CFP professional competency exam

Transcription

1 CFP professional competency exam Examiner feedback: February 2014 exam Note from the FPI: Answers to the question papers are normally not released and going forward question papers and memoranda will not be released at all. The FPI Certification Department is however of the opinion that releasing the latest paper with some guidance notes on how to answer a typical Professional Competency Exam question will render much more benefit to candidates going forward. Not all the questions to the February 2014 paper will be released and these questions below have been selected for release. Case study 2: Investment planning (Alex Ngcobo) Financial planning components covered in question Amount of marks included in question Type of Question Marks allocated Investments 17 Knowledge 6 Financial Management 2 Comprehension 0 Retirement / EB 0 Application 7 Estate planning 0 Analysis and synthesis 6 Risk planning 0 Evaluation 6 Tax planning 6 TOTAL 25 Health care benefits 0 Ethics and regulatory environment 0 TOTAL 25 CLIENT OVERVIEW Alex Ngobo (34) is a marketing manager with a large retail group. His taxable income for the 2013/2014 tax-year amounts to R He is single, but has a daughter (10) from a previous relationship whom he supports by paying a monthly maintenance amount to her mother. Alex s uncle died during 2013 and Alex was surprised to find out that his uncle had bequeathed a cash amount of R to him. The executor contacted Alex in early February and indicated that since the estate is almost finalized he can expect payment of the amount by the end of February. 1 P a g e

2 Alex grew up in a low-income household and had to work throughout his time at university to pay for his tuition and associated fees. He would thus not wish to sacrifice any portion of the funds on unnecessary fees, but he understands that he would have to take on an amount investment risk to achieve growth. He just feels he does not want to take any more risk than required to achieve his objective. He plans to earmark the funds for the purchase of a house at age 40, i.e. in 6 years time. He would like to have an amount of R available at that time for this purpose. Should he die before that age he would like the investment to be available to his daughter in the most cost-effective and expedient manner. He received an above-inflation salary increase at the end of 2013 and would thus like to contribute R750 per month on a debit-order basis to the investment as well. He does not want to commit to an escalating contribution as he is unsure about the level of future salary increases. Alex consulted two independent financial advisers during January, requesting proposals regarding the investment of the legacy. The two advisers presented him with the following two options - each as being the most suitable to Alex s needs: Option 1: Stanlib Equity Fund and the Stanlib ALSI 40 Fund (investment split equally) Initial advice fee: 0% On-going advice fee: 0.75% Option 2: Coronation Balanced Defensive Fund and the Prudential Inflation Plus Fund (investment split equally) Initial advice fee: 0% On-going advice fee: 0.75% The following attachments are provided: Fund fact sheets for all four funds above A comparative analysis you conducted in respect of the two investment options QUESTION [25 marks] When providing advice on investment options, one needs to decide on the most suitable investment vehicle, as well as the most suitable investment fund for the proposed investment. 2 P a g e

3 Write a report to Alex that includes the following: An evaluation of the two investment options in terms of suitability for Alex s needs, as outlined above; make specific reference to fees and risk and return; (12 marks) An evaluation of the most suitable investment vehicle for the investment in terms of suitability of Alex s needs, considering direct and Longterm Policy options; (6 marks) Your advice as to the most suitable vehicle and investment fund option for Alex (5 marks) Your report may not exceed 5 (five) pages and detailed calculations are not required. Marks will also be allocated for structure, logic, flow and appropriate language usage. Only 5 pages will be marked. 3 P a g e

