BUDGETING AND FINANCIAL

PLAN
QUESTIONS

NOTE THAT Q4.1-5 ARE NOT IN THE TEXTBOOK.

Q4.1 WHAT ARE THE THREE TYPES OF DATA? GIVE AN EXAMPLE OF
EACH AND DESCRIBE HOW THIS INFORMATION MIGHT BE USED IN
THE CONSTRUCTION OF A STATEMENT OF ADVICE.

 Quantitative data such as salary level and

superannuation contributions.
 This information is used to determine the client’s current
and potential future wealth.
 Qualitative data are the personal details, goals and
attitudes a client has
 Including factors like wanting to retire early, not valuing
insurance cover, or funding a child’s university fees
 That will determine what advice and how to deliver that
advice.
 Assessed data will set the parameters for making
longer-term projections of portfolio values and cash
flows.
 Includes risk tolerance and projected longevity.
Q4.2 WHAT ARE THREE REASONS A CLIENT MIGHT HAVE TO
MODIFY THEIR GOALS? GIVE AN EXAMPLE.

 There is not enough time to achieve their goals;

for example, clients need $500,000 for their
retirement, they only have three more years to
retirement and they only have $300,000 saved.
 Their goals cannot be achieved; for example, the
client wants an investment that will pay high
returns, but wants security of their investment
money.
 Regulatory barriers; for example, clients want to
receive the age pension, but fail the assets test as
they have three investment properties and other
personal investments.
Q4.3 WHAT ARE THE SECTIONS OF AN EXECUTIVE SUMMARY
AND WHY ARE THEY IMPORTANT FOR THE CLIENT

Four sections
 The first provides a quick summary of the
personal details, so that the client knows the
advice will be relevant to them.
 The second section reiterates the client’s goals,
which allows the client to review what the
adviser believes they want to achieve.
 The third section provides a succinct outline of
the key recommendations which are clearly
linked to the goals listed in section two.
 The fourth section provides expected outcomes
assuming the recommendations are implemented
and are also clearly linked to the client’s goals.
Q4.4 WHY MIGHT DISCUSSIONS OF PERSONAL INSURANCE
AND ESTATE PLANNING BE DIFFICULT FOR FINANCIAL
ADVISERS TO HAVE WITH THEIR CLIENTS?

 Personal insurance and estate plans are related

to the client or their spouse’s illness, disability
and death.
 Most people would prefer to ignore these issues
or postpone discussions.
Q4.5 WHY ARE ONGOING REVIEWS SO IMPORTANT?

There are a number of reasons why ongoing reviews are

important.
 First, they give the adviser a chance to update their
files and provide additional advice.
 Second, they cement the relationship so that the
client will be more likely to approach the adviser if
they need additional advice.
 They will also be more likely to refer others to the
financial adviser.
 Changes across markets, products and regulations
can mean that some strategies are no longer as
effective.
 This means changes may need to be made to help the
clients achieve their goals.
Q5.3 DEFINE THE BALANCE SHEET, ITS COMPONENTS, AND HOW
YOU WOULD USE IT IN PERSONAL FINANCIAL PLANNING.
DIFFERENTIATE BETWEEN INVESTMENTS AND PERSONAL
PROPERTY.

 The balance sheet summarises financial position by

showing assets (what you own listed at fair market
value), liabilities (what you owe), and net worth (the
difference between assets and liabilities) at a given
point in time.
 With a balance sheet, you know whether your assets
are greater than your liabilities and, by comparing
balance sheets for different time periods, you can see
whether your net worth is growing.
 Investments are assets that are acquired to earn a
return; they largely comprise property and financial
assets. Personal property is movable property — cars,
furniture, jewellery, clothing etc.
 There is an expectation that some property may grow
in value while other property may be expected to
decline in value.
Q5.4 WHAT IS A CASH-FLOW STATEMENT? WHAT ROLE DOES
IT SERVE IN PERSONAL FINANCIAL PLANNING? NAME THE
FOUR BASIC TYPES OF EXPENDITURE.

 The cash-flow statement captures the various cash-

flow activities that have occurred over time, normally
over the course of a month or a year.
 In personal financial planning, the statement permits
comparison of actual results to the budget’s values.
 Its components are cash inflows and outflows, and
cash surplus (or deficit).
 Some of the inflow sources include wages and
salaries, bonuses and commissions, interest and/or
dividends received, proceeds from the sale of
securities, proceeds from the sale of assets, social
security payments, alimony and/or child support, and
other items.
 The four basic types of outflows are: living costs,
purchases of various assets, tax payments, and debt
payments.
PROBLEMS

NOTE THAT P4.1-4 ARE NOT IN THE TEXTBOOK.

P4.1 MARCEL AND TRUDY HAVE A GOAL TO ‘SUPPORT THEIR
DAUGHTER’S EDUCATION THROUGH FOUR YEARS OF
UNIVERSITY’. IN ORDER TO PUT THIS GOAL INTO FINANCIAL
TERMS, WHAT INFORMATION WOULD YOU NEED TO COLLECT?

