You are on page 1of 18


Wealth Creation and Protection: Case Scenario of Mr. and Mrs. Wang
Senthur Kugathasan
RMIT s3291172

Wealth Creation and Protection

Mr. and Mrs. Wang, both 46 years of age, are looking to grow your wealth in the next ten
years. You have two dependents, Alex and Caitlin Wang, both 21 years of age. You would wish
to do so by investing in a fund that would enable you achieve your goals and objectives in terms
of wealth creation and protection. Your cash flow and other financial statements show a healthy
financial position in which you have a net asset value of $ and a surplus income of $24,116.
Also, Arthur Wang has a risk insurance policy for income protection of $150,000 that
commenced in 2002 and was last reviewed in 2010. Your wife, Susie Wang, on the other hand,
has a risk insurance policy on trauma that commenced in 2004 and was last reviewed in 2009.
You both have a will that was last reviewed in 2008 and that has no enduring power of attorney
and no funeral plans set out in it. Arthur has an Easy-super currently valued at $300,000 to which
his employer contributes $ 19,000 while Susie's Easy-super is currently valued at $ 50,000 to
which her employer contributes $ 2,850.
Client Assessment
Table 1: Money-Smart Calculations
Amount ($)
Period (years)
Investment earnings (%)
Management Costs (% p.a.)
Add Contributions (%)
Advice Fee (% p.a.)
Interest rate (%)
Starting Balance ($)
Monthly contribution

Managed Fund


Goals and Objectives

The goals and objectives detailed in youdata form will be impacted on in the following ways:

Wealth Creation and Protection

1. House and holiday home pay off in 5 years

You are currently paying $ 25,000 annually on the mortgage for both your principle and
Holiday home that has a balance of about $200,000 on it. From calculation, it means that you
have about eight years remaining on your mortgage to fully clear it. You can achieve this goal,
but you will have to use some of your surplus income to clear out the remaining loan.

2. $200,000 invested in 10 years' time wealth-building goal

This goal is achievable for you since it is a long term wealth building strategy. You would
like to build the same amount of wealth as your current mortgage balance in the same amount of
time as you are scheduled to pay off the mortgage. For you to achieve this goal you would have
to invest your surplus income for the time frame set. At forecasted investment earnings of 8.9%
and a management cost of 0.90%, you would make $ 51,732 in the time horizon. This value is,
however, way below your target value, therefore; you would need more funds to reach this goal.
The ideal investment amount would be $ 200,000.
3. Tax reduction
Currently, you pay an individual marginal tax rate of 47% but, you can drastically reduce
the amount of deductions remitted by applying several techniques. In doing so, you would open
up your surplus income to allow you access to more disposable income to invest or assign to
other urgent goals on your priority list.
4. New car every three years
This goal is achievable for if the cash to undertake this goal is derived from your current
car expense. This may mean that you do not have to assign cash from any other income
generating activity to satisfy this need. The anticipated income increase for Sussie, a year from
now, may be introduced into the investment pool as opposed to taking care of this goal.

Wealth Creation and Protection

5. Annual charitable donations of $5,000

You have a combined income surplus of $ 24,116 annually, this means that you can
comfortably contribute the $ 5,000 annually towards charitable organizations and still meet your
day to day expense requirements. However, this would drastically impact on your investment for
wealth creation and protection. The donation means that you only have $ 19,116 to invest.
6. Savings for childrens university degrees ($5000 each) in 10 years time
To reach this goal then you would have to have in your account at least two hundred
dollars ($200) as a principle amount (table 1). At the current savings interest rate of 3.25%, this
goal is achievable in ten (10) years. You need to make a monthly savings deposit of three
hundred and fifty dollars and twenty-eight cents ($350.28). However, this may only be achieved
by making a sacrifice on other objectives at hand. Given the limited surplus income of twentyfour thousand, one hundred and sixteen dollars ($24,116), your wealth creation goal of two
hundred thousand dollars ($200,000) will have to take up more monthly savings than initially
Risk Profile
In provision of this financial advice, we have adopted five basic profiles. These are based
on your attitude, adoption of diversified investment portfolios and your chosen investment time
frame. The profiles are; Defensive, Moderate, Balanced, Growth and high growth in the order of
increasing risk and volatility.
Based on the information form you filled, your risk profile is considered that of a Growth
investor. The profile is characterized by investors seeking high return investment. Investors in
this profile are prepared to invest for a long-term and endure extended periods of negative

