time and effort to maintain existing clients than it does to secure new clients. This is why it is important to put processes in place to ensure that you can provide an ongoing service to your clients. In this part of the module you will learn about: • the importance of providing ongoing service • key steps in the review process. 2.1 Importance of ongoing service The financial planner needs to have an ongoing relationship with the client rather than simply selling the client a one-off SOA. A very important issue is that you must have a reasonable basis for making your recommendations. The two main tests for having a reasonable basis are: • ‘know your client’ rule • ‘know your product’ rule. These rules are not static. Clients’ circumstances can change just as the relevance of products can change. From the client’s point of view, they need to be convinced that they are receiving value for money from ongoing service. 2.2 Ongoing review To ensure you continue to meet your client’s needs, you need to have a formal monitoring and review process in place. This process gives you the opportunity to formally assess whether the SOA continues to meet your client’s financial and personal needs in an ever-changing economic environment. When discussing a personal SOA with your clients, they will tend to express their wants in today’s terms. That is, what they want to happen now, rather than looking too far into the future. The adviser, generally agrees to such requests knowing that the client is more likely to understand and agree to a strategy that addresses today’s wants. It is recommended that you agree at the outset the type of review your clients require and that this is incorporated into the SOA. For example, review once per annum at the anniversary of implementation, at an SOA review fee of $X, or review once per quarter, at an SOA review fee of $X per quarter. Page 4 – 6 © Kaplan Education Unit 4: Implementing the SOA and Providing Ongoing Service IN PRACTICE Consider these common clients requests: • I want $25,000 for living expenses. • I will need $20,000 for an overseas trip next year. • I want to buy a new house in two years. These wants are priced at the time of the initial discussion. Would you limit your plan to providing only those amounts? Would you try to explain possible increases, for example in the cost of living, to the client and allow for that in your calculations? Here we briefly outline the main steps in the review process. Review the client’s needs Client’s needs and objectives should be reviewed before considering how their investments are performing. Reviewing client needs involves considering their position, once again, in relation to social security, taxation, health, future plans, need for security of capital, estate planning needs and so on. You should also review the client’s objectives. You should approach this process as you would for a new client. 4 Review financial and investment strategies At least once a year strategies need to be reviewed to identify: • changes which may have affected the client • how these changes impact on existing strategies • how the strategies can be amended to cater for new needs. Assess current position of investments This step involves determining the current value of the investment portfolio and comparing it to original expectations. Investment markets go through cycles, so even though an investment may not have performed as expected it does not necessarily mean it is weak or should be sold. Determine today’s best portfolio Here you should forget about where the money is invested and ask yourself, ‘If the funds were in cash right now, where would I recommend they be invested?’ You should choose investments in today’s market, most appropriate to the client’s current needs and objectives and without bias towards previous decisions. Compare best versus current portfolio If there are major differences between how the money is currently invested and how you would invest the money today, this is a signal that the money is no longer invested in the most appropriate investments. Here the review becomes challenging because you should list the differences between the current and the ideal portfolio. Make decisions to alter investments When there are significant differences between the current and ideal strategy you must decide what recommendations to make to your client. Considerations such as transaction costs, taxation and redemption penalties all need to be considered at this point. 940.SN1.4 Page 4 – 7 Adviser Skills (940) IN PRACTICE Ongoing service Imagine that you have completed negotiations with your client about the implementation of their SOA. You now raise the issue of ongoing service. Your client looks sceptical and you guess they suspect it is simply a means of generating more income for you. How would you justify the need for ongoing service and review with this client? IN PRACTICE Case study — changing needs To end this unit, let’s look ahead a few years and see what has happened to your case study clients, Christopher and Christine. To do this we will look at some notes from your hypothetical diary. Review year 1 Presented figures to show that recommended investments are performing pretty much as predicted. Christopher and Christine’s expectations have been met and they feel comfortable with their SOA. Confirmed that they had set up enduring powers of attorney, as suggested. Raised question of insurance. As they are off on their overseas trip in the next 12 months, convinced them some insurance cover outside superannuation was advisable. They have agreed to meet with Fred from the insurance company. No other changes necessary. Agreed to meet again in 12 months. Review year 2 Hadn’t spent as much on their trip as expected so can bring forward renovations. Asked me what effect that would have on their financial standing. Renovations money in a separate account so could easily calculate what their other investments would return and how they might invest the extra trip money. They were happy with the figures. Suggested they transfer some of their capital to a more growth-oriented fund to build a bigger nest egg. Encouraged them to take a longer-term view of financial planning. They want to think about it. Review year 3 Busy with renovations, didn’t want to change anything until all the bills were in and paid. Page 4 – 8 © Kaplan Education Unit 4: Implementing the SOA and Providing Ongoing Service Review year 4 Renovations finished, both children in high school. Christine reducing working hours to spend more time helping the children and enjoying the improved house. Need to review their situation as though new clients. Need to: • completely review family’s assets and liabilities, income and expenses • revisit their needs and objectives • encourage them to take a longer-term view • analyse data • develop appropriate strategy • compare with existing investments • present new SOA, if needed, with supporting figures • update client file. 4 940.SN1.4 Page 4 – 9 Adviser Skills (940) Checklist Below is a checklist of the main points covered by this unit. Use this to check your learning. It is important to agree and prepare a strategy implementation plan with your client. You must obtain written authority to proceed from your client. You, as the adviser, should also sign off on the agreement to proceed. A detailed implementation schedule should be prepared, the complexity of which will vary depending on the complexity of the financial strategy. Ensure you monitor the implementation of the SOA. Agree on ongoing review strategy with the client. Ongoing service ensures your client’s needs and objectives, which may change over time, continue to be met. The main steps in the review process are: • review the client’s needs • review the strategy • assess current investments • determine today’s best portfolio • compare best versus current portfolio • make decisions to alter investments. Page 4 – 10 © Kaplan Education ...
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This note was uploaded on 10/10/2010 for the course ECON 7300 at University of Sydney.

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