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Table of contents :
Full Title
Copyright
Publisher’s Note
About the Author
About the Contributors
Table of Contents
Part 1 — Introduction: Setting the Scene
Chapter 1 The Financial Planning Environment
Chapter 2 Ethics and Compliance
Chapter 3 The Client–Adviser Relationship
Chapter 4 Constructing a Statement of Advice
Part 2 — Building Wealth
Chapter 5 Cash Flow, Budgeting and Managing Credit
Chapter 6 Asset Allocation and Managing Risk
Chapter 7 Direct Investing
Chapter 8 Indirect Investing
Chapter 9 Investing in Superannuation
Part 3 — Managing Wealth
Chapter 10 Taxation — Strategies for Financial Planners
Chapter 11 Insurance — Life, Income Protection, Health and General
Part 4 — Using Your Wealth
Chapter 12 Superannuation and Retirement
Chapter 13 Social Security
Chapter 14 Estate Planning — Core Principles and Practice
Chapter 15 Keys to Successful Financial Planning
Appendix A — Time Value of Money
Appendix B — Present and Future Value Tables
Index
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Financial Planning in Australia 2017 Essentials Edition

Sharon Taylor BCom (Accounting, Finance and Systems), MCom, FCPA Senior Lecturer, School of Accounting Western Sydney University

LexisNexis Butterworths Australia 2017

LexisNexis AUSTRALIA LexisNexis Butterworths 475–495 Victoria Avenue, Chatswood NSW 2067 On the internet at: www.lexisnexis.com.au ARGENTINA LexisNexis Argentina, BUENOS AIRES AUSTRIA LexisNexis Verlag ARD Orac GmbH & Co KG, VIENNA BRAZIL LexisNexis Latin America, SAO PAULO CANADA LexisNexis Canada, Markham, ONTARIO CHILE LexisNexis Chile, SANTIAGO CHINA LexisNexis China, BEIJING, SHANGHAI CZECH REPUBLIC Nakladatelství Orac sro, PRAGUE FRANCE LexisNexis SA, PARIS GERMANY LexisNexis Germany, FRANKFURT HONG KONG LexisNexis Hong Kong, HONG KONG HUNGARY HVG-Orac, BUDAPEST INDIA LexisNexis, NEW DELHI ITALY Dott A Giuffrè Editore SpA, MILAN JAPAN LexisNexis Japan KK, TOKYO KOREA LexisNexis, SEOUL MALAYSIA LexisNexis Malaysia Sdn Bhd, PETALING JAYA, SELANGOR NEW ZEALAND LexisNexis, WELLINGTON POLAND Wydawnictwo Prawnicze LexisNexis, WARSAW SINGAPORE LexisNexis, SINGAPORE SOUTH AFRICA LexisNexis Butterworths, DURBAN SWITZERLAND Staempfli Verlag AG, BERNE TAIWAN LexisNexis, TAIWAN UNITED KINGDOM LexisNexis UK, LONDON, EDINBURGH

USA LexisNexis Group, New York, NEW YORK LexisNexis, Miamisburg, OHIO National Library of Australia Cataloguing-in-Publication entry

Author: Title: Edition: ISBN: Notes: Subjects: Other Authors/Contributors:

Taylor, Sharon (Sharon Maria). Financial Planning in Australia 2017. Essentials edition. 9780409342536 (pbk). 9780409342543 (ebk). Includes index. Finance, Personal — Australia. Investments — Australia. Colley, Graeme. Cull, Michelle. Griffin, Ray. Monahan, Robert William. Seymour, Elen.

© 2017 Reed International Books Australia Pty Limited trading as LexisNexis. 1st edition published 2015. This book is copyright. Except as permitted under the Copyright Act 1968 (Cth), no part of this publication may be reproduced by any process, electronic or otherwise, without the specific written permission of the copyright owner. Neither may information be stored electronically in any form whatsoever without such permission. Inquiries should be addressed to the publishers. Typeset in Archer and Gotham. Illustrations, graphic design and typesetting by Stephane Bowker, Who Dunnit? Graphic Design. Printed in China. Visit LexisNexis Butterworths at www.lexisnexis.com.au