Wealth Creation and Protection

returns provided that eventually they may benefit from higher returns. The asset allocation for
such a portfolio is largely on growth assets such as shares (83%). Capital invested is never
guaranteed, and the investment may experience large fluctuations and negative returns from year
to year. There exists a significant risk of a portfolio decreasing in value in the short term, but, this
is drastically reduced for investments over the recommended minimum investment period of
seven years. In these regards, you are well over the minimum investment term by three years.
This profile means that an your allocation over a period not less than seven years should
be as follows:

5 % Australian Cash
8% Australian Fixed Interest
4% International fixed interest
The sum of all defensive assets comes to 17% of the total investment. The remaining

83% is distributed as follows:

42% Australian shares

31% International shares
10% property
This set up ensures 84.9% probability that in a single investment year the fund will

receive a positive return and a 15.1% probability that in any given year the fund will record a
negative return. The range of returns for such a portfolio in 1 year is between -9.8 % and 30.5 %.
In five years, it would be between -0.1 % and 17.9, and in 10 years it would have improved to
between 2.45 and 15.0 %.
Forecasting investment returns for this portfolio would give a portfolio target return of
inflation + 5.5 %' and a forecast average return over the long term at 8.9%. If you hypothetically

Wealth Creation and Protection

were to invest $ 100,000 for ten years, you would receive a low of $ 149,996, a high of $
341,983 and an average of $ 233,653

Goal and objectives

To achieve the objective of paying off the House and holiday home mortgage in 5 years,
we would recommend that you make additional monthly payments of $1,500. This would ensure
that the term of the remainder of the mortgage is reduced by at least three years and nine months.
By applying the accelerated payment method, you will substantially reduce the time remaining
on your mortgage and meet your goal much sooner than anticipated.
To achieve your wealth creation goal of $ 200,000 in ten years, you need extra income to
realize this. The calculated amount to achieve this in the specified time period is $ 100,000. You
currently have a surplus income of $24,116, some of this will go into paying off the mortgage;
annual charitable donation; and savings for your childrens education. An extra $ 80,000 is
needed for investment in the fund so that you may be able to comfortably achieve this goal
without a compromise on the other objectives at hand.
Table 2: Financial contribution and requirement
1st year
Surplus income
(Less) Mortgage contribution
fee = (350.28 monthly contributions + $200 starting balance)
(Less) Charitable contribution
Net Surplus income
(Less) Fund requirement
Gearing amount


Wealth Creation and Protection

The taxation reduction objective is achievable if you are willing to open a discretionary
family trust and name your children beneficiaries of the said trust. In this way your children get
the income and capital the trust owns and since they are of a lower tax bracket, they get to be
charged lower rates than what the clients would have been charged. A bigger portion of the
income may be distributed to beneficiaries on a lower tax regime(as is in the case of your
children). This can also be applied to those in the family without another income source to utilize
their $ 18,200 tax-free threshold and potentially the low-income tax offset
You can acquire a new car every three years without drastically affecting your income.
We would, however, recommend that as opposed to leasing you look to buy a family car. This
may be expensive in the short run but will eventually increase your surplus income to allow you
invest in other goals. The long run benefit of buying as opposed to leasing is that you can sell the
car at almost the same price and acquire a new one without the pains if recurrent expenses that
come with a lease.
The annual charitable donation goal of $ 5,000 is only feasible if you are willing to
sacrifice this amount from your surplus income. There is, however, another way of acquiring this
money without digging into the surplus income, by using the tax refunds to fund this goal.
Although this may not be enough it, it reduces the burden of the objective substantially.
You can shop around for more favorable interest rates in the market for your savings plan
for your children to go off to university in 10 years time at the cost of $ 5,000. Shopping for
better interest rates means you pay less monthly contributions to the savings plan or pay the
initially recommended monthly contribution in table 1 ($ 350.28) and achieve this goal in a
shorter period. If you decide to go with the tabulated interest rate then it would mean that in your
first year you will have to reduce yout charitable contribution by about $4,400 (table 2). This will

Wealth Creation and Protection

bring down the amount required for gearing to about $80,000 which is more manageable in terms
of repayment given your cash flow.

