Order Description
Scenario: Luke and Kelly Hubbard
Financial Planner (FP): Luke and Kelly, thanks for coming in. I understand that you have just
purchased a new home and are interested in putting together a financial plan.
Luke: That’s correct. We bought a new house about three months ago in Chelsea in Victoria.
We move in tomorrow – the last day of June 2015 – we can’t wait.
FP: Congratulations – buying a home is usually the first step to wealth creation so now is a
good time to assess your current financial position and to make some plans for the future.
Kelly: I must say that I am nervous about making plans for the future – so many things can
change and upset the best laid plans, as they say.
FP: True but my philosophy is that a plan is much better than no plan and plans can always
be updated and changed to meet new circumstances. Tell me a bit more about this house
purchase.
Luke: Well the house cost $525,000. We have had to borrow $380,000. Our mortgage
broker suggested that we split the loan into two. So we have a $250,000 fixed rate loan. The
rate is 6.25% fixed for the first two years. The loan itself is a 25 year loan. Repayments are
monthly. We wanted to fix the loan for five or ten years however our broker suggested that
we initially only fix for two years. I’m still not sure if we have done the right thing. What are
the advantages and disadvantages of fixing an interest rate for a shorter or longer period?
FP: Well there are a number of factors to consider when deciding on the fixed term for a
loan. Rather than answer that now let me make a list of questions you want answered and I
will include my answers in my report to you. What about the other $130,000 – did you
borrow that a variable rate?
Kelly: Yes. It is a variable rate, 25 year loan with monthly repayments. Thanks to the last
official interest rate cut the annual rate is now 4.9%.
FP: Can you tell me a bit more about your jobs and how much you earn?
Luke: I work as a lawyer for a Melbourne based legal firm. My salary package is $93,075 and
this includes the standard superannuation guarantee contribution. In the last five years my
salary has gone up by about 4% per annum and I think this rate of increase is likely to
continue for the foreseeable future.
Kelly: I used to work as a graphic designer and web developer. Now I work from home
running an online clothing business. I do have a business plan. Last financial year I had a
taxable income of $57,000. My business plan projects that this income will increase by
about 6% per annum. As I said earlier I get nervous about plans because so many things
change but so far so good.
FP: Kelly what about contributions to superannuation.
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MAF255 Financial Planning
Assessment 2 – Limited Scope Statement of Advice
T2, 2015
Kelly: None I’m afraid. I do have about $10,000 in superannuation left over from my graphic
designer/web developer days. I’ve never quite seen the point of locking your money away in
superannuation for 30 years particularly when there are bills to pay and a house to buy.
FP: Whilst we are on the subject of superannuation Luke how much do you have in super?
Luke: (Luke hands over his last superannuation statement which shows he has a balance of
$56,230).
FP: Besides your house and your superannuation what other assets do you have?
Kelly: I inherited a parcel of 1000 CBA shares back in 2007 when my Uncle passed away.
Back then they were valued at $56.93. I sold 500 of the shares at $92.40 on the February 9
this year to help with the purchase of the house. I still have the other 500. I guess I am going
to have to pay some capital gains tax on the sale. Capital gains tax has me very confused and
whilst on the subject of confusion, franking credits have me completely bamboozled. Can
you give a simple and straight forward explanation – maybe an example might help.
FP: Let me add that explanation to my list.
Luke: I have suggested to Kelly that she should sell the remaining 500 CBA shares – the stock
market is very volatile at the moment. What goes up must come down. I think she would be
much better off putting the money in a term deposit – at least there we know it is safe and
we can work out what rate of return we are getting. What do you think?
FP: I think my list just got longer.
Kelly: Besides the 500 CBA shares we have left we also have two cars worth about $32,000
in total. We also have $50,000 in a bank term deposit which is in Luke’s name and which
pays 3.25% interest, and a bank transaction account in joint names which has $27,000 and
which pays zero percent interest.
FP: Do you have any gold, jewellery, family heirlooms?
