Personal Financial Planning - Report Example

Personal financial planning Course Author Name Name of Affiliation Executive summary Investment is passive sources of income is wise decision for the couple who are at their mid 30s. Many of them prefer to invest in apartments while others in assorted in the stock assets. The clients with less capital will start with diversified portfolio and later invest in stock market. The benefit of having a diversification portfolio results in the benefits primarily we would have more of a return or a higher chance of expected gain and combined have a lower portfolio risk than we would have been exposed to had we invested all the money in a single stock. The client’s needs analysis shows that the client needed a passive source of analysis and he is able to raise money for investment. The client has a net worth of $ 1,215,000 with a potential annual savings of 97,968. At the close of the year the client was expected to have a saving of 212,968, this reduced the amount that was going to be borrowed to 1 million for the investment of 1.2 million that is expected to be made. In choosing the best alternatives for investment for the client apart from the proposed apartments viability and available cash was considered. However, Investing in the securities market has proved worth. Investment in funds has proved worthwhile. However, once one gets to get the feel of how investing in the stock market works, the possibility to earn so much more is unfolded. The initial move in decision to invest takes more anxiety as fundamental questions looms. When all the vital questions are answered and one knows what kind of investing to pursue, things become easier as long as there is continued research to support actions. As with any endeavor, experience will prove to be a great tool to allow for the realization of objectives and aspirations. There are many ways that stocks, bonds, mutual funds, exchange traded funds, and futures contract can make substantial wealth for anyone. Table of contents I Executive summary 2 II Table of contents 3 III Clients’ needs analysis 4 IV Fact Finder Choice 4 V Key assumptions and understanding of facts 5 VI Statement of Net Worth 5 VII Budget/Cash flow statement 6 A). Tax calculation 7 VIII Needs, wants and priorities 7 IX Risk Assessment 8 X Information provided by planner 12 XI Justification of Risk Profile Tool Used 13 XII Alternative plans and investment strategies 13 XIII Recommendations 15 Reference List 18 Clients’ needs analysis Our client is a couple aged 35 years and 32 years for husband and wife. The husband, John is self employed with a net annual income of $ 230,000 saves 10% of his annual income which is $ 20,000 per year. The wife, Jennifer is employed with an annual salary of 180,000 and she has annual superannuation contribution of $12,000 per Annum. The client needs to invest in passive source of income which will help them during their old age. The husband have inherited certificate deposit of $100,000, he has a car loan of $150,000 where he pays $4350 for interest and principal for next 4years, he as investment stock of $50,000, treasure bonds of $10,000 savings of $70,000 for the business and a home worth $350,000. The wife has a car loan of $200,000 which attracts interest and principal of $5250, she has horticultural farm worth $500,000 generating $40,000 profits per annum which she inherited from her mother. She has a saving account with a deposit of $45,000. The couple has family leaving expenses of $5000 per month the husband is also pursuing his professional course which he pays $27,000 per semester. The shares earned dividend of $900. The client wants to invest in apartments which have 3 to 4 bedrooms as a source passive income. At their ages it is possible the required $1.2 million to enquire property. The client has sourced for three possible properties to invest in. Justification of Questionnaire/Fact Finder Choice The questionnaire asked to the client is meant to collect information about their financial position. The questions which were asked cantered on retirement, tax, future plans and goals of the investor. It would be of fundamental importance to conduct interviews with clients about their needs so that it can be framed, how the planning will be able to achieve them. Then, a checklist or a questionnaire should be handed out to client to receive feedback on plans that are needed to be created to cater their needs. The interview with loyal customers can be a good strategy to see preferences and suggestions as to the type of investments they want to see and how it can beneficial. Key assumptions and understanding of facts The assumptions made are that Superannuation allowable rate is 9% The couple files their returns separately and the tax rate are 10% for the first 8700, 15% for the next 26650, 25% for the next 36000, then followed by 28% for 37375, the next 85450 is 33% and anything above 194,175 is taxable at 35%. We have assumed that interest and dividend incomes are subjected with withholding tax therefore is not taxed again. We have also assumed that car loans interest is not allowable expenses for tax purposes. We have assumed that professional education is not related to the self employed business therefore not allowable Balance Sheet (Statement of Net Worth) Description wife husband total