FINS3637: Wealth Management Advice

&
FINS5537: Financial Planning Advice & Ethics

Lecture One

Lecturer: Nidal Danoun

 About the Course
• Looks at the key knowledge and skills elements of providing
financial planning advice in Australia

• “Capstone” course
• Course pre-requisites, Personal Financial Planning and
Management FINS2643 & FINS5510

• Assumed knowledge
• Possible course benefits
– Employment
– Personal
 Course Outline
• Download the course outline document

• What is expected from you

• University policies
– Assignments
– Exams
– Plagiarism – Turnitin  assignment expectation
– Special Consideration
 Course Resources
• Textbooks for this course is:
– Thomson Australian Financial Planning Handbook Latest Edition OR
– CCH Master Financial Planning Guide Latest Edition
And
– LexisNexis, Financial Planning in Australia OR
– Wiley, Financial Planning 2ED McKeown Warren

• Other texts and websites that may be useful in the course are:
– Ethics and the Conduct of Business (7th Edition) Boatright, J.R. 2012.
– Standard of Practice Handbook (10th Edition), CFA Institute
– Financial Planning Code of Ethics (current edition, copy on Blackboard)

• Useful websites for the course are:

– Financial Planning Association (FPA): www.fpa.asn.au
– Australian Securities & Investments Commission (ASIC): www.asic.gov.au
• ASIC Regulatory Guides

• Additional resources and website links are available online:

– Lecture notes and additional reference articles
– Important notices, a message board and other forms of communication
 FINS3637: Wealth Management Advice
&
FINS5537: Financial Planning Advice & Ethics

Lecture One

Introduction to Financial Planning

Lecturer: Nidal Danoun

Source: Slides in this presentation are extracted from the course prescribed text
book Financial Planning Mckewon ©2014 John Wiley & Sons Australia, Ltd
 Introduction
• What is Financial Planning
– Financial and non financial goals
• Where you are now
• Where you want to go
• How to get there

• Why clients do not plan – assumption of:

– Insufficient funds
– Complexity
– Not needed
– Expensive

• The risk of not planning

• The need for financial planning

 The Concept of Financial Planning
• Financial planning process
– Fact finding and analysis
– Identifying goals, objectives, needs and concerns
– Risk management
– Formulate strategy
– Implement strategy
– Review

Current situation, Goals & Objectives, Risks, Concerns and Special Circumstances  Recommended Strategy
 What is personal
financial planning?
• The financial means to satisfy personal objectives
• Useful to consider objectives in 3 time frames:
– Short: within one year
– Medium: up to 5 years
– Long: up to 40 or even more years
• To be realistic a goal needs 2 components
– Specific or quantifiable
– Referenced to a specified time frame
 Preparing personal
financial statements
Personal financial statements can be prepared in
two parts:
• Personal cash flow budget/statement includes:
– Anticipated income from all sources
– Items of spending or expenditure
• Personal balance sheet includes:
– Personal assets
– Personal liabilities
 Personal cash flow budget
• Income includes money received from salary, wages,
interest, profits, bonuses, fees charged, dividends,
distributions, social security pensions or allowances,
and any other earnings
• Expenditure includes payments for food, clothing,
gas, electricity, rent, interest on loans, rates, and any
other expenses
• Net Savings where Income > Expenditure
• Negative Savings where Expenditure > Income
Personal cash flow budget continued
• Personal cash flow budget example:
Personal cash flow budget continued
• Projected cash flow budget example:
 Personal balance sheet
• Demonstrates financial well being
• Assets are things of value we own such as bank
deposits, property, managed funds, etc.
• Liabilities are amounts of money we owe to other
people or organisations such as credit card debt,
loans and mortgage.
• Net worth is the difference between assets and
liabilities
 Personal balance sheet
continued
• Personal balance sheet example:
 Why is personal financial
planning important?
• It enables people to set in place personal objectives
and arrange financial means to satisfy these
objectives
• Has its roots in life cycle theory of consumption and
saving
• Life cycle theory provides a framework to meet
short, medium and long-term objectives
• While consumption is relatively smooth over a
person’s life cycle, lifetime income is quite uneven
 Why is personal financial
planning important? continued
Theoretical Income and expenditure over a lifetime
 Why is personal financial
planning important? continued
• A person’s retirement capital needs depend on the
lifestyle they wish to have in retirement
• Many retirees do not have sufficient funds for retirement
• Personal financial planning is gaining importance due to:
– increasing numbers in older age groups
– increase in longevity
– expected restrictions to accessing old age pension
– introduction of compulsory superannuation
– greater range of superannuation choices
– anticipated changes to government fiscal policy.
 Increasing numbers in older
age groups
• Population is aging due to:
– falling birth rates
– falling death rates
– changing rates of immigration.
• Significant feature of the Australian population is the
size of the ‘baby boomers’ group (born 1945-60)
• It is expected that by 2050, the ratio of working
people to retirees will fall from the current level of 5
to only 2.7 workers per retiree
 Increase in longevity
• Average life expectancy has increased from 55 for
men and 59 for women in the 1900s to 79 for men
and 84 for women in recent times
• It is expected that life expectancy will increase to 88
for men and 91 for women by 2050
• Reasons include:
– vast improvements in medical science
– changes in dietary habits
– awareness of health issues and the need for regular
exercise.
 Restricted access to
age pension
• In recent years, modifications have been made to
eligibility for age pension
– Age of entitlement for women rising to match that of
men (currently 65)
• Pension age to be raised to 67 (progressively) from
2017
• Government offers incentives to encourage people of
pension age to defer taking it up beyond retirement
age
– Work bonus scheme
 Compulsory superannuation
contributions
• Compulsory employer superannuation (or SG)
contributions first introduced in 1992 at 3% of
employee’s remuneration. This has progressively
increased to 9 and 9.5% with industry expectation for the
SG to reach 12 -15 % at some point in the future
• Why? what is the rational? what are he challenges?

