FINANCIAL SERVICES ADVISOR

Transcription

1 FINANCIAL SERVICES ADVISOR PROFESSIONAL COMPETENCY EXAMINATION SUGGESTED ANSWERS Date: 16 February 2017 Time: 09:00 13:00 (4 hours) Total marks: 50 Open book examination Pass mark: 60% Question 1 (7.5 marks) Question 1.1 As Toni and Mick s financial adviser, briefly DISCUSS the fit and proper requirements for a Financial Services Provider who holds a category 1 licence and who is a natural person (sole proprietor) in terms of the FAIS Act. Fit and proper requirements may include, but are not limited to, appropriate standards relating to- (a) (b) (i) (ii) (iii) (c) (d) (e) personal character qualities of honesty and integrity; competence, includingexperience; qualifications; and knowledge tested through examinations determined by the registrar; operational ability; financial soundness; and continuous professional development Ref: FAIS act section 6A (2) S. 6A inserted by s 180 of Act 45/2013 w.e.f 28 February 2014 Page 1 of 14

2 Question 1.2 (1 marks) Mick mentioned that he approached his former financial adviser, Sam van Zyl, with a complaint about a product Sam recommended. Sam tried to convince Mick that there was nothing wrong and he gave him a bottle of wine. Mick was still not happy and did not know what to do. COMMENT on the actions of Sam what was Sam supposed to do in terms of the legislation? (Name legislation as well) In terms of the FAIS General Code of Conduct, the adviser was supposed to inform the client about the complaints procedures. Question 1.3 (1.5 marks) Toni stated that she heard that the principles of TCF ensure that financial planners are nice to all clients. COMMENT on this statement. This statement is incorrect. The aim of the TCF policy is to ensure that the customer s needs are appropriately met by regulating financial product design, the marketing of financial products, the information provided to consumers, aspects of financial advice, the after-sale support of consumers and the complaint procedure. Question 1.4 (1 mark) EXPLAIN what is required from FSA professional members of the FPI with regard to Continuous Professional Development (CPD) in order to retain their professional membership. They are required to comply with CPD requirements of 35 CPD points over a 1 year period. Question 2 Question 2.1 (7 marks) (5 marks) Assume that Toni and Mick are in the final stages of getting a divorce. Toni has contacted you to assist her with getting her financial affairs in order. Mick has always controlled their monthly budget and paid all the accounts from their joint income, after the divorce Toni is going to have to look after her own finances. Toni has sent you the following summary of some of the financial aspects of their divorce agreement: Page 2 of 14

3 For now, Toni and the children will move into the townhouse that is situated in a security complex. The current primary residence will be sold and the proceeds shared equally. Mick has to pay Toni maintenance of R1 500 per child per month. This will have to increase with inflation each year. The children will remain on Mick s medical aid scheme and he will cover the costs of any additional medical expenses. Mick will have to pay half the children s school fees, school uniforms and stationary each year. He will also have to pay half the fees for any extra-mural activities or hobbies that the children may take part in. Mick also will have to pay half the premiums for saving towards the children s education. Currently there is an endowment education plan for Sue in place. Mick and Toni are in the process of taking out an endowment education plan for Pam. This premium is R250 per month. Mick has to pay half the entertainment expenses for the children, this includes the DSTV. Mick and Toni will each be responsible for the monthly expenses of their own debts, policies and investments. Toni indicates that in terms of her other household expenses, she estimates that she will pay the following: Groceries: R4 000 Car insurance: R450 Townhouse levy and other related expenses such as garden service: R2 500 Based on the above information provided by Toni, draw up a monthly budget for her where you reflect her income and her expenses. COMMENT on any expenses that she might not have taken into consideration but will have to include in her budget. Page 3 of 14

4 Income Expenses Comments Net income R Town house levy R2 500 & other expenses Maintenance R Car instalment R2 200 Groceries R4 000 Petrol Toni has not taken her petrol expenses or any other vehicle maintenance into consideration. Cell phone Toni will have to provide the amount of her subscription Helper Toni will have to decide if she is going to retain the services of her helper. If she does, what will the wages be? Telephone account/landline Will Toni install a landline at the townhouse or will she just use her cell phone? School fees R4 000 DSTV R 326 Short term insurance R 450 The information only reflects her car insurance, but what about household insurance? Insurance policies R1 410 and investments Medical The children will remain on Mick s medical. Toni will therefore have to make provision for her own medical Credit card debt Toni will have to take these debts into account as well. and any clothing accounts Entertainment R 600 Total R Total Page 4 of 14

