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James Macready

Section 3        Present appropriate strategies and solutions to client and negotiate a financial plan, policy or transaction

Part A

The SOA has been completed and a meeting has been organised with James to present the recommendations and, if he agrees, to implement them.

During the meeting, you must ensure that James understands the advice that you are providing. Answer the following as if you were talking to James, in language he would understand:

(a)     Identify and use one (1) piece of supplementary information to help explain your recommendation.

(b)       Explain one (1) risk associated with the solution.

(c)     Provide the answer you will give to one (1) question James might ask you in relation to your advice regarding his share portfolio.

(d)       Provide the answer you will give to one (1) question James might ask you in relation to your advice regarding managed investments.

a. Risk is not a term that should evoke negative images. Risks as mentioned to him in the earlier document provided or as it may have been mentioned in the advice should be regarded as an aspect of investing and it is not about losing his savings or the benefits that have been set for his parents. Instead, reality investment risks are multifaceted and James has to differentiate these aspects. The most important factor and an aspect that should act as his supplementary information to help in the recommendation provided is that while risk mean general risk of loss, he has risks that can be broken down into more specific classifications so that matter his portfolio can be strong enough.

b. The solution as provided must take care of inflation risks or interest-rate risks. That is, James’ portfolio could be risky in a number of ways and the risk can be attributed to the fact that his fixed-income investments for instance, might be unstable. On the other hand, the risk that James could face based on the advice above is that the price of a bond or in some cases, bond fund may fall with the interest rates

His share portfolio as earlier analysed shows a case where he is immune or protected from any risks associated with market. Therefore the question James could ask is whether interest rate risks are associated with the general risks markets could be having. Based on this question it is essential to tell James that the value of his portfolio is likely to be eroded by a decrease or decline in the purchase of his savings and this might be caused by attributes such as inflations.

c. James should note that managed investments are tricky and fluctuate depending on the market trend. One of the questions he is likely to ask is whether credit risks might affect his managed investments. The right answer to be given to this question is that he will have to understand and play with bond funds and bonds. That is, the higher the ratings, the lower the credit risks.


Assessor feedback:


Part B

Provide an analysis of two (2) funds, comparing key elements regarding the fund manager, philosophy, process, people and the investments of each fund. Explain why you have chosen one over the other for James. (250 words)

He should note that regardless of the type of investment he wants to undertake, there is bound to be a mutual fund that can fit his desires and styles. Based on his specific case, he needs to make a comparison between money market funds and equity funds. Money market funds are made of short term instruments, in most cases they comprise of treasury bills. This is the most ideal place for James to put his money basing on his short-term and long term goals. However, it has to be noted that by putting his money he may not be able to have huge returns on the one hand but he will not be worried about losing his principal. In most ideal market, a typical return is almost twice the amount he will earn in a normal or regular savings account.

On equity funds, funds that are designed to be invested in stocks act on behalf of the larger category of mutual funds. In most cases, the decision to invest in this class of funds is a long term growth of capital with some benefits or income attached to it. On the same note, equity funds are varied and there are a number of options available for James. Regardless of the type of equity fund James chooses, this decision is a long term and it will only be beneficial if he intends to save his money for a longer period.

Based on the two funds, equity fund is the most ideal because James has always preferred long-term investments.

Assessor feedback:


Part C

Discuss how you will ensure James fully understands your proposal. In your answer, discuss the strategies involved, alternative strategies you considered and why the ones you recommend are ultimately the best choice for James. (400 words)

An option that can help him understand the proposal is to match as much as possible, his investment and goals he has set. Before providing recommendations on what he should do it will be prudent to help him make a decision on the type of investment that are appropriate but these must be pegged on his objectives and appropriate risk perspective. Therefore matching his investment goals with the proposal means to re-state and underline every saving goal he earlier mentioned and beneath such goal recommendations on how to attain the goal. Every recommendation will be embedded on his previous performances. Taking a case study of what James stated, he argued that he wants to stretch his benefits to his parents. On this goal it will be easy for him to understand them if he is made aware that the longer his time horizon, the more volatility he can tolerate in his portfolio. However, as a long time investor he should be worried about inflation.

On the other hand, it has been established that much of the proposal has addressed risks and the best strategies that can be used to address these risks. However, it is imperative that a clearer strategy is set to help James comprehend what risks he is facing and how they are directly linked to his portfolio or investments. The best way to make him understand these attributes easily is to show how each risk has its potential rewards rather than making risks look like a negative option in the process of investment. That is, every risk will be given a suggestion on how it is a stepping stone in pursuing his financial goal. Every risk must be linked to how they help him pursue his intended goal. By doing this James will easily understand what risks mean to him and how some risks are almost inevitable when it comes to the realisation of profits. Basing on his share portfolio, it will not be sensible to just mention risks associated with his portfolio instead, a strategy that will help him is to show that interest risks are the risks that the price of a bond fund or bond will fall with rising interest rates. This way, James will understand interest rate risks. This will also be the case when detailing for him other risks such as credit risks and how they are related with bond and bond funds.