• Tax deduction offered to self-employed to encourage

contribution towards their own retirement
• Other incentives have been introduced to encourage
additional saving for retirement
This is discussed further in the superannuation lecture
 Choice of
superannuation fund
• From 1 July 2005, most employees have been able to
choose the fund into which their employer
superannuation contributions are paid
• This has encouraged funds to offer larger range of
portfolio mixes
• Competition between funds is expected to force
underlying member fees to be reduced over time
 Budgets for various households and
living standards (only a rule of thumb)
• Budgets for various households and living standards:
 Retirement benefits provided
by many employers
• The move from defined benefit form of
superannuation to accumulation form has resulted in
the transfer of investment risk from employers to
employees
• These socioeconomic changes mean that:
– individuals must take responsibility for their own
retirement
– planning must start at an early age to maximise
retirement benefits
– complexity of products, rules and decision making
requires individuals to become better educated
regarding personal financial decisions.
 Role of financial counsellor
• Financial Counsellor provides range of free public
services
• Seeks to contribute to community education and
development of financial issues
• Specific tasks provided may include:
– financial advocacy
– restructuring debt facilities
– budgeting.
 Financial literacy foundation
• Established by the government in 2005, it seeks to
improve public access to relevant financial
information
• Operates in partnership with industry, education
bodies and community organisations to enhance
financial literacy
• Foundation to date has promoted its activities via:
– media campaigns
– interactive website
– education programs
– conducting research.
 Understanding risk
There are many types of risk. Some include:
1. Mismatch risk 6. Lack of diversification risk
2. Inflation risk 7. Currency risk
3. Interest rate risk: 8. Liquidity risk
- Reinvestment risk 9. Credit risk
- Market volatility 10. Legislative risk
4. Market risk 11. Gearing risk
5. Market timing risk
Features of the economic environment
• Greater economic volatility pre 1990, sustained
expansion of Australian economy from 1992 to the
onset of the GFC in 2008
• Recovery since then due to RBA monetary policy and
the federal government stimulus spending as well as
the demand for our resources by China and India
• Government monetary and fiscal policies are applied
to ‘manage’ the local economy as it goes through
different stage of the business cycle
Features of the economic environment
continued
Four Stages in the Business Cycle
1. Boom or expansion – high employment, high
economic growth, increase inflationary pressure
2. Contraction - economic growth starts to slow, sales
begin to fall, unemployment starts to rise
3. Recession - high unemployment, low economic
growth
4. Recovery - unemployment begins to fall, economic
growth starts to rise
Features of the economic environment
continued
• The business cycle:
 Historical events of investment
markets
Some major events that we can learn from include:
• 1987 share market crash
• 1990 – 2000:
– Property trust freeze (1990)
– Pyramid Building Society closure (1991)
– Japanese share market crash (1992)
– Bond market crash (1994)
– Asian Crisis (1997)
– Dot com crash (2000)
 Historical events of investment
markets continued
• 2001-2013:
– World Trade Center disaster (2001)
– Corporate collapses (2001-02)
– Falls in world market share (2002)
– Share market rebound (2004)
– Collapse of Westpoint Corporation (2006)
– Housing affordability crisis (2006)
– US subprime mortgage crisis and the Global Financial Crisis
(2007-13)
– European debt crisis (2010 onwards)
 The Global Financial Crisis and
its impact on Australia
• US banks mispriced risk, lending standards fell
• US merchant banks parcelled up mortgages into
Collateralised Debt Obligations (CDOs) and sold them
world wide only to see them fail as US house prices
plummeted and mortgagees walked away from their
obligations
• Questions asked of Rating Agencies who had rated
CDOs as safe investments
