Financial Planning

Based on the interview transcript - Initial Client Interview, you are required to prepare a detailed file note.

File Note – Statement of Advice

Client's name: Rodney McKenzie
Date of contact: 4 April 2016
Re: Initial Appointment

FSG and adviser profile

Rodney was handed Financial Services Guide (FSG) version 3 010715 and my Adviser Profile at the interview on 4 April 2016. The FSG was explained to him.

Scope of advice

Full statement of advice (SOA).

Current situation

⦁ Rodney (aged 24), is single and has no dependents.
⦁ Rodney is employed by EngDesign Pty Ltd and is an electrical engineer. He earns $70,000 per annum plus superannuation of 9.5%.
⦁ Currently renting.
⦁ Rodney currently has $18,000 in a high interest savings account. (2.5%)
⦁ Rodney has $750 per month surplus.
⦁ Rodney receives interest income of $500 per annum.
⦁ Home contents worth $20,000.
⦁ Credit card owing $2,000 that gets paid every month to avoid interest.
⦁ HECS debt balance of $30,000. The compulsory repayments are being made on this.
⦁ One superannuation fund with Engineer Super (Balance $22,500)
⦁ Second superannuation fund with Buildit Super (Balance $5,500)
⦁ Both funds are accumulation funds and are both in the ‘balanced option’.
⦁ He has currently got comprehensive car insurance
⦁ Currently has private health insurance with Bupa
⦁ Healthy non smoker
⦁ No Will. (Estate Planning).

Potential issues / special consideration

⦁ Rodney is not keen on putting extra money into superannuation, however he would consider it.
⦁ How to make the most out of employer contributions. (Long term goal, Low priority).
⦁ Rodney would like to keep $3,000 in the high interest savings account for any emergency that may arise.
⦁ Conservative investor, combination of income and growth with low risk. He is not comfortable with risk.
⦁ Doesn’t want to spend time on something (superannuation) until he is 65.


⦁ Rodney would like to buy a house within the next 5-6 years (prefer 5 years though). He will need a deposit of $60,000 plus $3,000 for fees. (High priority).
⦁ Rodney needs a car ($10,000) for work commitments within the next couple of months. (Higher priority than the deposit for house).
⦁ Superannuation needs to be looked at to see if it is being invested appropriately. He is currently using the default option with employer. He also has 2 Superannuation funds that needs to be looked into as he only wants one fund. (High priority).
⦁ Getting a Will (Estate Planning)
⦁ Establish binding death benefit nominations for his superannuation fund.
⦁ Establish an advanced health directive

Risk profile

⦁ Rodney is a conservative investor. (70% fixed interest and cash, 30% shares and property).
⦁ We discussed the risk profiles with the client [Rodney does not have any investment preferences and is happy to go with any recommendations that are made].

Wealth creation recommendations – outside superannuation

⦁ Objective 1 [house deposit]

⦁ Managed Investment Scheme - Conservative index fund. The Fund targets a 70% allocation to income asset classes and a 30% allocation to growth asset classes. Short to medium term investment horizon
⦁ Invest $5000 into the fund at 6.3% This has been rounded down from 6.5% as this could be on the high side.
⦁ Investment time frame will be 5.3 year (63 months) as this timeframe will reach his objective.
⦁ Contribute $750 per month from Rodney's surplus income to the Conservative index fund monthly.
⦁ With the above strategy Rodney will be able to meet his objective of having a house deposit with the least amount of risk in the required time frame.

Advantages of strategy

⦁ From the calculations of FV (appendix A), Rodney will be able to reach is objectives.
⦁ Regarding the $3000 for emergencies Rodney will be able to access this as it does not make up part of the strategy. If Rodney does require the $3000 for an emergency, he will be able to use this and his objective of having a house deposit will still be meet.
⦁ This strategy fits Rodney risk profile as he can accomplish his objective with the least amount of risk.
⦁ Funds will be managed by a professional.
⦁ Provides Rodney with an efficient way to capture long-term market performance.
⦁ Managed funds provides a greater choice of assets for a given amount of capital than can be achieved through direct investing. By investing in managed funds, a diversified portfolio of investments can be built because they are able to access a range of investments across many asset classes.
⦁ Can access a broad range of assets or markets with a relatively small amount of cash.
⦁ Index funds are cheaper as you are not paying for investment expertise.
⦁ Diversified portfolio of securities, which means the Fund is less exposed to the performance fluctuations of individual securities.
⦁ Through making regular contributions Rodney is able to obtain the benefits of dollar cost averaging.

