Advanced Diploma of Financial Planning...Advanced Diploma of Financial Planning FNSASICT503A Provide...

Advanced Diploma of Financial Planning

FNSASICT503A Provide Advice in Managed Investments

:

Course: Advanced Diploma Financial Planning

25th October 2013 Version 1 Section 734 Meadowbank TAFE – NSI of 65 Share point

LEARNER GUIDE

FACILITATOR’S DETAILS

This learner guide is only to be used as a supplement to your text and other materials. Contact Details: Address: TAFE NSW - Northern Sydney Institute

See Street, MEADOWBANK, NSW 2114, Australia

Course: Advanced Diploma Financial Planning 25th October 2013 Version 1 Section 734

Meadowbank TAFE – NSI of 65 Share point

Table of Contents

Contents CHAPTER 1 - MANAGED FUNDS AN INTRODUCTION 5 CHAPTER 2 - SUPERANNUATION AND MANAGED FUNDS 9 CHAPTER 3 - TYPES OF MANAGED FUNDS 12 CHAPTER 4 - WHAT ARE MANAGED INVESTMENT SCHEMES? 13 CHAPTER 5 - GENERAL FUNDS - (SOURCE - ASIC.GOV.AU) 16 CHPATER 6 - OTHER MANAGED INVESTMENT SCHEMES 18 CHAPTER 7 - MORTGAGE FUNDS 21 CHAPTER 8 - MANAGED FUND TYPES 28 CHPATER 9 - PLATFORMS AND THIRD PARTY PROVIDERS 28 CHAPTER 10 - FEES AND COSTS 29 CHAPTER 11 - REDEEMING YOUR MANAGED FUNDS 31 CHAPER 12 - TYPES OF RISKS 32 CHAPTER 13 - INVESTING IN SHARES 35 CHAPTER 14 - BONDS AND OTHER INVESTMENTS 36 CHAPTER 15 - DIRECT PROPERTY OWNERSHIP 37 CHAPTER 16 - BORROWING TO INVEST 38 CHAPTER 17 - TAXATION 41 CHAPTER 18 - PROVIDING FINANCIAL ADVICE 62



Managed Funds in Australia



Chapter 1 - Managed Funds an Introduction

Financial planning requires an understanding of the financial concerns of your Clients, the ability to understand and communicate investment risks and ascertain and work together to achieve the financial goals and personal objectives of a client. Advising clients on strategy is what we aim to provide as advisers. Products that get the client to where they want to go is the vehicle in which they would like to travel. The recommended product such as investments, if necessary, is important in a client meeting their financial needs and objectives. Investment is a means to an end; it is not the strategy nor is what you as an adviser have control over. Generally an investments purpose, for an individual, is to increase his or her wealth and secure their future by either gaining additional or maintain current income and/ or achieving increased capital value in their investment by the use of capital gain. To enable you to advise clients appropriately, it is important that you understand the implications of the investment plan chosen—that is, its level of volatility and the potential for loss. The possibility of return and the comfort level of the client with the investments. As an adviser you need to provide the opportunity of a review not of just asset allocation but of the person being incline with their ongoing investment strategy. The assessment of cash flow and assets and liabilities in line with taxation and any Centrelink implications. This is not exhaustive however it is important that a review is not about assets allocation and which funds your money is invested in, it is about the person not the product. Managed funds are services through which many investors may pool their funds, using specialists to handle the daily investment decisions and management as well as administration.



What is a Managed Fund The concept of the unit trust has its origins in England. A system was developed to satisfy the needs of minors that had been left money, however due to their age, they held no independent legal means to use the funds left to them. The unit trust was put in place to assist the child when a person died. The unit trust is a legal arrangement providing the deceased to rule from the grave so that funds can be used to benefit a minor. This was achieved by setting the funds left for a child to be put in the hands of a trustee (the legal owner), these funds were then to be used for an on behalf of the beneficiary (the beneficial owner) and until the child came of age. This legal form was eventually put to use for investors (the beneficial owners), who gave money to a trustee. The trustee then in turn invested money employing the expertise of a fund manager. The unit trust concept was introduced to Australia in 1936, but not until some 50 years later did it become popular. Trusts in Australia were structured as a three-way arrangement, with investors investing in the trust as beneficiaries, the manager managing the trust assets, and the trustee responsible for the assets being managed in accordance with the law and the trust deed. Under the Managed Investments Act 1998 (Cwlth), managed investments may now be run by a single responsible entity. The Australian Securities and Investments Commission (ASIC) licenses the responsible entities. The Corporations Act sets out some specific requirements for information to be included in prospectuses, which basically includes all information that investors and their advisers would reasonably expect to find in the prospectus, for the purpose of making an informed assessment. When there is a significant change in the information contained in a prospectus or a significant new matter arises, a supplementary prospectus must be issued.



Managed investment or Products Advisers may recommend from a wide variety of investment products that are classified as managed funds. Managed funds are in most cases unit trusts. As in the case of cash management trusts, the general public is also able to participate in the long-term fixed interest market through these managed investment products. Normally you would need significant funds and technology and an understanding of each market. Portfolio managers seek to maximise the return to investors by an appropriate allocation of stocks to maximise returns while minimising the risk of loss. The returns to unit holders in these funds are normally variable, and depend on the expertise of the portfolio manager in anticipating future interest rate movements. Managed funds are usually a subsidiary of a merchant bank, stockbroker, trading bank, life insurance company or friendly society. The investor is merely a unit holder in the trust that ensures the fund managers comply with the trust deed. Costs are in the order of 0% to 5% per cent as a once-only up-front fee, and about 1 per cent is normally deducted annually as the manager’s commission. Sometimes special tax concessions apply to managed products offered by life insurance companies and friendly societies, usually sold as life insurance or friendly society bonds.



Why invest in a managed fund?

Advantages • Use of professional investment managers. • Diversification across asset classes as well as diversification with an asset

classes. • Economies of scale and therefore access to investment opportunities

not otherwise accessible to individual investors. EG large whole property. Domestic or Global fixed interest.

• Convenience of consolidated reporting. • Taxation advantages in some cases (e.g. friendly society bonds, allocated

pensions). • Regular income paid that may be compounded (reinvested) or paid to a

nominated bank account.

Disadvantages • Lack of personal control of the investment selection. • Ongoing investment management fees as well as entry and exit fees

which at times are significant. • No control over personal taxation within the fund which is distributed

directly back to individuals each year. • Locked into markets according to mandates of the fund. • Possibility of the fund closing down and forced crystallisation of Capital

Gains • Possible suspension of outflows to members due to illiquidity of the fund



Chapter 2 - Superannuation and Managed Funds

Superannuation is a complex area of financial planning. The process of keeping up to date in Financial Planning and specific areas of expertise is an ongoing one. Superannuation itself is not an investment, just as a company is not in itself a business. It is what happens inside the superannuation fund and a company that is relevant. Superannuation funds can invest in many assets and be used to pay for life insurance and some salary continuance insurance's.

What is superannuation?

