Financial Planning For The Client : Case Study

Describe about the Case Study for Financial Planning for the Client.

 

This report is related with the financial planning of the client- Mr Mitch and his wife Jill. Initially client profile will be stated which will include client details, goals and objectives and current financial situation. It will include comprehensive cash flow statement, detailed tax calculations, and a balance sheet based on the couple’s existing situation. Then Risk profile and investment strategy will be stated. For this purpose interview will be conducted so that risk profile can be created. Further investment recommendation will be stated which will determine one appropriate managed fund under each of the following 4 assets classes: Australian fixed interest; Australian property; Australian equity & International equity. On the basis of that recommended strategies will be stated.

Personal profile

PERSONAL LIFE
	Relation	Age
Mitch	Self	30
Jill	Wife	28
Tessa	Kid	6
Matthew	Kid	3
School Age		10
School Cost		12000

 

Assets	Type	Value
Home	Joint	650000
Contents	Joint	80000
Cars	Joint	60000
Savings- Cash	Mitch	12000
Savings- Shares *	Mitch	25000
Superannuation Balance	Mitch	20000
Superannuation Balance	Jill	40000
TOTAL		887000
Liabilities
Home Mortgage **		420000
Car Loan***		15000
Credit Card-Avg Monthly Bal		4000
TOTAL		439000

 

Savings- Shares *
Shares Cost Price		30000
Purchase Year		2012
Home Mortgage **
Var Interest Rate		5.50%
Monthly Repayment		3100
No of years		18	216
Car Loan ***
Var Interest Rate		6.60%
Monthly Repayment		302
No of years		5	60
		Home Mortgage	Car Loan
Monthly Payment		-3067	-294

 

Income	per annum
Salary	40000
Net profit from business	130000
Bank Interest	120
Fully Franked Dividends	500
	170620
Payments
Living Expenses	40000
Mortgage and Loan Repayments	40824
Private health insurance	3200
Professional Membership fees
-Mitch	700
-Jill	800
Travel Expenses for work
-Jill	400
Tax preparation (50/50)	2000
Donations (50/50)	1500
Holidays and entertainment	10000
	99424
Superannuation  Accounts
Mitch
-Net wealth superannuation account	20000	4 years
-- invested in conservative option
--includes death and TPD cover for 50000
Jill
-Net wealth superannuation account	30000
-- invested in conservative option
--includes death and TPD cover for 50000
- Legal Super Industry Super Fund	5000
--invested 20% in shares and 80% in cash
- ABC Super Fund	5000
--invested 100% in cash

(Mca.gov, 2016)

• The couple wants to reduce their debt obligations as soon as possible.
• Investments done must be revised so that tax liabilities can be reduced.
• They want the best way to create wealth for retirement planning, from now onwards.
• They want to rationalise their superannuation funds.
• To achieve a well- diversified portfolio within their superannuation investments based on their risk appetite.
• After 2 years, they want to fund a holiday for the family to America which will cost them $12,000.
• They want to plan an education fund to place Tessa in a private school, when she turns 11 years.

• Cash flow statement

COMPREHENSIVE CASHFLOW STATEMENT
Income	per annum
Salary	40000
Net profit from business	130000
Bank Interest	120
Fully Franked Dividends	500
TOTAL INCOME	170620
Expenses
Living Expenses	40000
Private health insurance	3200
Professional Membership fees
-Mitch	700
-Jill	800
Travel Expenses for work
-Jill	400
Tax preparation (50/50)	2000
Donations (50/50)	1500
Holidays and entertainment	10000
TOTAL EXPENSES	58600
EBIT(Earnings Before Interest and Taxes)	112020
Interest Expense	14491
PBT (Profit Before Taxes)	97529
Taxes applicable	62529
Net profit	35000
Total Repayments	26333
Cash Profit	8667

(Riskstrategies, 2016)

• Detailed tax calculations
  

Earnings of Family	97529
Tax Limits	Rate	Fixed Charge	Amt. Eligible	Tax Applicable
18200	0%	0	18200	0
37000	19%	0	79329	15073
80000	32.50%	3752	60529	23424
180000	37%	17547	17529	24033
TOTAL				62529

