Professional Documents
Culture Documents
Wealth Creation and Protection: Case Scenario of Mr. and Mrs. Wang
Senthur Kugathasan
RMIT s3291172
Introduction
Mr. and Mrs. Wang, both 46 years of age, are looking to grow your wealth in the next ten
years. You have two dependents, Alex and Caitlin Wang, both 21 years of age. You would wish
to do so by investing in a fund that would enable you achieve your goals and objectives in terms
of wealth creation and protection. Your cash flow and other financial statements show a healthy
financial position in which you have a net asset value of $ and a surplus income of $24,116.
Also, Arthur Wang has a risk insurance policy for income protection of $150,000 that
commenced in 2002 and was last reviewed in 2010. Your wife, Susie Wang, on the other hand,
has a risk insurance policy on trauma that commenced in 2004 and was last reviewed in 2009.
You both have a will that was last reviewed in 2008 and that has no enduring power of attorney
and no funeral plans set out in it. Arthur has an Easy-super currently valued at $300,000 to which
his employer contributes $ 19,000 while Susie's Easy-super is currently valued at $ 50,000 to
which her employer contributes $ 2,850.
Client Assessment
Table 1: Money-Smart Calculations
Item
Amount ($)
Period (years)
Investment earnings (%)
Management Costs (% p.a.)
Add Contributions (%)
Advice Fee (% p.a.)
Interest rate (%)
Starting Balance ($)
Monthly contribution
Managed Fund
200,000
10
6.58
0.90
0
0
-
Savings
50,000
10
3.25
200
350.28
returns provided that eventually they may benefit from higher returns. The asset allocation for
such a portfolio is largely on growth assets such as shares (83%). Capital invested is never
guaranteed, and the investment may experience large fluctuations and negative returns from year
to year. There exists a significant risk of a portfolio decreasing in value in the short term, but, this
is drastically reduced for investments over the recommended minimum investment period of
seven years. In these regards, you are well over the minimum investment term by three years.
This profile means that an your allocation over a period not less than seven years should
be as follows:
5 % Australian Cash
8% Australian Fixed Interest
4% International fixed interest
The sum of all defensive assets comes to 17% of the total investment. The remaining
receive a positive return and a 15.1% probability that in any given year the fund will record a
negative return. The range of returns for such a portfolio in 1 year is between -9.8 % and 30.5 %.
In five years, it would be between -0.1 % and 17.9, and in 10 years it would have improved to
between 2.45 and 15.0 %.
Forecasting investment returns for this portfolio would give a portfolio target return of
inflation + 5.5 %' and a forecast average return over the long term at 8.9%. If you hypothetically
were to invest $ 100,000 for ten years, you would receive a low of $ 149,996, a high of $
341,983 and an average of $ 233,653
Recommendations
4,403.36
$5000
13,212.64
100,000
86,787.36
The taxation reduction objective is achievable if you are willing to open a discretionary
family trust and name your children beneficiaries of the said trust. In this way your children get
the income and capital the trust owns and since they are of a lower tax bracket, they get to be
charged lower rates than what the clients would have been charged. A bigger portion of the
income may be distributed to beneficiaries on a lower tax regime(as is in the case of your
children). This can also be applied to those in the family without another income source to utilize
their $ 18,200 tax-free threshold and potentially the low-income tax offset
You can acquire a new car every three years without drastically affecting your income.
We would, however, recommend that as opposed to leasing you look to buy a family car. This
may be expensive in the short run but will eventually increase your surplus income to allow you
invest in other goals. The long run benefit of buying as opposed to leasing is that you can sell the
car at almost the same price and acquire a new one without the pains if recurrent expenses that
come with a lease.
The annual charitable donation goal of $ 5,000 is only feasible if you are willing to
sacrifice this amount from your surplus income. There is, however, another way of acquiring this
money without digging into the surplus income, by using the tax refunds to fund this goal.
Although this may not be enough it, it reduces the burden of the objective substantially.
You can shop around for more favorable interest rates in the market for your savings plan
for your children to go off to university in 10 years time at the cost of $ 5,000. Shopping for
better interest rates means you pay less monthly contributions to the savings plan or pay the
initially recommended monthly contribution in table 1 ($ 350.28) and achieve this goal in a
shorter period. If you decide to go with the tabulated interest rate then it would mean that in your
first year you will have to reduce yout charitable contribution by about $4,400 (table 2). This will
bring down the amount required for gearing to about $80,000 which is more manageable in terms
of repayment given your cash flow.
