A Limited Purpose Statement of Advice - Term Paper Example

STATEMENT OF ADVICE MR WAYNE BROWN AND MRS KAREN BROWN 1ST October 1, 2016 Prepared for: The Brown’s Family 10 Equity Street, South Murang Vic Date Prepared: 1ST October, 2016 Adviser: (Students Name} Authorized Representative no. {Admission No.} Address……. Tel……. Email……. Authorized Representative of: {Name of the Institution} Section 1: Executive Summary Based on the unforeseen future of life after retirement, it is of absolute importance to have mechanisms in place to enable one’s survival thereafter. For this reason, Mr. Wayne Brown and Karen Brown have decided to seek advice of how to plan for their future considering the fact that, they each have seven years left to their retirement. As matter of fact, after retirement couple may not have time as well as strength to engage in other income generating activities that require a lot of sacrifice. Therefore, for Wayne and Karen the proposed recommendations would prove to be helpful if adhered to and thus will work towards safeguarding their future. 1.0 Section 2: Personal Details and Objectives This Statement of Advice outlines the advice provided to you during our first two meetings and it is in line with your financial planning strategies discussed during the mentioned meetings. In addition, the Statement of Advice report is inclusive of information that you would need to decide as a couple whether it is relevant for your financial planning strategies or not. However, you should note that this is a limited purpose Statement of Advice and therefore will cover only the advice provided to you as a couple during our meetings. The following is the summary of your financial profile as provided to us during our second meeting. The Browns' Lifestyle Fixed Assets Market Value Total Home     Joint $ 700,000.00   House Contents     Joint $ 100,000.00   Car     Wayne     Karen $ 20,000.00         Total Lifestyle Fixed Assets $ 820,000.00   The Browns' Investment Assets(Current)     Savings     Joint $ 18,000.00   Wayne -   Karen -   Term Deposit(Maturity Date-1 Nov 2015     Joint -   Wayne $ 80,000.00   Karen -   Share Portfolio     Joint -   Wayne $ 60,000.00   Karen -   Super Annuation     Joint -   Wayne $ 425,000.00   Karen $ 120,000.00   The Browns' Investment Assets(Current) $ 703,000.00   The Browns' Total Assets   $ 1,523,000.00       The Browns' Liabilities (Long Term)     Home Mortgage $ 100,000.00   The Browns' Liabilities (Long Term) $ 100,000.00         Investment Liabilities (Current)     Liabilities     Joint -   Wayne -   Karen -       $ (100,000.00) The Browns' Lifestyle Net Assets   $ 1,423,000.00 Other Important Information as provided our meeting 1.1 Age Mr. Wayne Brown is 58 years old and intends to retire at 65 years whereas Mrs. Karen is 55 years old and has plans to retire at 62 years. This implies that the couple have a combined total of 14 years to retirement and therefore, the recommendations should have this in consideration. 1.2 Health As stated during the first meeting, Mr. Wayne Brown was good health wise and had not experienced life threating illness whatsoever. Mrs. Karen Brown on the other hand had been suffering from back pain from time to time and this may absolutely have impact on the couple’s saving in the near future. In addition, given their advanced age, their body response to such illness may be inadequate as compared to young generation such as their children. Therefore, medical cover has to be in existence to cater for such eventualities in the future and likewise for the children that are still growing up. 1.3 Marital Status Having gotten marriage on 7th March, 1985 and have been together ever since, there is likelihood that combined investment may not be compromised in any way since you have grown to build trust amongst ourselves and that of your dependents in the long run. Likewise, probability of break up at your age is quite minimal and hence putting your resources together will increase your returns thus enabling you to have a secure future and that of your children 1.4 Dependents The Browns’ family comprises of five, that is, Mr. Wayne Brown and Mrs. Karen Brown and their three children who are Brad Brown, 20 years old, Cory Brown, 18 years old and Amy Brown, 15 years old. Therefore, the one of the most important things is to future a future for these children in terms of their education and health. It would be helpful to have insurance cover for their college education as well as health insurance cover to cater for medical expenses in case any of them falls sick. 1.5 Income Although there is limited time left to retirement, the combined earnings of $162,000 (Mr. Wayne Brown’s $122,000 and Mrs. Karen Brown’s $40,000) before the deduction of the salary sacrifice can be so beneficial in the near future if proper financial mechanisms related to investment are taken into consideration as a couple. In addition, increasing the superannuation contribution voluntarily or even the term deposit and savings may work towards securing your future and that of your children 1.6 