4 Aspects to consider when analysing the question and the facts related to Alex: There is no one correct way in which the question could be approached. This type of scenario is typically what a CFP professional should be able to handle in practice. This is a professional competency exam, not a post graduate qualification exam. Candidates will be tested against the FPI Competency Profile in terms of bringing the knowledge, skill and abilities expected from a CFP professional together in a question paper. Refer to the FPI Competency Profile Collection matrix (pg 6), Analysis matrix (pg 7) and Synthesis matrix (pg 8) for the specific fundamental financial planning practices that will assist in deciding which approach to follow in answering a question like this. Please download a copy of the FPI Financial Planner Competency Profile for ease of reference. When considering suitability of advice, it is critical to link the advice specifically to the client s objectives, needs and risk appetite. Marks will be attracted if this is evident from the answer. Reduction of tax payable should always be considered, but it should never be the driving force of the advice. The driving force should always be the person s objectives, needs and risk profile. Guidelines for suitable advice to Alex: As per instruction in the question, the first section should make reference the fees and risk and return associated with both options. In terms of fees the following can be deducted from the fund fact sheets and should be mentioned to Alex: o Option 1: An upfront fee of 5.7% is payable but the adviser can discount it down to 2.28% (5.7% less 3.42%). In this case it will mean that an amount of R will be sacrificed with only the balance invested. Other aspects to mention is that R17.10 of every monthly contribution will be sacrificed in upfront fees. o Option 2: No upfront fees are payable to the product providers, resulting in the full R2.5 mil to be invested. The same will apply to the premiums, resulting in the full R750 pm invested monthly. o All admin/management fees should also be considered. o Option 2 has a higher TER. Candidates should explain that TER is reflected in unit price, which is thus not a fee for the investor himself. When discussing the Risk and Return, the following must be considered in advice to Alex: 4 P a g e

5 o Option 1: These funds have consistently outperformed option 2 over the last 5 years, with the exception of Alex s risk tolerance is important to take into consideration as he only requires around 12% growth per annum. In terms of this, the outperformance at the additional risk is not in line with his needs. o Option 2: The performance over previous 4 years is adequate for Alex s return requirements and the volatility is significantly lower. Candidates should have considered also an additional Alpha over option 1 with much lower volatility at Lastly, the candidate should have mentioned that there may be Capital Gains Tax payable in the year of withdrawal, depending on the capital situation in that year. To counter this, a slightly higher target should be taken into consideration to make provision for this. Summary of relevant fees/risk and return investment vehicles Option 1 Option 2 Fees: Upfront: initial Advice: TER: 2.28% 1.14% 0.87% 0% 1.14% 1.67% Return 19.94% avg p.a. over 5 years 13.63% avg p.a. over 5 years Risk/Volatility An evaluation of the most suitable investment vehicle for the investment in terms of suitability for Alex s needs, considering direct and Longterm Policy options; (6 marks) Both investment vehicle options can only be accessed in one of two ways: either directly or via a long-term policy such as an endowment or sinking fund on a LISP platform. RA is not an option if Alex s liquidity need is considered. Both options will be fully liquid at the time of Alex turning 40 years old. Matters to consider when evaluating the options: OPTION 1: o Direct: Income and gains will be reported in Alex s annual income tax return. Option 1 generates dividend income which will result in no income tax 5 P a g e

6 implications as it is fully exempt. Until the age of 40 Alex does not consider any withdrawals with will then also not result in any CGT implications. However, when the funds are withdrawn, the taxable capital gain will be included in his taxable income during that year. o Long-term policy: Because of the nature of these funds, no income tax or CGT implications on full withdrawal for Alex himself. However, CGT will be payable in the Individual Policyholder Fund, though as the units will still be disposed of in order to pay out the full withdrawal value. Thus the full investment value will not be available to Alex when he withdraws. OPTION 2: o Direct: Again, income and capital gains to be included in Alex s return annually (whether reinvested or not). Dividend portion is exempt, but Coronation Balanced Defensive Fund alone generated 3.93% in interest income during the 2013/2014 tax-year. Similar for the Prudential Fund, though income split not specific. Actual interest amount will thus most certainly be in excess of the interest exemption and thus potentially taxable (depending on Alex s other income and deductions). As above capital gains not relevant until age 40 at which time taxable capital gains to be added to his taxable income. o Long-term: Interest component to be taxed at the IPF rate of 30%. On full withdrawal no income tax implications for Alex, but as above units will be disposed of in order to pay out the full withdrawal value and capital gains tax thus payable within the IPF i.e. the full investment value will not be available on withdrawal at age 40. Your advice as to the most suitable vehicle and investment fund option for Alex (5 marks) o Investment vehicle: Alex pays tax at a rate of 25%, thus the interest generated via Option 2 will attract slightly more tax in the long-term policy structure as opposed to the direct option. BUT the actual rand amount will be small compared to the benefit on Alex s death (consider his needs of costeffectiveness and expediency): no executor s fee will be payable and if he nominates his daughter the value will pay to her (or likely her mother given she s a minor) upon submission of the claim. A direct investment would fall within the estate as no beneficiary can be nominated and would thus attract executor s fees and only be available once the estate is wound up which could be as long as 12 months or more. Thus long-term option is more suitable given Alex s needs. 6 P a g e