• Institutional lending froze as institutions failed and
others were afraid to deal with counterparties
 The Global Financial Crisis and
its impact on Australia continued
• Share markets halved in value
• A number of Australian institutions had invested in CDOs
and were negatively affected but Australia was relatively
unaffected despite one quarter of negative economic
growth
• Confidence in the financial markets fell
• The Australian federal government acted by:
– Guaranteeing the safety of deposits in banks
– Increased spending through various projects
– Offering $900 cash bonus to taxpayers to stimulate spending
 Evolution of the financial planning
environment
Major events in the development of financial planning:
• 1980s – saw the introduction of:
– ‘Rollover’ superannuation funds (1983)
– Capital Gains Tax and fringe benefits tax (1985-86)
– Imputation credit on company dividends (1987)
• 1990s – saw the following changes:
– Introduction of compulsory superannuation (1992)
– Wallis report - deregulation of financial services (1997)
 Evolution of the financial planning
environment continued
• 2000s – some major changes include:
– Financial Services Reform Act (2001)
– Proposed changes under ‘Simple Super’ (2006-07)
– Age pension asset and income tests (2007)
– Major reviews of the financial planning industry (2008-10)
• 2010s – changes include:
– Proposed changes under the Future of Financial Advice
(2011)
– Introduction of ‘MySuper’ default fund (2011)
– A revision of RG175 following the Future of Financial
Advice (2011)
 Regulatory framework
Financial planning profession is governed by the
following principal regulations and controls:
 Corporations Act 2001
Corporations Act 2001 includes amongst other things:
• Licensing regime for the provision of financial
services and products
• Rights and obligations of the licensees in the
appointment of authorised representatives
• Definitions of ‘financial product’ and ‘financial
service’
• ‘Know your client’ obligation
• Definitions of retail and wholesale clients
• Details of Financial Services Guide content
 Financial Services Reform Act (FSRA)
2001
• Provides single regulatory regime for:
– Financial services
– Financial products
– Financial markets
– Clearing and settling facilities
• Administered by ASIC
• Incorporated as Chapter 7 of the Corporations Act
2001
 Financial Services Reform Act (FSRA)
2001 continued
• Objectives are to:
– promote confident and informed decision making
by consumers of financial products and services
– promote fairness, honesty and professionalism
– reduce systematic risk and provide fair and
effective clearing and settling facilities.
• Various licensing regimes including Australian
Financial Services Licence (AFSL)
 Financial Services Reform Act (FSRA)
2001 continued
• AFSL required by people who provide financial
services
• Representatives act under the licence of the principal
• ASIC issues regulatory guides as basis for
interpretation of the legislation
• Licensees must adequately train their
representatives according to ASIC training standards
• Training levels set at Tier 1 or Tier 2 depending on
activities of staff representing licensee
 Financial Services Reform Act (FSRA)
2001 continued
• FSRA requirements of principals:
– Monitor and supervise competent and trained
representatives
– Sufficient financial, technological and human
resources
– Possess relevant competence, skills and expertise
– ASIC-approved dispute resolution processes
– Adequate risk management systems and
compliance measures
 Financial Services Reform Act (FSRA)
2001 continued
• FSRA disclosure requirements
– Three statements
• Product disclosure statement (PDS)
• Financial services guide (FSG)
• Statement of advice (SOA)
– Additional information provided on request
– Confirmation of transactions
– Advice of material changes and significant events
– Periodical statement of investment products
– Other changes under FSRA
 Future of Financial Advice (FOFA)
• Key elements
– Ban Commission on insurance inside superannuation
– Opt-in (every 2 years)
– Volume-based payments ban
– Soft dollar benefits ($300 or more per benefit)
– Scaled advice
– Basic banking products exemptions
– Removal of the accountant exemption