Assets Certificate deposit 100,000 100,000 Stock 50,000 50,000 Treasure bond 10,000 10,000 Horticultural farm 500,000 500,000 Savings 45,000 70,000 115,000 Home 350,000 350,000 Superannuation 190,000 150,000 440,000 Liabilities Car loan 200,000 150,000 (350,000) Net worth 1,215,000 Budget/Cash flow statement Incoming wife husband Gross salary 180,000 180,000 Net income 230,000 230,000 Farm income 40,000 40,000 Interest income 1500 4500 6000 Dividend 900 900 Total cash in flow 121500 235400 356,900 Cash outflows Income tax 42,507.25 57824.75 100,332 Car loan payments 5250 4350 9600 Expenses (5000x12) 60,000 Professional education (2x27000) 54,000 54,000 superannuation contribution (12,000) (23,000) (35,000) Total cash outflow 258932 Net savings 97,968 Cash 115,000 Total savings 212,968 Tax calculation Tax paid by the individuals will depend on their income bracket. The following is tax calculation for the husband and wife. The wife`s income with attract superannuation of 9% of 180,000 which translate to 16,200. This leaves wife’s taxable income as 163,800. The husband`s taxable income will be 230,000-9% of 230,000 = 209,300 Taxable income Rate Wife-Tax husband 8700 0% 870 870 26650 15% 3,997.5 3,997.5 36000 25% 9000 9000 37375 28% 10465 10465 55,075 33% 18174.75 85,450 33% 28198.5 15125 35% 5293.75 Total 42,507.25 57824.75 Needs, wants and priorities The client is a couple who are employed and contemplating to make property investment. The couple may choose to take out a loan from the bank or just slowly save a portion of their incomes and then wait until they have come up with the total amount. Obviously, the option to save the amount is less risky and prudent but it will take a long time. The husband is diabetic and is 35 years while the while the while is 32 years has no known medical condition. They want to invest in this invest in this apartment so that they can live in one unit while the other units rented out to increase their passive income. The clients immediate priority is to settle short term and medium term needs so he will be free to invest to gain some capital and to prepare for the presupposed future needs. First thing on the list is to get an appropriate health and life insurance policy. Since they will be able to borrow $1000, 000, they need to continue on the investment track; set aside something for stocks and to build another savings cache to finance a business that is still in its continuing conceptualization stage. Embarking on a venture is always risky, but that is where the challenge is and it should be a good learning activity, experience is still one of the most solid capital for an entrepreneur. Taking on this difficult yet exciting task of getting familiar about the asset market is a push for a sound financial wellbeing for the future. The clients’ initial move was firsthand investing by venturing on stocks with similar, but lesser move on bonds and cash. The foremost thing to settle is to decide as to what type of investor client is. To maximize the returns of passive income, there will be individual shares that will be pursued while the bulk will go to Exchanged Traded Funds and a mutual fund is being considered. The underlying strategy will be as what many investors envision dealing with securities, to buy low at the bid and to sell high at the ask while surfing the waves of high turnovers. In investing, the ideal may just be a figment of the imagination and what is best is to temper the risk. If options and other risky types come into contemplation, only a small percentage will be allocated. Risk Assessment The most popular method of determining allocation is to choose the assets depending on the age or goal of the client. If the client is young, then stocks that are poised for growth are chosen because the client still has plenty of working years ahead of him and very little bonds for the portfolio because he doesn’t need the slow but guaranteed income from bonds. The situation is different however if the client is old. John is particularly exposed to greater risk of losing his income due to health reasons and not getting any other income as a return. His case is even more exposed to this risk because he is self-employed and relies on his good health to always have the means to support himself and his family This means our client needs a hybrid form of insurance wherein the income from their monthly premiums are also invested in the stock market by the insurance companies financial managers and then a portion of it is given to them with the additional sweet promise of having insurance coverage during the coverage of the insurance policy and after it has been fulfilled completely (Bruner 1998). In short, they are no better than my initial and strong recommendation of investing in stocks themselves without the hassle of having an insurance company take their cut with it. It is best for them to take out only one life assurance to be used by either of them. They only need to choose a plan that allows it to be applicable to either partner. They need to combine it with investing aggressively in stock units. The purpose of not having insurance for both of them is to eliminate the excessive burden of having to pay for monthly insurance premiums. Although there is always risk, it is acceptable in their circumstance as they are still in their 30’s and not