(Ato.gov.au, 2016) (Ato.gov.au, 2016) (Exfin.com, 2016)

• Balance sheet

Assets	Type	Value
Fixed Assets
Home	Joint	650000
Contents	Joint	80000
Cars	Joint	60000
Net Fixed Assets total		790000
Current Assets
Savings- Cash	Mitch	20667
Cash & Equivalents total		20667
Current Investments
Superannuation Balance	Mitch	20000
Superannuation Balance	Jill	40000
Investments total		60000
TOTAL ASSETS		870667
Liabilities
Home Mortgage **		420000
Car Loan***		15000
TOTAL LONG TERM LIABILITIES		435000
Current Liabilities
Bad Debt- Shares		30000
Credit Card- Payables		48000
TOTAL CURRENT LIABILITIEs		78000
TOTAL LIABILITIES		513000
Share Capital/ Equity
-Mitch		118833
-Jill		238833
TOTAL EQUITY		357667
TOTAL LIABILITIES & EQUITY		870667

(free-management-ebooks, 2016)

It is a process through which optimal level in the investment is evaluated. It is the methodology through which required risk and the capacity of the risk along with that tolerance of the risk is examined (riskprofiling, 2016).  It helps in determining the right assets allocation so that proper return can be generated from that (Professionaladviser, 2016). In other words it can be said that it is used for the strategic deployment of the portfolios' resources (Hughes, 2016).

1. What is your name?

Mitch

2. What is your age?

Age 35 years

3. What is your willingness in terms of financial risk?

According to the interview, respondent's willingness towards the financial risk is moderate in nature that is neither too high nor too less. Since respondent is having nuclear family which includes two children and wife, therefore he is not ready to take high risk.  This question clearly states that willingness towards the financial risk is totally dependent upon the structure of the family and family members' earnings. In the given case, Michael is the only earning member of the family (Telstrasuper, 2016). 

4. In financial context what is risk?

According to the respondents, risk is the combination of the opportunity and danger which is associated with the instrument of the portfolio. Risk is always associated with the portfolio. Whether market is too god or moderate risk will be there. Therefore it can be said that it is an indispensible part of the investment.

5. After how many years you will withdraw invested funds from your portfolio?

According to the interview, respondents would like to withdraw funds after 3-5 years.

6. Can you define holding period for the long term investment?

According to the interview, respondents had a belief that long term investment is for more than 3years. Then only desired return can be obtained from the long term investment (Moss, 2016).

7. If the share of your portfolio goes down by 40% in a short period of time, then what will be up decision?

According to the response of the respondents, he would like to sell portion of the investment in the market. Portion which is sold out will be invested in other investment which has high return. Portion of the investment will be invested in that source which has stable return. Respondents will not buy more investment because it may be very risky. Holding of the investment is not advisable because in case share goes down by some more percentage then investor has to face huge loss. 

8. Would you like to invest in an investment which has no value fluctuation, although it might generate low return?

In the interview it was asked form the respondent that in what type of investment he would like to invests. Respondent strongly agrees to the given statement according to which he would like to invest in that investment which has no value fluctuation, although it might generate low return.