7 o Investment Fund: Option 2, whilst producing significantly lower returns p.a. over reported periods it is more suitable to Alex as an investor. This meets his return objectives with significantly lower investment risk. Marks have also been allocated for structure, logic, flow and appropriate language usage. The page limit was 5 pages. Evaluate how questions were answered by candidates Where marks were lost in general Common trends and tendencies What went well What went poorly Critical evaluation of performance of students Candidates did not interpret the question properly Candidates failed to identify the various characteristics in evaluating the two investment options (fees/cost/risk/return) and at times did not provide supportive information. Tax implications were not included in general Identification of the various investment vehicles Assuming the applicable Investment vehicle and the applicable solution (linking the two together) Assessor Comments (per question) Question Comment Suggestion for corrective action N/A N/A N/A Fees: Information of upfront fees not included or calculation incorrect. TER: few candidates failed to identify that the TER was reflected in the unit price. Risk and Return: Volatility was either not provided or provided no supporting evidence was given. Performance: candidates used an incorrect assumption in their analysis of the performance of the funds Capital Gain Tax: Most candidates did not correctly identify the relevant investment vehicle. If they did, they did not include the capital gains tax implications in their analysis. The question was fair and valid. However, the most obvious point of improvement will be w.r.t the learning material. Most FA s are tied agents and at times are not comfortable with company specific information. This became evident in that some candidates separated the two funds already incorporated as one fund. Some candidates have failed to comprehend some of the information/terms given within the fund fact sheet as the fund information was not generic. Candidates should be able to interpret both generic and fund specific information. 7 P a g e

8 Assessor Comments (per question) Question Comment Suggestion for corrective action N/A At times candidates provided the incorrect tax rate for the client (not acceptable at this level). N/A Layout was poorly articulated and did not make sense overall (candidates gave conflicting view regarding the funds chosen and the applicable investment vehicle). 8 P a g e

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19 Case study 3: Ethics and Regulatory Environment Financial planning components covered in question Amount of marks included in question Type of Question Marks allocated Investments 0 Knowledge 6 Financial Management 0 Comprehension 6 Retirement / EB 0 Application 0 Estate planning 0 Analysis and synthesis 6 Risk planning 0 Evaluation 7 Tax planning 0 TOTAL 25 Health care benefits 0 Ethics and regulatory environment 25 TOTAL 25 CLIENT OVERVIEW After being referred to you by an existing client of yours, you met with Sarah Adams in early January 2014 for an initial meeting, with a follow-up meeting two weeks later. You followed your advice process and presented Sarah with the documents in Annexure B and Annexure C at a meeting on 17 February. QUESTION [25 marks] Consider all applicable legislation as well as the Financial Planning Institute s Code of Ethics and Professional Responsibility. Provide a detailed analysis, with motivations, regarding compliance of the financial plan and record of advice with the above legislation and Code. Your answer may not exceed 4 (four) pages and no calculations are required. For purposes of your answer you may assume the following: All information on product suppliers as well as the financial services provider has been supplied to Sarah in the appropriate format and as prescribed; All annexures referred to have been provided and calculations are correct. 19 P a g e

20 Annexure A Record of Advice: Ms S Adams 17 February P a g e

21 SUMMARY OF FINANCIAL POSITION Our financial analysis and recommendations focused on the following life goals: 1. You would like to be able to retire at the age of 60. You will require income in retirement of R per month (current value) until the age of Ensure that Casey s tertiary education is provided for. FINANCIAL PRODUCT/S RECOMMENDED Based on the information supplied and the analysis conducted (as included in your Financial Plan) the most suitable financial product is a retirement annuity, to be invested in the Allan Gray Balanced Fund. Herewith the most important criteria for the selection of the financial product and product provider: CRITERION YES NO COMMENT Institutional security X Allan Gray is a well-established asset manager and an authorized FSP Cost of product X No upfront fees payable Fund choice X Fund selected meets client s investment growth requirement Termination X Early termination may incur penalty fees Access to capital Taxation X X Investment may not be accessed until age 55 at which time the retirement capital will become available Deductibility of premiums within limits set by the Income Tax Act; income and capital gains within the investment fund not taxed Administration X Allan Gray is the administrator Communication X Bi-annual reviews 21 P a g e