As your adviser, I would recommend the Vanguard Life Strategy Growth Fund (VLSGF).
The investment strategy and investment return objective for this product is such that it tracks
weighted average returns of various indices of the underlying funds in which it invests, in
proportion to the Strategic Asset Allocation (SAA), before taking into account fees, expenses and
The investment fund diversifies it units in the following underlying funds:

Vanguard Australian Fixed Interest Index Fund

Vanguard International Fixed Interest Index Fund (Hedged)
Vanguard International Credit Securities Interest Index Fund (Hedged)
Vanguard Australian Property Securities Index Fund
Vanguard International Property Securities Index Fund (Hedged)
Vanguard Australian Shares Index Fund;
Vanguard International Shares Index Fund;
Vanguard International Small Companies Index Fund; and
Vanguard Emerging Markets Shares Index Fund.
At its discretion, Vanguard may commence investing directly in the securities that are,

have been or are expected to be in theindices of the underlying funds or in different or other
Table 3: Strategic asset allocation
Income assets
Australian fixed interest
International government

SAA (%)

Range (%)
10 14
10 - 14

bonds (hedged)
International credit securities


Wealth Creation and Protection

Growth assets
Australian property securities
International property
securities (hedged)
Australian shares
International shares
International small companies
Emerging markets shares


28 32




29 33
22 26
1.5 - 5.5
1.5 - 5.5
68 72

The minimum suggested time frame for this portfolio is seven years with a high-risk
level. The potential for higher returns than lower risk investments; however, there is a higher
potential for below-average return and some capital loss over the investment time horizon
This investment portfolio package is best suited for you as you are considered buy and hold
investors seeking long-term capital growth, but requiring some diversification benefits of fixed
income to reduce volatility.
Asset allocation for this product will be as follows:
The current surplus income is $ 24,116 that can be invested into the fund. If we are to
invest the whole sum, then the best asset allocation strategy would be that of 65% shares ($
15,193), 14% bonds ($ 3,617) and 21% cash ($ 5,306). This proposal is based on your age (46
years), current asset ($ 24,116), a marginal tax rate of 47 % (highest marginal rate for individuals
in Australia). Taking into consideration your risk tolerance (growth) the asset allocation strategy
is calculated with a risk tolerance level 7 (out of 10).
Consequently, we have considered the expected change in surplus income that would
result from Susie taking up the full-time job next year, resulting in a $ 30,000 increase in surplus

Wealth Creation and Protection


income. Fully investing this extra amount would not change the asset allocation percentages in
any way. We recommendation that if you are to invest your total surplus income into the
suggested product, do so in the provided proportions.
However if we are to put into consideration all your objectives and goals, then as earlier
suggested, you would need to borrow cash to invest in the product and this will bring your
allocation to the recommended growth risk profile client asset allocation.

Gearing is only appropriate for growth based investment such as shares and property and
as such should be viewed as a long-term investment strategy (7 to 10 years time frame). In the
application of gearing you will need to be able to retain your investment (and maintain the set
out loan repayment schedules) during potential short-term market falls in order to obtain the
benefits of the predicted long-term growth.
Negative gearing is a strategy where the interest payable on borrowed funds and any
other expenses incurred to derive that income is in excess of the net income received from the
investment. This kind of gearing is appropriate for you as you have surplus income over and
above your daily living expenses to meet the shortfalls of the investment. Your risk profile also
supports this kind of gearing;

Your risk profile is assertive, and you are prepared to accept investment volatility
You both have a strong and secure cash flow that is protected by appropriate insurance

You are on a high individual marginal tax rate, 47%
Your investment time frame is ten years, greater than the recommended minimum of
seven years

On taking up this strategy you will be able to enjoy the following benefits that accrue:

