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Financial Planning, 2nd Edition


Financial Planning, 2nd edition, has been thoroughly revised to reflect the changing legislative and professional regulations affecting the Australian financial planning industry, as well as capture the latest developments in teaching and learning design.

Throughout this edition, a significant amount of work has been undertaken to integrate the Future of Financial Advice (FOFA) reforms across the title. The FOFA reforms had their genesis in a string of high-profile collapses that included Storm Financial, Westpoint and Opes Prime, which in turn led to a lack of trust and confidence in the financial planning sector. This edition also includes a new chapter on self-managed superannuation funds. This is the fastest growing sector of the fast growing, trillion dollar plus superannuation industry, and the new chapter provides students with a clear context and understanding of its wide-reaching impact.

The authors have further built on the title’s reputation for presenting a comprehensive introduction to financial planning decisions, services and products, risk management, and the importance of long-term, strategic financial planning and lifelong management. In this 2nd edition, there is an increased focus on learning and understanding through the use of practical case studies to illustrate concepts.

As more and more Australians look to financial planners for information and guidance on investment opportunities, and both short-term and long-term financial planning goals, this new edition reflects the financial planning industry’s need to ensure that it's members are accredited and comply with the industry-recognised professional and ethical standards.

The financial planning profession is expecting significant growth over the next few years and, accordingly, an increasing number of graduates will aim to build a professional career around assisting others to achieve their financial goals and objectives. Financial Planning, 2nd edition, has been designed to equip students of higher education institutions with the knowledge, concepts and skills required to successfully enter the exciting profession of financial planning.

Warren McKeown was the Senior Lecturer and Course Director of Financial Planning at RMIT University for 11 years, where he devised and taught a range of fi nancial planning subjects in the undergraduate Financial Planning degree program and also subjects in the Master of Financial Planning program. He is currently a Teaching Fellow in Financial Accounting at the University of Melbourne. He has degrees in economics and education and a business master’s degree by research. He has 25 years’ experience in fi nancial planning as a Chartered Accountant and as a Certified Financial Planner. He maintains a small client base to ensure that his fi nancial planning skills are up to date. Warren prepared materials and presented workshops in fi nancial planning for the Personal Financial Planning and Superannuation segment of the CPA program for over 10 years. He was also a panel member of the Financial Industry Complaints Service (now Financial Ombudsman Service) and is currently a subject expert for CFP1, the Professionalism module of the FPA’s CFP program.

Mike Kerry is currently the Director of Learning Services at Deakin- Prime. Prior to joining DeakinPrime he was a Senior Lecturer in Financial Planning in the Faculty of Business and Law at Deakin University. Mike has been instrumental in the development and growth of both the undergraduate and postgraduate Financial Planning programs at Deakin University. He has also been extensively involved in the development of fi nancial planning curricula for the university’s commercial clients. Mike’s research interests include retirement planning and the use of computerbased technology to enhance planner-lient communication. Mike has a Bachelor of Commerce and a Master of Finance (Honours) from the University of Melbourne. Mike is also a Fellow of the Certifi ed Practising Accountants of Australia and a Financial Planning Specialist.

Marc Olynyk is a Senior Lecturer in Financial Planning at La Trobe University and has held various roles within both academia and industry in the areas of fi nancial planning, superannuation, and retirement planning and accounting. He has many years’ experience in both teaching and program leadership positions and has played a key role in the development, growth and accreditation of the financial planning discipline at La Trobe University. Marc is a member of the Financial Planning Association and the Institute of Chartered Accountants, a foundation member of the Financial Planning Education Council and a member of the Financial Planning Academic Forum. Marc has published articles in fi nancial planning, superannuation and financial literacy.