22 FEES Upfront fee: None On-going adviser fee: 1% p.a. Total Expense Ratio: 1.78% REPLACEMENT TER CURRENT PRODUCT 2.98 % REPLACEMENT PRODUCT 1.78% Exclusions/restrictions None None Financial planner r fee 1.14% (incl. VAT) 1.14% (incl. VAT) I, Sarah Jane Adams, hereby acknowledge that this record of advice, in conjunction with the financial plan prepared, represent an accurate record of events. I hereby accept the recommendations presented to me in the financial plan. SARAH JANE ADAMS DATE 22 P a g e

23 Annexure B Financial Plan: Ms S Adams 17 February 2014 INTRODUCTION Thanks for your meeting with me and participating in our two previous meetings. At Sure Financial Planning we aim to build, along with your valuable input, a financial plan that aims to provide you with a framework for your current and future financial well-being. Sure Financial Planning has a team of dedicated, experienced specialist financial planners and associated staff to ensure best practice and best service to all our clients. 23 P a g e

24 YOUR GOALS We have identified the following as your most important life goals: 1. You would like to be able to retire at the age of 60. You will require income in retirement of R per month (current value) until the age of Ensure that Casey s tertiary education is provided for. YOUR CURRENT SITUATION PERSONAL INFORMATION Name and Surname: Sarah Jane Adams Date of birth: 28/04/1984 Spouse: John Stephen Adams (32) Children: Casey Anne Adams (2) You and John have been married for 5 years and share jointly in the household expenses. John is an author and is currently mid-way through a novel, which is likely to be published in In addition to his authoring John is also a part-time lecturer. You are married out of community of property with the accrual regime applicable. Your family home is jointly owned and the bond registered in both your names. The home is situated at 31 Prive Crescent, Rondebosch, Cape Town. You work as the Marketing Director for Web World (Pty) Ltd, an on-line retail company. You have worked for your employer for 3 years. As mentioned your main priorities at the moment are ensuring you save sufficiently for Casey s tertiary education as well as for your retirement. You and John will both retire when you turn 60. Page 24 of 31

25 ASSETS AND LIABILITIES You provided us with a list of assets, liabilities and investment products. We will keep the full schedule on file, but for purposes of this plan the following are of importance: OM1234 Old Mutual Retirement Annuity Current value: R Beneficiaries: Inception: 1 April 2007 Contribution: R1 300 p.m. Spouse Maturity: 31 March 2040 Escalation: 6% annually Fund: Old Mutual Balanced Fund DD4455 Discovery Endowment Current value: R Beneficiaries: Inception: 1 May 2011 Lump sum investment None noted Maturity: 30 April 2016 Fund: Allan Gray Balanced Fund SB Standard Bank Savings Account Current balance: R You are also a member of your employer s pension fund. The current value is R and you contribute 7.5% of your retirement funding income. Your employer contributes 9% of which 1.5% funds the group risk benefits. When you resigned from your previous employer you transferred the full pension fund value into your current employer s pension fund. RECOMMENDATIONS AND STRATEGIES Let us deal with your two stated goals individually. Saving for Casey s tertiary education: Based on the information you provided the current value for a year of tertiary study is R Casey would probably be in her first year of study at age 19 thus in 17 years time. The analysis (see annexure) indicates that with an average annual investment return of 12% the value of the Discovery endowment policy in 17 years time will be sufficient to cover the education needs. For purposes of our analysis we have assumed the cost of study increases annually with an inflation rate of 6%. The Allan Gray Balanced Fund has managed, since inception, to provide an annual investment return in excess of 12%. Whilst one must always bear in mind that past Page 25 of 31