in the late 50’s. The income they can possibly derive from stock dividends could greatly outpace the income they can possible derived from having to pay monthly insurance premiums. This is the reason why the advice is only to take out one insurance because it provides a safety net somehow but not so much that it takes away the potential for even greater income potential. The extra risks when purchasing assets like stocks would be the possibility of having a well performing stock but it does not pay dividends because the company needs to use it for successive investments in order to reach its goals for growth(Graham, 2006). The client would be forced to sell a portion of the stocks if they ever need some cash for personal use and that is not necessarily a good thing because there would be capital taxes involved. It is still better to depend on the dividends these stocks produce because they are passive in nature. Of course, if the client is old and near the end of their life, there is no issue with liquidating some or most of their holdings whenever they need it seeing as they are not going to be able to stay alive and make use of it in the long run anyway. The risks for bonds on the other hand would be the lower returns they have for the investor. They are indeed safer than stocks but any investor would be plagued by inflation if they happen to be unable to invest in a bond with a higher rate than inflation. Bonds should only be chosen for the sake of having an emergency cash fund that yields a decent rate of return. Only stocks offer the possibility of a very healthy profit potential. For both bonds and stocks however, there are common risks that should be dealt with by the investor. There shouldn’t be any excessive trading for stocks and excessive movements for bonds as well because they all incur a broker’s fee or management fee from the brokerage house that you are buying securities from. You earn your profit from choosing securities well and let time do its work on the growth aspect but financial firms derive their revenue from the constant activity of the financial market regardless of whether or not it is good for you. This is the reason why financial brokerage firms encourage day trading in the first place. For the investor however, the rules are different and you would be well advised not to follow what is being done by the majority of the market(Graham, 2006). Another risks for both these asset classes, would be governmental regulations that can affect the profitability of the companies you are investing in. There are also potential civil wars that can hamper the operational capabilities of the companies you are investing into. Even if you have already been able to determine the fundamental business strength of a company there are always these factors that can’t be explained nor predicted in the financial statements. It is the same reason why any investor should monitor their investments for potential changes in the market that can alter their assets profitability for short term and long term scenarios. There are also rare but nonetheless significant events that can totally impact your investments like civil war in the country you have chosen to invest in or a major civil disturbance at least. Any weather disturbances that can hinder the operations of your chosen business will naturally impact your returns as well. Typhoons, floods as well as landslides can all happen anytime. Even the totally unexpected disaster that happened to Japan has far reaching consequences for related business that are not even located in Japan itself. Of course, the detail would also depend on what is the nature of the business you have invested upon. The possibility of default is also present for both stocks and bonds asset class because the companies behind them are facing financial concerns always in the real world. It is for this reason that investors should be very wary and thorough when investigating potential assets to buy. Obvious financial weaknesses as well as operational risks should be fully evaluated before buying anything. It should be noted however that not all risks involving a security for investment can be gleaned just from reading their financial statements. The most significant risks are sometimes based in the future hence; there is no current data that will indicate this for you. The best way to deal with this risk aspect is simply to try to ascertain the future risks in addition to the thorough financial analysis. Any future changes in technology that can render a company’s competitiveness should also be considered for probability. This is also a very significant risk for the asset because it can range from a decrease in profitability to outright bankruptcy. The investor should guard for this possibility as well. The type of risks might not always be obvious but they do have very significant impacts on businesses even if they happen rarely. It should be considered as well into the decision when buying these types of securities. For bonds, obviously the investor should never choose those with weak financial foundations. For stocks, the future profitability is considered equally important as the current financial status because stocks are chosen for their growth not just current financial health. All in all, the risks associated with both stocks and bonds can best be