1202AFE Financial Planning 1

Workshop 1

Workshop 1 – summary solutions

Question 1

Provide two reasons why personal financial planning has increased in importance in
recent years. Explain your answer.

Answers may include information on:

 The number & complexity of financial products and services
 Changing legislation (particularly superannuation and the age pension)
 An aging population (more people living longer)
 More knowledge re importance of protecting wealth (insurance) / estate planning
 Less stress, concern and arguments about money
 Etc etc

Question 2

For each of the 6 stages of financial advice (refer Appendix 1), what is one piece of
information you will need from your client (e.g. one question you would ask or
documentation you would request) in order to be able to provide your client with the
best possible advice?

1. Gather information
e.g. where do you currently work? what is your annual
salary? etc

2. Establish goals & objectives

e.g. what are their goals - expand for more information
such as required timeframe, establishing priorities etc

3. Analyse date & identify financial issues

More an internal process, but could discuss any
preferences client has / issues if not able to achieve
goals in desired timeframe etc. Consider documents we
may require from the client including tax returns,
superannuation statements etc

4. Prepare, develop & present SOA

Particularly presenting SOA – whether the client has any questions, including if they
are unsure of any recommendations provided etc. Consider what documents we
need to provide to the client e.g. SOA and any PDS’s.

5. Implement agreed upon recommendations

Make sure you have a signed authority to proceed!

6. Review & revise SOA

Any changes to data previously gathered? Or goals/objectives?

Note: Personal advice takes into account the particular circumstances of the client (must be a
licenced adviser or Authorised Representative). General financial advice does not take into
account personal circumstances.
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Question 3

The Corporations Act requires financial planners disclose three documents to their
clients.

a) What are these documents?

b) What is the purpose of these documents?
c) When do they need to be provided to a client?

The Corporations Act requires licensees and their representatives to disclose a Financial
Services Guide (FSG) and to provide a Statement of Advice (SOA) and a Product
Disclosure Statement (PDS).

The FSG provides information about the advisor and the services they provide.

The SOA provides detailed information re the client (i.e. their current situation) & the
recommendations given by the advisor, including the benefits and risks associated with the
recommendations.

The PDS is supplied by the product supplier and provides information about the product e.g.
fees, any risks / exclusions etc.

Question 4

In late 2008, Storm Financial collapsed having lost nearly $3 billion of investor’s funds,
decimating many investors’ retirement savings and forcing others to sell their family home to
repay loans. Loans that they had taken out to purchase shares (known as a margin loan)
following advice from Storm Financial.

Storm’s founder Emmanuel Cassimatis likened his company’s approach to financial advice as
a Big Mac or Ford production line, adopting a one-size-fits-all approach, regardless of their
situation. For example, a 70-year-old pensioner was given the same product to invest in as a
wealthy financially independent investor. This advice was generally along the lines of gearing
(borrowing money) against the family home and investing all the proceeds in shares, often
combined with further gearing against the shares purchased. When share prices plummeted
in the Global Financial Crisis (GFC), many clients were left with substantial margin loans and
were forced to sell the family home to repay these.

This is applied to a real life example in the simplified case study on what went wrong with
Storm Financial in Appendix 2. Read this and then answer the following questions:

a) What are two issues that you think contributed to either the collapse of Storm
Financial, or the large investment losses by it’s clients?

 Double gearing
 Everyone received the same advice regardless of their personal circumstances
 Timing (GFC) – the strategy required share prices to increase
 Greed / lack of understanding by clients
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b) What does the Best Interests Duty (as per the Corporations Act 2001) require
financial planners to do? Refer to the ‘safe harbor provisions’ in Section 961B(2)
in Appendix 3 for guidance.

Overall, the Corporations Act requires advisers to treat investors as individuals and
ensure they get to ‘know their client’ and make recommendations to suit the client’s
needs based on their personal situation.

c) What did Storm advisers do that breached the best interests duty?

Storm advisors made little effort to know their client’s and failed to base their
recommendations on the client's relevant circumstances (s 961B(2)(f)).

d) If you were in Nana Jones’ position (i.e. seeking advice to help with your cash
flow) what would you do?

 Not double gear! [do not put the house at risk]

 See a financial counselor
 See a registered independent financial planner – get a second opinion if
recommendations seem too good to be true!
 Check age pension eligibility
 Check possibly of withdrawing additional funds from super
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Appendix 1 – six stages of financial advice

1. Gather
information

2. Establish
6. Review &
goals &
revise SOA
objectives

The
financial
planning
process 3. Analyse
5. Implement
data &
agreed upon
identify
recommend-
financial
ations
issues

4. Prepare,
develop &
present SOA
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Appendix 2

Storm Financial. A Simplified Case Study Of What Went Wrong And Why
Everyone Is Angry.