(A definition of) A superannuation fund (may be expressed as) is: - “(a superannuation fund is) an indefinitely continuing fund set up solely to provide benefits to its members on retirement or (death benefits) to members’ dependants on death of the member. A superannuation fund is established by governing rules (a trust deed for the private sector) and an Act of parliament or Ordinance for a public sector fund) and is managed by Trustees.”1

What is superannuation? (Cont.)

In other words superannuation is a tax advantaged trust enabling people to save to build up their financial assets to be used at retirement. Superannuation, as a consequence of compulsory employer contributions, is the most common way individuals will save for their retirement. The contributions within the specified legislated limits and investment earnings of a complying superannuation fund are concession ally taxed at maximum 15%. The rationale for providing tax concession to superannuation funds is to

1 Master Financial Planning Guide p. 186



encourage individuals to contribute to a superannuation fund creating a “nest egg” that they can draw on in retirement. Please refer to the following where indicated. Upon reference, please read each reference to understand each heading. You may have to use various resource material where indicated. As such you will have to use the links provided and utilise the Investment Book where indicated.



Types of Superannuation Funds In Australia Corporate funds

Industry funds

Public Sector funds

Small APRA funds

SMSF

Retail funds

RSA's



Chapter 3 - Types of Managed Funds

Types of Managed Funds include - • Public Unit trusts • Retail • Wholesale / Institutional

• Conservative • Balanced • Growth

• Active • Passive • Indexed • Exchange traded • Listed and Unlisted Managed Investments • Hedged Funds • Single sector • Fund of Funds



Chapter 4 - What are managed investment schemes?

Generally in a managed investment scheme:

• people are brought together to contribute money to get an interest in the scheme ('interests' in a scheme are a type of 'financial product' and are regulated by the Corporations Act 2001 (the Corporations Act).

• your money is pooled together with other investors (often many hundreds or thousands of investors) or used in a common enterprise.

• a 'responsible entity' operates the scheme. You do not have day to day control over the operation of the scheme.

Managed investment schemes cover a wide variety of investments. Some of the popular managed investment schemes you may be offered include:

• cash management trusts • unlisted property trusts • property trusts • Australian equity (share) trusts • many agricultural schemes (e.g. horticulture, aquaculture, racehorse

syndications) • international equity trusts • some film schemes • timeshare schemes • mortgage funds, including unlisted mortgage funds • actively managed strata title schemes



http://www.fido.gov.au/fido/fido.nsf/byheadline/Unlisted+property+trusts?openDocument

http://www.fido.gov.au/fido/fido.nsf/byheadline/Timeshares?openDocument

http://www.fido.gov.au/fido/fido.nsf/byheadline/Unlisted+mortgage+funds?openDocument

What types of investments are NOT managed investment schemes

Generally, only investments which are 'collective' are managed investment schemes. Some examples of investments that are not managed investments schemes include:

• regulated superannuation funds; • approved deposit funds; • debentures issued by a body corporate; • barter schemes; • franchises; • direct purchases of shares or other equities; • schemes operated by an Australian bank in the ordinary course of

banking business (e.g.: term deposit).

How safe are managed investment schemes? Generally a scheme must be registered with us if it has more than 20 members or the scheme is promoted by someone who is in the business of promoting investment schemes. Registered managed investment schemes must operate within the Corporations Act. We have been given special powers to supervise the operation of these schemes. To be registered, a scheme must:

• be operated by a responsible entity (who has sole responsibility for the operation of the scheme and must be a public company holding a licence authorising it to operate the scheme); and

• have a 'constitution' (this document outlines the rules of the scheme); and

• have a 'compliance plan' (this document outlines how the responsible entity will ensure the scheme complies with the constitution and the Corporations Act).



http://www.fido.gov.au/fido/fido.nsf/byheadline/Unlisted+debentures?openDocument

Registered schemes must also:

• issue a product disclosure statement (PDS). This document must be issued by a scheme wanting to raise money from the public. It must clearly and concisely set out enough detail about the product for you to compare a range of similar financial products so that you can make an informed decision about which ones to invest in;

• conduct independent audits of the scheme and the responsible entity; • keep the scheme's property separate from the property of the

responsible entity and other schemes; • have a procedure for removing the responsible entity.

Constitution and compliance plan The constitution sets out the rules of the investment scheme including matters like:

• how much it costs to buy interests in the scheme; • the investment powers of the responsible entity; • how to resolve complaints by investors; • the rights of investors to withdraw from the scheme.

The compliance plan sets out how the responsible entity will make sure the scheme complies with the Corporations Act and the scheme's constitution. You may ask if your money is safe even though there is no separate trustee for every managed investment scheme. Parliament considered this issue in detail. After examining the arguments and evidence, it decided that the changes made to the Corporations Act in 1998 do offer adequate protection for investors. The Corporations Act contains safeguards for your protection which are set out in this information sheet.



Chapter 5 - General funds - (Source - asic.gov.au)

Managed funds are sometimes referred to as trusts. 1 Cash management These funds invest only in the money market, and usually only in instruments which are guaranteed or supported by a government, bank or large company. For example, short-term government bonds and bank bills. 2 Fixed interest and bond These funds invest in a mixture of government bonds, cash and bank bills. They generally aim to outperform an index or other similar fund/s, targeting investors who wish to receive an income stream and maintain the value of their investment over the long term. You should always be aware that returns over the short term may fluctuate or can even be negative. 3 Share (sometimes called equity trusts) Share funds invest in shares, mainly in listed companies. 4 Mortgage These funds invest in residential, industrial and commercial property mortgages. Find out more about investing in an unlisted mortgage fund. 5 Property These funds invest directly or indirectly in residential or (more frequently) commercial properties. The advantage of investing indirectly is that of greater liquidity, as you would only have to sell your interest in the fund as opposed to having to wait to sell the entire property, and your liquidity is higher if the property securities trust is listed. Find out more about investing in unlisted property trusts. Newer Styled Funds As the industry has responded to market demand, new products have been developed within the broad categories of managed funds. They may be specialised or diversified funds.





For example, some funds invest in a range of categories of funds, so as to spread risk. This can be through a diversified portfolio of income-producing assets, such as money market and fixed interest assets, with some exposure to some "growth" assets such as shares and property. Or by investing in a wide variety of asset classes, including shares, property, bonds and cash. Other funds focus on a specific sector. Some specialised share funds may invest only in Australian shares or overseas shares, or focus on a specific area of the market, like the resource sector, small emerging companies or ethical companies (see 'Responsible' investing). You will also find funds which only invest in Australian companies that produce fully franked dividends, and are designed to take advantage of the dividend imputation taxation rules. International share funds can involve investments in shares across a variety of countries within a specific region, say the South-East Asia region, or in particular overseas markets, or even a combination of regions and markets.