• Recent changes

• ASIC- RG 175- licensing , RG244 –scaled advice, RG245 – fee

disclosure statement
 Other relevant legislation
• Common Law
• Superannuation Industry (Supervision) Act 1993
• Life Insurance Act 1995
• Insurance Act 1973
• Australian Securities and Investments Commission
Act 2001
 Statutory complaints
Resolution schemes
Structures regulating complaints and potential disputes
with clients are:
• Internal complaints-handling mechanisms for
superannuation funds
• The Superannuation Complaints Tribunal
• The Financial Ombudsman Service (FOS)
– Operates as an external dispute handling body for
complaints by clients against financial planners, life
insurance advisers, managed investment schemes and
stockbrokers
 The role of ASIC
• ASIC administers laws that protect consumers in financial
products and services and corporate markets
• ASIC contributes to Australia’s economic reputation and
wellbeing by ensuring that Australia’s financial markets are
fair and transparent, supported by confident and informed
investors and consumers
• ASIC monitors disclosure of all forms of remuneration
received by licensees or their representatives
• ASIC has the power to revoke or suspend a license or ban a
person from providing financial services
 Lessons for investors and
financial planners
• Investors and financial planners need to be aware of:
– Market cycles
– Risks accompanying high returns
– Benefits of diversification
– Underlying portfolio of investment products
– Scams
– The need to review investments
– The need to abide by established rules of conduct
and regulations
 Regulatory framework
• Chapter 7 – Corporation Act
– Financial Services Reform Act (FRSA) 2002
• AFSL holder & authorised representatives

• Licensing regime – single licensing regime

– Australian Financial Services Licence (AFSL)

• Financial services
– Financial product advice
– Personal Vs General Advice

• Wholesale Vs Retail clients

 The Role of the Adviser
• The traditional role

• The current role

• The growth in the sector

• Use of the term “financial planner”

• Challenges in the sector

 Financial Planner Remuneration
• FPA’s six key principles
1. Understand and comparing the fees
2. Ability to compare fees
3. True to label fee structure
4. Fees separated between advice and product
5. Client agreement to the fee and the ability to switch
it off if no-ongoing advice is required
6. Client and not the product provider pay for the
financial planning service

• New remuneration policy applies from 1/7/2012

 Future of Financial Advice (FOFA)
• Key elements
– Ban Commission on insurance inside superannuation
– Opt-in (every 2 years)
– Volume-based payments ban
– Soft dollar benefits ($300 or more per benefit)
– Scaled advice
– Basic banking products exemptions
– Removal of the accountant exemption

• Recent changes

• ASIC- RG 175- licensing , RG244 –scaled advice, RG245 – fee

disclosure statement
 The Accountant Exemption
• The removal of the accountant exemption

• Transition period

• Limited ASFL

• Options for accountants

• ASIC Information sheet 179 (INFO179)

 Recent Regulatory Activities&
Announcement
• CP153 – National exam

• RG146 consultation & Training register

• Educational and professional standards

• Financial Services Inquiry

• TASA and financial planners

• Role of ASIC
 FPA Code of Practice
• 8 Principles to FPA Code of Ethics
1. Client first
2. Integrity
3. Objectivity
4. Fairness
5. Professionalism
6. Competence
7. Confidentiality
8. Diligence
 CFA – Standards of Professional
Conduct
i. Professionalism
ii. Integrity of capital markets
iii. Duties to clients
iv. Duties to employers
v. Investment analysis, recommendations, and
actions
vi. Conflicts of interest
vii. Responsibilities as a CFA Institute member or
CFA candidate
 Code of Conduct & The Profession
• Ethics vs. the law

• Code of practice / professional conduct

– Common themes
• Client interest first
• Professionalism, Integrity, competence, objectivity, confidentiality
and diligence
• Conflict of interest – Disclose and manage

• Fiduciary duties

• Significance of maintaining public trust for a profession