Wealth Creation and Protection


1. Potential for increased capital gains and diversification: you will be able to increase the
size of your investor portfolio by being able to purchase additional investments with
borrowed funds.
2. Potential for increased investment diversification: By increasing the number of securities
in your portfolio, the greater portfolio diversification may reduce the volatility of the
overall investment portfolio.
3. Taxation: Although this should not be the main reason for opting for an investment
strategy, gearing will offer you some additional tax benefits. Under the current
legislation, interest payment on the money borrowed to invest in income producing
investment, plus the ongoing expenses, can be claimed as deductions against your taxable
income. With this strategy, you may be able to pay the interest cost for up to 12 months in
advance. Given that your marginal tax rate is high, you are bound to make greater tax
savings from your tax deductions. Investment income predominantly sourced from
Australian investment may provide you with an additional benefit through the value of
any franking credit.
There are however several risks that come with the high risk, high return investment strategy that
is gearing. The risks include:

Negative gearing compounds the risk associated with standard gearing. It further reduces
your cash flow since the income from investment does not necessarily cover the interest
costs that may result in a reduction of both cash flow and the ability to service the interest
cost. In simpler terms, negative gearing means that your expenditure on the fund increase

every time interest is due.

Reduction in capital value: there are potential wealth creation benefits to be gained from
gearing, though these gains are achieved through higher risk. It is important to note

Wealth Creation and Protection


though that gearing may increase capital gains in a well-performing market, it can also

mean a capital loss in a poorly performing market.

Capital gains tax (CGT): this may be payable when you sell your investment. When

gearing is applied to buy more investment, you may have more tax to pay when you sell.
Interest rate fluctuations: if the income from investment does not change, but interest
rates on the borrowed funds rise, you will incur additional costs that will need to be

covered by other sources.

Growth based investment: to adopt a successful gearing strategy you need to invest a high
proportion of the portfolio into growth assets such as property and equities. These
investments can be volatile over short term periods(that is, in the short term, there may be
years in which the portfolio does not perform well or even lose value). It is for this reason

gearing is a long-term investment strategy.

Increased borrowing: increasing an existing loan and establishing a new loan may incur
bank fees and government charges. If you later on decide to borrow or draw down further
fund you could affect the gearing strategy that may then require a re-assessment of its

appropriateness to your situation.

Income protection insurance: a key factor in commencing a geared investment strategy is
consistent income flow. In the event that your income ceases or reduces for any reason,
you may be unable to continue to meet repayments on your loan. In this instance, you
may be forced to sell the investment at the wrong time and realize a capital loss rather
than the desired gain. As it would be, your income level needs to be reasonably secure
and adequately high. To ensure that your income is appropriately protected in the event of
ailment, we strongly recommend that all parties involved in this strategy take up income
protection insurance.

Wealth Creation and Protection


Loan defaulting: a default on your loan interest repayment may mean that you may be
compelled by the lender to make payments, penalties imposed for late payments or be

asked for immediate repayment in full.

Loan termination: to terminate your loan facility, it may be necessary to sell the geared
investment or securities held by the lender to do so. This may mean that you sell your
investments at a lower price than what was paid for the same or too early for the gearing

strategy to have provided the significant benefits hoped for by the investor.
Marginal lending: with these kinds of plans, marginal calls may be made if the value of
the portfolio reduces below particular set limits.
Owing to the risks attached to gearing (and especially negative gearing) this report would

highly recommend that you do not take up negative gearing as an investment strategy. This
statement does not however mean that you may not consider gearing as a strategy in your wealth
creation goal. Taking into consideration the fact that Susie anticipates a $30,000 increase in
income in a year's time, you may at this point take up gearing as a strategy to increase your
wealth in the investment time horizon (ten years).
One of your key objectives is to reduce taxation and make charitable contribution
annually. A negative gearing strategy would pose a risk to these two goals by increasing the
amount of taxes and other market-related levies to be charged on invested amount and by
reducing cash flow.
In conclusion, to meet all your goals and objectives, you will have to take up some form
of gearing. We will, however recommend that you consider taking up standard gearing strategy.
The standard strategy has alower risk on invested amount and retains much of your cash flows.
With the standard gearing, payments are paid as would a normal personal loan. Payments of this

Wealth Creation and Protection


kind are much easily managed and can be attached to your individual incomes. Given that the
gap in your investment requirement is large and you still need to satisfy all your goals, you will
have to cushion this risk by gearing your fund to allow more income to be allocated to the
remaining goals.