Reference - www.asic.gov.au



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http://www.fido.gov.au/fido/fido.nsf/byheadline/Definition+of+terms?opendocument%23franked_dividends

http://www.fido.gov.au/fido/fido.nsf/byheadline/Definition+of+terms?opendocument%23dividend_imputation

Chpater 6 - Other managed investment schemes

These funds are often quite complex. It is a good idea that you get professional advice before investing in one of the following schemes. 1 Investor directed portfolio services Because it is quite common for investors to hold units in a number of managed funds, products have been developed to simplify managing those investments. These products are called investor directed portfolio services (IDPS) and include investment platforms, master trusts and wrap accounts. 2 Direct real property From a practical point of view, property syndicates are very similar to unlisted property trusts, the main difference being that you have a legal entitlement (along with all the other investors) to the property underlying the fund. With a property trust, another party which holds the property for the benefit of the investors has legal ownership. 3 Primary production and film schemes These are schemes where the nature of an interest held by investors in that scheme is that of a "grower" of the primary product (e.g. tea trees, pine trees, paulownia trees, olives, viticulture, beans, coffee etc). The investor/grower usually enters into an agreement with the manager/responsible entity for the scheme to plant, establish and maintain the trees until they are harvested at maturity. Profits from the harvest are distributed according to your holdings in the scheme. When your interest includes rights to the land on which the scheme operates, the responsible entity must ensure that your rights are protected. That is, the land is registered in your name with the land titles office. Film schemes operate in a similar way to primary production schemes. These schemes are often run in a away to maximise taxation benefits for investors. However, there have been a number of times when the purported tax benefits of a scheme have been disallowed by the Australian Taxation



http://www.fido.gov.au/fido/fido.nsf/byheadline/Investment+platforms%2C+master+trusts+and+wrap+accounts?openDocument



Office a number of years after people invested. Always make sure that the stated tax benefits do in fact apply. Do not just rely on assertions from the fund manager. The Australian Taxation Office now provides written product rulings on which schemes fall within certain tax laws. Before investing in a scheme which advertises tax benefits, contact the Australian Taxation Office to find out if it has issued a ruling on the scheme. 4 Serviced strata schemes A serviced strata scheme can involve a hotel, resort, or apartment block. We consider that there is likely to be a serviced strata scheme when an investor in a strata (apartment) unit has a right (by agreement or an understanding with the promoter) to a return which depends, in whole or in part, on the use of other investors' strata units (as opposed to common property). For example, your return depends on an arrangement for pooling income or for fairly allocating tenants. We also consider that there is likely to be a serviced strata scheme when an investor in a strata unit has a right (including by agreement or an understanding with the promoter) to a return which depends, in whole or in part, on an investor's strata unit being used as part of a serviced strata arrangement. For example, you depend on the serviced strata arrangement to receive some kind of fixed or indexed return. 5 Timesharing A timesharing scheme is a scheme:

• in Australia or elsewhere, where participants are entitled to use, occupy or possess, for 2 or more periods, property to which the scheme relates; and

• that is to operate for not less than 3 years.

Real property time-sharing schemes, for example, commonly include title-based schemes where a purchaser becomes a tenant in common with the right to a share of the real property.



http://www.ato.gov.au/level3.asp?placement=AS/IN/IN/IN01%23PRT

6 Commercial horse breeding (broodmares/stallion) The life of broodmare schemes is not restricted to the breeding life of a specific mare, unlike stallion schemes, where the life of the scheme is restricted to the functional life of a particular stallion. In a stallion scheme, the asset being syndicated is a specific stallion whose identity is known. The promoter usually buys or leases the stallion before the scheme's fundraising. The promoter actively markets the scheme. The manager manages the day-to-day activities of the stallion. The promoter and manager can be the same and may have a substantial interest in the scheme. Usually the promoter issues about 40 "shares" or interests in the scheme. This is because a stallion is usually capable of providing between 40 and 80 stud services per season.

Reference - www.asic.gov.au



Chapter 7 - Mortgage Funds

What is a mortgage fund’? Mortgage funds can also be called ‘mortgage trusts’ or ‘mortgage schemes’. A mortgage fund is a type of investment in which you buy units in a fund that is operated by a professional fund manager. Other investors also buy units in the mortgage fund. The fund’s money is lent out (as mortgage loans) to a range of borrowers who use the money to buy and/or develop properties. It might also be used for other investments (for example, investing in other mortgage funds). In return for investing your money (your ‘capital’), the fund manager promises to pay you a regular income, usually quarterly or half-yearly (called ‘distributions’). There are two types of mortgage funds-

Pooled mortgage funds Contributory mortgage funds

All investors share in all mortgages/investments.

All investors share the income and spread the risks of all mortgages/investments.

Some funds promote that you can withdraw your money at short notice, but it might take a while (e.g. 12 months) to get it back.

You or the fund's manager choose which mortgage(s) you invest in.

Your mortgage(s) might pay a different income than other mortgages in the fund.

Your risk depends on the quality of borrower(s) you or the fund manager lend to.

For most funds, you can only withdraw your money when your mortgage(s) matures.



What is an ‘unlisted’ mortgage fund? An unlisted mortgage fund is not listed on a public market, such as the Australian Securities Exchange (the ASX). The differences between listed and unlisted mortgage funds can make it harder for investors to easily know what’s going on with their investment. What’s the difference between a mortgage fund and other investments?

Investment type How it works

Unlisted debenture You lend your money to a business, usually for a fixed term. You are not guaranteed a fixed rate of interest or return of your capital. The business might invest in mortgages and/or properties. Refer to Investing in debentures guide asic.gov.au

Unlisted mortgage fund You invest your money in a mortgage fund. You might not be able to withdraw from the fund at short notice. You are not guaranteed a fixed rate of interest or return of your capital. The mortgage fund invests in residential and commercial mortgages. Investing in mortgage funds guide www.asic.gov.au

Unlisted property trust You invest your money in a property trust. You only get your money back when the property trust ends or if you have a right to withdraw. You are not guaranteed a return on your investment or the return of your capital. The property trust invests directly in property, rather than in mortgages over property. Investing in property trusts guide www.asic.gov.au

These investments are not the same as term deposits offered by prudentially regulated financial institutions.



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Why is the PDS important? The fund manager must give you a Product Disclosure Statement (PDS). The PDS tells you how the mortgage fund works and you should read it in full. Under the law, the PDS must include enough detail for you to compare similar financial products so you can make an informed decision about which one to invest in. Concentrate on the sections that:

• explain the key features and risks of the investment • tell you about the fees you will pay for this investment • give you information about certain indicators (or ‘benchmarks’),

which can help you assess the risks of unlisted mortgage funds. You should find this information in the first few pages of the PDS. The fund manager must also tell you if there are significant changes to the information in the PDS (this is called ‘ongoing disclosure’). Check the mortgage fund’s website and look for regular updates in the mail (if you decide to invest). A PDS does not have to be lodged with ASIC before it can be used to raise money from investors. ASIC does not endorse the underlying investment in any way. Consider the risks The return offered on an investment is not the only way to assess how risky it is.



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ASIC's benchmarks for mortgage funds can help you assess the risks See www.asic.gov.au ASIC has developed 8 benchmarks that apply to unlisted mortgage funds to help you assess the risks. Benchmark 1: Liquidity (for pooled mortgage funds*) Benchmark 2: Fund borrowing Benchmark 3: Portfolio diversification (for pooled mortgage funds*) Benchmark 4: Related party transactions Benchmark 5: Valuation policy Benchmark 6: Loan-to-valuation ratio (LVR) Benchmark 7: Distributions Benchmark 8: Withdrawing from the fund Benchmarks are designed to help you:

• understand the risks and • decide whether to invest your money.