26 performance is not an indication of future performance, the fund choice is appropriate at present. I would thus recommend that you maintain this investment in the current investment fund. We will consider this investment to be allocated to that specific purpose and will not take it into account for any other financial needs. Saving for your retirement: Based on the information you provided you would require an income of R per month from the age of 60 until the age of 100. The income must escalate at inflation annually. The analysis (see annexure) indicates a shortfall in retirement capital which necessitates an additional saving of R annually, or R per month if you wish to accumulate sufficient capital at retirement to meet your stated goal. Your current retirement savings amount to R per annum towards your pension fund (this includes your own as well as your employer s contribution) PLUS R per annum towards your retirement annuity. This is a total of R per annum/r6 925 per month. There are a number of strategies you can consider in the context of the retirement situation. You can either: Retire later this enables your savings to accumulate for longer, with additional contributions; OR Contribute more; OR Take on more investment risk this will enable your savings to grow at a faster rate. As discussed you want to combine the benefits of additional contributions and somewhat more investment risk. We discussed a number of savings vehicle options and I recommend that additional savings be made into a retirement annuity. You will benefit from the deductibility of the additional premiums and in addition growth within the fund will be free of taxation. We discussed a number of investment fund options and I recommend the Allan Gray Balanced Fund. We explored the possible range or returns over various investment periods. You indicated that you feel comfortable with the level of volatility within this fund. You will find the summary of the range of returns over the various investment periods in the annexures hereto. Page 26 of 31

27 I would recommend that you take out a second retirement annuity with Allan Gray with a regular monthly contribution of R10 000, escalating at 6% annually. Investment to be in the Allan Gray Balanced Fund. I would further recommend that you transfer the existing Old Mutual retirement annuity to the new Allan Gray retirement annuity in terms of section 14 of the Pension Funds Act. The benefits of such a consolidation are: We can monitor consolidated performance against your goals No fees payable in respect of the transfer One set of administration fees payable FEES As discussed our on-going financial advice fee is 1% per annum of all your assets managed by ourselves. No initial adviser fee is payable. The on-going fee is calculated annually and is payable monthly. You will notice this fee reflected on the investment statement you will receive periodically from Allan Gray. In addition to the advice fee there is also an administration fee payable. This fee is paid to the administrators of your investment, thus Allan Gray. At present Allan Gray unit trusts provide a manager fee discount equal to the administration fee which means that the administration fee is discounted in total. The Total Expense Ratio of the chosen fund is currently 1.78%. This is not an additional fee paid by the investor but is a measure of the costs incurred in managing the fund as such it is already included in the unit price. NEXT STEPS Once you have indicated acceptance of these financial planning recommendations we will complete all requirements necessary to implement the recommendations as soon as possible. As part of our service offering to you we will be in contact with you twice annually for a review of your financial plan. Given that the financial planning environment is constantly changing and influenced by legislation, the investment environment and your personal circumstances impact directly on your financial plan it is imperative that we ensure the appropriateness of the plan to your needs at all times. Page 27 of 31

28 ANNEXURES (Please note for examination purposes these have not been included) Please find the following attached in the annexures that follow: A copy of the disclosure document presented to you at our initial meeting The calculations/analysis referred to above which form the basis of our recommendations, along with all assumptions used. Investment vehicle descriptions: endowment policy and retirement annuity policy Notes to candidates to consider in such a question: Again these are no one correct answer or correct format in which answers can be presented. The following is a guideline as to what candidates could have considered. Important: the question did not ask for shortcomings but for a detailed analysis of all aspects that should be complied with. In answering such a question, it is imperative that candidates understand the various requirements well and know where the overlap between the FPI Code of Ethics and FAIS General Code of Conduct is. It is further important to reference the various sections that would be mentioned in the answer as to facilitate the assessment of the question. Page 28 of 31

