Date: 16 February 2017 Total Marks : 50 Time: 09:00 13:00 (4 Hours) Pass mark : 60%

Transcription

1 Financial Services Advisor FSA PROFESSIONAL COMPETENCY EXAMINATION Tear this top page off, read it, sign it and please hand in with your answer booklet Date: 16 February 2017 Total Marks : 50 Time: 09:00 13:00 (4 Hours) Pass mark : 60% This examination paper comprises of 15 pages. You are expected to fully motivate all your answers, where applicable. Only answers in your own handwriting in the official answer book will be considered. PLEASE READ THE FOLLOWING RULES AND INSTRUCTIONS FOR THE EXAMINATIONS 1 The duration and type of examination is clearly indicated on the coversheet of the examination paper. 2 If you arrive late, no extra time will be allocated to you. No candidate will be allowed to leave the examination room within the first half hour or the last fifteen minutes of the examination session. 3 This is an open book examination. You are allowed to use textbooks, notes, financial calculators and tax tables during the exam. Candidates are not allowed to use cell phones or any other electronic device for whatsoever reason or purpose. Cell phones must be switched off and securely packed away in the candidate s bag. 4 Please use the stickers provided and place a sticker on the top right hand corner of each examination book as this promote anonymity. Also write your ID number on every page of the answering book. Do not write your name on any booklet. Answer each case study in a separate book. Please tear off the first page, sign at the bottom and include in your examination script. 5 No communication of any nature will be tolerated between candidates whilst the exam is in sitting. Candidates who disobey this rule will be expelled from the exam venue immediately. 6 You may not copy from any person during the examination nor allow anybody to copy from you. Any candidate suspected of cheating during the exam sessions will be investigated and may lead to disciplinary action (even if suspected by assessors after you have left the venue). 7 No smoking shall be allowed during the examination and no candidate shall be allowed to leave the examination venue for this purpose. 8 The results of the examination will be available ten (10) weeks after the examination. 9 Should you not be satisfied with the examination process, examination paper or results, you have the right to lay a complaint or appeal the exam in accordance with the PCE Examination policy available on I with ID number hereby acknowledge that I have read and understand all of the above. Page 1 of 15 Candidate signature

2 Leave Blank Candidate needs to sign first page and hand in to invigilator Page 2 of 15

3 Case Study You are the financial adviser of Toni and Mick Jagger. You have been a representative of Disco Very (Pty) Ltd since April Toni has just found out that her husband has been unfaithful and is considering a divorce. She would like you to conduct a financial needs analysis taking into consideration her future status as a single parent. In preparation for the financial needs analysis she has given you the following information: Personal detail Date of birth, Mick (spouse) - 18 July 1978 Date of birth, Toni - 10 February 1980 Marriage: married in community of property. Date of marriage - 23 July 2004 Dependants: Two daughters, Sue 9 years old and Pam 3 years old Education and employment details: Mick Mick is a qualified teacher with a 4 year degree in education. He is a teacher at a private school. Mick earns R per annum. He is a member of a pension fund and a medical aid scheme. His wife and children are dependants of the medical aid. The monthly contribution of R2 400 is deducted from his salary. Education and employment details: Toni Toni is a human resources manager at a leading retail store. She has an honours degree in human resources. She earns R per annum. Toni is a member of a provident fund. Toni also earns R4200 per month rental income for a townhouse that she inherited from her parents in The townhouse is excluded from community of property. Retirement fund details Mick- Pension Fund Toni- Provident Fund Current accumulated benefit R R Employer Contribution 12% of which 2% funds risk benefits 19% of which 1.5% funds risk benefits Employee contribution 7.5% 0% Retirement age Page 3 of 15

4 Retirement annuity fund details Mick Toni Fund value - R Contribution: R250 p.m. Fund value - R Contribution: R300 p.m. and 10% escalation p.a. Unapproved group life and disability cover Mick 4 times annual salary Toni 4 times annual salary Assets and liabilities Primary Residence- Bought in 2004 Mick Toni Current Debt Current value Debt value R R Townhouse R Nil Vehicle R R Monthly instalment: R3 000 Household assets R R R Monthly instalment: R2 200 Credit card R6 000 R4 200 Page 4 of 15

