Financial Planning: Conflict of Interest
37 Questions
1 Views

Choose a study mode

Play Quiz
Study Flashcards
Spaced Repetition
Chat to lesson

Podcast

Play an AI-generated podcast conversation about this lesson

Questions and Answers

What is hyperinflation most commonly a result of?

  • A shortage of goods in the market
  • Excessive government spending
  • An abundance of paper currency (correct)
  • An increase in international trade

    • How is income defined in the context provided?

  • Any monetary support received from family or friends
  • Revenue generated from business operations only
  • Payments received that can be used for spending or savings (correct)
  • Only earnings from investments and salaries

    • What unique characteristic does fiat currency possess?

  • It has no intrinsic value (correct)
  • It is universally accepted without governmental declaration
  • It is determined by foreign exchange rates
  • It possesses a value based on commodity backing

    • What does real wage growth measure?

    <p>Wage increases adjusted for inflation</p> Signup and view all the answers

    What is the relationship between credit and debt as described?

    <p>Credit must be obtained prior to incurring debt</p> Signup and view all the answers

    What is the primary purpose of a Statement of Advice (SoA)?

    <p>To set out the advice and the context for that advice</p> Signup and view all the answers

    Under what condition can advice be given without providing a SoA?

    <p>If the advice involves selling a product only</p> Signup and view all the answers

    What essential detail should be included in a SoA if advising on replacing one product with another?

    <p>Potential losses from disposing of the original product</p> Signup and view all the answers

    Which of the following is NOT a required component of a Statement of Advice (SoA)?

    <p>A complete list of all financial products available in the market</p> Signup and view all the answers

    How can a financial planner avoid conflicts of interest when recommending products?

    <p>By ensuring the client knows the planner's commission structure</p> Signup and view all the answers

    What must a Statement of Advice include regarding the adviser?

    <p>Contact details, name, and qualifications</p> Signup and view all the answers

    When must a SoA be provided to a client?

    <p>Before any actions implementing the advice are taken</p> Signup and view all the answers

    Which of the following is a valid reason to replace one product with another in a SoA?

    <p>Demonstrated benefits of switching to the alternative product</p> Signup and view all the answers

    What is a primary characteristic of bad debt?

    <p>It is typically associated with short-term consumption.</p> Signup and view all the answers

    How does paying off a home mortgage relate to financial strategy?

    <p>It can reduce financial stress by eliminating non-deductible debt.</p> Signup and view all the answers

    Which of the following best describes a characteristic of good debt?

    <p>It funds investments expecting to gain returns.</p> Signup and view all the answers

    In terms of financial planning, why is funding long-term consumption using debt considered less problematic?

    <p>Depreciating assets accompanied by a tangible utility can offset costs.</p> Signup and view all the answers

    What is a significant characteristic of revolving credit?

    <p>It allows for ongoing borrowing up to a certain limit.</p> Signup and view all the answers

    What distinguishes passive income from earned income?

    <p>Earned income involves active work or labor.</p> Signup and view all the answers

    What often constitutes a source of financial stress related to homeownership?

    <p>The percentage of disposable income allocated toward a mortgage.</p> Signup and view all the answers

    What is the role of credit in relation to debt?

    <p>Credit represents the initial phase of accumulating debt.</p> Signup and view all the answers

    What is a key characteristic of equity compared to debt?

    <p>Equity provides a residual claim on cash flows.</p> Signup and view all the answers

    Which of the following best describes bond ETFs compared to traditional bonds?

    <p>Bond ETFs provide lower management fees.</p> Signup and view all the answers

    What does the equity risk premium refer to?

    <p>The excess return of equity over equivalent risk bonds.</p> Signup and view all the answers

    In which circumstance might investors face significant short-term volatility in their portfolio?

    <p>When investing in equities during market downturns.</p> Signup and view all the answers

    What is the first step for an individual interested in investing in public company shares?

    <p>Contacting a broker to set up a trading account.</p> Signup and view all the answers

    Why might retirees be particularly affected during market downturns?

    <p>They often rely on equity returns for retirement income.</p> Signup and view all the answers

    What is a common practical consideration when investing directly in shares?

    <p>Understanding market trends for better decision-making.</p> Signup and view all the answers

    Which statement accurately reflects the consequences of investing in equities compared to cash?

    <p>Equities tend to outperform cash investments in the long run.</p> Signup and view all the answers

    Why is proper documentation essential for shareholders?