Publisher’s Note Financial Planning in Australia 2017 Essentials Edition is an introductory textbook for Australian business and finance students, which provides a contemporary view of the fundamental issues in financial planning. Now in its second edition, the content combines the knowledge of a team of leading academics and practitioners in a variety of financial planning areas. Also by these authors is the market-leading advanced textbook Financial Planning in Australia: Advice and Wealth Management, published by LexisNexis. This book provides students with a comprehensive introduction to financial advisory and planning processes, including insight and advice into the real-world applications of those processes. This edition has been substantially updated since the first edition, with a view to assisting and enhancing student learning, including the use of new characters throughout the chapters. The characters encounter various financial planning issues and add a practical element to the content. Financial Planning in Australia 2017 Essentials Edition is an essential resource and is supported by a wealth of online learning materials for both students and lecturers. The author, contributors and publisher would like to acknowledge the prior contributions of Roger Juchau, Beverly Houterman and Michael Perkins to the development of this work in its first edition, published in 2015. Their professional and scholarly contributions have helped to establish the Financial Planning in Australia Essentials series as a competitive title in the academic market. LexisNexis October 2016

About the Author Sharon Taylor is a senior lecturer in Accounting at Western Sydney University (WSU). She has worked at the Australian Taxation Office and is a Fellow of CPA Australia and a Registered Tax Agent. For many years, she was an academic supervisor in the School of Accounting, and also the Associate Head of School Engagement at WSU. Sharon is currently a member of the Financial Planning Academic Forum and Deputy Chair of the Financial Planning Education Council, and was a Foundation Fellow of the Association of Financial Educators. Additionally, she held the role of convenor of the Financial Services Discipline Team for many years, and was Chair of the committee developing both the Master of Commerce (Financial Planning) and the Bachelor of Financial Advising degree programs. She has contributed to numerous publications, including Australian Accounting Research Foundation, Financial Services Review, Financial Planning Research Journal and Australasian Accounting Business and Financial Journal.

About the Contributors Graeme Colley is currently the Executive Manager, SMSF Technical and High Wealth at SuperConcepts, where he is involved in and manages the SMSF technical program for clients, advocacy and assists in delivering the company’s education program to private clients. Previously, Graeme was Director of Technical and Professional Standards at the SMSF Association from 2012 to 2016. Prior to that he was the National Technical Manager of ANZ’s financial services arm, OnePath Australia, which he joined in 2001. At OnePath, he was responsible for providing technical advice on superannuation, Centrelink, aged care and taxation strategies to over 2,100 financial planners and users of OnePath products. Dr Michelle Cull is a lecturer in Accounting and Financial Planning at Western Sydney University, where she has held various academic positions since 1999, including head of program. She has contributed to the curriculum development of the Bachelor of Business (Accounting) and Master of Financial Planning and currently oversees the offshore delivery of the Bachelor of Business and MBA programs. Michelle previously worked extensively in the areas of commercial, financial and management accounting at ASX 100-listed companies and has also worked as a consultant. She has recently completed a PhD on the role of

trust in financial planning and has contributed to numerous publications, including Accounting Education — An International Journal, Australasian Accounting Business and Finance Journal, Economic Labour Relations Review and Financial Planning Research Journal. Ray Griffin holds an Executive Master of Business Administration, a Diploma of Financial Services and is a graduate of the Australian Institute of Company Directors. Under his own Australian Financial Services Licence, he operated his business for almost 20 years, and is a Director of Biaocchi Griffin Private Wealth Pty Ltd. He has been a regular commentator for magazines, radio and television, and is a past winner of Money Management’s Financial Planner of the Year award. In 2003, Ray chaired the International Council of Certified Financial Planners’ Strategic Planning Task Force, and was a key contributor to the development of the global standards-setting body, the Financial Planning Standards Board. He cofounded the annual Corners for Kids Motorcycle Rally, and in 2007 instigated the establishment of Future2 Foundation, the charitable foundation of the Financial Planning Association of Australia. Robert Monahan is the principal lawyer at Monahan Estate Planning. Robert was first admitted in 1976 and has been accredited by the Law Society of New South Wales since 1998 as an accredited specialist in the area of wills and estate law. Robert’s career has taken him from private practice to a corporate environment followed by a

consultancy at Maddocks Lawyers. Robert has now returned to private practice since establishing his boutique estate-planning firm where he now works with his daughter, Julia. Robert is the general editor of the Estate Planning Service, published by LexisNexis, and a regular contributor to Retirement & Estate Planning Bulletin. With Michael Perkins he co-authored the book Estate Planning: A Practical Guide for Estate and Financial Service Professionals, the fourth edition of which was published in 2015. Robert lectures in Estate Planning at the University of Technology, Sydney, and is a regular speaker at conferences for lawyers, accountants and financial advisers.