Disadvantages of strategy

⦁ He may not be able to convert his investment to cash when he wants to.
⦁ You rely on the skills of other people and do not control investment decisions
⦁ It is important to understand that the value of the investments may go up and down, investment returns are not guaranteed and investors may lose some of their money
⦁ If large withdrawals are made, the fund manager may have to sell their most liquid investments. Sometimes, especially if there are problems in the market, there is a rush of investors trying to cash in funds and this may cause a halt on redemptions so your investment might be illiquid.

Alternatives considered

⦁ Fixed Interest - Term Deposits - Using rollover. At the moment a 6-month term deposit offers 3.10%. Divide the $10,000 into 5 equal amounts. For the first term deposit he will deposit $2,000 plus 1-month savings ($750). Every month for the next 5 months invest $2000 plus 1-month savings. At the end of 5 months he will have 5 term deposits made up of $2750. Every month after the first 6 months, he will set up a new 6-month term deposit from the amount of the matured 1st deposit and the interest paid plus his savings of 2 months. This strategy will meet Rodney’s objectives however will require much more work every month. With this strategy if an emergency was to arise and he needed to gain access to money he will have to pay fees.

Lifestyle recommendations

⦁ Objective 1 [car]

⦁ Cash - Savings Account - Buy the car outright. $18,000 -$10,000 leaves you $8,000 less the $3,000 that you need in case of emergencies. This leaves you $5,000 to invest for the deposit of your home. The $3,000 will be left in the high interest savings account earning interest.
⦁ With the above strategy Rodney will be able to meet his objective of buying a car with the least amount of risk.

Advantages of strategy
⦁ From the calculations of FV (appendix A), Rodney will be able to reach his objectives.
⦁ Rodney will have liquidity to be able to access the money in the case of an emergency.
⦁ This strategy fits Rodney’s risk profile as he can accomplish his objective with the least amount of risk.
⦁ The deposit of the money is safe and secure.

Disadvantages of strategy

⦁ It is possible that the capital will not be able to keep up with inflation which will lose value in real terms in regards to the $3,000 that is left for emergencies.
⦁ The interest rate of 2.5% is low.
⦁ When the $3,000 is withdrawn for an emergency the interest that it was making will no longer make this even though it would only be a small amount of interest earned.

Alternatives considered

⦁ Cash - Savings Account - Invest $18,000 into a cash savings account that is paying 2.5% pa.
⦁ Contribute $750 / month from the surplus income to the savings account for 3 months.
⦁ Withdraw $10,000 to pay for car, which $10,000 is available for house deposit.
I choose not to use this strategy as I am able to reach Rodney's objective in the least amount of time with the strategy that has been used. The alternative strategy would have only made $2810 which could have still been a risk if Rodney required money for an emergency and he would be 3 months behind in saving for the home deposit.

Wealth creation recommendations – superannuation

⦁ Objective 1 [sort out superannuation]

⦁ Superannuation needs to be looked at to see if it is being invested appropriately. He is currently using the default option with employer. He also has 2 Superannuation funds that needs to be looked into as he only wants one fund. (High priority)
⦁ One superannuation fund is with Engineer Super (Balance $22,500)
⦁ Second superannuation fund with Buildit Super (Balance $5,500)
⦁ Both funds are accumulation funds and are both in the ‘balanced option’


Consolidate the 2 funds into 1 Superannuation fund. Change this fund into a growth fund. (however need to speak to Rodney more about this (change to growth) as he is not comfortable about risk. Understanding the time frame will help him feel more comfortable about this decision).
Rodney will not be currently Salary sacrificing into superannuation concessional contributions, as Rodney would not be able to afford it at this time. This is primarily because it will reduce his cash flow that is required to meet his earlier objectives. However, this will need to be reconsidered at a future time. As he can contribute up to $30,000 including the employers 9.5%.

Advantages of strategy

⦁ Paying only one set of fees: you pay administration and other fees on each super account you have.
⦁ Less paperwork: one fund means only one lot of paperwork (such as annual statements, funds reports).
⦁ There’s less chance of you ending up with lost super accounts if you only have one to keep track of and only one fund to tell if you change your address
⦁ It’s easier to manage your investment strategy if you have only one account rather than having your super spread across several funds and in a variety of investment options.

Disadvantages of strategy

⦁ Some funds charge an exit fee for you to transfer your super into another fund. This fee can be quite high.
⦁ You may lose insurance benefits that the other fund has by transferring.
⦁ You might want more than one super fund. The main reason for this is to take advantage of cheap insurance in a certain fund or increase the variety of investment options.