Wealth Creation and Protection

Bank Rate. (2015). Asset Allocation Calculator. Retrieved July 10, 2015, from Bank Rate:
Direct Invest. (2014). Investment risk profile. Retrieved July 4, 2015, from 2020 Direct Invest:
Money Smart. (2015). Managed Funds fee calculator. Retrieved July 3, 2015, from Money
Money Smart. (2015). Savings goal calculator. Retrieved July 3, 2015, from Money Smart:
Smart Investor. (2014, January 28). Six tips for paying less tax. Retrieved July 4, 2015, from
Smart Investor:
Vanguard. (2014, April 8). Vanguard Investor Funds. Vanguard Investor Funds: Supplementary
Product Disclosure Statement. Southbank, Victoria, Australia.


Wealth Creation and Protection

Russell and Vanguard
Below is a comparison table for two recommended products. This table shows details of
the two products including their individual pros and cons
Table 4: Russell and Vanguard product comparison

The fund has a management cost that

The major cost under this product is the

include expenses recoveries,

management cost (Vanguards remuneration

investment management fees and

for managing the fund). The maximum

estimated performance fees payable

management fee charged is:

out of the investment. This does not

1.5% p.a. for Vanguard High-Yield

Australian Share Fund

O.90% p.a. for the Vanguard Life

however include transaction costs

and other costs that an investor would

Strategy Balanced Fund and

incur if the investor invested directly

Vanguard Index Hedged

in the underlying assets.

The management cost has no set
value or estimate but, varies based on
the latest available figures as at the
date of the PDS and throughout the
Under this product; the investor is
expected to pay a financial adviser
enumeration of up to 0.15% of the

International Fund
0.85% p.a. for all other funds

An additional $50 p.a. may be introduced to

all funds except the Vanguard High-Yield
Australian Share Fund and the Vanguard
Life Strategy Balanced Fund.
Apart from the management fee there are
other charges to the investment namely,
transaction and operational costs (taxes,


Wealth Creation and Protection

value of the investment.

regulatory charges, bank charges, brokerage

commission, buy/sell spread cost and stamp
There are, however, no charges towards


The following risks may be

financial advice.
The fund remains vulnerable to the


following risks:

Interest rate risk

Derivatives risk
Liquidity risk
Counter party and settlement

Currency risk
Performance fee risk
Emerging markets risk
Short-selling risk
Leverage or borrowing risk
Alternative strategies risk
Securities lending risk
Credit risk
Political risk
Underlying funds absence of

Market risk
Derivative risk
Counterparty/credit risk
Currency risk
Regulatory risk
Manager risk
Fund risk and
Other operational risks (mostly
those that are not within Vanguard's
control such as war, fire, and civil


regulatory oversight
The major benefit accrued from using This fund provides the following benefits:

this is the commissions and other

Competitive long-term performance

benefits (e.g. research) from brokers

- an efficient way to capture long-

effecting trades for the fund. These

term market performance.

Diversification - The Funds provide

benefits may flow to the Fund.

Russell actively instructs investment
managers to only trade with brokers

exposure to a diversified portfolio of

securities, which means the Funds


Wealth Creation and Protection

providing best execution regardless

become less exposed to fluctuations

of whether or not those particular

in the performance of individual

trades are placed with brokers related

securities. This is a moderation of

to Russell.

the volatility of the portfolio and

smooths out' investment returns
with time. Tax efficiency the
fund buy and hold strategy means
that they hold securities in a
portfolio for longer. Some securities
when held for more than 12 months,
capital gain (if applicable) on the
disposal of those securities may be
reduced under the capital gains tax
discount rules - a tax efficient
outcome for eligible investors. Low
investment cost - The Funds have
low ongoing fees as we strive to
minimize the costs of managing and
operating the Funds. The Funds
typically have low portfolio
turnover resulting in low trading
costs such as brokerage and other
transaction costs.