Elen Seymour BA, LLB, LLM is a law lecturer with Western Sydney University specialising in tax and financial services. Prior to becoming a lecturer, Elen worked for the Australian Tax Office as a graduate and then as an auditor with the International Tax Transfer Pricing team. Later, Elen worked for PricewaterhouseCoopers as an international tax consultant in Sydney, before transferring to become a Senior Associate with the international tax team with PricewaterhouseCoopers in Ottawa, Canada. Elen has been lecturing in tax and commercial law since 2003. Elen is a fellow of the Tax Institute.

Contents Publisher’s Note About the Author About the Contributors Part 1 — Introduction: Setting the Scene Chapter 1 The Financial Planning Environment Chapter 2 Ethics and Compliance Chapter 3 The Client–Adviser Relationship Chapter 4 Constructing a Statement of Advice Part 2 — Building Wealth Chapter 5 Cash Flow, Budgeting and Managing Credit Chapter 6 Asset Allocation and Managing Risk Chapter 7 Direct Investing Chapter 8 Indirect Investing Chapter 9 Investing in Superannuation Part 3 — Managing Wealth Chapter 10 Taxation — Strategies for Financial Planners Chapter 11 Insurance — Life, Income Protection, Health and General Part 4 — Using Your Wealth Chapter 12 Superannuation and Retirement Chapter 13 Social Security

Chapter 14 Estate Planning — Core Principles and Practice Chapter 15 Keys to Successful Financial Planning Appendix A — Time Value of Money Appendix B — Present and Future Value Tables Index

[page 1]

PART 1

Introduction: Setting the Scene

Chapter 1 Chapter 2 Chapter 3 Chapter 4

The Financial Planning Environment Ethics and Compliance The Client–Adviser Relationship Constructing a Statement of Advice

[page 3]

CHAPTER 1

The Financial Planning Environment What will I learn from this chapter? This introductory chapter sets the scene for the subsequent technical chapters. In many ways, financial planning is a product of the circumstances that arose in the early 1980s when it became apparent that such issues as an ageing population, poor levels of domestic savings and substantive changes in government policy relating to the funding of an individual’s retirement created the need for holistic financial advice. This chapter attempts to define and explain the term ‘financial planning’, followed by a discussion of the factors which have contributed to the emergence of this new profession/industry. Finally, the chapter briefly considers the historical framework of the industry and the role played by the major professional bodies and other industry participants.

Learning Objectives

After studying this chapter, students should be able to: have an understanding of the difficulties associated with defining the term ‘financial planning’ and the elements it incorporates; appreciate the impact of the external environment in which the financial planning industry operates; understand that there are many economic factors that have played a role in heightening the importance of obtaining good financial advice; appreciate the history and development of the financial planning profession/industry as we know it today; have an understanding of the roles of the professional bodies in maintaining codes of conduct, ethics and standards generally; understand the role of the government in relation to both fiscal policy and regulation, and how this impacts on the giving of financial advice; and have an appreciation of the roles of other stakeholders and how these impact on the future development of the financial planning industry.

[page 4]

Introduction 1.1 As a learning tool, we would like to introduce Stephen and Amy, a couple whom you will meet periodically throughout this book. Stephen and Amy have just completed high school and are commencing their first semester at university. Stephen is studying business with a major in financial planning, and Amy has enrolled in a Bachelor of Education with a major in mathematics and science. At the end of week one, the two students are discussing their courses.

History continues to show us the ongoing volatility in financial markets over time. This fact, combined with factors affecting the Australian domestic scene, has led to numerous lessons being learned, as well as providing data for reflection. In 2008, for the first time, many investors experienced loss of their capital and they were keen to ensure there was no repeat of such losses. Hence, many investors sought financial advisers to give advice in relation to risk and return, market volatility,

portfolio construction and diversification, as well as ongoing management of their investment portfolios.

The concept of financial planning as a discrete discipline is somewhat new. Until the early 1990s, financial advice was given by a multitude of different professional groups. For example, accountants typically gave advice on investments, superannuation and tax issues, whereas lawyers were concerned with estate planning and superannuation. Then there were the insurance agents giving advice on insurance products, and real estate agents recommending strategies incorporating negative gearing and direct property — for example, purchase of residential units or homes rather than property trusts. Consequently, there was no all-encompassing approach to an individual’s wealth creation. This fragmented approach often left clients with no clear plan as to how their overall financial goals and aspirations were to be met and, whether, given their circumstances, the goals were realistic and/or achievable. [page 5]

HISTORY OF FINANCIAL PLANNING IN

AUSTRALIA 1.2 The origin of financial planning can be traced back to ancient times. Even then, people required food, water and shelter and, hence, some form of planning was required. As Cull (2009) states (at 28):1 A concept of wealth was already in progress and often linked to fertile land, water (wells), livestock and grain. In early times, this ‘wealth’ also included children, wives and slaves (as they could be bought and sold and provided a source of labour).

