The following case study series will help you understand how our process works and our financial planning approach.
You will appreciate that we always place your client’s best interests before ours and yours.
NEW INSURANCE POLICIES
Mitch is an accountant. Glenn has been a client for many years. One day, Glenn’s son Gavin asks Mitch if he can help organize some life insurance – Gavin’s partner is pregnant and they need to organize their finances! They saw a financial planner who recommend huge sums insured – and huge premiums to go with them.
As an experienced accountant, Mitch thinks that Gavin probably needs income protection cover and $1 million in life and TPD cover. But because Mitch is an accountant and not a financial planner, he can’t recommend insurances to Gavin directly. Instead, Mitch logs in to our online portal and asks that we organise cover for Gavin. He even suggests the IP and term life/TPD amounts to us. It takes Mitch ten minutes to upload the relevant information into the portal.
We consider Gavin’s situation and agree with Mitch’s estimate of what Gavin needs. We prepare a fully compliant Statement of Advice, which is reviewed by our licencee and an independent lawyer. 24 hours later, Gavin has a fully compliant Statement of Advice, a copy of which has also been given to Mitch as Gavin’s advocate.
Gavin accepts the advice and we use our established system to obtain the cover for Gavin. We CC Mitch in at each step of the process.
Gavin is happy because Mitch has helped him get sensible cover at a sensible price. He will use Mitch to do his accounting and tax from now on. Glenn is happy because his future grandchild is now looked after. He remains a loyal and happy client of Mitch.
Mitch is very happy because he was paid 50% of the commissions paid on the insurance, and he will get 50% of the trailing commissions next year as well. What’s more, he gets the client kudos and there is no risk of losing his client. After all, Gavin and Glenn both see that it was Mitch who organised the solution to their problem.
RISK INSURANCES
Wendy is a schoolteacher who was referred to Mitch by a colleague for whom Mitch rebated the trailing commission on risk insurance premiums. When Mitch meets Wendy, it is obvious that her existing life insurances are inadequate for her purposes. Since the existing life insurances were taken out, Wendy has separated from her husband and has acquired a large mortgage on the new home in which she lives with her three children.
Wendy needs at least $250,000 of additional term life insurance. Because Mitch is not a financial planner, he is not allowed to make any recommendations about cover directly to Wendy.
However, Mitch is allowed to act as Wendy’s advocate. He logs onto our website and completes the fact-finder, and lets us know that it looks like Wendy needs extra cover.
We review the situation and agree that $650,000 is an appropriate sum insured. We identify an insurer who can provide that level of cover for little more than Wendy’s existing premium. We prepare a fully compliant statement of advice and undertake all of the administrative work to assist Wendy to have the new cover in place. This includes ensuring that there are no health issues that would make changing insurer a risky thing to do.
The first year premium for Wendy’s insurances is $1400. The insurer pays a commission of $1540 for this policy. Mitch receives 50% of this as his advocacy fee. This fee is fully disclosed in a statement of advice to Wendy. In future years, the insurer will pay an annual commission of around 10% of Wendy’s annual premium. Mitch gets his 50% every time we do.
Wendy is reassured that she now has a higher level of insurance without any real impact on her daily cash flow – she is paying virtually the same premium as she had been paying previously.
Wendy is concerned that her former husband is also under-insured given their changed circumstances. After all, if something happens to him, she needs to raise the kids alone. Happily, their separation was amicable, and Wendy tells her former husband about Mitch’s service. He and Mitch have an appointment next week…
SMSF INVESTMENT STRATEGY
Colin is another one of Mitch’s clients. Last year, Colin established a self managed superannuation fund with the intention of making a property purchase. Mitch was very worried, because Colin had been to a property seminar and was contemplating buying and of the plan apartment through his super fund. Happily, the property promoters have gone out of business, but Colin now has a self managed super fund holding approximately $150,000 in cash. Colin is 51 and single. He is self-employed, and could afford to make the maximum super contributions each year. While some would say that the balance in his fund is low for a self managed superannuation fund, Colin likes the idea of managing his own super and will continue to add to the fund substantially in the next few years.
