Topic 1 Flashcards
(16 cards)
Discuss the different financial issues and priorities that are likely to exist between a couple in their mid-thirties with 3 children as compared to a couple in their fifties with no dependent children.
(a) Couple in mid thirties with 3 children
Need to answer question in terms of the life cycle and the changing needs and risk profile of a client.
- single income, education expenses, paying off mortgage, need for insurance, moderate risk profile, little spare cash for investment, long time frame.
- interested in: wealth creation, insurance, debt management
What impact does the performance of investment markets in the U.S., Europe and Asia have on the Australian financial market? Discussion question with no specific answer.
Need to discuss this question in light of the internationalisation of investment markets, trading positions and Australia’s relatively minor influence within world financial markets. Consider overseas impact on:
- stockmarkets
- exchange rates
- imports and exports
- interest rates
- confidence levels
Discuss the different financial issues and priorities that are likely to exist between a couple in their mid-thirties with 3 children as compared to a couple in their fifties with no dependent children.
(b) Couple in fifties with no dependent children
- mortgage paid off, less need for insurance, planning for retirement, need for smaller home, more spare cash for investment, low-moderate risk profile
- interested in: maximising superannuation contributions, estate planning, wealth creation, retirement planning
4 phases of the business cycle
Recovery/Expansion
Boom/Peak
Contraction
Recession/Trough
Recovery/Expansion
- increasing spending, increasing price levels, rising employment
- interest rates fall, (bond prices thereby increase), share prices increase property prices start to rise
Boom/Peak
- high employment, faltering business optimism, slackening of business activity, interest rates starting to increase, higher costs for firms
- interest rates low but start to increase, share prices peak but start to fall, property prices peaking
Contraction
- decline in spending, decreasing prices, decreasing wages
* interest rates increasing (bond prices falling), share prices falling, property values commence to fall.
Recession/Trough
- low level of investment, excess capacity, high liquidity preference, high unemployment, interest rates start to fall
- interest rates high but start to fall, share prices bottom out and commence to rise, property prices low
Explain the major difference between the following:
• An Australian Financial Services Licence holder
• An Authorised representative
An Australian Financial Services Licence holder
- any person who carries on a financial services business needs to hold an Australian Financial Services License (AFSL). The issuance of an AFSL will be based on:
- financial solvency and liquidity
- good character
- existence of a strong compliance system
- technological requirements
Explain the major difference between the following:
• An Australian Financial Services Licence holder
• An Authorised representative
An Authorised representative
is a person who acts on behalf of a licensed dealer. A representative is required to hold a “Proper Authority”. This is a statement which has been signed by the dealer by whom the representative is employed and for whom the representative acts
Discuss how a client’s attitude towards risk may affect goal setting and recommendations.
A client’s attitude to risk will be affected by many factors including:
• their age
• their income generating capacity
• particular assets and asset classes already held
• the value of investments currently held
• the level of their borrowings
• their financial responsibilities
• the time frame.
The risk profile of clients can generally be categorised as conservative, moderate of aggressive. The particular risk profile of a client will affect the recommendations provided and thereby impact upon the achievement of goals and objectives. The recommendations will be affected by such factors such: the types of products recommended, the need for insurance, the ability to borrow, the need for liquidity etc.
Given the current state of the economy, and likely future directions, how would you respond to the following 3 situations:
(a) Liz aged 32 and single, has just inherited $120,000. She is looking at investing all of the funds into the stockmarket into blue-chip companies but is concerned about the recent stockmarket losses. What would be your advice and what other factors would you need to consider?
(a) Need to firstly ask questions about client’s goals and objectives and risk profile. Consider short term volatility of the stockmarket and the appropriate time horizon of an investment into shares
Need to determine whether an investment in the sharemarket is appropriate for the person. Consider such things as: other investments, health, employment position, income levels etc.
Given the current state of the economy, and likely future directions, how would you respond to the following 3 situations:
(b) John aged 42 and married with 3 children, has an investment property worth around $330,000 and a loan currently standing at $200,000. John is starting to become concerned with the prospect of falling property values and is seeking your advice about whether he should sell the property, pay off the loan and invest his money into a conservative managed fund. What factors would you need to consider in your advice to John?
(b) An investment property should be considered as a long term investment. The decision to sell should be considered in the light of:
- tax implications
- likely movement in interest rates
- likely growth in property values
Increases in interest rates are usually associated with falls in property values. Is now the right time to sell? Can John fund the increase in interest rates?
Does an investment into a conservative managed fund suit John’s circumstances –risk profile, future goals, tax benefits etc.
Given the current state of the economy, and likely future directions, how would you respond to the following 3 situations:
(c) Mary comes to you in a distressed state about the negative returns being experienced in her superannuation fund. She is looking to retire in 3 years time and says she cannot afford for her fund balance to deteriorate any further. Should Mary move her superannuation funds away from stocks and into more conservative investments?
(c) Need to stress the short-term volatility of the stock market and the time horizons that should have been discussed with Mary at the time she made the original investment. If she were to sell out of stocks now, she would crystallise losses and perhaps move into another sector of the market that was overvalued and perhaps might fall in the future also (eg. increasing interest rates leading to a fall in bond prices). However, the client needs to be happy with the overall investment allocation strategy developed
Q7
DO IT
(a) Mr and Mrs Finn believe that their risk profile is balanced. Describe what investment characteristics you think a balanced investor may have.
(c) Investment characteristics of a balanced investor
- some concern with return volatility
- concerned with achieving a reasonable rate of return on investments as well as achieving some capital growth
- invest in a mix of conservative and more aggressive investments (fixed interest, shares, property, and cash)
- concern with achieving some income inflow
- concern with having access to a reasonable amount of liquidity
- moderate levels of debt outstanding / borrowing