    <p>To prove ownership and manage tax and legal obligations.</p> Signup and view all the answers

    Which type of broker provides comprehensive advice and research along with trade execution?

    <p>Full-service broker</p> Signup and view all the answers

    What is a common consequence of transaction costs when buying and selling shares?

    <p>Reduced overall returns due to fees and commissions.</p> Signup and view all the answers

    What does capital gains tax apply to?

    <p>Profit made when shares are sold.</p> Signup and view all the answers

    Which analysis method focuses on assessing a company's financial health and future prospects?

    <p>Fundamental analysis</p> Signup and view all the answers

    What challenge do investors face when trying to invest in private companies?

    <p>They are less accessible and typically require personal connections.</p> Signup and view all the answers

    What paradox is presented by the Efficient Market Hypothesis (EMH)?

    <p>That information is already reflected in share prices, challenging the need for analysis.</p> Signup and view all the answers

    What information do investors typically seek before deciding which shares to buy?

    <p>Insights from both technical and fundamental analysis.</p> Signup and view all the answers

    Study Notes

    Financial Planning: Conflict of Interest

    • Financial planners (FP) should not put their own interests above those of the client
    • A conflict of interest occurs when an FP recommends a product solely for the commission they earn, rather than based on the client's needs
    • Disclosing commissions is crucial and recommendations must be objective and based on the client's circumstances and goals

    Statement of Advice (SoA)

    • A SoA outlines the advice and the context of the advice
    • When personal advice is given, a SoA must be provided before implementing any actions based on that advice
    • A SoA must include:
      • Product details and reasons for the recommendation
      • Details about the advisor, including qualifications and contact information
      • Remuneration and benefits received by the advisor, including how and to whom they are distributed
      • Information about any association that might influence the advice
      • A warning if the advice is based on inaccurate or insufficient information
      • Reasons for product replacements
    • Advice can be provided without a SoA in minimal investment circumstances:
      • Investments, basic deposit products, or super amounts are under $15,000
      • Advice consists solely of an offer to sell a product
      • The client explicitly states they don't intend to buy
      • No sale or issue results from the offer
      • Advice is given over the phone for traded products (subject to client approval and an FSG provided)
    • When a SoA recommends replacing a product:
      • Benefits of changing to an alternative product
      • Losses incurred by the client from disposing of the original
      • Charges for disposing of the original product
      • Charges for switching to a new product
      • Other significant consequences of the action

    Key Financial Concepts

    • A PDS (Product Disclosure Statement) is a legal document required to be provided to investors before they invest in a financial product
    • A PDS should include information about the product, such as its risks, fees, and potential returns
    • A unit of account allows for the valuation of different elements using a common unit for calculation, valuation, and comparison, providing precise monetary measurement
    • Fiat currency is declared legal tender by a government, meaning it is used to acquire goods and services and pay financial obligations
    • Fiat currency has no intrinsic value
    • Hyperinflation occurs when a currency becomes practically worthless, often resulting from an excessive amount of paper money, which reduces the value of money
    • Income is the main source of spending and saving
    • Income can be earned through salary/wages, passively through investments (interest, dividends, rent), or other receipts
    • Capital amounts (sale of assets), gambling winnings, and gifts are not typically considered income but may be subject to tax rules

    Salary/Wages and Real Wage Growth

    • The main source of income is typically earned through salary/wages
    • Nominal wage growth is currently positive and increasing
    • However, real wage growth (inflation adjusted) is a more accurate measure of purchasing power
    • Compared to a base of 100 in March 2020, real wage growth is declining, putting current buying power at levels comparable to December 2008
    • Initial years in the workforce often require a period of "catch up" in earnings

    Credit and Debt

    • Credit is the initial stage of a debt transaction, allowing a borrower to take on debt
    • Bad debt is characterized by:
      • No asset being purchased
      • Interest paid is not tax deductible
      • Spending provides only intangible benefits
    • Good debt is used:
      • To build assets
      • To fund investments with the expectation of earning sufficient returns to offset the purchase price
    • Examples of bad debt:
      • Spending on nights out, clubbing, drinking
    • Examples of good debt:
      • Funding depreciating assets with a useful lifetime (cars, furniture, white goods)
      • Funding assets with a potential to appreciate in value (homes, vintage cars, boats, holiday homes, renovations)