Employment Having confirmed to be in employment with Mr. Wayne Brown working as an assistant manager at The Ballarat Bank and Mrs. Karen Brown being a part-time nurse at Northern Hospital, it would have been of absolute importance if you had an addition income generating activity to supplement your earnings from the employment. As couple, you can discuss among yourself what sort of a business you think you can handle properly and have a business proposal drawn and source for capital either through bank loan which would be easier to service while still in employment. As a matter of fact, securing a loan after retirement would be quite a challenge given your age then and the fact that your repayment ability will have been impaired due to lack of monthly salary. 2.0 Section 3: Risk profile and investment allocation / strategy 2.1 The Couple’s Risk Profile Following the fruitful discussions that we had during our previous two meetings, there tend to be a little bit of some risks associated with your financial planning which should be known and proper strategies laid out to counter them. After, careful analysis with some relevant authorities we came up with the following risks that are likely to arise in the course of implementing the recommended strategies:- Given the fact that Mrs. Karen Brown is 55 year old and tend to suffer from back pain from time to time, this eventually may end up having a negative impact on her future health and thus affecting her earning capacity. This is a concern that should not be taken lightly since as the time goes by, Karen would be required to have enough bed rest to avoid straining her back and this may in the long run reduce her working hours which of course translates to reduced earnings. To make it even worse, the back pains may require proper medical attendance in the future and this would end up eating on the family saving hence affecting the implementation of the investment plans that will have been agreed upon by the family while trying to secure the retirement future (Hughey, Cullen & Kerr, 2008). In some severe cases, Karen would end up retiring even before the planned retirement age of 62 and thus would mean that, Wayne will have to cater for all the household expenses as well as service the home mortgage by himself and this may not give room for saving enough money for the future. Therefore, to avoid or minimize chances of such scenarios, it would be necessary for Karen to have an appointment with a medical doctor and discuss her condition before it is too late. This will enable her to know the maximum hours she should be working at any given time and the rest required for the same (Heritage, 2014). Likewise, the necessary precautions she should take into account while at work or at home. In the meantime, a total dependency on her income should be avoided as much as possible. This would be possible only though reduction of unnecessary expenses that are eating on the family income from time to time. 3.0 Section 4: The recommended Strategies and Projections in Summary Following your need to have income provision upon retirement, I would recommend you transfer the superannuation funds from the accumulation phase to retirement phase. The rationale behind is that:- It will ensure you have sufficient liquidity within the funds to continue supporting your living standards and those of your dependents With time, your income needs has a couple will rise with increase in inflation, therefore in order to be able to take care of this, it is necessary to have some level of growth within the funds so as to ensure your available funds are not preying upon by increased withdrawals as compared to growth of funds which are supporting the savings. It is also of great necessity to invest in assets since with the diversity in asset investment, the impact of market volatility would be reduced tremendously. You should also note that while approaching retirement, your home mortgage and other existing debts shall have been reduced whereas your three children’s dependency in you would also be low. Therefore, you need to review your living standards as well as other insurance policies that are being held by the funds. If you discover that some of them are no longer necessary, scrapped them off and have the premiums retained by the funds. The living conditions should also be adjusted a little bit, that is, the household shopping’s should be done at once every once month end based on the time drawn by the family. The unnecessary purchases or expenditures such as visit to the First-Food Joints should be reduced from thrice a week to one a month The most important aspect would be to remind you as a couple to: Continue being active member of the Australian Super superannuation program and even increase your monthly voluntary contribution by 20% if possible. Strive to have your employer superannuation contribution within the salary sacrifice arrangement increased a little bit by 10% for the remaining seven years for each of you (Hughey, Cullen & Kerr, 2008). Try and budget on the assumption that Karen will