Luke: Not really, other than about $40,000 in house contents – that’s about it really.
FP: What about your living expenses – do you budget your living expenses?
Luke: Yes we do. To save some time I prepared this list of living expenses for 2014/15 last
week. I was surprised as to where our money actually goes. (At this point Luke hands over a
copy of the living expenses. See the excel spreadsheet template provided.)
FP: OK what about what you owe? I know that you have a $380,000 mortgage. Any other
debts?
Luke: We both have credits cards. I have a Visa card with about $20,000 owing and Kelly has
a Myers card with about $6,000 owing.
FP: Do you know what rate of interest you are paying on these cards?
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MAF255 Financial Planning
Assessment 2 – Limited Scope Statement of Advice
T2, 2015
Kelly: Not really – I know we should – they are just so convenient. We never really pay them
off – with the interest, our payments and new purchases each month the balance owing
stays fairly constant – although I have noticed the balance owing creeping up a bit each
year.
FP: There are more questions that I need to ask but maybe just one more for now – do you
have any personal risk insurance policies?
Kelly: Well we have health insurance if that is what you mean. I guess we also have some life
insurance through our superannuation funds. The superannuation funds keep sending us
letters asking us if we want to buy additional units of life insurance, whatever that means,
but we just throw them in the bin. So no, we don’t have much in the way of life insurance
and we don’t have any other personal risk insurance policies.
FP: Excellent. I think that is just about everything I need. Do either of you have any
questions?
Luke: I am curious about how you can project so far into the future.
AFP: Well I have to use the information you have given me and I need to make assumptions,
for example:
– I will assume that the inflation rate is 2.5% per annum
– I will assume that the current tax rates and levels of dividend income remain
unchanged for the next five years, and
– that your expenses will rise by inflation, unless there are contracts in place,
which will affect these payments
I will build a simple model in Excel and if you wish to change any of my assumptions it will
be a simple matter of changing a cell or two and seeing what impact it has on the overall
outcome.
Luke: That sounds great – I look forward to our next meeting and seeing your report.
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MAF255 Financial Planning
Assessment 2 – Limited Scope Statement of Advice
T2, 2015
Required:
Kelly and Luke are comfortable with their existing estate planning arrangements and also
feel well informed on their social security entitlements and are therefore happy for you to
exclude these two areas from the SOA you are preparing. They also acknowledge that it is
too early to discuss issues related to retirement planning, and do not want the advice to be
dominated by superannuation. Your SOA should acknowledge that your advice has been
scaled in this way.
- Statement of Current Financial Position as at 30 June 2015.
- A Cash Flow Statement for 2014/15 using the excel template provided. (We will
assume that the surplus cash generated in 2014/5 was used to assist with the
purchase of the house).
- A projected Cash Flow Statement for each of the next 5 financial years i.e. from
2015/16 through to 2019/20 using the excel template provided. Based on the
following assumptions:
- Kelly and Luke basically maintain the same expenditure pattern as before
however the costs of owning a home will replace the costs of renting a home.
- As the cost of items purchased with the credit card increase due to inflation
so too will the amount of interest increase e.g. interest on credit card debt
will be expected to be $5,356 in 2015/16.
- All surplus cash will be deposited in the joint bank account. (We recognise
that this is not a realistic assumption however we are not asking you to
prepare a comprehensive financial plan for the clients).
- Based on the current level of mortgage repayments how much will be still be owing
on the mortgage on the 30th of June 2020?
- Throughout the interview you have promised to report back to Kelly and Luke on a
number of issues – you should report back under the heading ‘Financial planning
issues raised during the interview’.
(Maximum of 900 words)
- If you have done your modelling correctly under 3 above Kelly and Luke should
generate a cash surplus. Provide Kelly and Luke with your ‘Top 3’ prioritised
recommendations (and justification for those recommendations) for how this cash
surplus could be used. Broader advice is not required – this is not a comprehensive
financial plan.
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