29 General Code of Conduct for Authorised Comments Financial Services Providers and Representatives BN 80 of 2003 ( the General Code ) Part II section 2 General duty of provider Part II section 3 Specific duties of provider section 3(1) (a)(i) (viii) Part III section 4 and 5 Part VI section 7 Information about the Financial Service section 7 (1) (a) and (c) (vii) (xiii) Part VII section 8 Furnishing of Advice: Suitability section 8 (1) (a) Section 8 (1) (b) Section 8 (1) (c) Section 8(1) (d) Section 8 (4)(a) (b) Part VII section 9 Record of advice: Section 9 (1)(a) (d) Section 9(2) Diligence questionable. Is replacement in the interest of the client? If not, comment on this with suitable motivation why this is your opinion The documentation included in the annexures are found to meet this requirement (with regards to representations made and information provided to a client by the provider) The information is compliant with these sections this was assumed in the facts of the case study. The question here to determine is whether the client was placed in a position to make an informed decision It appears that not all disclosures were made to the client comment on which disclosures according to you are not made (a) Requirement not fully met what about risk planning for instance? (b) Full analysis not conducted. (c) Even though it appears that a risk tolerance discussion took place; no discussions took place around cash flow and affordability (d) Not all disclosures with regards to replacements were made. Again, was client placed in a position to make an informed decision? (4)(a)(b) No, only specific needs were addressed-provider needs to bring this to the attention of the client and alert the client of the clear existence of risk to the client as soon as possible. Record of advice not compliant with section 9 of the general code as a brief summary as per (a) was not provided, does not reflect which other financial products were considered. It does through provide a brief explanation of why the product selected is likely to satisfy the clients identified needs and objectives. Requirement met as copy of ROA provided to client Page 29 of 31

30 FPI Code of Ethics and Professional Responsibility ( FPI Code ) Part 1: Principles of conduct 8 Principles Standards of conduct 10 elements Part 2: Financial Planning Practice Standards This part of the FPI Code also refers to the Six-steps of the Financial Planning Process Comments Principles 6 and 8 appears not to be met, this ties in with Part II section 2 of the General Code above These elements serve to direct the member of the FPI in respect of how the principles of conduct must be applied within their conduct towards their clients etc. Students could have discussed any of the ten elements in relation to the facts of the case study. Merely quoting the FPI Code word for word with no application did not suffice Reference to the said six-steps in relation to the case study facts, were acceptable. Merely mentioning what the six-steps are with no application to the case study did not suffice either. *Important to note that the first two steps of the six-step process had already been complied with as per the assumptions provided in the case study (this ties with Part III section 4 and 5 of the General Code) Page 30 of 31

31 Additional notes with aim to assist with preparation of PCE exams: The CFP Professional Competency Exam ( PCE ) is set at an NQF 8 level. It is therefore expected that students should be able to refer to the correct legislation in the correct format. There is no such thing for instance as section 9 of the FAIS that refers to a Record of Advice. A statement like this is grossly and totally incorrect as does not reflect the level of professionalism the Financial Planning Institute of Southern Africa NPC ( the FPI ) require. Correct reference would be, using the same example: Part VII section 9 of the General Code of Conduct for Authorised Financial Services Providers and Representatives ( the General Code ) refers to a Record of advice. Furthermore indicate clearly which legislation you are referring to by quoting in the beginning of your answer that the General Code of Conduct for Authorised Financial Services Providers and Representatives will be referred to as the General Code and the FPI Code of Ethics and Professional Standards will be referred to as the FPI Code. The Financial Advisory and Intermediary Services Act 37 of 2002 will be referred to as the FAIS Act. Do not expect the assessor and/or moderator to make any assumptions on your behalf. You need to state clearly for instance: the record of advice is not compliant with section 9 of the General Code of Conduct for Authorised Financial Services Providers and Representatives ( the General Code ) in that it does not reflect which other financial products were considered. The client was therefore not placed in a position to make an informed decision in terms of section 8(2) of the General Code. Refrain from mentioning merely: Section 9 of the code was not complied with. Why not and which code? Critical evaluation of performance of students Evaluate how questions were answered by students Where marks were lost in general Common trends and tendencies What went well What went poorly Students generally applied the 6 Step planning process to answer the questions or/and merely listed legislative requirements Candidates tended to list the regulatory requirements, however did not apply it to the ROA and Financial Plan provided Candidates generally provided answers that were not required i.e. explaining implementation and review process Some candidates did in fact interpret the question correctly - and subsequently provided answers that were required in terms of analysing the relevant legislation and codes of conduct. Candidates did not interpret the question correctly in terms of what was required, and thus either listed the 6 step planning process or provided a list of applicable legislation Page 31 of 31