determined by due diligence before committing any funds to any of them. If a person is not financially savvy, he or she should best leave the financial decision to a capable financial manager of their retirement funds(Rader and Logue, 2004). Description of other information/documentation to be provided by planner The financial planner will issue report which will assist the client to make investment and saving decisions. The planner gives his opinion with a clause stating that he shall not be held lay able for the performance of investment decisions made from his recommendation. In the report there will be a budget cash flow statement and taxes that will be charged. It will have a financial Needs analysis of the clients. The Financial Needs Analysis offers a general analysis and four specific types of analysis. The general analysis will look at the overall financial position of the client. The specific clients will help the client plan to pay off debts, save for their retirement, protect their income, and save for college education. The client satisfaction is likely to increase after Financial Needs Analysis. The decrease in customer satisfaction levels is unlikely simply because of the fact that the Financial Needs Analysis is designed to satisfy the customers. Any decrease in the client satisfaction level would indicate a flaw in the Financial Needs Analysis design. As the product has yet not failed, it is unlikely that the product will decrease the customer satisfaction. While the actual data about the products performance cannot be gathered due to inaccessibility to the product records, it can be inferred from the data available about the product that the product will be viable and useful to the people. Justification of Risk Profile Tool Used Factor Analysis of Information Risk is used to calculate the accurate probability for the frequency and magnitude of the occurrence of loss events. Factor Analysis of Information Risk is not the magic potion for assessing risks exactly but what Factor Analysis of Information Risk does is, it provides a good understanding of what risk is and the factors that contribute to risk, Factor Analysis of Information Risk is in fact a framework for doing risk analysis. Factor Analysis of Information Risk can be used to fortify the existing risk management policies in practice in an organization instead of replacing them. In other words Factor Analysis of Information Risk complements existing risk management methods rather than replacing them(Graham, 2006). The Factor Analysis of Information Risk methodology was used to do the risk assessment for client’s investment. It calculates the accurate probability for the frequency and magnitude of the occurrence of loss events. There are 4 stages in the Factor Analysis of Information Risk methodology like Stage 1 – Identify scenario components, Stage 2 – Evaluate Loss Event Frequency, Stage 3 – Evaluate Probable Loss Magnitude , Stage 4 – Derive and articulate Risk. Alternative plans and investment strategies The client should think of investing in portfolio consisting stocks, mutual funds, treasure bills, bonds and traded funds. The client should think of investing managed portfolios because they do not have shares that as high volatility in returns. The main reason is because they lack information that will enable trade in the stock market regularly. This will offer a good alternative to investing in apartments. The diversification benefit does depend on the time period over which returns and variance are calculated. Some of the riskiness associated with individual assets can be eliminated by forming portfolios. The process of spreading an investment across assets is called diversification tells us that the spreading an investment across many assets will eliminate some of the risk. Not surprisingly, risks that can be eliminated by diversification are called diversifiable risks. The simple fact that securities carry differing degrees of expected risk leads most investors to the notion of holding more than one security at a time, in an attempt to spread risks by not putting all their eggs into one basket. Diversification of one is holding is intended to reduce risk in an economy in which every asset`s returns are subject to some degree of uncertainty. Even the value of cash suffers from the inroads of inflation. Most investors hope that if they hold several assets, even if one goes bad, the others will provide some protection from an extreme loss. The couple already have the relevant tools that will enable them to seek the services of an asset manager especially when they want to save for a house. They both have checking accounts from where they can obtain the money for their expenses as well as savings account. It is important that in the event that the income becomes more than the expenses that this money is invested wisely. John already has a certificate of deposit from an inheritance worth $100,000 that is expected to mature in five months. This means that he already has money in the asset management field. He has also stocks in a brokerage firm; in addition they have individual accounts where she has invested through a mutual fund. This means that this couple has a lot to start with in terms of asset management because they already have long term investments. The other alternative is to invest in