 We require a lot more information, such as:

 the current age of the daughter and when she expects to
start university;
 where she would like to go to university, the current fees
and expected costs;
 whether she will commute, stay on campus or live off
campus;
 whether she will seek work to offset some of the courses;
 how much money the word ‘support’ means to Marcel and
Trudy;
 whether they have the financial resources to pay the
intended level of support out of cash flow or if they need to
save now to be able to pay later;
 if they are going to save, how much can they can save,
where they should put their savings, and will their savings
be enough.
P4.2 GEORGE IS AN OPTIMIST. HE BELIEVES HIS CASH
MANAGED ACCOUNT WILL CONTINUE TO EARN 6% FOREVER.
YOUR ASSUMPTION IN THE SOA IS THAT CASH WILL RETURN
5.5%. WHAT MIGHT YOU SAY TO GEORGE TO GET HIM TO
ACCEPT THE LOWER ASSUMPTION?

 ‘We believe that assumptions regarding future

performance should be conservative. If you are
correct, George, your returns will be higher than
assumed, which is good. However, if we plan with
a lower return in mind and can still achieve your
goals, you can have more confidence in the
outcomes.’
P4.3 AN EXISTING CLIENT COMES IN TO SEE YOU WITH AN
INVESTMENT THAT HER ACCOUNTANT RECOMMENDED AS
ONE THAT WILL SAVE HER TAX. WHAT DO YOU NEED TO SAY
TO HER AND WHAT WOULD YOU NEED TO DO BEFORE YOU
CAN MAKE A RECOMMENDATION (EITHER TO INVEST OR NOT
TO INVEST)?
 First, remember no investment or strategy should be
undertaken for tax benefits only.
 Next, the adviser would have to do a full review of the client’s
situation to identify any changes since the last advice was
given.
 The adviser would then have to research the product to
understand how it works, where the tax benefits come from,
the costs, the expected returns and the risks.
 Where the results of this analysis are positive, then a
recommendation to invest might be made.
 Where the results indicate uncertainty regarding the
appropriateness of the investment, a recommendation not
to invest, or the substitution of a different, more
appropriate product should be made
P4.4 A NEW CLIENT SEEMS TO BE QUITE ACCEPTING OF
YOUR RECOMMENDATIONS UNTIL YOU REACH THE
IMPLEMENTATION SCHEDULE AND THEY SEE ALL THE WORK
THAT HAS TO BE DONE. HOW WOULD YOU WORK WITH THEM
TO GAIN THEIR COMMITMENT TO PUTTING THE PLAN IN
PLACE?

 The implementation schedule lists all of the actions and who is

going to undertake the actions. At a quick look, the amount of
work that needs to be done may seem very large. Students should
come up with some ideas, such as:
 Have an assistant help them.
 Break up the tasks into what they have to do and what
you/your assistant will be doing.
 Break up the tasks into time periods, ie, ‘Next week, you only
need to do these three things’.
 Set up a meeting where the client and you/your assistant
complete the tasks together.
 Suggest any other reasonable ideas.
P5.2 THE MOORE HOUSEHOLD’S FINANCIAL STATEMENTS
FOR 2016 AND 2017 CONTAIN THE FOLLOWING
INFORMATION:
2016 2017
$ $
Total net worth 410 000 450 000
Total assets 980 000 810 000
Liquid assets 7 500 9 000
Total current liabilities 65 000 60 000
Total monthly loan payments 5 100 4 900
Monthly gross (before tax) cash inflow 12 500 14 000

COMPUTE SOLVENCY, LIQUIDITY AND DEBT SERVICE RATIOS

FOR 2016 AND 2017, AND ADVISE THE MOORES WHAT THE
RATIOS REVEAL ABOUT CHANGES IN THEIR FINANCIAL
CONDITION.
P5.2 ANSWER (ALL PERCENTAGES ARE ROUNDED):
2016 2017
Solvency Total Net Worth 410,000
=42% 450,000
Total Assets 980,000 = 55%
810,000

Liquidity Liquid Assets 7,500 9,000

Total Current Liabilities = 11% = 15%
65,000 60,000

Debt Service Monthly Total Debt Payment 5,100 4,900

Monthly Gross Income = 41% = 35%
12,500 14,000

 Ratios indicate an improvement in the financial strength of the

Moore household. In 2017, they had a stronger net worth position,
a stronger capacity to pay their current liabilities and stronger
income coverage to handle their monthly debt payments.
 The Moore’s should:
 For the short term: further reduce their liability burden and explore ways
to reduce debt and to review lifestyle impacting debt.
 For the longer term: consider opportunities to grow their personal wealth.
P5.3 TWO HOUSEHOLDS, TURNBULL
SHORTEN, HAVE
AND
THE FOLLOWING ASSETS AND DEBTS AS AT 31 DECEMBER
2017. PREPARE THEIR BALANCE SHEETS AND COMPARE
THEIR FINANCIAL POSITIONS.

Turnbull Household 2017 $ Shorten Household 2017 $

 Investments
Cash 9,000 Cash 4,650
Vehicles 8,500 Vehicles 16,350
Jewellery 14,000 Jewellery 30,500
Clothing 9,000 Clothing 7,700
Artwork 17,000 Artwork 3,550
Appliances 40,000 Appliances 42,500
Property 170,000
Property 220,000
Caravan 13,000
Caravan 20,500
Bills payable 21,700
Loan payable (6 months) 22,000
Interest payable 1,000
Interest payable 1,800
Income taxes payable 4,750
Taxes payable 3,000
Bank loan payable, 2,500
Loan payable, non-current 78,000 current position
Bank loan payable, 37,500
non-current
P5.3 TURNBULL AND SHORTEN PROBLEM CONTINUED.


 Turnbull’s balance sheet reveals a stronger net
worth position.
 In solvency terms, Shorten has a better position.

 Liquidity ratio reveals that Shorten has a weaker

position.