The financial planning industry as we know it today plays a drastically different role to the one it played in the early 1980s. At that time, Australians lived in an economic environment of high inflation and high interest rates. While the Labor government of the time sought to engineer the economy to make it generally more robust and internationalised, it was apparent that many domestic issues relating to savings and retirement needed to be addressed urgently. Australia’s government recognised that the nation’s declining birth rate, combined with the ageing baby-boomer population and a poor savings record, required drastic action.

In many ways, the financial planning industry was borne out of the insurance industry. Many insurance advisers soon realised that a client’s financial wellbeing required a more holistic approach. In the late 1970s, independent insurance advisers began to take on this role despite having had almost no structured training. At that time, there were virtually no training programs, and advice was extremely limited and fragmented. In the 1990s, what had been a rather disjointed way of giving advice was considered by the two professional bodies representing the industry: Australian Society of Investment and Financial Advisors (ASFIA); and International Association of Financial Advisors (IAFP). The result was the formation of the Financial Planning Association of Australia Ltd, the first organisation to represent qualified financial advisers in Australia (this is discussed more fully in ‘Professional Associations’ later in this chapter; see [1.19]). See Figure 1.1. FIGURE

1.1

Industry bodies

[page 6]

Summary of Key Events Across the Financial Planning Landscape, 1980s–Present Day 1.3 Key events across the financial planning landscape are summarised below. 1980s The government introduced rollover provisions in relation to superannuation to ensure that employees who left one employer to work for another could transfer (‘roll over’) their superannuation benefits to the new employer. Taxation laws were changed to encourage this practice, rather than having individuals withdraw their lump sum superannuation benefits. 1985 Capital gains tax (CGT) was introduced and, with this, came the development of new investment products, which, in some cases, were CGTexempt. Additionally, many investors for the first time sought professional advice as to how to best structure their investments to minimise tax effects. 1987 The system of dividend imputation (or franking credits) was introduced in 1987. Previously, dividends were taxable in the hands of the company but then also formed part of the shareholder’s taxable income, with no recognition of the tax paid by the company. In effect, this was double taxation and did not provide any incentive for investors to buy shares in companies that paid dividends. The introduction of dividend imputation removed

this disincentive and recognised that the shareholder was entitled to a credit for the tax paid by the company on the dividend. The 1987 share-market crash saw share prices fall anything up to 50% in a few days. For many advisers in the financial planning sector, it was the first time both they and their clients had experienced such a drastic market correction. Many brokers and fund managers went out of business during this period. 1990s Dramatic changes occurred in the financial environment, both in Australia and overseas. In Australia, the property trust freeze and the collapse of financial institutions, such as the Pyramid Building Society, saw investors withdrawing funds and an overall climate of panic in the investment market of dividend income. 1992 Closer to home, the introduction of the superannuation guarantee charge (SGC) (now called the superannuation guarantee (SG)), heralded a new era for Australians, with the implementation of [page 7]

a compulsory superannuation scheme. Since the scheme’s introduction, there have been many changes within the superannuation arena, which, today, provides potentially trillions of dollars ($1.62 trillion as at the end of June 2013) in funds

to the Australian investment markets. Initially, the contribution by employers was 3% of their employees’ earnings to a superannuation fund. Currently, the rate is 9.5%, which will progressively rise over the years and, by 2025, the SG will have been increased to 12% of employee earnings. 1994 The Japanese stock market crashed, followed by the crash of US government bonds. 1997 World currency markets were severely impacted by the Asian crisis, and the World Bank and the International Monetary Fund combined to draft a rescue package for many Asian countries. 2000 At the beginning of the new century, sharemarket volatility was again evident, with sharp falls recorded in the value of share markets in many of the world’s developed countries. In the early part of the new decade, corporate collapses, such as HIH Insurance Limited, created a climate of instability and a lack of confidence that permeated the investment markets in Australia. 2007/08 Volatile conditions were exacerbated with the subprime loan collapses in the United States and the ripple effect on world and Australian financial markets. Early 2008 again saw huge volatility on the world’s share markets, and this continues to the present time. In terms of the Australian share market, some of the market losses that occurred early in 2008 were initially, and to some extent, recouped, but an environment of uncertainty remains and is reflected in investors’ current behaviours. In late 2007, Australia underwent a change to a Labor government. In May 2008, the new

government brought down its first Budget, signalling that taxation and financial services issues were firmly on the agenda. This focus has continued, with several inquiries being set up and reports released, such as the Ripoll Inquiry reviewing financial services, the Henry Tax Review considering taxation reform, and the Cooper Inquiry into superannuation. 2009 Findings from the Ripoll and Cooper inquiries were released in late 2009. [page 8]