The fund manager should tell you in their PDS if the unlisted managed fund meets each benchmark. If the fund doesn’t meet a particular benchmark, they should explain why not, allowing you to make up your mind whether you’re comfortable with the explanation. The fund manager should also update you about any significant changes to the mortgage fund’s performance against the benchmarks (through ongoing disclosure). The Investing in mortgage funds guide has more detail on each benchmark, and how you can use them to assess the risks in unlisted mortgage funds.











http://www.fido.asic.gov.au/fido/fido.nsf/byHeadline/Brochures%23investing-in

Benchmark 1: Liquidity (for pooled mortgage funds*) ‘Liquidity’ means a mortgage fund’s ability to meet its short-term cash needs. Liquidity is an important measure of a mortgage fund’s ability to meet its payment obligations to you as an investor and to other parties. If the fund hasn’t enough cash or liquid assets, there might not be enough money to pay you regular distributions, or pay your money back when you expect it. Benchmark 2: Fund borrowing You can get a good idea of a mortgage fund’s financial status by knowing:

• how much money the mortgage fund owes (its debts) and when those debts are due to be repaid (their ‘maturity profile’).

• how much money the fund can borrow compared to how much it has already borrowed (its ‘undrawn credit facility’).

If a mortgage fund has debts that are due to be repaid in a relatively short timeframe, this can be a significant risk factor, especially during times when credit is more difficult and costly to get. Unless the mortgage fund can renew or extend the due date of its debts, it might be forced to sell assets (possibly for less than their estimated value) to repay them. It might even have to stop operating. In this case, you could lose all or part of your capital because other creditors of the mortgage fund will be repaid before you. Benchmark 3: Portfolio diversification (for pooled mortgage funds*) Just as you can spread your own investments to manage risk, a mortgage fund can manage risk by spreading the money it lends and invests between different loans, borrowers and investments. This is called ‘portfolio diversification’. Is the mortgage fund’s portfolio heavily concentrated on a small number of loans, or loans to a small number of borrowers? If so, there is a higher risk that a single negative event affecting one loan will put the overall portfolio (and your money) at risk.



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Benchmark 4: Related party transactions A ‘related party transaction’ is a transaction (for example, a loan) involving parties that have a close relationship with the fund manager. The risk with related party transactions is that they might not be made with the same rigor and independence as transactions made on an arm’s length commercial basis. There could be a greater risk of the loans defaulting (putting your money at greater risk) if:

• the mortgage fund has a high number of loans to, or investments with, related parties, and

• the processes for assessing, approving and monitoring these loans and investments are not rigorous.

Benchmark 5: Valuation policy Knowing exactly how much a mortgage fund’s underlying assets are worth (that is, accurate valuations of the mortgage security) can help you assess its financial position. To work out how accurate these valuations are likely to be, you need to know how they’re done. Without information about how valuations are done, it will be more difficult for you to assess how risky a mortgage fund’s loan portfolio is. Keeping valuations up-to-date and shared among a panel means they are more likely to be accurate and independent. Benchmark 6: Loan-to-valuation ratio (LVR) The loan-to-valuation ratio (LVR) tells you how much of the value of an asset is covered by loan money. This ratio is a key risk factor when assessing whether to lend money to someone. A high loan-to-valuation ratio means that a mortgage fund is more vulnerable to changing market conditions, such as a downturn in the property market.



Therefore, the risk of losing your money could be higher. Benchmark 7: Distributions ‘Distributions’ are payments you receive from the mortgage fund during the year. These payments could come from:

• income received (for example, interest from borrowers), and/or • other borrowing by the fund or selling off assets.

Some mortgage funds promise to pay you a regular distribution regardless of whether the fund actually receives the expected income. Other mortgage funds only pay you regular distributions if the fund earns enough interest from borrowers and other investments during a particular period. If a mortgage fund pays distributions from sources other than income received, this could be unsustainable. This is important if you are depending on distributions from the mortgage fund for regular income. Benchmark 8: Withdrawing from the fund Most contributory mortgage funds only offer you the right to withdraw from the fund when the particular mortgage you have invested in matures. On the other hand, most pooled mortgage funds say that you can withdraw from the fund at short notice. Either way, it might take a while (for example, as long as 12 months) to get your money back. Before you invest, make sure you can wait this long. If a mortgage fund’s policy is to re-invest your money and you don’t withdraw it before it’s rolled over, your money might be tied up for longer than you planned. A ‘fixed unit price’ might not remain fixed under certain circumstances. This could mean you won’t get back the money you expect when you withdraw from a mortgage fund if the value of the fund’s assets falls. Source asic.gov.au




Internet References and further reading

www.Colonial First State.com.au www.Morning Star.com.au www.Coin.com.au www.Xplan.com.au



Chapter 10 - Fees and Costs

• (up front or Deferred )

• Management Expense Ratio

• Trail Commission

• Transaction Cost

• Adviser fee

• Selecting funds with no or low fees

Disclosure of Fees:

• Investment - i.e. name of recommended investment

• Owner – name of client investing

• Investment ($) – amount of funds for noted investment;

• Entry Fee – dollar fee payable for entry

• Ongoing Fee this is the MER of the recommended fund expressed in percentage terms but disclosed in dollars $

• Other Fees ($) – this the administration fee of the fund;

• Exit Fee (%) – this is the exit fee percentage payable (Please note for EF funds this will be 0);



How much Commission will and your Licensee will receive

This section outlines the commission payable to FP / Licensee.

• Investment - i.e. name of recommended investment;

• Owner – name of client investing;

• Investment ($) – amount of funds for noted investment;

• Maximum Planner/ Licensee

• Upfront commission ($) – amount of initial commission payable on the recommended investment;

• Maximum Licensee Ongoing commission ($) - amount of ongoing commission payable on the recommended investment.



Chapter 11 - Redeeming your Managed Funds

Selling or redeeming your managed investment units When you want to exit from a fund, you redeem your units through the fund manager. This means the fund manager pays you out for your units at the current market value. Make sure you know what this rate is before you redeem your units. Your financial planner, or the fund manager, will give you a redemption form, which you fill in and send to the fund manager. In some cases, for example cash management trusts, the fund manager will accept telephone instructions to redeem your investments. Keep in mind you may have to pay an exit fee when you redeem your units. Only managed funds which are listed on a public market, such as the Australian Securities Exchange (ASX) are bought and sold on the exchange. You can sell these units in the same way you sell shares, through a stockbroker. Alternatively, your financial planner can arrange this for you. Your ability to withdraw from the fund will depend on the particular managed fund you invest in. For example:

• Most contributory mortgage funds only offer you the right to withdraw from the fund when the particular mortgage fund you have invested in matures.

• Most pooled mortgage funds say that you can withdraw from the fund at short notice (although it might take as long as 12 months before you get your money back).

• Most unlisted property trusts do not offer withdrawal rights at all (that is, you can't take your money out before the trust ends).

Managed funds might impose conditions on your withdrawal rights (for example, they might freeze withdrawals if they don't have enough cash to pay them). If other investors want their money back at the same time as you, there might be a cap on the number of units you can cash out.