    Paying off Non-Deductible Debt

    • Home mortgage loans typically consume 20-40% of disposable income, sometimes more
    • Investing by paying off home mortgage loans (saving on interest) is a low-risk strategy
    • Even though the return from saving on mortgage outgoings is not tangible compared to a cash investment return, it offers a sense of gratification
    • Paying off a mortgage is not subject to market volatility, and variable rate loans contribute to some variability in return, making it a relatively risk-free approach
    • Paying off non-deductible debt can often provide better returns than taxable investment income

    Types of Debt

    • Fixed Payment Loans:
      • Personal loans, car loans, BNPL (Buy Now Pay Later), and home mortgage loans
      • Secured vs unsecured
      • Fixed payments over a finite period of time (used in annuity formulas)
    • Revolving Credit:
      • Credit cards, overdrafts, lines of credit

    ETF vs CMT

    • Bond ETFs have gained popularity due to their flexibility, lower costs, intraday trading, diversified bond exposures, and lower management fees

    Debt and Equity: Key Differences

    • Debt:
      • Imposes a contractual obligation for the company to make regular payments of interest and principal to lenders
    • Equity:
      • Represents a residual claim on the cash flows generated by the firm's assets
      • Dividends are paid after interest
      • Capital is returned after borrowings are repaid
      • An equity risk premium exists
      • Can be generated internally (retained earnings) or externally (new issues)

    Long-Term vs. Short-Term Returns on Equities

    • Equities (stocks) have historically delivered stable, higher returns compared to other asset classes like bonds or cash
    • Long-term equity investments tend to outperform other investments
    • Short-term equity investments can be risky due to market volatility
    • Market volatility can lead to significant losses in the short term, as exemplified by the COVID-19 pandemic and the 2008 Global Financial Crisis
    • The S&P/ASX200 Index experienced a 50% decline in 2008, significantly impacting investors, particularly retirees

    Practical Considerations and Risks of Direct Share Investment

    • How and Where to Buy Shares:
      • Shares of public companies are listed and traded on stock exchanges like the ASX
      • Investors require a broker and trading account to buy shares
      • The ASX provides educational resources for new investors
    • Which Shares to Buy:
      • Requires research on companies, understanding market trends, and diversification to reduce risk
    • Finding Share Price Information:
      • Investors need access to reliable, timely information about share prices for informed decisions
    • Use of Brokers:
      • Brokers facilitate buying and selling shares
      • Full-service brokers offer advice and research, while discount brokers execute trades at lower fees
    • Transaction Costs:
      • Buying and selling shares incur costs like brokerage fees and commissions, affecting overall returns
    • Documentation of Ownership:
      • Proper documentation is essential to prove ownership of shares and manage tax and legal obligations
    • Taxation of Share-Related Income:
      • Income from shares, like dividends, is subject to taxation, and capital gains tax applies to profits from selling shares
    • Valuation of a Share:
      • Understanding share valuation is crucial for investment decisions, requiring an assessment of a company's financial health, future prospects, and market position

    Direct Investment in Shares in Australia

    • Public Companies:
      • Shares of public companies are easily accessible through the ASX
      • A broker facilitates buying and selling
      • The ASX provides resources for beginners
    • Private Companies:
      • Investment in private companies (unlisted) is more challenging as these shares are not publicly traded
      • Typically requires a personal connection with the company's owners or principals

    Methods for Selecting Shares

    • Fundamental Analysis:
      • Involves analyzing a company's financial statements, earnings, growth potential, industry position, and economic factors to determine its intrinsic value
      • Aims to find undervalued stocks with strong growth potential
      • Evaluates current management
      • Compares with similar companies in the same line of business
      • The market requires efficient fundamental analysis, but the EMH assumes that information is already reflected in share prices (the paradox of the EMH)
    • Technical Analysis (Charting):
      • A time series prediction technique using price history charts and other indicators

    Studying That Suits You

    Use AI to generate personalized quizzes and flashcards to suit your learning preferences.

    Quiz Team

    Related Documents

    Measuring Financial Wellbeing with Self-Reported and Bank Record Data (PDF)

    Description

    This quiz covers essential concepts in financial planning, focusing on conflicts of interest and the importance of objective advice. Learn how to effectively disclose commissions and provide a Statement of Advice (SoA) that meets client needs. Understanding these principles is crucial for ethical financial advising.

    More Like This

    Use Quizgecko on...
    Browser
    Open
    Browser
    Browser