According to survey sheet filled by Mr. Mitch and his wife Jill, the client is young, has family with two children and a home. The couple is young and earning with 2 children. The current and future income sources from salary, pensions and other investments of the clients are stable and fairly secure. They have mortgage and also have to cover the childcare costs and small cash balance balances. The client is not entirely familiar with the investment matters. They have a little knowledge of share market and the other investments areas. The client has been into investment for not a very long time which is 3 years only. The investment does not include money spent in buying home and deposits in bank. In the current situation of client, they do need to access the money invested in the 3 to 5 years as they do not see any current emergency arriving. They will access money when their children will start going to the private schools. Apart from the investment, client has already plans to meet short term cash flows and in case of emergency. So the client is planning to keep the money for approximately 3 to 5 years. Mitch and Jill are also interested in tax savings. They understand the fact that some investments will help in tax savings but the benefit of saving the taxes will come with some risk. The couple is ready to take some variability in risk which also includes tax savings. The couple was asked a hypothetical question about the investment that if the client invested $100,000 and due to some bad market conditions, the portfolio drops to $85,000 in a short period, then what will the client would do. The client decided that they will sell a portion of the portfolio to cut the losses and reinvest into more secure investment sectors. Also if the portfolio further falls in   the next 12 months, then the client is willing to hold the investments and sell nothing, expect the market conditions to get better or improve. Hence it can be said that risk portfolio of the client is risk averse in nature. This shows that the client is willing to take the risk but not high risks which may or may not involve the good returns. The client is willing to have a balanced portfolio with spread of investments. They are willing to take the risk of negative return in 1 out of 7 years. This means the client is the balanced investor and has some understanding about the investment market behaviour. The client prefers balance between capital growth and capital security. They are prepared to bear short term risk in order to have long term capital growth.

Based on client’s risk appetite, they have several investment opportunities. As per their objectives of long- term savings for children’s education, they can invest in equity- linked securities. This will give them long- term capital appreciation. Besides that, they want to save their tax payments.  So, for that they can go for debt instruments which will help in tax saving. Following investments are proposed for the client in particular.

• Australian fixed interest

Mitch should go for Legg Mason Western asset Aus Bd A. It will provide fixed rate of income to the investor. This fixed interest rate instrument has been selected because its growth rate is constantly increasing from 2011 onwards. Income generated over the five years investment is 5.86% (Netwealth, 2016). Growth percentage is 1.12%. Index percentage is 6.54 and category percentage is 5.64. Credit quality of this bond is moderate medium. Standard deviation of the fund is 2.32. Sharpe ratio is 1.67. Beta and alpha of the stock are 0.94 and 0.41 respectively. Average weighted price is 112.31. Minimum initial investment is $30000. Minimum additional investment is $ 5000. Minimum withdrawal is 0 %. Thus it will ensure the stability of the principal and the interest income (Morningstar, 2016).

• Australian property

In this category investor should go for Black rocked Indexed Aus listed property. It is one of the most popular investments because investor is having full control over the investment (Anz.co.nz, 2016). Several tax benefits are attached with this investment. It is regarded as a tangible investment. Income generated over the five years investment is 5.30%. Growth percentage is 14.71%. Index percentage is 20.85 and category percentage is 19.18. Credit quality of this equity is large growth. This grows faster as compared to the share market. Standard deviation of the fund is 11.18. Sharpe ratio is 1.55. Beta and alpha of the stock are 1 and 0.01 respectively. Minimum initial investment is $500000. Minimum additional investment is NAv. Minimum withdrawal is NAv. Switching is allowed and the distribution frequency is on quarterly basis. (Morningstar , 2016)

• Australian equity

In this category, investor should go for Bennelong Concentrated Australian Eq. Equity is related with the long term investment. It assures high return but it is related with the high risk. Accumulation index return of this is very constant i.e. 1.25%. Quarterly return of the stock is 3.73%. Income generated over the five years investment is 11.52%. Growth percentage is 4.65%. Index percentage is 9.60% and category percentage is 9.35%. Credit quality of this equity is large growth. This grows faster as compared to the share market. Standard deviation of the fund is 13.55. Sharpe ratio is 1.78. Beta and alpha of the stock are 0.92 and 10.29 respectively. Minimum initial investment is $10000. Minimum additional investment is $1000. Minimum withdrawal is $5000. Switching is allowed and the distribution frequency is on semiannual basis. Annual ICR of the bond is 1.09% (Morningstar, 2016).

• International equity

In this category investor should go for Maple-Brown Abbott Global Listed Infras. Investor should go for international equity because it provides diversified opportunities and reduce risk at optimal level. It provides liquidity and flexibility to the investor. It is one of the best ways to assume the risk of investing in equity linked investments. One will be able to expose to huge risk, ensuring good returns while having a diversified portfolio.Income generated over the three years investment is 6.59%. Growth percentage is 11.18%. Index percentage is 12.32% and category percentage is 13.28%. Credit quality of this equity is medium growth. This grows faster as compared to the share market. Standard deviation of the fund is 8.78. Sharpe ratio is 1.74. Beta and alpha of the stock are 0.58 and 9.78 respectively. Minimum initial investment is $20000. Minimum additional investment is $5000. Minimum withdrawal is $0. Switching is not allowed and the distribution frequency is on quarterly basis. Annual ICR of the bond is 0.98% (Morningstar , 2016).