5 Question 2.2 (2 marks) Toni has decided to buy a small flat in Jeffery s Bay that she and the children will use for holidays. The cost of this flat is R which includes all purchasing related costs. Toni has looked at her budget and she estimates that she can spend between R4 000 and R5 000 per month towards a bond payment for this flat. Toni is considering taking the following course of action, she will either: Put down R towards the flat and take out a bond for the balance over 20 years, or She will put down R towards the flat and take out a bond for the balance over 15 years. Assume that the bank is willing to give Toni a bond at 10,5% interest. Question Toni would like you to CALCULATE what her instalment would be in each of the options. Instalment calculations: End mode Shift clear all 12 shift P/YR PV 20 shift xp/yr 10.5 I/YR PMT: First option: End mode Shift clear all 12 shift P/YR PV 15 shift xp/yr 10.5 I/YR PMT: Second option Question 3 Question 3.1 (7 marks) (3 marks) Toni is very concerned about the effect the divorce will have on her risk planning. She had always assumed that should she no longer be able to work due to disability or other reason, Mick would provide for the family. She would now have to carefully assess her disability provision. She has given the matter some thought and believes she will require 60% of her current annual salary should she become disabled. In order to retain the value of the income over time she would like the income to escalate by inflation + 2% annually and be available until her planned retirement age of 60. In terms of the rules of her pension fund the accumulated fund value will become payable on permanent disability after which membership will cease. Page 5 of 14

6 CALCULATE Toni s capital needs at disability. She has asked that you do not take the rental income into account in your calculations as she is unsure whether she will retain the properly should she become disabled. Indicate all the steps in the calculation. Capital required to meet income need: Resultant rate: 10-8/1.08 = BEGIN MODE PMT (60% x R ) N 27 I/YR PV Capital available: Unapproved group benefit: R x 4 = R Provident fund: Accumulated fund benefit: R Total: R Policy: Disability benefit R Total capital available: R Shortfall: R R = R Question 3.2 (4 marks) Toni has revisited her benefit statement provided by her employer and noticed that the risk benefits provided are unapproved. She is concerned by this term as it sounds as if the benefit structure is somehow problematic. She is unsure how her risk benefits are affected. A) DEFINE and DESCRIBE to Toni what unapproved group life benefits are. B) Then explain to what extent she is impacted by this particular benefit structure. Page 6 of 14

7 Unapproved group life and disability benefits means that benefits are not provided by a retirement fund registered in terms of the provisions of the Pension Funds Act and approved by the Commissioner of SARS. The fund rules will prescribe that on the death (or disability) of a fund member a certain level of benefit must be paid to the member or his/her nominees/dependants. In order to provide these benefits the fund must take out a life policy on the life of its members this is usually a group policy (fund policy) and not an individual policy on the life of each member. In the case of unapproved group life and disability benefits this policy is owned by the employer (and not the retirement fund as would be the case with approved benefits). The benefits thus do not form part of the accumulated benefit that the retirement fund pays to the member. The policy benefit will be paid directly to the beneficiary when Toni dies (or becomes disabled). She is thus impacted as follows: The provisions of the Pension Funds Act do not apply to these benefits thus on death the group life benefit will be paid directly to her nominated beneficiary and not in terms of s.37c as would have been the case if the benefits were provided by a registered fund. On Toni s death the group life benefit will be included as deemed property for purposes of calculating her estate duty liability whereas in the case of approved group life benefits the benefit would be excluded for purposes of calculating the estate duty liability. From a taxation perspective the premiums paid by the employer in respect of the group life benefit must be included as a fringe benefit for purposes of calculating Toni s income tax liability annually. The benefits at death or disability will be tax-free. Page 7 of 14