Product
As your adviser, I would recommend the Vanguard Life Strategy Growth Fund (VLSGF).
The investment strategy and investment return objective for this product is such that it tracks
weighted average returns of various indices of the underlying funds in which it invests, in
proportion to the Strategic Asset Allocation (SAA), before taking into account fees, expenses and
tax.
The investment fund diversifies it units in the following underlying funds:
have been or are expected to be in theindices of the underlying funds or in different or other
funds.
Table 3: Strategic asset allocation
Income assets
Australian fixed interest
International government
SAA (%)
12
12
Range (%)
10 14
10 - 14
bonds (hedged)
International credit securities
48
(hedged)
Total:
Growth assets
Australian property securities
International property
securities (hedged)
Australian shares
International shares
International small companies
Emerging markets shares
Total:
30
28 32
4
4
26
26
31
24
3.5
3.5
70
29 33
22 26
1.5 - 5.5
1.5 - 5.5
68 72
The minimum suggested time frame for this portfolio is seven years with a high-risk
level. The potential for higher returns than lower risk investments; however, there is a higher
potential for below-average return and some capital loss over the investment time horizon
This investment portfolio package is best suited for you as you are considered buy and hold
investors seeking long-term capital growth, but requiring some diversification benefits of fixed
income to reduce volatility.
Asset allocation for this product will be as follows:
The current surplus income is $ 24,116 that can be invested into the fund. If we are to
invest the whole sum, then the best asset allocation strategy would be that of 65% shares ($
15,193), 14% bonds ($ 3,617) and 21% cash ($ 5,306). This proposal is based on your age (46
years), current asset ($ 24,116), a marginal tax rate of 47 % (highest marginal rate for individuals
in Australia). Taking into consideration your risk tolerance (growth) the asset allocation strategy
is calculated with a risk tolerance level 7 (out of 10).
Consequently, we have considered the expected change in surplus income that would
result from Susie taking up the full-time job next year, resulting in a $ 30,000 increase in surplus
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income. Fully investing this extra amount would not change the asset allocation percentages in
any way. We recommendation that if you are to invest your total surplus income into the
suggested product, do so in the provided proportions.
However if we are to put into consideration all your objectives and goals, then as earlier
suggested, you would need to borrow cash to invest in the product and this will bring your
allocation to the recommended growth risk profile client asset allocation.
Gearing
Gearing is only appropriate for growth based investment such as shares and property and
as such should be viewed as a long-term investment strategy (7 to 10 years time frame). In the
application of gearing you will need to be able to retain your investment (and maintain the set
out loan repayment schedules) during potential short-term market falls in order to obtain the
benefits of the predicted long-term growth.
Negative gearing is a strategy where the interest payable on borrowed funds and any
other expenses incurred to derive that income is in excess of the net income received from the
investment. This kind of gearing is appropriate for you as you have surplus income over and
above your daily living expenses to meet the shortfalls of the investment. Your risk profile also
supports this kind of gearing;
Your risk profile is assertive, and you are prepared to accept investment volatility
You both have a strong and secure cash flow that is protected by appropriate insurance
policies.
You are on a high individual marginal tax rate, 47%
Your investment time frame is ten years, greater than the recommended minimum of
seven years
On taking up this strategy you will be able to enjoy the following benefits that accrue:
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1. Potential for increased capital gains and diversification: you will be able to increase the
size of your investor portfolio by being able to purchase additional investments with
borrowed funds.
2. Potential for increased investment diversification: By increasing the number of securities
in your portfolio, the greater portfolio diversification may reduce the volatility of the
overall investment portfolio.
3. Taxation: Although this should not be the main reason for opting for an investment
strategy, gearing will offer you some additional tax benefits. Under the current
legislation, interest payment on the money borrowed to invest in income producing
investment, plus the ongoing expenses, can be claimed as deductions against your taxable
income. With this strategy, you may be able to pay the interest cost for up to 12 months in
advance. Given that your marginal tax rate is high, you are bound to make greater tax
savings from your tax deductions. Investment income predominantly sourced from
Australian investment may provide you with an additional benefit through the value of
any franking credit.