Chaper 12 - Types of Risks Readings Financial Planning in Australia 5th Edition

• Mismatch

• Inflation

• Interest Rate

• Market

• Timing

• Currency

• Liquidity

• Credit

• Legislative

• Inadequate Diversification



Measuring Performance Further Reading Financial Planning in Australia Sources of Return

Income Distribution Capital Gains Unrealised Capital Gains

Future Performance Measures of Return

Reinvestment of Dividends and Capital Gains Long term returns Page 298 Returns on Listed Funds

Risk Holding Period Return



Chapter 13 - Investing in Shares

Readings Financial Planning In Australia Page 194 Objectives in Investing Page 197 Ways to invest Page 198 What are shares? Page 199 Preference Shares Convertible Notes Derivatives Options Futures Page 205 - 206 Holding Period Return Page 206 Internal Rate of Return Page 206 Yield for a single cash flow Page 211 Investing in Shares Page 212 Dividend Yield Page 221 PE ratio Page 212 Return on original Investment Page 215 Types of Shares



Chapter 14 - Bonds and Other Investments

Readings Financial Planning in Australia Page 224 Why Invest in Bonds Characteristics of Bonds Page 225 to 230 The Bond Market Page 230 to 231 Present Value Page 231 to 232 Future Value Page 463 Deposit Bonds and what are they.



Chapter 15 - Direct Property Ownership

Readings Financial Planning in Australia Page 469 Direct Property Investment Page 470 Listed Property Trusts Syndicates

Pages 470 to 471 Advantages and Disadvantages of Direct Property

Investment Residential Home Ownership Readings Page 456 Residential Property Page 457 Commercial Property Page 457 Housing Prices and affordability Page 459 Tax on Home Purchases / Stamp Duty Page 464 Mortgages Page 465 Rent or Buy Page 466 Housing in Retirement Page 466 Reverse Mortgages



Chapter 16 - Borrowing to Invest

• Is the risk of the strategy understood

• Is the client investor profile appropriate

• Is there adequate cash flow to support the plan

• Is there discussion of cash flow protection

• Is there a projection of income and cash flow from the strategy

• Has there been correct taxation treatment of income

• Has the risk of rising interest rates been assessed via a sensitivity analysis

• Are the assumptions provided reasonable

Borrowing money to reduce your tax How it works Borrowing money is usually how people get a tax deduction on investment schemes. You borrow money to buy an asset that produces an income. The interest you pay is deducted from your assessable income and you pay less tax. Some schemes suggest you pay the interest in advance to get the total tax break immediately rather than piecemeal. Borrowing is often called 'gearing'. Borrowing can work but you must understand it and know what you will do if something goes wrong. Borrowing and How safe is it? Borrowing money makes things go faster. You can make money faster, however you can also lose it faster. If your investment increases in value, your returns will be larger because you invested someone else's money as well as



your own. But if your investment loses value, your losses will be even greater. You will still owe what you borrowed and you will have to make up the difference out of money you never intended to invest. Before you sign anything, consider: what you will do if you lose your job or your income? How will you pay the interest on the loan? If you cannot pay, the lender may be able to sell all your investments, possibly your home and anything else you own. You also need to be extra careful about the conditions of your loan. Some loan agreements allow the lender to demand the money back 'on demand', which really means straight away whenever the lender wants. What will you do if they demand the money back at an inconvenient moment? Usually you will have to give the lender a mortgage or other form of security over your home or some other valuable asset. Make sure you understand exactly how much you owe and exactly what security you have offered. 'Margin loans' allow you to borrow money up to a certain amount of the value of your investments (called the 'margin'). If the value falls below the agreed margin, you have to make up the difference or the lender may sell your investments. Margin loans mean you can be forced to top up or sell just when you don't want to. Many people have lost money through margin lending. What are the returns? When you borrow money, you must remember that the cost of the interest, application fees and other charges for the loan all reduce the returns from your investment. Make sure you know the full cost of borrowing over the entire period of your loan. Investments that promise high returns usually make a lot of very hopeful assumptions about the future. When you have interest to pay as well, you are putting a lot of faith in those assumptions. Are you comfortable about that?



Some companies offer schemes for buying shares that promise you will get all the gains but none of the losses if the shares go down in value. You should check the documents very carefully. You do end up paying for the guarantee through a higher interest rate or some other device. You should also remember that even if you do get your original money back, you have still paid interest in the meantime on what you borrowed. So you have lost money - not all your money, but some of it. What are the other costs? Loans usually cost money to set up. Application fees, valuation fees, account keeping fees. Sometimes the salesperson will also get commission for setting up the loan with you. You should find out about all these fees and about any commissions. You also need to check about repaying the loan. Will there be extra costs if you decide to repay the loan early, or make extra payments as you go along? Sales pressure Tax schemes are usually sold as the end of the financial year approaches. You feel in a hurry to do something about your tax. This is very dangerous because you may not give yourself enough time to investigate properly. On top of that, the salesperson may try to put pressure on you to act quickly. Please resist pressure selling, especially if you are borrowing money. Good financial planning advice will take into account any taxation and social security issues relevant to your circumstances. Talk to your accountant/financial adviser particularly if you are thinking of:

• investing to reduce your tax

• borrowing money to reduce your tax



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Chapter 17 - Taxation Managed Investments are usually structured to pay no tax in their own right. This means that any tax consequences usually flow to the owner of the investment – i.e. the individual(s) or other entity. Hence managed investments cannot, in their own right be utilized as vehicles for tax minimization and due care should be taken in relation to ownership structures. Due care also needs to be taken in relation to the advertised returns or performance figures published by a managed investment. For instance if Managed Investment A, which is an Australian Share base investment, claims to have returned 35% over the past year and Managed Investment B, which is also an Australian Share base investment returns 30%, this does not necessarily mean that Fund A has outperformed Fund B. You need to look at the “turnover” of the shares in these two funds over the past 12 months. For instance, if Fund A achieved the 35% return as a result of selling or “turning over” 100% of its portfolio over the past 12 months, then the entire 35% may be assessable as capital gain in the hands of the investor. On the other hand, if Fund B achieved the 30% return and only “turned over” 15% of its portfolio, then only 15% of the applicable return could be assessed for capital gains purposes. In effect, the after tax return of Fund B could be superior to that of Fund B! A Word about Tax Evasion Some people make the disastrous mistake of trying to evade tax or hide assets or income which may affect their social security entitlements. Some people ask their advisers to help them do this. No reputable adviser will assist you in this kind of illegal activity. The risks are: 1 You may end up in jail or paying a fine If you are caught, you may end up going to jail or paying a fine, as well as



penalty tax or losing any advantage you gained. 2 You are setting yourself up to be swindled Just remember that if someone is crooked enough to help you evade tax, then they are definitely crooked enough to rip you off as well. Most schemes aimed at evading tax involve deliberately hiding assets or income, and giving someone else a large degree of power over your money. This means there may be no paper trail to link you to the assets or income if you want to claim them as your own. It is all too easy for a crook to siphon off your money and leave you none the wiser or with no evidence to show you have been swindled. If you mess around with illegal activities and lose your money, you might be too frightened or embarrassed to complain.