Alternatives considered

⦁ Depending on his insurance benefits with the type of funds he currently has keep the 2 funds. Change both of these into growth as he does have the required timeframe. Reconsider changing this back to the ‘balanced option’ as he gets older.
⦁ Not being able to use superannuation concessional contributions will slow down how much money is in superannuation when it comes to retirement. At a future date using superannuation concessional contributions will be an effective strategy, he can choose to use a salary sacrificing arrangement as a way to pay less tax by reducing the amount of personal income that is taxable (although the concessional contributions are subject to at least 15% contributions tax within the super fund).

Wealth protection (insurance) - recommendations

⦁ Life insurance

⦁ As Rodney is currently single with no dependents the 1 unit of life insurance that he has with Engineer Super will be sufficient to cover funeral expenses, estate administration and debt repayment (prior to house no debt. However, after the house has been bought it would need to be sold to pay the debt). Reconsider life insurance when Rodney decides to get married and have dependents. Life insurance within super is appealing because it is low cost. The amount of insurance cover he can get from the I unit he holds could be less than what he needs to cover all the expenses.
There can be delays in life insurance benefits being paid since these initially go to the fund, which then distributes them to the beneficiaries. This could be a lengthy and frustrating process.

⦁ Total and permanent disability (TPD) insurance

⦁ Rodney should get TPD insurance to cover the financial risk of losing the ability to work along with the increased costs of ongoing care. Although more expensive he should use own occupation. This has to be outside of superannuation due to choosing own occupation. If he is unable to work in his occupation but can work in another occupation a claim payment will still be made. If he did not have own occupation and was to use any occupation and was able to work in another occupation he may have a significant drop in his earnings so this why I have recommended Rodney should choose own occupation.

⦁ Income protection (IP) insurance

⦁ Rodney relies on his income so he will need income protection insurance up to the maximum of 75%. The waiting period needs to be 14 days as this will help pay for basic things like food, clothing, mortgage/rent payments and other debt obligations.
⦁ Rodney should use Indemnity cover within Income Protection as this will have significantly lower premiums. The downside to this though is it corresponds to the income that the claim is made at the time, so if Rodney’s income is reduced the cover will also be reduced. As Rodney’s salary doesn’t fluctuate, indemnity will be a good choice.
⦁ Rodney should hold this outside his superannuation. This is because if he was to have it inside super he would have to meet the requirements of the temporary incapacity condition of release before the income protection benefit can be paid. If he was to have it outside super (recommended), he only has to comply with the terms of the insurance contract.
⦁ This is also tax deductible.

⦁ Trauma insurance

⦁ I recommend Rodney to have Trauma insurance. Having this will take the pressure off him if he was to get a serious medical condition i.e., cancer, heart attack, stroke or have an accident.
⦁ It will help pay for out of pocket expenses. Allowing him to make lifestyle changes so he could focus on healing and help with debt repayment.
⦁ This policy can be costlier than a standard life insurance policy.
⦁ A disadvantage to this is that within the first three months of buying the policy, you get diagnosed with cancer, a heart condition or stroke, you won’t be allowed to make the claim immediately.
⦁ Rodney will have to meet a prescribed definition of critical illness in order to get benefit from the policy.

⦁ Other insurance

Rodney currently has private health insurance with Bupa, this is good but should have a look at the things that are in his policy. Doing this will help bring down the costs of the health insurance as Rodney would not need everything in the policy. Rodney should still keep the health insurance although he is young and his tax bracket is not within Medicare Levy Surcharge. This has benefits like giving you the option of being treated by your own doctor, shorter waiting times for elective surgery and more control over when and where you are to be treated.

⦁ Estate planning

In terms of Estate Planning, we recommend Rodney:

⦁ Complete a will and establish an enduring POA (none current).
⦁ Establish binding death benefit nominations for his superannuation fund.
⦁ Establish an advanced health directive.

Fees and commissions

Plan Fee: $3,000 – 50% payable upfront, 50% due when SOA is presented to client and recommendations discussed.

Ongoing fees: to be discussed at next meeting


Please send to Para planners.


Fact find – completed at initial appointment.

Appendix 1 – Future value (FV) calculations (House deposit)


Future value (FV) calculations [Car]


⦁ Buying outright

⦁ $18000 - $10000 = $8000 - $3000 (emergencies) = $5000 (invest for home deposit)

Alternative strategy

Leave all available money into high interest savings for 3 months.