FINS3631 Risk, Insurance and Superannuation

Individual Assignment – Term 3 2021

Assumptions

• • Inflation 2.1% o AWOTE 2.4% (use for wages inflation)
  • Assume the investment rate of return is 5.5% applied to investable assets (i.e. Superannuation) where a growth risk profile asset allocation is used, 
  • Use 2021-22 tax rates where applicable
  • Use FBT rates effective 1 April 2021 if and where applicable

Refer to the mark allocation and what is expected from you section below for further details and tips

Case Study - The Lee Family

Eric Lee (aged 36) is married to Emily (aged 35). They have two children, Olivia (3) and Leo (1).

Eric is works at an accounting firm in Sydney, he has recently been promoted to partner. Eric enjoys working at the firm, although he has always dreamt of starting his own accounting practice at some point, however, he is currently overwhelmed with a demanding life between his work and raising his family. 

Emily is a. She is a school teacher, she is always trying to balance between work and family. Emily has recently return to work after a 12-month maternity leave. 

Eric and Emily have been discussing for a while the need for them to see a financial adviser to ensure they have adequate insurance and to consolidate their superannuation accounts since they both have accumulated 2 sperate accounts from their past employment. They also want to make sure their superannuation is invested appropriately, to help them grow their superannuation and save for retirement, particularly in light of the latest superannuation changes. 

Eric and Emily have a very strong view to do whatever possible for their children including making the investment to put them through private school education from primary school if they can afford it otherwise at least for their high school years and would like to continue to assist them in every way possible. 

Both Eric and Emily have reasonable experience when it comes to investment and management of their financial affairs. Although in recent times Eric and Emily have been too busy to pay attention to their financial affairs. They, however, hope this will change in the near future as they are keen to take control of their investments to ensure they meet their lifestyle and retirement goals and objectives.

Eric and Emily have decided to come and see you. They made an appointment for an initial consultation with you.

Eric and Emily have left you with the information below after the first interview.

Notes to the supplied information:

* The employer makes only the mandated employer contribution (SGC) to their superannuation nominated superannuation fund.

** Eric and Emily’s total current income requirement will continue until retirement.

You need to clearly address the following issues:

• Their goals, objectives, needs, and concerns and whether they can achieve their objectives including their retirement objectives and how (attempt to present them with more than one option where applicable).

• They also ask you to address and consider the following specific issues:

• • Eric and Emily would like to retire once Eric reaches age 67. However, they are happy to postpone retirement for a few more years if this would help them achieve a more comfortable retirement as Eric is happy to scale down his workload and stay working on a consultancy basis for a few more years. They think that they need an after-tax income of $75,000 in today’s dollars during their retirement (assume that this income can be produced tax free at retirement). They would like to know whether they will have sufficient superannuation savings accumulated to help them fund their retirement objectives. (Use the longest life expectancy between Eric and Emily and the add 8 years when performing their retirement projection).

• • Emily has attended a seminar at her covering how to use a salary sacrifice to superannuation strategy to maximise retirement income, she is questioning whether such a strategy would be suitable to either her, Eric and or both (provide a calculation illustration with your explanation).

• • Eric and Emily would like to consolidate their superannuation, they want to understand the meaning of the different superannuation component (Tax free and Taxable components). They have also been considering establishing an SMSF. They wanted to know the key relevant issues they need to be aware of including their roles and responsibilities as trustees as well as the key risks and benefits related to their specific circumstances. At present Eric and Emily’s superannuation contribution goes to an employer nominated retail fund, they are wondering whether they can consolidate all their superannuation into an SMSF and have their future employer contribution directed to the SMSF.

• • Eric and Emily are keen to save for their retirement and grown their superannuation savings. They want to also explore the concept of borrowing to purchase a property by using a Limited Recourse Borrowing Arrangement. 

• • Eric and Emily would like to know more about the possible investments available in an SMSF including investment in real property, they also would know the rules surrounding the purchase and leasing of a real property through the SMSF. 

• • Eric and Emily would like to know more about their option in utilising their superannuation savings to commence a pension or an income stream in retirement. They would like to know the different types of pensions can be available to them to utilise with their superannuation savings to fund their retirement. They also would like to know if the latest superannuation changes impact their retirement plan.

• • Eric and Emily would like to pay off their home loan as soon as possible.

• • Eric and Emily would like to continue their commitment towards their children’s private schooling both for their primary and secondary school education if they can afford it. They would like to set aside $27,000 p.a. for each child.  

• • Eric and Emily would like to ensure they have adequate general and personal insurance. They want to know the type of insurance and the amount of cover they should be considering to ensure they are adequately covered Be specific in your advice and perform an appropriate needs analysis as part of your justification, discussing why it’s important to have a risk management plan and the different risk management strategies they can consider including insurance highlighting the need for insurance and  the risks of under insurance.

• • Provide appropriate projection model to justify your recommendations.

• • Use diagrams and charts to assist with your illustrations.

Risk Profiling- after a risk profile assessment and a through discussion with Eric and Emily on their risk tolerance, attitude to risk and risk capacity, it was determined that their risk profile is “Growth risk Profile” consisting of 80% growth and 20% defensive assets. 