Chapter 18 - Regulation

Prudential regulation The Wallis Committee recommended that financial system regulation should be organised on a functional basis. By this, it meant there should be dedicated agencies responsible for each of:

• the stability of the financial system as a whole and the payments system the Reserve Bank (RBA);

• Overseeing competition in the financial system – i.e.. the Australian Competition and Consumer Commission;

• promoting efficient and fair conduct in financial markets, including disclosure about financial products and consumer protection arrangements – this is ASIC; and

• Prudential regulation of Financial Institutions – which is where APRA fits in.

APRA 2 Came into being on 1 July 1998 and its role was best described by the CEO, Graeme Thompson as this: “A prudential regulator like APRA has two main roles. One is indicated by the name itself – to encourage and promote prudent behaviour by regulated financial institutions so as to reduce the likelihood that they will be unable to meet their obligations to the people who put money with them. In other words, we try to ensure that banks can repay their depositors that insurance companies meet their commitments to policyholders, and so on”. Definition within Macquarie Dictionary - "Prudent" ".... Wise..."

2 APRA web



A superannuation funds are a Trust there must be a trustee (or more than one) of the fund who invests the funds for the members giving due consideration the members of that fund”. The trustee of the superannuation fund will usually engage asset consultants to manage the investments of the fund. This is the case for large industry funds and may also be engaged by small “family” superannuation funds. These small family funds are often a self managed super fund. ASIC The Australian Securities and Investments Commission is another government organisation responsible for consumer protection and market integrity. In the superannuation industry, this means ensuring consumers receive adequate information to make informed decisions about the superannuation products and services on offer. ASIC may also prohibit people or organisations from providing superannuation products and advice where the information is found to be misleading.3 Find out more about ASIC’S consumer role at FIDO, the website for consumers and investors at www.asic.gov.au

3 Financial Planning in Australia p. 523



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The Australian Securities and Investments Commission Act 2001 requires ASIC to

• uphold the law uniformly, effectively and quickly • promote confident and informed participation by investors and

consumers in the financial system • make information about companies and other bodies available to the

public • Improve the performance of the financial system and the entities within

it.

Who does ASIC regulate? ASIC regulates Australian companies, financial markets, financial services organisations and professionals who deal and advise in investments, superannuation, insurance, deposit taking and credit. Australian Taxation Office ATO The ATO has a number of roles in relation to superannuation, including traditional revenue collection for superannuation funds under the income tax legislation. In addition, it has responsibility for supervision of the operation of self managed superannuation funds. Superannuation Complaints Tribunal (SCT) The Superannuation Complaints Tribunal was established by the Superannuation (Resolution of Complaints) Act 1993 (Cwlth) (the SRC Act). The Tribunal commenced operation on 1 July 1994. The SCT is an independent body set up by the government to deal with complaints regarding superannuation funds. The tribunal tries to bring about a resolution by conciliation but where that is not possible it will make a ruling. There is no cost for lodging a complaint with the SCT. However, you must first make the complaint with the trustee of your superannuation fund and they have 90 days in which to give you a response.



Financial Ombudsman Service (FOS) Independent dispute resolution services for the vast majority of Australian banking, insurance and investment disputes are now available under one roof. On 1 July 2008, the Banking & Financial Services Ombudsman (BFSO), Financial Industry Complaints Service (FICS) and Insurance Ombudsman Service (IOS) merged to form the national Financial Ombudsman Service. The Credit Union Dispute Resolution Centre (CUDRC) and Insurance Brokers Disputes Limited (IBD) became, respectively, the Mutual’s and Insurance Broking divisions of the Financial Ombudsman Service on 1 January 2009. Financial Ombudsman Service dispute resolution services are free to consumers. This independent umpire provides free, fair and accessible dispute resolution for consumers and some small businesses unable to resolve a dispute directly with their financial services provider. External dispute resolution processes can help to resolve disputes through negotiation or conciliation as an alternative to court proceedings and can make decisions which are binding on participating financial services providers. The Financial Ombudsman Service helps to increase public awareness and access to external dispute resolution processes for consumers by providing a single national service for banking, insurance and investment disputes in Australia. Membership of the Financial Ombudsman Service is open to any financial services provider carrying on business in Australia. Financial Ombudsman Service independent dispute resolution processes cover complaints about financial services including banking, credit, loans, general insurance, life insurance, financial planning, investments, stock broking, managed funds and pooled superannuation trusts. The merging of separate schemes to establish the Financial Ombudsman Service follows calls for greater accessibility and public awareness. Merging of these schemes enables efficient use of resources, cross-fertilisation of expertise and more accessible dispute resolution processes. Current rules for dispute resolution processes will continue during a 12 to 18 month transition period, while the Financial Ombudsman Service conducts an



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exhaustive national Terms of Reference Consultation to establish a single set of rules, procedures and definitions for financial services disputes in Australia by 1 January 2010. The Financial Ombudsman Service can be contacted nationally on 1300 78 08 08. SOURCE Financial Ombudsman Service - "About US" June 2009 http://www.fos.org.au/centric/home_page/about_us.jsp




Regulation - Anti Money Laundering

Anti-Money Laundering and Counter-Terrorism Financing Act 2006

The Anti-Money Laundering and Counter-Terrorism Financing Act 2006 (AML/CTF Act) received Royal Assent on 12 December 2006. The AML/CTF Act forms part of a legislative package that will implement the first tranche of reforms to Australia's AML/CTF regulatory regime. Background The reforms are a major step towards:

• enabling Australia's financial sector to maintain international business relationships

• preventing and detecting money laundering and terrorism financing by meeting the needs of law enforcement agencies for targeted information about possible criminal activity and

• bringing Australia into line with international standards, including standards set by the Financial Action Task Force (FATF).

About the AML/CTF Act

The AML/CTF Act covers the financial sector, gambling sector, bullion dealers and other professionals or businesses ('reporting entities') that provide particular 'designated services'. The AML/CTF Act will be implemented in stages. The commencement dates of some obligations are a day, 6 months, 12 months and 24 months after Royal Assent. This will allow industry to develop necessary systems in the most cost efficient way.

The AML/CTF Act imposes a number of obligations on reporting entities when they provide designated services.

These obligations, and the dates on which they come into effect, include:

• customer identification and verification of identity - 12 months after Royal Assent

• record-keeping - in various stages, a day, 6 months and 12 months after Royal Assent and



• establishing and maintaining an AML/CTF program - 12 months after Royal Assent

• ongoing customer due diligence and reporting (suspicious matters, threshold transactions and international funds transfer instructions) - 24 months after Royal Assent

The AML/CTF Act will implement a risk-based approach to regulation. Reporting entities will determine the way in which they meet their obligations based on their assessment of the risk of whether providing a designated service to a customer may facilitate money laundering or terrorism financing. Under the AML/CTF Act, AUSTRAC will continue its role as Australia's financial intelligence unit. Importantly, AUSTRAC will have an expanded role as the national AML/CTF regulator with supervisory, monitoring and enforcement functions over a diverse range of business sectors. On 13 July 2007, the Attorney-General's Department released draft provisions setting out designated services which will be covered by the second tranche of the AML/CTF legislation. Sectors which will be affected by the second tranche legislation are:

• real estate agents in relation to buying and selling of real estate • dealers in precious metals and stones engaged in transactions above a

designated threshold • lawyers, notaries, other independent legal professionals and

accountants when preparing for or carrying out certain transactions • trust and company service providers when they prepare for or carry out

for a client the transactions listed in the Glossary to the FATF Recommendations.