8 Question 4 (6 marks) Question 4.1 Toni is concerned about the financial needs of her children should she die. She believes that Mick will not be concerned as he has lost all interest in his family. She now wants to take out a life policy making her children equal beneficiaries, to meet their income needs in the event of her death. You have done a death needs analysis and accordingly inform her that she would require a life policy of R5m for this specific need. She reminds you that Mick does have a policy on her life already for R1m. He is the owner of that policy but she is the beneficiary. DISCUSS all the implications you think are necessary to bring to her attention with regard to the R1m policy currently on her life as well as the policy she intends to take out should she die. Your answer should include: Mick can at any time change the beneficiary on the policy he has on her life for R1m because he owns the policy. So there is no guarantee that she will be the recipient of those proceeds. If she takes out her own policy before her divorce, she would require her spouse s consent since they are married in COP If taken out after the divorce, his consent will not be necessary. The policy will be estate dutiable if payable to the children or the estate. Provision for estate duty should be built into the cover amount. If the children are nominated as beneficiaries on the new policy there will be no Executor s fees. Question 4.2 (3.5 marks) With REFERENCE to legislation, DISCUSS the implications if Toni were to die soon after the divorce without changing her will and also mention anything else she must do immediately after the divorce (with reference to her policies). There is an assumption in the Wills Act, section 2B that former spouses intend to disinherit each other unless the contrary is obvious. This assumption applies for 3 months from date of divorce. Toni should amend her will immediately removing her husband as the sole heir. Beneficiary nominations of policies and investments where she had previously appointed her spouse as the beneficiary should be changed. Page 8 of 14

9 Make provision for the creation of a testamentary trust in her will and ensure that policy proceeds and the inheritance left to her children will be transferred to the trust on her death. In so doing the trustees will protect the assets and administer the trust in the best interest of the children. The policies and investments will be paid out according to the beneficiary nominations in terms of the policy and investment contracts irrespective when she dies.. Question 4.3 (1 mark) Toni wants to know about the taxability and/or deductibility of maintenance payments in terms of a divorce order. EXPLAIN this to her by referring to the applicable legislation. The payment of maintenance has no effect on the tax liability of either of the parties. The spouse who is ordered to pay in respect of the divorce order is not entitled to a deduction in respect of any portion of the amount paid. The recipient spouse is likewise exempt from tax thereon. Question 5 Question 5.1 (7.5 marks) (6 marks) Toni is is of the opinion that her retirement savings are more than sufficient. CALCULATE a retirement plan for her to put this into perspective. Assume she will need R p.a. before tax in today s values. Her income must grow with the inflation rate after retirement. She also would like to go on a world tour that currently costs R and purchase a new car with a current value of R when she retires. Take her life expectancy after retirement to be 19 years. Assume for purpose of the calculation that contributions to the provident fund and retirement annuity fund are made annually in advance, i.e. R p.a. to the provident fund and R3 600 p.a. to the retirement annuity fund. Page 9 of 14

10 Primary Calculations needed for the question Age 33 Current accumulated benefit R ( ) Salary R Employer Contribution 19% of which 1.5% funds risk benefits Employer Contribution R ( x 17.5%) Employee contribution 0% Retirement age 60 Years to retirement 27 Years after retirement 19 Resultant Rate = (10-6)/1.06 = % FUNDS NEEDED Budget Total monthly R Total annually R Calculate the FV of the annual income required at Age 60 N 27 I/YR 6.00% PV R Future Value of current expenditure R Calculate the capital required to provide R in the year of retirement and which will grow with the inflation rate after retirement. PMT I/YR 3,7736 N 19 PV R Future Value of Car (PV = , I = 6%, N = 27) R Future Value of Holiday (PV = , I = 6%, N = 27) R TOTAL REQUIRED (EXPENSES+CAR+HOLIDAY) R Provident Fund FUNDS AVAILABLE Calculation of projected value of provident fund s current values Future Value of current fund value PV R N 27 I/YR 10.00% Future Value of current fund value (to be calculated) R Page 10 of 14

11 Future Value of provident fund s future contributions 1P/YR Begin Mode PMT (annual contribution) R I/YR - Resultant Rate = (10-6)/ % N 27 PV (to be calculated) R PMT 0 I/YR 10.00% FV (to be calculated) R Total savings (contributions + current value) R Retirement Annuity Calculation of projected value of retirement annuity current values Future Value of Current fund value PV R N 27 I/YR 10.00% Future Value of current fund value (to be calculated) R Future Value of retirement annuities future contributions 1P/YR Begin Mode PMT (annual contribution) R3 600 I/YR - Resultant Rate = (10-6)/ % N 27 PV (to be calculated) R I/YR 10.00% PMT 0 FV (to be calculated) R Total savings (contributions + current value) R COMPARISON OF FUNDS REQUIRED AND FUNDS AVAILABLE Funds required R Funds available ( ) R Surplus R Thus there is a surplus of R in Toni s Retirement Plan. Page 11 of 14