be working for less hours than she actually does hence less income. Thereafter, the income she generates besides the budgeted income should be directed towards family savings would prove to be helpful in the near future after the seven years Seek an attorney’s guidance on how to sign a cohabitation agreement that would works towards covering the family business as well as mechanisms to be followed if it happens that the couple are having irreconcilable differences and therefore are opting for a divorce. To ensure that both parties do not suffer in any way, it would be advisable to have the family estate shared on a 50/50 arrangement subject to further consultation depending on the custody and status of the three children therein Work towards increasing the long term salary prospects as well as employment prospects as a couple through coming up with personal development plans aimed at enhancing your professionalism at your respective work place. Discuss how to have your life insurance cover increased especially for Karen Brown considering a health conditions which may get even worse as time goes on. 3.1 Explanation of the strategies and Benefits 3.1.1 Striving to have your employer superannuation contribution increased by 10% under salary sacrifice arrangement The aspect of salary sacrificing is often considered one of the best ways of contributing under superannuation arrangement. Ideally, Salary sacrificing involves giving up some of your salary while putting it superannuation instead. This often works in such a way that you avoid too much taxation while increasing your investment returns under superannuation. The concept is often every easy, it only involves you as an employee to request your employer to direct a portion of your salary as a contribution to super. For your case for instance, Mr. Wayne Brown will simply ask his employer, The Ballast Bank to increase his contribution from $11,590 to $12,749 while Mrs. Karen Brown on the other hand will have request the Northern Hospital to increase her contribution towards super $4,180 from the previous $3,800. In both cases, this represent a 10% increase in super contribution while in other word it involves sacrifice of the couples’ gross pay. As a matter of fact, by sacrificing some part of your before-tax income and directing it towards super contribution, you will be privileged to enjoy tax at a special rate of 15%. This confirms why the super contribution is also known as concessional contribution since there is always tax concessions in the contribution of this nature. This move will be beneficial especially to Wayne Brown who enjoys higher income and thus is subjected to high marginal rate. 3.1.2 Estimate budget based on Karen’s anticipated working hours Taking into consideration the health status of Mrs. Karen Brown, it would be important to propose a family budget that do not entirely depend on her income. This is based on the fact that, as she grows old, her condition of frequent back pain may worsen and thus may not always allow her to go to work as she used to and thus reduce her working hours and eventually the pay. Therefore, the pay that she will take home then may not be enough to meet the house expenses that had been expected to be settled by the said income, instead the family will have to source for income from their savings or cut on the important expenses that were expected to have been met. To manage such a situation, the family expenses should depend entirely on Wayne Brown’s income with little emphasis on the Karen’s income such that in the event that she gets bed ridden, the family expenses are met with ease as if nothing much as happened. However, if all turns out to be well with her for the next seven years, her income will have increased the couple’s savings and thus securing their future as well. 3.1.3 Attorney’s guidance in wills and estate planned sharing Due to circumstances that surround our everyday living conditions, some situations such as separations or demise of the estate owners may happen unexpectedly and thus implicate issues either for the remaining partner or even the estate dependents. Therefore, to make the work easy, it would be important to seek attorney’s assistance in singing a simple will which would ensure smooth transition of a property from one party to another. Likewise, there tend to be dilemma whether something should be left for the parents (Wayne and Karen’s parents) as well. To have a common ground on this, it is encouraged to have at least some percentage allocated to their parents since with your demise, their lives may turn for the worse since they had entirely depended on you and now that your existence will be no more it would be quite relevant to safeguard their future as well in addition to those of your children (Hughey, Cullen & Kerr, 2008). It would be good to continue having a joint ownership of the home at a ratio of 05:05 as joint tenants such that incase one partner passes on before the other, the deceased owner’s interest in the home passes with ease automatically to the surviving partner without attracting unnecessary court battle with other irrelevant parties that may be having interest in the estate. Therefore, it would be important to prepare and sign a co-habitation agreement to control your relationship in the remaining phase of their lives. 