There are however several risks that come with the high risk, high return investment strategy that
is gearing. The risks include:
Negative gearing compounds the risk associated with standard gearing. It further reduces
your cash flow since the income from investment does not necessarily cover the interest
costs that may result in a reduction of both cash flow and the ability to service the interest
cost. In simpler terms, negative gearing means that your expenditure on the fund increase
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though that gearing may increase capital gains in a well-performing market, it can also
gearing is applied to buy more investment, you may have more tax to pay when you sell.
Interest rate fluctuations: if the income from investment does not change, but interest
rates on the borrowed funds rise, you will incur additional costs that will need to be
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Loan defaulting: a default on your loan interest repayment may mean that you may be
compelled by the lender to make payments, penalties imposed for late payments or be
strategy to have provided the significant benefits hoped for by the investor.
Marginal lending: with these kinds of plans, marginal calls may be made if the value of
the portfolio reduces below particular set limits.
Owing to the risks attached to gearing (and especially negative gearing) this report would
highly recommend that you do not take up negative gearing as an investment strategy. This
statement does not however mean that you may not consider gearing as a strategy in your wealth
creation goal. Taking into consideration the fact that Susie anticipates a $30,000 increase in
income in a year's time, you may at this point take up gearing as a strategy to increase your
wealth in the investment time horizon (ten years).
One of your key objectives is to reduce taxation and make charitable contribution
annually. A negative gearing strategy would pose a risk to these two goals by increasing the
amount of taxes and other market-related levies to be charged on invested amount and by
reducing cash flow.
In conclusion, to meet all your goals and objectives, you will have to take up some form
of gearing. We will, however recommend that you consider taking up standard gearing strategy.
The standard strategy has alower risk on invested amount and retains much of your cash flows.
With the standard gearing, payments are paid as would a normal personal loan. Payments of this
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kind are much easily managed and can be attached to your individual incomes. Given that the
gap in your investment requirement is large and you still need to satisfy all your goals, you will
have to cushion this risk by gearing your fund to allow more income to be allocated to the
remaining goals.
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References
Bank Rate. (2015). Asset Allocation Calculator. Retrieved July 10, 2015, from Bank Rate:
http://www.bankrate.com/calculators/retirement/asset-allocation.aspx
Direct Invest. (2014). Investment risk profile. Retrieved July 4, 2015, from 2020 Direct Invest:
https://www.2020directinvest.com.au/investor-education/risk-profiles.aspx
Money Smart. (2015). Managed Funds fee calculator. Retrieved July 3, 2015, from Money
Smart: https://www.moneysmart.gov.au/tools-and-resources/calculators-and-apps/managedfunds-fee-calculator
Money Smart. (2015). Savings goal calculator. Retrieved July 3, 2015, from Money Smart:
https://www.moneysmart.gov.au/tools-and-resources/calculators-and-apps/savings-goalscalculator
Smart Investor. (2014, January 28). Six tips for paying less tax. Retrieved July 4, 2015, from
Smart Investor: http://www.afrsmartinvestor.com.au/p/marketintelligence/six_tips_for_paying_less_tax_qeA3ffqoPOJ9DFs3Ki0MbN
Vanguard. (2014, April 8). Vanguard Investor Funds. Vanguard Investor Funds: Supplementary
Product Disclosure Statement. Southbank, Victoria, Australia.
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Appendices
Russell and Vanguard
Below is a comparison table for two recommended products. This table shows details of
the two products including their individual pros and cons
Table 4: Russell and Vanguard product comparison
Item
Cost
Russell
The fund has a management cost that
Vanguard
The major cost under this product is the
International Fund
0.85% p.a. for all other funds
17
Risk
financial advice.
The fund remains vulnerable to the
experienced:
following risks:
risk
Currency risk
Performance fee risk
Emerging markets risk
Short-selling risk
Leverage or borrowing risk
Alternative strategies risk
Securities lending risk
Credit risk
Political risk
Underlying funds absence of
Market risk
Derivative risk
Counterparty/credit risk
Currency risk
Regulatory risk
Manager risk
Fund risk and
Other operational risks (mostly
those that are not within Vanguard's
control such as war, fire, and civil
disturbance)
Benefit
regulatory oversight
The major benefit accrued from using This fund provides the following benefits:
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to Russell.