FINA2209

Financial Planning
Week 2: Financial planning processes and

procedures

Dr. Elizabeth Ooi

elizabeth.ooi@uwa.edu.au
At the end of last week:
Financial product advice
See RG 175: Licensing: Financial product advisers – Conduct
and Disclosure.

• Certain obligations are imposed on providing entities to ensure

that clients receive professional and reliable advice about financial
products.
• Advice is required to be suitable or have a ‘reasonable’ basis in
line with 2 important concepts:

‘Know your client’ & ‘Know your product’

‘Know your product’ is self explanatory

so more on ‘Know your client’ today…
At the end of last week:
The FP process
• Personal financial
planning is about
planning & process

• Advisers work within

regulatory framework:
compliance, records,
communication

• Not a static but rather a

continual process
Recap of last week
• The need for financial planning
• Aging population, financial illiteracy, Superannuation in
Australia
• FP Environment
• Ongoing regulatory reform (APRA, ASIC, ATO), licensing,
disclosure
• Financial planners have a statutory duty to do
the best thing for their client
– Know your client, know your product- Today we’ll
discuss how you determine and document this
Today’s agenda

• Reflective exercise instructions on LMS in

‘Assessments’ folder

• Still discussing the ‘landscape’ of financial

planning in Australia
– Last week: Macro issues
– This week: Processes/procedures
When is financial advice
provided?
An adviser will be providing financial product advice
when either:
• a recommendation
• a statement of opinion
• a report of a recommendation or statement of
opinion
is provided with the intention to influence a person
in making a decision in relation to a particular
financial product or group of financial products, or in
circumstances where some might reasonably expect
the adviser had that intention
Are you giving advice?
You are at a BBQ with friends and
acquaintances. Fred Burke knows you are a
financial planner and is looking for some
free advice. Fred knows how to push your
buttons and knows you work for fund
manager MLC. He starts comparing MLC’s
Equities Imputation fund with ING’s (the one
he is invested with) to MLC’s disadvantage.
You argue the merits of your fund.
Are you giving advice?
Personal vs. general advice
Personal Advice General Advice

The adviser has considered one or more of The adviser did not consider any of the
the objectives, financial situation and needs objectives, financial situation and needs of
of the person the person

A reasonable person might have expected A reasonable person did not expect the
the adviser to have considered any of those adviser to have considered any of those
matters matters

General advice warning:

When general advice is given to a retail client, the adviser must
• warn that the advice is not based on knowledge of client
circumstances and objectives
• indicate that the client must consider the advice in this light if
inclined to act
• suggest that a PDS should be considered (if applicable) before
acting.
Personal advice is provided
when…
• The adviser explicitly offered to provide advice
(and for example provided an FSG)
• The adviser had an existing financial relationship
with the client
• The client requested personal advice
• The adviser requested details about the client’s
personal circumstances
• Personal circumstances are referenced in a
recommendation
• The adviser had received or already possessed
info about the client’s personal circumstances
Still personal advice

In RG175, ASIC advises that advice may be

personal even when:
• It is not given face-to-face
• There is no direct contact with the client
• It relates to only one product
• The client is a body corporate
• The adviser (subjectively) did not intend
to provide personal advice.
Financial planning processes
and procedures

Initial interview

Follow up interview

Ongoing interviews
Step 1: Data collection

 What is the purpose?

 The data collection process assists you to understand
your client’s needs and provides the opportunity to
know your client.
 It can potentially justify and substantiate the reasons for
a particular course of advice if that advice turns sour.
 How is the data collected
 Data is most commonly collected through a document
known as a Client questionnaire or “Fact finder”
 What can go wrong if not done properly:
 Eg: superannuation overlap with insurance, inefficient
/excessive super contributions, cash flow problems
Step 2: Determining goals and
objectives
 Each client will have differing goals and objectives:
Each financial plan will therefore be different
 Some client goals are unachievable and should be
reconsidered

 Goals will vary from client to client, but certain age groups
are likely to have similar types of goals.
 Age 20 – 30 Varying goals
 Age 30 – 40 Varying goals
 Age 40 – 60 Wealth creation, retirement planning
 Age 60+ Wealth drawdown or maintenance, social
security planning, estate planning,
aged care accommodation
Example ‘Fact Finder’