First of all Mitch should identify the risk.  This will help in describing and recognising the amount of risk that will affect the project's outcome.  In this investor should broadly identify its objectives and goals (continuingprofessionaldevelopment.org, 2016).

Earnings of Family	97529
Tax Limits	Rate	Fixed Charge	Amt. Eligible	Tax Applicable
18200	0%	0	18200	0
37000	19%	0	79329	15073
80000	32.50%	3752	60529	23424
180000	37%	17547	17529	24033
TOTAL				62529

After identifying the risk Mitch should analyse the risk deeply.  This will helps in determining the likelihood as well as the consequences of the each risk (litten, 2016).  It will help in gaining knowledge relating to the nature of the risk.  It will examine that how particular risk can affect goals and objectives of an individual.  This information will be useful in describing and building portfolio of the client (CTB, 2016).

Home Mortgage	420000
No of years	18
Annual repayment	23333
Interest Rate	5.50%
		Year 1	Year 2	Year 3	Year 4	Year 5	Year 6	Year 7
Opening Mortgage Amount		0	396667	373333	350000	326667	303333	280000
Additions		420000	0	0	0	0	0	0
Repayment		23333	23333	23333	23333	23333	23333	23333
Closing Mortgage Amount		396667	373333	350000	326667	303333	280000	256667
Interest cost applicable		10908	21175	19892	18608	17325	16042	14758
Total payable		34242	44508	43225	41942	40658	39375	38092
Total paid		37200	37200	37200	37200	37200	37200	37200
Interest Cost paid		13867	13867	13867	13867	13867	13867	13867

Evaluate the risk; this will help in identifying the magnitude of risk. Consequence as well the likelihood will be evaluated through this.  Though this investor can make decision that whether risk is tolerable or it has to be transferred or mitigated. This will help in knowing the volume of the risk and its consequences.

Car	15000
No of years	5
Annual repayment	3000
Interest Rate	6.60%
		Year 1	Year 2	Year 3	Year 4	Year 5
Opening Loan		0	12000	9000	6000	3000
Additions		15000	0	0	0	0
Repayment		3000	3000	3000	3000	3000
Closing Loan		12000	9000	6000	3000	0
Interest cost applicable		396	578	413	248	83
Total payable		3396	3578	3413	3248	3083
Total paid		3624	3624	3624	3624	3624
Interest Cost paid		624	624	624	624	624

Treat the risk, last but not the least investor should treat the risk. In this investor should plan the response planning relating to the risk. Selling car: The couple has taken two long- term borrowings- one for the house worth $420,000 for 18 years; and the other is for 2 cars worth $15,000 for 5 years. The family consists of 4 people only. They can adjust with a single car as well. After all, they are incurring transport expenses for work purposes, having two cars. So, even if they sell a car they can adjust conveniently. This will help in reducing the interest obligations to a great extent. First of all, $302 which they are paying as interest on car loan will vanish. Besides that, the amount they retrieve from the sale of a car can be used to repay a part of house loan. So, they can save interest payments here as well.

Monitor the risk: in this investor would assess the investment strategy. It will help in identifying the impact of different strategies on the portfolio of the client. For the given case Mitch's main aim was to mitigate the tax implication. If above stated strategies are followed by the Mitch then its   revised earning of the family will be 50000 instead of 97529 and tax implication will be as follows:

Revised earnings	50000
Tax Limits	Rate	Fixed Charge	Amt. Eligible	Tax Applicable
18200	0%	0	18200	0
37000	19%	0	31800	6042
TOTAL				6042

Hence it can be said that tax impact has reduced from 62529 to 6042, through recommended strategies.

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