I was reminded yesterday that unless they’re in the financial sector or directly involved, most
Australians don’t know what happened at Storm Financial. All they know is that whenever
they hear the name mentioned in the news, it’s usually followed by a video clip of a person
who looks very angry, very upset or both. So I thought I’d prepare a case study to explain,
what allegedly happened so that you can be forewarned, next time someone promises you
wealth beyond mention.

Disclaimer: At the outset, I want to say that I was never employed with Storm Financial and
have only innuendo, industry rumour and clients stories to base this case study on.

Nana Jones

When Peter Jones Jr. first received the call from his mum that his Nana had lost her life
savings, he was at first upset for her. That pain quickly turned to anger once he saw her and
heard her story and realised that she’d lost more than just a few dollars in a term deposit.
She was now, homeless.

When Nan and Pop first got married, they bought a little home in Nundah, a family oriented
suburb in Brisbane’s Northside. There were plenty of schools around for the family that was
on its way and a train station, a short walk away which Peter Jones Senior would use for 40
years to take him backwards and forwards to the factory he worked in a few suburbs along
the line.

Everything went according to plan, they raised their kids, they paid off their mortgage and
built up a small nest egg. Pop retired and saw out his days helping Nana in her garden.

After he died, Nana’s Age Pension was reduced to 66% of what her and Pop used to receive
as a married couple. Too proud to ask her family for help to pay the bills, medical costs and
general living costs that were now starting to seem insurmountable, Nana reached out for
help. One of the ladies at her bowls club referred her to a Financial Planner she was seeing.

Most Financial Planners are good people. This one wasn’t.

Given that her problem was cashflow, Nana’s Financial Planner, John, advised she use the
equity in her home to buy a portfolio of shares in managed funds, which he said would
provide her with an investment return larger than the cost of borrowing the money to invest.
The money would be invested in companies she knew he said. Household names. And it
was.

There were two problems though, one was that the economy and investment markets had
been booming for years and secondly it was mid-2007.

Why Nana is homeless

Nana’s home was worth $500,000 when she saw her Financial Planner and the bank he
referred her to, lent her $400,000 (to a pensioner!). This adviser then used that $400,000 as
security for a margin loan of $800,000 with another lender. Nana now has total debt and
investment portfolio of $1.2Million.
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When the markets crashed in 2008 her portfolio fell with it to $600,000 and she was forced
to sell. As a result she had $600,000 in debt remaining, so the bank which is now owed
money, takes her $500,000 home and she is left homeless with a $100,000 debt to her bank.

Know your risks

All financial strategies carry risk, even leaving your money in a bank account can be risky.
Before you employ any strategy, make sure you understand each and every risk you could
confront before moving forward. Seek advice from a Financial Planner, if your Adviser
glosses over the risks, or fails to explain them to your satisfaction, don’t sign a thing. There
are lots of really wonderful Financial Planners out there who genuinely want to help you
achieve the financial security you seek. Get a second opinion, if you feel that would help. A
good Planner will welcome the scrutiny.

No amount of “potential” investment return is worth losing the roof over your families head.

This article is sourced from: https://rodneybukuya.com/2013/03/15/storm-financial-a-

simplified-case-study-of-what-went-wrong-and-why-everyone-is-angry/
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Appendix 3: Section 961B Corporations Act 2001

Provider must act in the best interests of the client

(1) The provider must act in the best interests of the client in relation to the advice.

(2) The provider satisfies the duty in subsection (1), if the provider proves that the provider
has done each of the following:

(a) identified the objectives, financial situation and needs of the client that were
disclosed to the provider by the client through instructions;

(b) identified:

i. the subject matter of the advice that has been sought by the client
(whether explicitly or implicitly); and

ii. the objectives, financial situation and needs of the client that would
reasonably be considered as relevant to advice sought on that subject
matter (the client's relevant circumstances );

(c) where it was reasonably apparent that information relating to the client's relevant
circumstances was incomplete or inaccurate, made reasonable inquiries to obtain
complete and accurate information;

(d) assessed whether the provider has the expertise required to provide the client
advice on the subject matter sought and, if not, declined to provide the advice;

(e) if, in considering the subject matter of the advice sought, it would be reasonable
to consider recommending a financial product:

i. conducted a reasonable investigation into the financial products that might

achieve those of the objectives and meet those of the needs of the client
that would reasonably be considered as relevant to advice on that subject
matter; and

ii. assessed the information gathered in the investigation;

(f) based all judgements in advising the client on the client's relevant circumstances;

(g) taken any other step that, at the time the advice is provided, would reasonably be
regarded as being in the best interests of the client, given the client's relevant
circumstances.