Example of Fact Find from Mercer Wealth Solutions

(I am not promoting Mercer. It was the first one that
came up in a google search.)

https://secure.superfacts.com/Web/IWfiles/attachments/Form/MWS_Financi
alFactFind_AUG11.pdf
Step 3: Identify issues and analyse
client circumstances

Before appropriate strategies can be recommended, an

analysis of the client’s circumstances will be required:
 Analyse the financial circumstances of the client
 Prepare financial statements, ratios and projections
 Analyse the risk profile of the client
 What degree of risk is the client willing to accept with
their investments?
 Identify issues and problems with the client’s existing
strategy
 eg. may have: high taxes, low liquidity, too much debt, no
investment strategy, lack of diversification, estate/legal
problems
Step 3: Analysing a client’s
financial situation
• Importance of determining the client’s current
financial position in order to develop appropriate
strategies

• 2 main financial statements that should be drawn up

to assist the planner to summarise information:
– Balance sheet
– Cash flow statement

Note – these are not accounting statements governed

by standards and legislation
Step 3: Analysing the
balance sheet
• A balance sheet represents a financial snapshot of the
client’s financial position at a certain point of time
– Net worth = Assets less liabilities
• not required to balance to equity
• Assets should be broken down between:
1. Lifestyle assets:
• Designed to provide a service to the client
• House, car, holiday house etc
2. Investment assets
• Designed to generate a return
• Cash, shares, managed funds, superannuation
• The ownership of the investment is important
• Use current market values instead of historical cost to
value assets.
Note – planners do not normally provide recommendations around
personal “lifestyle” assets of the client
Step 3: Balance Sheet –
format and analysis

Assets $ Liabilities $
Cash 12,000 Credit cards 12,000
Managed Fund 23,000 Car Loans 22,000
Motor Vehicles (2) 32,000 Home equity
House and contents 650,000 Home mortgage 250,000
Superannuation 240,000
Sub Total 284,000
Net Worth 673,000

Total Assets 957,000 Total 957,000

Step 3: Analysing the
cash flow statement
Consists of 3 main parts:

1. Sources of cash inflows:

– Salary, returns from investments, business income,
pensions, gifts, asset sales
2. Sources of cash outflows
– Living expenses, taxation, asset purchases, debt
repayments
3. Cash surplus or deficit
– A cash surplus will indicate the client’s ability to invest,
commence a savings scheme or repay debt
– A cash deficit will indicate the need for budgeting,
increased sources of income / reduced expenditure,
increased borrowings
Step 3: Cash Flow Statement –
format

• The Wong’s Personal Cash Flow Statement

The Wongs
Income (2015) Expenses
Qinbo (after tax) 85 000 Food, clothing, utilities
Feilian (after tax) 35 000 and Insurances 55 000
Interest and Managed School fees, uniforms etc. 15 000
Funds Distributions 3 000 Loans and credit cards 22 000
Super contributions 6 000
Total 123 000 Entertainment, holiday etc. 18 000
Total 116 000
Surplus/(deficit) $ 7 000
Step 3: Using Financial Ratios
as a Planning Tool
• Use personal financial statement to:
– monitor income/expenditure patterns
– assess whether on track to meet
short/medium/long term goals
• Useful financial ratios:
– Net worth/Solvency ratio
– Liquidity ratio
– Savings ratio
– Debt service ratio
 Step 3: Using Financial Ratios
as a Planning Tool
1. Net Worth
= Net worth x 100
Total assets
= $673 000 x 100
= $957 000
= 70.13%

• This means that the Wongs own 70% of the

assets that they have acquired and other people
( e.g. institutions) own 30%
 Step 3: Using Financial Ratios
as a Planning Tool

2. Liquidity Ratio
= Liquid assets x 100
Total current liabilities
= $12 000 x 100
$12 000
= 100%
OR ($12,000/$34,000 if you include car loan) = 35.3%
• This shows the percentage of assets available to
cover current debt
Variation: Basic liquidity Ratio
Liquid assets x 100
Monthly expenses