Preface xiv

Acknowledgements xvi

1 Personal financial planning 1

Introduction 3

What is personal fi nancial planning? 3

Why is personal fi nancial planning important? 4

The role of the fi nancial counsellor 12

The National Financial Literacy Strategy 12

Understanding risk 13

Features of the economic environment 16

The global fi nancial crisis and its impact on Australia 22

The evolution of the fi nancial planning environment 23

The regulatory framework that applies to fi nancial planning 24

What investors and fi nancial planners can learn from history 36

Appendix: The Financial Planning Association of Australia (FPA) 44

2 Financial planning skills 47

Introduction 48

Preparing personal financial statements 49

Financial mathematical skills applied in financial planning 56

Compound interest and the time value of money 57

Nominal and effective interest rates 64

Credit cards 67

Net present value 72

Further applications of the time value of money concept 73

The internal rate of return 73

Fixed-interest securities 75

Effect of tax and infl ation on the rate of return 77

Appendix: Financial modelling 85

3 Taxation planning 89

Introduction 91

The Australian taxation system 91

The components of taxable income 94

Calculation of net tax payable for an individual resident taxpayer 100

Impact of tax on investment income 103

Taxation planning 113

Income splitting 114

Income versus capital growth 115

Tax structures 115

Negative gearing 120

Salary packaging and remuneration planning 120

Goods and services tax 127

4 Investment choices 141

Introduction 142

General attributes of investors 143

Broad investment classes 144

The risk and return relationship 147

The benefits of diversification 151

Recent performance of asset classes 160

General investment strategies 161

Investor behaviour 166

Investment scams 169

Information sources for investment choices 171

5 Direct investment -- fixed interest and shares 177

Introduction 178

Cash and fixed-interest securities 179

The nature of and participants in the fixed-interest market 180

Different forms of fixed-interest investments 182

The nature of and participants in the share market 190

The influences on share prices 195

The capital asset pricing model (CAPM) 202

Basic valuation models -- the Gordon dividend discount model and the price-earnings ratio 204

Alternative direct investments 216

6 Direct investment -- property 223

Introduction 224

Qualities and characteristics of property 225

Different forms of property investment 226

Features and benefi ts of property funds 228

Taxation of property investments 233

Valuation of property investments 237

Advantages and disadvantages of home ownership 240

Financial implications of home ownership versus renting 244

Financing a house purchase 246

Taxation and housing 251

7 Managed funds 261

Introduction 263

Growth and characteristics of managed funds 263

The regulation and structure of managed funds in Australia 266

Investing into managed funds -- advantages, downsides and risks 270

Typical fee structures of MISs 275

Selecting a managed fund for investing 277

Management and investment styles 287

Taxation issues for investors in managed funds 291

Measuring returns and analysing the performance of managed funds 291

8 Leveraged investments 309

Introduction 310

Leveraged investing 311

Gearing 311

Income taxes and geared investments 313

Capital gains tax and geared investments 316

Mortgages 318

Margin lending 321

Benefits and risks of margin lending 325

Derivatives 329

9 Risk management and insurance 347

Introduction 348

Risk and risk management 349

Key concepts in insurance 350

Life, disability, trauma and health risks 357

House and contents risk management 380

10 Superannuation 395

Introduction 397

What is superannuation? 397

Why the need for superannuation? 398

The three pillars policy of superannuation 398

The legislative context for superannuation 399

Types of superannuation funds and who provides them 401

11 Retirement planning 441

Introduction 442

What is retirement planning? 443

Individuals’ needs in retirement 443

The three phases of retirement 444

12 Self-managed superannuation funds 487

Introduction 489

The history and growth of small superannuation funds 489

Setting up a self-managed superannuation fund 491

13 Social security 533

Introduction 535

History of social security in Australia 535

Rationale underlying the provision of social security 536

Centrelink and the Department of Human Services (DHS) 536

The range of social security benefits 537

Pension and allowance benefit entitlements and eligibility rules 539

14 Estate planning 573

Introduction 575

Obligations of the financial planner 575

The role of a will within estate planning 576

Drawing up a valid will 576

Rights of beneficiaries 581

Contesting a will 581

Dying intestate 583

Estate planning and taxes 585

Capital gains tax 586

The 3-year rule 587

Stamp duty 588

Estate planning and trusts 588

15 Development of a statement of advice 613

Introduction 615

Disclosure requirements for the provision of a financial product 615

Appendix 15A: No advice statement 657

Appendix 15B: Confi dential client questionnaire 658

Appendix 15C: Risk tolerance classifi cations 669

Appendix 15D: Example Statement of Advice 671

Client information 671

Glossary 694

Index 703