Mitch got in touch with us and asked if we could help with an investment strategy for Colin’s fund. We were more than happy to help.
Colin is at least 10 years away from retirement, and so a long-term investment approach makes sense in his case. He is a cautious man, and so we agreed on a balanced investment strategy where between 70 and 80% of his superannuation assets are invested into growth assets and the balance is held in interest-bearing cash accounts.
Our advice to Colin centred on two things. Firstly, we recommended that he establish a direct debit from his business account to his self-managed super fund’s cash management account for $2083 per month. Over a full financial year, Colin will make total contributions of $25,000. This is the limit for concessional contributions that Colin can make. Following our advice, Colin will have obtained the maximum tax benefit available to him through superannuation.
Secondly, we recommended that he commence a strategy of purchasing index tracking ETF’s in the name of the fund. Index tracking ETF’s provide an investment return equal to the market average each year. However, index tracking ETF’s are a very low cost way of managing investments, and this means that the net investment return after costs are factored in, is better than the market average each year.
Index tracking ETF’s provide a simple way of obtaining a diversified investment portfolio. Diversification substantially reduces the risk of the share market investment – especially the specific risk that she’s in individual companies represents.
But specific risk is not the only risk of a share market investment. Many investment advisers ignore timing risk, which is the risk that a share market investment will be made just before the market makes one of its frequent downturns in price. In the short-term, the share market is usually volatile and there is always a good chance that the next movement in share prices will be down. If clients invest just before one of these frequent downturns, their advisor can look forward to a very unhappy client – indeed, the advisor can often look forward to a very unhappy ex-client.
Colin is currently holding $150,000 in cash and he anticipates making contributions of $25,000 in the next financial year. After tax, these contributions will add another $20,000 or so to the amount available to invest. Of this $170,000, we recommended that Colin keep 25% in a defensive cash investment and invest the remaining $127,500 in the index tracking ETF. However, the last thing we want is for Colin to make this investment all at once. So the advice to Colin was that he should invest smaller amounts of $10,625 each month for the next 12 months. This allows Colin to avoid making a large investment just before prices turn down – in fact, if prices do fall this will be good news for Colin because he will be making his next purchase at a lower price. Remember, low prices are good when you’re a buyer.
This is a simple investment strategy that Colin understands and sees the wisdom in. This investment strategy will do at least as well as the market average and so the chances of an unhappy Colin blaming his advisers for a poor investment result is low. Colin’s advisers can look forward to a happy client for many years to come.
TRANSFER OF SERVICING RIGHTS
Mitch has another client, Andrew. Andrew has been with Mitch for the last five years. He is a teacher and Mitch helps him to lodge a fairly simple tax return each year.
Andrew uses a financial planner, and every time he sees Mitch he complains about the planner. In his most recent appointment with Mitch, Andrew complained that his financial planner had simply not returned his phone calls over a period of several weeks. Andrew is annoyed that the financial planner is receiving a trailing commission on risk insurances that were put in place for both Andrew and his wife several years ago. The annual premium for these policies is $4000, and the adviser is receiving more than $400 in annual payments.
Mitch explains to Andrew that, If Andrew transfers the servicing rights to his policies to Financial Planning Advocate, Mitch will receive 50% of the annual commission . Mitch then undertakes to rebate this trailing commission to Andrew.
Andrew thinks this is a great deal, and the next day speaks very highly of Mitch’s services in the staff room at work. In the next week, three of Andrew’s colleagues make contact and engage Mitch as their tax agent. We organise a transfer of servicing rights for each of these clients. We give Mitch 50% of these payments, and he agrees to rebate them to his clients for as long as they remain his tax clients. Mitch also identifies that one of his new clients needs to increase her sum insured. We discuss Wendy’s case below.
Being a financial planning advocate has gained Mitch three more accounting clients as well as a financial planning advocacy fee for one of those clients.