Monthly Expenses = $110, 000/12 = (excluded super contributions)

= $9,166

Basic Liquidity ratio = $12,000/ $9,166

= 1.3 months
This shows the number of months in which expenses
can be covered with no income… Not a whole lot, but
CC debt is priority. Is all debt recurring?
 Step 3: Using Financial Ratios
as a Planning Tool

3. Savings Ratio
= Surplus x 100
Disposable income
= $7000 x 100 OR $7000 + $6000 x 100
$123 000 $123 000
= 5.7% 10.6%

Should you focus on saving or spending at this point in your

life?
What is “Lifestyle Creep”?
Step 3: Using Financial Ratios
as a Planning Tool

4. Debt Service Ratio

Total Debt x 100
Disposable Income
= $284,000 x 100
$123,000
= 231%

•Too high? When is there too much debt?

Step 3: Analysing a client’s
risk profile
 One of the most important components of the client analysis
is assessing the client’s risk profile.
 A recommended investment portfolio for a client should be
designed around their risk/return philosophy
 what amount of risk is a client prepared to accept in order to
generate a certain rate of return
 is the client - conservative, balanced, aggressive?

 Factors likely to influence the degree of risk a client is

prepared to accept:
 term of investment, likely need for the funds in future, previous
investment experience, investment knowledge, objectives,
relative importance of investment portfolio in terms of client’s
total wealth

 How do we determine what the client’s risk profile is?

Step 3: Analysing a client’s risk
profile
Method 1: Risk profile questionnaire

Method 2: Are you stock-like or bond-like?

The risk you expose your financial capital to should consider the
risks of your human capital
Is your wage income (as an investment) flexible?
Is your wage income (as an investment) sensitive?

Method 3: Risk-set point

Differentiate between needs and wants
Achieve $$ for needs and wants using different asset classes
Where safety zone ends & risky zone begins: Risk Set-Point

MORE ON THESE IN WEEK 4…

Step 4: Develop a financial plan
(Types of financial plans)
• An SOA must be provided for limited advice (scaled
advice) and comprehensive advice
• A Record of Advice (ROA), which superseeded the
Statement of Additional Advice (SoaA), can be
provided when
– an SOA has previously been provided with client
circumstances
– the relevant circumstances have not changed
significantly
– the relevant basis has not changed significantly
That is, the ROA is for “further” advice
Step 4: Statement of Advice
s946A RG 175

• The SOA is the primary documentation of advice

• SOA must contain sufficient information to enable
people to make an informed decision whether:
– the advice is appropriate
– they should act on it
• Provided at the same time as, or as soon as
practicable after, the advice is provided
• Documents the appropriateness of advice
Content and presentation are important
– not a “data dump” (ASIC shadow shopping)
Step 4: Statement of Advice
The SoA should:
• be designed to meet client objectives.
• be based on clients’ current and projected financial position, preferences and risk
profiles.
• be capable of explanation in plain language to the clients (and contain this
explanation in summary form).
• outline the nature of strategy and products recommended and point out possible
risks. Taxation issues should be clearly explained.
• have a definite initial timeframe in mind, and provide projections as to how the
financial prospects of the clients might be expected to evolve over that period.
• contain a summary of how the plan is expected to achieve the client’s objectives.
• contain a declaration of any associations, commissions, etc. which any person
associated with the provision of the plan might receive, which might influence the
objectivity of the advice.
• contain a clear statement of fees charged for each phase of service. If specialist
advice (e.g. actuarial, taxation or legal) is required, information as to how this can
be obtained and at what cost, should be provided.
• contain an outline of the dispute resolution mechanism available to clients.
 ASIC RG90 Example statement of advice (scaled)

http://asic.gov.au/regulatory-resources/find-a-
document/regulatory-guides/rg-90-example-statement-
of-advice-scaled-advice-for-a-new-client/

Example starts on page 28

This document is in the week 2 folder on LMS

 Summary
• Client-adviser relationship is built on open, honest,
trusting communication
• 6-step FPP provides framework for development of
the SOA
– Awareness of FSG, SOA, PDS role is important