2010 The report from the Henry Tax Review was handed down by the government in May 2010. 2011/12 During 2011–12, the government was very proactive in the financial services area, with the introduction of the Future of Financial Advice (FOFA) reforms, which, it was hoped, would lead to increased trust and confidence of Australian retail investors in the financial planning sector. The reforms were designed to tackle conflicts of interest that had threatened the quality of financial advice provided to Australian investors. The reforms were also the government’s response to the Parliamentary Joint Committee on Corporations and Financial Services inquiry into financial products and services in Australia. The FOFA legislation was to commence from 1

July 2012. 2012 Although the economic environment continued to improve in Australia, the same indicators were not present in other OECD (Organization for Economic Cooperation and Development) countries. By mid-2012, a sustained international recovery was still difficult to predict with any real confidence. In early 2012, concern was raised about the true state of the Australian economy. — For example, many people working in the retail sector said they could not remember a pre-Christmas period quieter than what had occurred in 2011. Similar sentiments were expressed about the housing and construction sectors, along with manufacturing and other businesses. Yet the official figures for the period January– March 2012 showed the Australian economy was growing much faster than expected — up a full 1% compared with the same period for the previous year, and amounting to economic growth of 2.5% for the year. — This was perhaps due to what had been referred to as a ‘two-speed’ economy: the mining sector continued to boom, but the same could not be said of other sectors in the Australian economy. The ‘situation’ fuelled domestic instability, which was compounded by the fact that continuing uncertainty in Europe failed to provide confidence globally — thereby adding to the already volatile domestic sentiment and beliefs about the robustness of the Australian economy generally. In May 2012, the Reserve Bank of Australia (RBA) opted to cut interest rates, giving households some mortgage relief, which, it was

hoped, would have the result of stimulating the economy. Overall, however, while the Australian economy performed better than many other Western economies over the last decade or so, economic growth in Australia was slow, which led to further cuts to interest rates, along with changes to fiscal policy, especially in the area of spending. At the time of writing, the RBA continues to review interest rates on

[page 9]

a monthly basis; the Australian cash rate reached an all-time low of 2.5% in August 2013 and, subsequently, rates dropped to the current rate in 2016 of 2%. The 2012–13 federal Budget, handed down in May 2012, sought to reduce government spending substantially, with the aim of securing a small surplus for 2012–13. This action did not result in the predicted surpluses. The situation continues to the present day, with the government running a substantial deficit in 2016. 2013 A coalition government took office in Australia. The new government embarked on a platform of strong fiscal policy and foreshadowed substantial changes to the FOFA legislation. 2014 In June 2014, the government announced that

amendments to the FOFA reforms would occur, using regulations to implement the majority of its proposed changes on 1 July 2014. A media article2 reported Acting Assistant Treasurer and Minister for Finance, Senator Mathias Cormann, as confirming, ‘This will provide certainty to financial advisers and consumers while the changes are considered in detail by Parliament’. The article went on to report that: The regulations will bring about the following changes, which will subsequently be progressed through legislation: Removal of the ‘opt-in’ requirement Removal of the catch-all provision of the best interest duty to provide clarity and certainty on how a financial adviser has to comply with the best interest duty Better facilitation of access to scaled advice Removing the requirement for fee-disclosure statements to be sent to pre-1 July 2013 clients. In addition, the regulations will implement the: Balance scorecard incentive payments which do not conflict advice are permitted Improvements to the FoFA grandfathering provisions to address unintended consequences and to facilitate competition in the financial advice industry.

These reforms hit more hurdles due to the political environment in the Senate; however, a last-minute deal with the Palmer United Party saw the amendments pass in the House. Senator Cormann on 15 July 2014 stated:3

[page 10]

I’m pleased to inform the Senate that the Government has reached agreement with measures that the Government will pursue, by way of further regulations, in order to ta United Party.

The regulations became effective from 1 July 2014 until 31 Decemb Chapter 2. 2014/15

Additional issues arose with the announcement of cost-cutting m receive Senate approval and were enacted on a limited basis. The government set up the Murray inquiry to scrutinise bank dep Hockey, called it a ‘root and branch’ inquiry.5 The Murray inquiry released an interim report on 15 July 2014. In an James Eyers stated that, although the interim report did not make wide range of topics, including the banking system, superannuati requirements under the Tax Agent Services Act 2009 (Cth) (TASA) The Parliamentary Joint Committee on Corporations and Financial S standards of the financial services industry released its report o subsequently tabled on 9 February 201