Exchanged Traded Fund in the form of the iShares Barclays TIPS Bond Fund. ETFs are similar to mutual funds; the main difference is the way they are traded. ETFs are dealt with on the open market exchange; they can be bought and sold at any time of the day, affording great flexibility for the trader. There are so many things that one can do with the fund, ”unlike mutual funds, ETFs can also be used for speculative trading strategies, such as short selling and trading on margin” (Whinney, 2011, para. 4). More so, ETFs are run by managers that greatly aid in decision making, especially on the right timing for buying and selling. One can consult the fund manager on different aspects of the investment which is quite a plus factor as specialists do have good and useful information to share. ETF allow for investing in different markets throughout the world and can be a very good source of learning for the novice investor. As diversification can offer long term benefits, the ETF is a great way to broaden the content on one’s portfolio. There are ETFs in virtually every sector and all major indexes like those issued by S&P, Dow Jones, and Nasdaq. The ETF does not just afford great flexibility; it is also quite a safe haven for the careful investor. There are different levels of protection. The fund is first placed in a bank which then passes the certificates through the Depository Trust Clearing Corp. This is US government agency that does the recording for individual stock sales and has a database for all the transactions; it provides an extra layer of assurance against fraud. ETFs pose good prospect for both novice and expert investor(iShares FTSE/Macquarie G I 100 Fd , 2012). There are many ways that stocks, bonds, mutual funds, exchange traded funds, and futures contract can make substantial wealth for anyone. What it involves is meticulous research and disciplined investing. As the saying goes, the trend is your friend; one has just to find their way in the complex maze of investing in the securities market. Recommendations A will advice the client to take a loan of 1million to finance the purchase of an apartment however the apartment is economic viability should be evaluated. This will ensure that they have made the right investment decision. I would strongly recommend high growth dividend stocks for them because they are relatively young and in the prime of their lives. They will benefit strongly from the combined capital growth and the steady dividends stock securities can provide. Insurance products that can provide pension for both of them are very inferior in terms of earnings potential. It is also ironic for them to place their trusts in insurance companies as these same companies are also investing in the stock market to create their revenue using the premiums paid to them(Rader and Logue, 2004). The only drawback of investing in stocks is if a person does not know what he is doing. It is the reason why my knowledge as a financial advisor would be of great help to them. I would be able to pick the highest income producing stocks for them that will be at a level bigger than what any insurance company can provide. The income generated by some insurance policies after a certain period of time and after the policy has expired is very inferior to what a decent stock can provide an investor (Krackov and Kaushik, 1988). There are several styles or principles that determine the portfolio allocation when choosing types of different assets. The most popular method of determining allocation is to choose the assets depending on the age or goal of the client. If the client is young, then stocks that are poised for growth are chosen because the client still has plenty of working years ahead of him and very little bonds for the portfolio because he doesn’t need the slow but guaranteed income from bonds. The situation is different however if the client is old. The portfolio this time is designed to hold more bonds than stocks because the client will need most of them within a few years of their lives and has no more time to wait for the stocks to mature and provide them with the income they need (Graham, 2006). Only the short term bonds can provide them some sort of passive income this time. The stocks they hold should be no more than protection against inflation and also a small form of growth for the little time they have left in this world(Bruner, 1998). The other recommendation is that they should think of investing in diversified portfolio which will be in a form of managed funds. This will provide a goo investment vehicle as their will be less variations in returns. Managed funds do not require services of investment advisor but the investment Reference List Bruner, RF., 1998. Case Studies in Finance: Managing for Corporate Value Creation. New York: Irwin McGraw-Hill. Graham, B., 2006. The Intelligent investor. New York, McGraw Hill iShares FTSE/Macquarie G I 100 Fd (ETF), 2012). Available from: [Accessed 10 May 2012]. Krackov, L.M., and Kaushik, SK., 1988. The Practical Financial Manager. New York: New York Institute of Finance Rader, J. & Logue, D. 2004. Managing pension and retirement plans: a guide for employers, administrators, and other fiduciaries. Oxford: Oxford University Press. Whinney, J., 2011. The benefits of ETF investing. Available from: [Accessed 10 May 2012]. Read More