The draft provisions (as per document below) were released for public comment by 7 September 2007 (the original closing date of 10 August 2007 was changed). AML/CTF Regulations On 30 January 2008, the Anti-Money Laundering and Counter-Terrorism Financing Regulations 2008 were registered. These Regulations amend the AML/CTF Act, resolving an unintended exemption in the Act by ensuring that managed investment schemes are captured in the legislation.



Identifying agents of customers Who needs to be identified when a reporting entity provides a designated service to a customer through the customer's agent? Under the Anti-Money Laundering and Counter-Terrorism Financing Act 2006 (AML/CTF Act) a reporting entity must identify a customer before providing them with a designated service. Where an agent is acting on behalf of a customer, a reporting entity is required to identify both the agent and the customer. Parts 4.2-4.7 of the Anti-Money Laundering and Counter-Terrorism Financing Rules Instrument 2007 (No. 1) (AML/CTF Rules) outline the customer identification procedures that reporting entities must comply with in relation to the customer. Part 4.11 of the AML/CTF Rules outlines the identification requirements that reporting entities must comply with in relation to agents of customers. Where the customer is an individual Paragraphs 4.11.2-4.11.4 of the AML/CTF Rules apply when a customer who is an individual appoints an agent to act on their behalf. Where the agent is an individual, the agent will need to be identified in accordance with paragraphs 4.11.2-4.11.4 of the AML/CTF Rules. Where the agent is not an individual (such as a company), it will act through an individual - for example, an employee or director. In these circumstances, it is the individual who will need to be identified in accordance with paragraphs 4.11.2-4.11.4 of the AML/CTF Rules. Where the customer is not an individual Paragraphs 4.11.5-4.11.8 of the AML/CTF Rules apply when a customer that is not acting as an individual (for example, a company), appoints an agent to act on its behalf. Where the agent is an individual, the agent will need to be identified in accordance with paragraphs 4.11.5-4.11.8 of the AML/CTF Rules. Where the agent is not an individual (such as a company), it will act through an individual - for example, an employee or director. In these circumstances, it is the individual who will need to be identified in accordance with paragraphs 4.11.5-4.11.8 of the AML/CTF Rules.



Where the customer is not an individual and has appointed a verifying officer Paragraphs 4.11.9-4.11.13 of the AML/CTF Rules apply when a customer that is not acting as an individual (for example, a company), appoints a verifying officer to identify its agents. Under paragraph 4.11.12 of the AML/CTF Rules, the verifying officer must collect certain information about the customer's agents including their name, position and level of authorisation. For a reporting entity to rely on customer identification carried out by the verifying officer, the reporting entity must:

• carry out the applicable customer identification procedure in respect of the verifying officer; and

• obtain the full name of the agent and a copy of the agent's signature from the verifying officer.

Must a reporting entity obtain evidence of the customer's authorisation before dealing with an agent? Under Part 4.11 of the AML/CTF Rules, where a reporting entity provides a designated service to an agent of a customer, the reporting entity has certain obligations to collect evidence of the customer's authorisation for that agent to act on their behalf. Where the agent is acting on behalf of a customer who is an individual and where information and documentation exists which evidences the customer's authorisation for that agent to act on their behalf, the reporting entity must collect it. Where the agent is acting on behalf of a customer that is not an individual (such as a company), the reporting entity must collect information and/or documentary evidence of the customer's authorisation for that agent to act on its behalf. Sources - http://www.austrac.gov.au/id_agents_of_customers.html http://www.austrac.gov.au/aml_ctf.html



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764A Specific things that are financial products (subject to Subdivision D)

(1) Subject to Subdivision D, the following are financial products for the purposes of this Chapter:

(a) a security; (b) any of the following in relation to a registered scheme:

(i) an interest in the scheme;

(ii) a legal or equitable right or interest in an interest covered by subparagraph (i);

(iii) an option to acquire, by way of issue, an interest or right covered by subparagraph (i) or (ii);

(ba) any of the following in relation to a managed investment scheme that is not a registered scheme, other than a scheme (whether or not operated in this jurisdiction) in relation to which none of paragraphs 601ED(1)(a), (b) and (c) are satisfied:




(c) a derivative;



(d) a contract of insurance that is not a life policy, or a sinking fund policy, within the meaning of the Life Insurance Act 1995 , but not including such a contract of insurance:

(i) to the extent that it provides for a benefit to be provided by an association of employees that is an organisation within the meaning of the Workplace Relations Act 1996 for a member of the organisation or a dependant of a member; or

(ii) to the extent that it provides for benefits, pensions or payments described in paragraph 11(3)(c) of the Life Insurance Act 1995 ; or

(iii) to the extent that it provides for the provision of a funeral benefit; or

(iv) issued by an employer to an employee of the employer;

(e) a life policy, or a sinking fund policy, within the meaning of the Life Insurance Act 1995 , that is a contract of insurance, but not including such a policy:





(f) a life policy, or a sinking fund policy, within the meaning of the Life Insurance Act 1995 , that is not a contract of insurance, but not including such a policy:



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(g) a superannuation interest within the meaning of the Superannuation Industry (Supervision) Act 1993 ;

(h) an RSA (retirement savings account) within the meaning of the Retirement Savings Accounts Act 1997 ;

(i) any deposit taking facility made available by an ADI (within the meaning of the Banking Act 1959 ) in the course of its banking business (within the meaning of that Act), other than an RSA (RSAs are covered by paragraph (h));

(j) a debenture, stock or bond issued or proposed to be issued by a government;

(k) a foreign exchange contract that is not:

(i) a derivative (derivatives are covered by paragraph (c)); or

(ii) a contract to exchange one currency (whether Australian or not) for another that is to be settled immediately;

(m) anything declared by the regulations to be a financial product for the purposes of this section.

Note: Even though something is expressly excluded from one of these paragraphs, it may still be a financial product (subject to Subdivision D) either because:

(a) it is covered by another of these paragraphs; or





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(b) it is covered by the general definition in Subdivision B.

(2) For the purpose of paragraphs (1)(d), (e) and (f), contract of insurance includes:

(a) a contract that would ordinarily be regarded as a contract of insurance even if some of its provisions are not by way of insurance; and

(b) a contract that includes provisions of insurance in so far as those provisions are concerned, even if the contract would not ordinarily be regarded as a contract of insurance.