5 Polices and investments Asset Unit trust- Growth Fund- Invested R in July 2008 Endowment; He is the owner and life assured. Toni is the beneficiary Telkom Shares Whole life policy with a disability benefit Bond cover with life and disability benefits - Mick and Toni are the insured lives Mick Toni Current value/benefit Monthly contribution Asset Current value/benefit R Nil Unit Trust- Balanced fund R Annual interest: Annual interest: R R1 200 R R420 Endowment- Education R policy - Life assured Sue. Number of shares: 2500 Share price: R66,00 Dividends earned: R Life cover -R Standalone Disability cover - R R R420 R480 Whole life policy with a disability benefit - She is the life assured and Mick is the policy owner. Toni is the beneficiary. Life cover: R Standalone disability: R Monthly contribution R500 R250 R360 Page 5 of 15

6 Monthly Budget Income Expenses Net Income Mick R Bond R Net Income Toni R Municipal rates & Utilities R3 600 Rental income R4 200 Car Instalment Mick and Toni R5 200 Groceries R6 000 Petrol R2 000 Domestic worker R2 000 Garden service R800 Cellular phones R1 600 Telephone account (landline) R400 ADT security R365 School Fees R8 000 Gym membership R600 DSTV R652 Short term insurance R2 600 Insurance Long term policies R1 930 Retirement annuity fund R550 Medical Aid R2 400 Clothes accounts/credit cards R3 200 Entertainment R1 200 R R Other information Both have wills in place and are currently the sole heir of each other. Rates and assumptions Inflation: 6% Investment growth: 10% For risk cover use the following rates per R Life cover: male rates R6.00 female rate R4.00 Capital Disability: R5.20 Income Disability: R6.80 Page 6 of 15

7 Use the same rate for males/female for disability benefits. All premiums are payable monthly in advance. Income after retirement is monthly in advance. Should the details provided prove insufficient for your purposes, you may make the necessary assumptions, provided that: you indicate that you have made an assumption, you give reasons for your assumption, and the assumption are in keeping with the preferences of the clients and the information already supplied. When answering the question please note: Do not merely show total values in any calculation: show a full breakdown of your calculations and list all items where applicable. Round all amounts to the nearest Rand. When using the resultant rate use four decimals. Page 7 of 15

8 Ethics and Practice Standards 7.5 marks Question 1 [7.5 marks] Question 1.1 (4 marks 8 x 0.5) 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. Question 1.2 (1 marks 2 x 0.5) 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) Question 1.3 (1.5 marks 3 x 0.5) Toni stated that she heard that the principles of TCF ensure that financial planners are nice to all clients. COMMENT on this statement. 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. Page 8 of 15

9 Financial Management 7 marks Question 2 [7 marks] Question 2.1 (5 marks 10 x 0.5) 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: 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. Page 9 of 15

10 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 in table format 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. Use the following table format in your answer book/script when answering this question: Income Expenses Comments R R Question 2.2 (2 marks 2 x 1) 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. Page 10 of 15

11 Risk Planning 7 marks Question 3 [7 marks] Question 3.1 (3 marks 6 x 0.5) 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. 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. Question 3.2 (4 marks 8 x 0.5) 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. (2 marks 4 x 0.5) B) Then explain to what extent she is impacted by this particular benefit structure. No calculations are required. (2 marks 4 x 0.5) Page 11 of 15

12 Estate Planning 6 marks and Tax Planning 1 mark Question 4 [6 marks) Question 4.1 (2.5 marks 5 x 0.5) 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. Question 4.2 (3.5 marks 7 x 0.5) 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). Question 4.3 (1 mark 2 x 0.5) tax planning 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. Page 12 of 15

13 Retirement Planning 7.5 marks Question 5 [7.5 marks] Question 5.1 (6 marks 12 x 0.5) Toni 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. Question 5.2 (1.5 marks 3 x 0.5) 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. (No need to do any calculations) Page 13 of 15

14 Asset Management / Investment planning - 9 marks Question 6 [9 marks] Question 6.1 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 2 x 0.5) EXPLAIN to Mick at least ONE advantages and ONE disadvantages of switching to a capital guaranteed fund. Question (2 marks 4 x 0.5) 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. Question (2 marks 2 x 1) Mick wants to know the impact of the volatility of the stock market on their regular premium investments. Please EXPLAIN this to him. Question 6.2 (2 mark 2 x 1) IDENTIFY Mick and Toni s risk profiles based on their existing portfolios. Page 14 of 15

15 Question 6.3 (1 mark 2 x 0.5) CALCULATE how much Toni needs to save as a lump sum to yield R in ten years at an interest rate of 10%. Question 6.4 (1 mark 2 x 0.5) 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%. Tax Planning 5 marks Question 7 (5 marks 10 x 0.5) [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) Total 50 Marks Page 15 of 15