3.1.4 Reduction on living conditions expenses As discussed earlier, the household expenses can always be managed, for instance the income statement of the couple (excel extract) the non-deductible expenses as well as entertainment and holiday can always be controlled and thus saving the extra for future use 3.2 Benefits If the above strategies are adhered to, your funds shall be able to provide you with income from the benefits accumulated over a given time period. Likewise, payments from the superannuation funds arrangement have taxation benefits attached, especially for those over 60 years of age with their income being tax-free. 3.3 Risks The move of taking more income than is necessary or even accessing lump sums is often regarded as a hindrance to the ongoing ability of the funds to continue paying income at the level necessary to maintain your lifestyle as a family. 4.0 Section 5: Investment Recommendations 4.1 Australian Superannuation Program This arrangement has remain to be the most significant investment platform as compared to the other entities such as retail managed funds The commission fee charged as well as low cost structure have remained to be quite encouraging for those planning their savings especially for retirement purposes. The contribution is often based on the amount of super an employer has to contribute on the employee’s behalf. The super guarantee contribution currently is at 9.5% based in your gross income and is expected to increase by 0.5% by 1st July 2021 which will be exactly one and half years to your retirement. The following will be your contribution to your retirement without taking into consideration the increase of super guarantee contribution by 0.5% on 1st July 2021 Year Age Salary Opening Super Balance Add employer super contibution Less 15% contribution tax Add net earnings Closing super balance 30-Jun-15 Wayne-58 122,000.00 425,000.00 11,590.00 1,738.50 9,851.50 434,851.50   Karen-55 40,000.00 120,000.00 3,800.00 570.00 3,230.00 123,230.00 30-Jun-16 Wayne-59 122,000.00 434,851.50 11,590.00 1,738.50 9,851.50 444,703.00   Karen-56 40,000.00 123,230.00 3,800.00 570.00 3,230.00 126,460.00 30-Jun-17 Wayne-60 122,000.00 444,703.00 11,590.00 1,738.50 9,851.50 454,554.50   Karen-57 40,000.00 126,460.00 3,800.00 570.00 3,230.00 129,690.00 30-Jun-18 Wayne-61 122,000.00 454,554.50 11,590.00 1,738.50 9,851.50 464,406.00   Karen-58 40,000.00 129,690.00 3,800.00 570.00 3,230.00 132,920.00 30-Jun-19 Wayne-62 122,000.00 464,406.00 11,590.00 1,738.50 9,851.50 474,257.50   Karen-59 40,000.00 132,920.00 3,800.00 570.00 3,230.00 136,150.00 30-Jun-20 Wayne-63 122,000.00 474,257.50 11,590.00 1,738.50 9,851.50 484,109.00   Karen-60 40,000.00 136,150.00 3,800.00 570.00 3,230.00 139,380.00 30-Jun-21 Wayne-64 122,000.00 484,109.00 11,590.00 1,738.50 9,851.50 493,960.50   Karen-61 40,000.00 139,380.00 3,800.00 570.00 3,230.00 142,610.00 30-Jun-22 Wayne-65 122,000.00 493,960.50 11,590.00 1,738.50 9,851.50 503,812.00   Karen-62 40,000.00 142,610.00 3,800.00 570.00 3,230.00 145,840.00 5.0 Section 6: What to do next In the event that you will have finished going through this statement of advice and you come across something that is not clear or requires further explanation, don’t hesitate to let me know so that we can arrange for another meeting. However, if you are satisfied, kindly sign the declaration form and have it returned to us so that we can implement our advice to you. 5.0 Section 7: Fees and Charges As communicated earlier, we charge fees depending on the length of time taken to implement our recommendations. However, the charges vary depending on the complexity of the recommendations and is based on an hourly rate of not more than $150 (plus GST). The payment as discussed earlier may be paid in person or deducted from the ongoing investment basis. 6.0 Section 8: Authority to Proceed You have our authority to proceed with reading the statement of advice. 7.0 Section 9: Client Declaration I have read this Statement of Advice and I understand its content and accept its recommendations. I understand that comments on future wellbeing are only a guide and no guarantee is given regarding future investment performance Signature: Date: Name: Signature: Date: Name: Adviser Declaration I declare that this Statement of Advice is an accurate and complete record of my advice. I declare that I only provided advice on retirement aspects for which I am authorized to advice on and that these products are appropriate to my client and in their best interests Signature: ………….. Date:………. Name:……………. Reference Heritage, C. (2014). Canadian Heritage’s Quarterly Financial Report for the quarter ended December 31, 2013. Hughey, K., Cullen, R., & Kerr, G. (2008). What the public thinks: where do we want to go with rural New Zealand in the 21st century?. Read More