CORPORATIONS ACT 2001 - SECT 765A - Specific things that are not financial products

(1) Despite anything in Subdivision B or Subdivision C, the following are not financial products for the purposes of this Chapter:

(a) an excluded security; (b) an undertaking by a body corporate to pay money to a related

body corporate; (c) health insurance provided as part of a health insurance

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(ca) insurance provided as part of a health related business (as defined by section 131- 15 of that Act) that is conducted through a health benefits fund (as defined by section 131-10 of that Act);

(d) insurance provided by the Commonwealth; (e) State insurance or Northern Territory insurance, including

insurance entered into by:

(i) a State or the Northern Territory; and

(ii) some other insurer;

as joint insurers; (f) insurance entered into by the Export Finance and Insurance

Corporation, other than a short-term insurance contract within the meaning of the Export Finance and Insurance Corporation Act 1991 ;

(g) reinsurance; (h) any of the following:

(i) a credit facility within the meaning of the regulations;

(ii) a facility for making non-cash payments (see section 763D), if payments made using the facility will all be debited to a credit facility covered by subparagraph (i);

(i) a facility:

(i) that is an approved RTGS system within the meaning of the Payment Systems and Netting Act 1998 ; or

(ii) for the transmission and reconciliation of non-cash payments (see section 763D), and the establishment of final positions, for settlement through an approved RTGS system within the meaning of the Payment Systems and Netting Act 1998 ;

(j) a facility that is a designated payment system for the purposes of the Payment Systems (Regulation) Act 1998 ;




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(k) a facility for the exchange and settlement of non-cash payments (see section 763D) between providers of non-cash payment facilities;

(l) a facility that is:

(i) a financial market; or

(ii) a clearing and settlement facility; or

(iii) a payment system operated as part of a clearing and settlement facility;

(m) a contract to exchange one currency (whether Australian or not) for another that is to be settled immediately;

(n) so much of an arrangement as is not a derivative because of paragraph 761D(3)(a);

(p) an arrangement that is not a derivative because of subsection 761D(4);

(q) an interest in a superannuation fund of a kind prescribed by regulations made for the purposes of this paragraph;

(r) any of the following:

(i) an interest in something that is not a managed investment scheme because of paragraph (c), (e), (f), (k), (l) or (m) of the definition of managed investment scheme in section 9;



(s) any of the following in relation to a managed investment scheme (whether or not operated in this jurisdiction) in relation to which none of paragraphs 601ED(1)(a), (b) and (c) are satisfied and that is not a registered scheme:








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(t) a deposit taking facility that is, or is used for, State banking; (u) a benefit provided by an association of employees that is an

organisation within the meaning of the Workplace Relations Act 1996 for a member of the organisation or a dependant of a member;

(v) either of the following:

(i) a contract of insurance; or

(ii) a life policy or a sinking fund policy, within the meaning of the Life Insurance Act 1995 , that is not a contract of insurance;

issued by an employer to an employee of the employer; (w) a funeral benefit; (x) physical equipment or physical infrastructure by which

something else that is a financial product is provided; (y) a facility, interest or other thing declared by regulations made

for the purposes of this subsection not to be a financial product; (z) a facility, interest or other thing declared by ASIC under

subsection (2) not to be a financial product.

(2) ASIC may declare that a specified facility, interest or other thing is not a financial product for the purposes of this Chapter. The declaration must be in writing and ASIC must publish notice of it in the Gazette .






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CORPORATIONS ACT 2001 - SECT 945A

Requirement to have a reasonable basis for the advice

(1) The providing entity must only provide the advice to the client if:

(a) the providing entity:

(i) determines the relevant personal circumstances in relation to giving the advice; and

(ii) makes reasonable inquiries in relation to those personal circumstances; and

(b) having regard to information obtained from the client in relation to those personal circumstances, the providing entity has given such consideration to, and conducted such investigation of, the subject matter of the advice as is reasonable in all of the circumstances; and

(c) the advice is appropriate to the client, having regard to that consideration and investigation.

Note: Failure to comply with this subsection is an offence (see subsection 1311(1)).

(2) In any proceedings against an authorised representative of a financial services licensee for an offence based on subsection (1),

it is a defence if:



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http://www.austlii.edu.au/au/legis/cth/consol_act/ca2001172/s9.html%23financial_services_licensee

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(a) the licensee had provided the authorised representative with information or instructions about the requirements to be complied with in relation to the giving of personal advice; and

(b) the representative's failure to comply with subsection (1) occurred because the representative was acting in reliance on that information or those instructions; and

(c) the representative's reliance on that information or those instructions was reasonable

Note: A defendant bears an evidential burden in relation to the matters in subsection (2). See subsection 13.3(3) of the Criminal Code .

(3) A financial services licensee must take reasonable steps to ensure that an authorised representative of the licensee complies with subsection (1).

Regulation & Further Reading Financial Planning in Australia Page 88 Attributes off a professional Relationship Page 96 to 101 Regulatory Structure Pages 101 to 106 Licence Securities Dealers Pages 111 to 113 Law of Contract Pages 113 to 115 Law of Agency Pages 117 Know your client Page 118 Know your product Page 119 Product Research






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Privacy ACT 1988(CTH) http://www.moneysmart.gov.au/ - tips and traps for you and your clients



http://www.moneysmart.gov.au/

Chapter 18 - Providing Financial Advice The Advice Process The financial planning process can be broken into 6 steps. These steps may be broken into “sub – groups”, however, following a six step process is quite widely accepted. Step 1: Gather Data The first step in any advice process is to “know your client”, in fact you are legally obliged to know your client and to be able to show that you do this is usually evidenced by a “Financial Fact Find”. Getting to know your client takes place in an informal and formal way. Firstly, there is an informal initial chat that gives you some insight into how the client may feel about the financial planning process. The more formal step is having the client complete a Financial Fact Find document. The fact find once completed gives you a document you can keep on file and is the starting point of the advice process. In reality, clients are generally reluctant to disclose all of their financial situation and you must warn the clients from the outset that failure to disclose information can lead to inappropriate advice. Step 2: Identify the Client’s Needs Being able to identify the client’s needs is a combination of factors. The first thing to do is to ask what it is they would like to achieve from getting financial advice. Most clients would say that they would like to improve their existing situation or that they would like to see if they are in fact on the right track towards providing for their retirement. An example of a client’s needs is: “I am age 55 now and I expect to retire at age 60. I need $600 dollars per week net of any tax. Have I saved enough?” Step 3: Analyse the client’s financial opposition to identify problems One problem may be that after you have analysed the client’s position, you discover that their goals are unrealistic. It is the role of the adviser to explain how the objectives of the client may need to be modified.



For example, if a client wishes to retire at 55, they have a life expectancy of almost 30 years. If they do not have significant financial resources at age 55, then a comfortable retirement may be difficult to achieve. Step 4: Prepare written recommendations It is a requirement of the Corporations Law that, when providing advice to a client, then it must be in writing. Step 5: Implementation Preparing for the presentation of the written recommendation. Confirming the presentation interview. Presenting the written recommendation. Client giving you an authority to proceed – signing off the plan that they agree with the recommendations. Lodging paperwork and obtaining all necessary signatures and approvals. Step 6: Review There will also need to be a review of the plan set at intervals that you have both agreed on. For example, there may be yearly reviews to look at what has changed in the investment markets, perhaps no products are available or the client’s circumstances have changed.



Other references used within this leaner guide -

www.apra.gov.au www.asic.gov.au www. rba.gov.au www.austlii.edu.au http://www.austlii.edu.au/au/legis/cth/consol_act/ca2001172/



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