As per the assumption provided a growth rate of 5.5 % is applied to investment assets invested in line with the growth risk profile.

Your task now is to prepare a complete scaled advice Statement of Advice (SOA) for Eric and Emily. The information provided in the client scenario is to be used in preparing your calculations and advice. As the assignment is to be a SOA for clients, it should be in a suitable and appropriate format and reader friendly. Clarity and conciseness are important but full explanations are required. Adopt the clear, concise and effective approach to your SOA.

 Your advice will be limited in scope covering at minimum the key areas below.

• Risk management plan including Insurance needs analysis and insurance advice including product recommendations.
• Superannuation consolidation, contribution, investment asset allocations strategies and recommendations providing reasoning and justifications.
• Retirement planning.
• Debt management
• Cash flow and asset projections
• Provide assumptions used and justifications (cost, risk, suitability, etc.) where required.

Assignment mark allocation & what is expected from you.

Mark Allocation

Marks breakdown between both tasks SOA and presentation slides (out of 100)

Overall Presentation SOA  25 Marks

Disclosure and compliance 15 marks

Analysing current situation, the client goals, objectives need and concerns 20 marks. Strategy and recommendation 40 marks

What is expected from you  

Deliver appropriate advice that address all the clients’ goals, objectives, needs, concerns and special circumstances. The advice needs to meet best interest duty and demonstrate the client will be in a better position in following the advice and recommendation you have presented. You need to clearly identify the risks of the advice and how they can be mitigated.  

Your SOA needs to be professionally presented and reader friendly, aiming for best practice and not for minimum standards. The statement of advice based entirely on your own work. The SOA need to be compliant with all the financial services regulation for the format, the advice itself and all appropriate and required disclosures. Providing a compliant statement of Advice (i.e., disclosure, meeting the best interest duty, regulatory etc.). The SOA must adhere ASIC RG175 requirements in particular the “Clear, Concise and effective” requirement. You also need to ensure other relevant compliance issues include switching advice.

Current situation: Building and structuring the client current situation (including pre advice cash flow and net worth)

Clearly analysing the fact in the case study

Appropriately addressing all the client goals, objectives, needs, concerns and special circumstances.  

Providing a client with strategy that addresses all the client goals, objectives and concerns and aims to meet the client goals

Providing client with options and solutions – providing alternative strategies

Highlighting how the strategy is in the best interest of the client – i.e. meeting the best interest duty  

Highlighting the risk of the strategy (if any) Addressing how the risks can be mitigated.  

Providing specific product recommendations to execute the strategy Obtaining Authority from the client to proceed with the recommendation.  

Insurance Advice: you need to perform needs analysis based on the clients’ facts and special circumstances listed in the case study. You need to identify needs and gaps and provide clear recommendations of what insurance covers should be sought, increased, or upgraded, cover type, sum insured, etc. For Insurance quotes, you can make appropriate and reasonable assumptions (i.e. client is in good health and is a non smoker, providing there no information to the contrary in the case study).  

SMSF & Superannuation Advice: you need to avoid including generic information and general pros and cons. Your advice related to SMSF (to set or not to set up, to keep and not to keep, etc.) need to be specific to the client’s circumstances and facts listed in the case study.  

Other superannuation advice needs to be provided with clear justification maintaining or switching. All super switching advice need to refer to ASIC information sheet INFO182. Switching Advice: All switching advice (superannuation, investment, and insurance) need to be clearly justified. 

Retirement Advice: you need to perform appropriate calculation to identify the amount required to fund retirement income and other expenditures (if any) the clients intending to undertake. You need to clearly demonstrate through both cash flow and net worth projections how the clients is able (or unable if they don’t have sufficient resources) to fund their retirement

Presentation – needs to be professionally presented and your SOA document must flow nicely and need to be reader friendly.  

Disclosure & Compliance – Appropriate disclosure of fees and benefits and meeting the regulatory requirement of advice documentation

Technically accurate advice - It is critically important to provide accurate advice for the client to rely on  

Again, always relate to the clients' specific circumstances throughout the SOA and ensure you are specific when explaining concepts, rules, regulations, legislative changes in terms of highlighting their impact on the clients specific and relevant.  

Key sections you must include in the SOA:  

• Covering letter 
• Cover page 
• Table of Content 
• Executive summary (2-3 pages max) 
• scope of advice 
• Assumptions 
• Current situation- information about the client 
• Goals and objectives analysis including needs, concerns and special circumstances.

advice and recommendations  

• Insurance advice 
• Superannuation and SMSF advice 
• Other advice related to specific goals and objectives (education funding, 
• specific questions, etc.) 
• Meeting best interest duty 
• Risks of the advice and how they are mitigated.
• Disclosure sections – meeting all legal and best practice disclosure requirements:  
• The cost of the advice and how you are paid. 
• All fees, commission and other benefits including soft dollar commissions. 
• Specific disclaimers.  
• How to proceed. Authority to proceed and actions to proceed. 
• Implementation schedule 
• Appendices 

End of Assignment

Individual Assignment Rubrics and marking guidance

The rubric below is read conjunction of the assignment expectation listed below