Assessor feedback:


Section 4          Agree the plan, policy or transaction and complete documentation

Part A

After explaining your recommendations to James, you realise he has concerns that he wants resolved before agreeing to the plan. Provide one (1) issue or concern that James has with your proposal and explain how you would address his concern. (200 words)

One of the concerns that James will be having after the presentation of the proposal is the process of diversification of portfolio or what it entails to diversify portfolio. James has to note that there are roles that he can play and there are some that are beyond him. Regarding this concern, banks’ exposure policy is to mandate or in the diversification of risk to the extent that will be beneficial for him. This will in turn minimise his possible loss with regard to overall portfolio. He will play little here and his case will be just to follow the proposal given and the bank or the institution chosen will come up with operational limits as well as guidelines for his investment that ensure limited risks and maximisation of profits.

In connection to this, James should not concentrate on only one risk but try as much as possible to understand the various risks that are involved. What James is undertaking is generally the probability that his actual return on the money placed will be lower compared to his expectations. Fear of losing part of his money should be considered as one reason why he may chose conservative investments.

Assessor feedback:


Part B

At Frontiers Pty Ltd, where you work, your advice comes with a fee for the services you have provided. Explain how you calculated your fee, what it covers and why it is appropriate for James. (200 words)

James case is a situation where there will be or there was an ongoing financial planning and consultation meetings and according to Frontiers Pty Ltd will be billed on retailed basis or on an hourly basis. There are some cases where James will be dealt with hourly and there are some cases where the issues raised will be dealt with on retailed basis. For hourly cases, the fees will be based on the actual time involved in the meeting, whether as a person or over the phone, the issue he has presented and the researching and analysis of issues presented and such compared with financial trends he has invested in. For this case, analysis and presentation of recommendation and implementation assistance  will cost as follows:

Comprehensive Financial Plan ranging from  $4,000-$6,000

Personal Financial Planning – $205/hour

The fee above will be specifically for his financial planning services.

On the other hand, the ratings below will apply to cases other than financial planning services. In particular, they will be applicable in the event related to investment management services. Importantly, it has to be noted that fees for on-going management will be calculated as a percentage of his invested assets. However, James will be charged investment management fees on quarterly, in advance.

Annual Advisory Fee

Portfolio Value Fee as % of James’ portfolio value

Under $600,000 1.35%

Over $600,000 1.500%

Assessor feedback:


Part C

James is now happy to go ahead with your recommendations and wants to implement them immediately. What documents should be completed and by whom? (150 words)

Frontiers Pty Ltd should issue James with a Statement of Advice which includes the rationale on which the financial advice was based and other information such as conflicts of interest, fees and commissions. The SOA is signed by both parties. The client is also issued with a signed Financial Services Guide (FSG) detailing information about Frontiers Pty Ltd. The function of the FSG is to communicate the particulars of the financial service provider services such as their identity, contacts, privacy policy, processes of lodging complaints and their renumeration procedures.

A Product Disclosure Statement (PDS) should further be issued and signed by James. This is often a group of documents containing details about the financial plan agreed upon and includes the benefits and risks plus the cost of the advice payable to the financial product issuer. Occationally, James may be issued with supplementary Product Disclosure Statements but always in relation to the initial PDS.

In,  addition to these documents, other auxiliary disclosure documents may be further issued to the client. The may include annual reports, product information statements (PIS) and product prospectuses.


Assessor feedback:


Section 5          Provide ongoing service where requested by client

Part A

Explain how, as a financial adviser, you would provide an adequate ongoing service to James. Include an outline of the services you will provide and actions you need to take to ensure the service is delivered to the client. (200 words)

The first service is a continuous assessment of market risks for James. There will be systematic risks assessment based on the choice he made. For instance if there will be cases where the market will be experiencing a sharp decline, there will be assessment to ascertain whether his stock mutual funds in his portfolio may go down as well.

Another ongoing service to assess is the inflation risk. After the investment choice made, there will be ongoing service to ascertain how the risk value of his portfolio will be eroded especially when there will be a decline in his purchasing power (when compared with his savings).

Thirdly, credit risk is another ongoing service that will be given to James. That is, will he be able to repay his debt as he promised when the bond matures? On the other hand, the assessment will be made to assess whether his investment are able to sustain his borrowings or future prospects.

Other issues to ascertain will be interest margin based on the underlying cost of funds, market risks, country risks, and currency risk. These risks will be linked with sufficient capital resources to sustain unexpected losses as well as expected loss (the risk premium in the case of a business).

Assessor feedback:


Part B
Explain why ongoing service is important for clients with share portfolios. (150 words)

Ongoing service is important for investors such as James but that entirely depends on his share portfolio, how it has been performing, the intention of the portfolio and current and future market trends. In totality, ongoing service with regard to James case are two-fold; it helps investors and in particular, James’ share portfolio when it comes to decision making regarding management of the risks with diverse investments. Guiding James to diversify his funds is one critical element of an ongoing service that will assist him in managing risks in a portfolio. As a matter of fact, since he seems to be investing in different securities, mutual funds should be an ideal way of helping him in the process of diversification. Secondly, ongoing service helps James to understand how to select mutual fund for his portfolio. There is need to select investment from more than one asset class. Taking a case where stocks are hard hit by fluctuation of market trends, bonds may not be influenced as drastically.


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