12 Question 5.2 (1.5 marks) With reference to contributions made to pension, provident and retirement annuity funds: EXPLAIN with reference to legislation how the deductions for the current tax year (2016/2017) differs from previous tax years when one does an income tax calculation for your clients. With effect 1/03/2016 the tax deductions for contributions made to pension funds, provident funds and retirement funds is significantly amended. From 1/3/2016 onwards, the tax deduction calculation for the three different funds will be identical. The deduction will be limited to 27.5 % of the greater off: (limited to R ) Taxable income (excluding any lump sum benefits or severance benefits) but before the donations deduction OR Remuneration (excluding any lump sum benefits or severance benefits) Material: PFK tax pocket booklet Question 6 Question 6.1 (9 marks) (5 marks) Mick s current value on the growth fund is R Three months ago this was R He has been reading a lot about the instability in world markets and is now considering switching to a guaranteed fund to protect his capital. Mick s initial objective was to accumulate capital growth and he plans to keep his investment for another 10 years. Question (1 mark) EXPLAIN to Mick at least ONE advantages and ONE disadvantages of switching to a capital guaranteed fund. With a capital guaranteed fund he will have peace of mind in knowing that his capital is secure. (Adv) The guaranteed fund is a low risk /low return fund therefore it will not grow at the same level as it has done in the past. (Dis Adv) Guarantees on the fund come with additional costs which are payable from the return on the capital and impact on capital growth. (Dis Adv) Page 12 of 14

13 Question (2 marks) Considering that Mick intend to keep this investment for another 10 years. EXPLAIN to him the possible impact of the volatile markets on his investment. A large portion of his portfolio is invested in equities and will therefore be impacted by the volatility in the markets. During upswing his portfolio will perform well and during a downturn it will perform poorly. However since he has another 10 years his portfolio will balance itself. He will still be better off in this fund than in a guaranteed fund in the long term. Question (2 marks) Mick wants to know the impact of the volatility of the stock market on their regular premium investments. Rand cost averaging will ensure that his investment will grow especially over the long term. Due to the fact that when the share price is high he buys at a higher price but when the price falls he buys at a lower price. Question 6.2 (2 mark) IDENTIFY Mick and Toni s risk profiles based on their existing portfolios. Mick - Aggressive investor Toni - Moderate investor Question 6.3 (1 mark) CALCULATE how much Toni needs to save as a lump sum to yield R in ten years at an interest rate of 10%. R X factor from interest table = R X 0, = R Page 13 of 14

14 Question 6.4 (1 mark) Toni would like your advice in respect of how much money she can invest in an interest bearing account before exceeding the interest rate exemption at an interest rate of 6%. CALCULATE the maximum amount that Toni needs to invest. Assume her marginal tax rate to be 40%. R X 100/6 = R Question 7 (5 marks) With regards to calculating the tax liability of a natural person, certain exemptions are allowed (Gross income less exemptions = income). EXPLAIN you understanding of the following exemptions: Bursaries (s. 10(1) (q) and Tax free investments (s 12T (2) Bursaries Bona fide scholarships or bursaries granted to any person to enable or assist that person to study a recognised education or research institute are exempt from tax. If the scholarship or bursary is granted by an employer or any associated institution in relation to the employer to an employee or to a relative of an employee, the amount will be taxable in the following circumstances: -Where such employee does not agree to reimburse employer if the employee fails to complete his/her studies for reasons other than death, ill-health or injury or -where granted to a relative of an employee and where the employee s remuneration exceeds R (previously ) and so much of the bursary to such relative as exceeds R in respect of NQF 1 4 qualification R in respect of Grade R to grade 12 education R in respect of NQF 5 to 10 qualification Tax free investments Any amount received by or accrued to a natural person in respect of a tax free investment is exempt from normal tax. Total 50 Marks Page 14 of 14