The Future of Financial Planning in Ireland

Transcription

1 The Future of Financial Planning in Ireland January 2013 Paul Grimes Principal Chief Executive Financial Planning Standards Board Ireland 1 Topics Definition Macro and Environmental considerations Examples Some thoughts on transitioning to a financial planning business 2

2 Financial Planning Capital accumulation from surplus earnings Use of capital to generate income Succession What type of assets should my clients own? What type of ownership structure(s) should they use? What would happen if there was a break in the earnings supporting this picture? Process of developing strategies to assist clients in managing their financial affairs to meet lifestyle goals

3 Financial Planning Process STEP 1 Establish and define the relationship with the client Step 2 Collect the client s information Step 3 Analyse and assess the client s financial status Step 4 Develop and present financial planning recommendations Step 5 Implement the client s financial plan Step 6 Review the client s situation Analytical Process 1. Map out the current position 2. Define Client s financial and lifestyle goals 3. Determine what resources are available to meet goals 4. Identify and agree client issues 5. Present options 6. Recommend solution Strategic Product 7. Review

4 What is Financial Planning? Every aspect of a client s financial life In a consultative and highly individualised way Complete range of products, services and strategies Individualised series of recommendations Completely tailored to each client Connecting with clients on personal level Way beyond the norm Source: Robert McCann Merrilllynch Including. Lifetime cash-flow modelling Asset/Wealth Management (incl. retirement) Risk assessment and management Tax planning Estate planning Legal advice

5 The financial planning environment Taxation Income Assets Pensions Legislation Social Welfare Economic considerations Sample Case Paul is married to Linda, and they are both aged 40. The couple have two children, Aoife and Aidan, aged 18 and 10, respectively. Paul owns his own company, Raglan Communications, from which he is currently drawing a salary of 100,000 per annum. Linda cares for the children and Paul s mother, and also works part time on an annual salary of 12,000. Paul also owns two investment properties in London and Dublin which provide additional income to the family. Paul s 67 year old mother, Mary, has fallen ill after the death of her husband and requires long term nursing home care. Her nursing home costs will come in at 30,000 per annum and she will be entering the care in the coming weeks. Paul recently sold his mother s home, on her behalf, for net proceeds of 150,000 (after all costs and redeeming any outstanding loans)

6 Client Objectives Plan to retire fully at age 60. They estimate that in retirement they will require an income of 50,000 net in today s values. This requirement will increase with inflation over the next 20 years. Wish to create an education fund to provide for their children s 3 rd level education. Wish to create a fund to provide for the long-term care of Paul s mother. Upon their deaths, wish to bequeath 1 million between the two children Sample Case Balance Sheet as at 31/12/11 Assets Liabilities Paul Linda Joint Combined Paul Linda Joint Combined Non-Financial Assets Primary Residence 500, ,000 Mortgage - - Total 500, ,000 Total - Investment Property Dublin Apartment 150, ,000 Loan 200, ,000 London Apartment 300, ,000 Loan 350, , , , , ,000 Investment Assets Cash 102,190 51, ,285 Business Interest 200, ,000 Share Portfolio 50,000 50,000 Pension Fund 50,000 50, ,285 TOTAL ASSETS 1,403,285 TOTAL LIABILITIES 550,000 Net Worth 853,

7 Cash-Flow Statement Income: Combined Salary 112,000 Deposit Interest 4,500 Child Benefit 1,680 Rental Income Residential Property - London 20,000 Residential Property - Dublin 17,000 Total Rental Income 37,000 Dividends 750 Total Income 155,930 Expenses: Estimated Tax & PRSI 50,135 Property-related loans Residential Property - London 16,100 Residential Property - Dublin 8,200 Other Costs Lifestyle Expenses 42,000 College Fees 8,000 Life Insurance 1,000 Total Expenses 125,435 Net Surplus / (Shortfall) 30,495 Taxable rent = 18, Analysis Nursing Home Annual Shortfall in costs after allowing for S.W. pension = circa. 18,000 Option 1 Use Mary s lump-sum = 7.9 years Lump-sum required in 8 years time = 106,778 Monthly accumulation = 1,097 Option 2 Income from Mary s cash = 8,414 Balance from clients (after tax) = 5,656 / or sinking fund of 100,830 What investment strategy (net of fees)? Tax implications Life Expectancy considerations

8 Analysis Education fund Aidan only Aoife s fees are already being paid from cash-flow Lump-sum required = 37,589 Option 1 = Savings Plan of p.m. Option 2 = Lump-sum investment = 35,457 What investment strategy (net of fees)? Tax implications Analysis Retirement Planning Inflation-adjusted target income = 108,463 (gross) Capital sum required = 2.237m = 4.032m Estimated Future Value of assets = 1.513m Shortfall in assets = 0.724m = 2.518m What investment strategy net of fees? Tax implications Life expectancy Personal Fund Threshold

9 Analysis - Survival Paul Linda Loss of Income on death 100k 12k Net of all expenses 51,400 nil Offset by replacement income 7,600 nil Capital sum required 45 yrs 275k Assets Available 453k (Cash / Life policy / Business) Replacement of cash-flow surplus Analysis - Summary Available resources: Cash flow surplus = 30,495 Cash Reserves = 153,285 Requirements Nursing Home costs lump-sum = = 5,656 p.a. or 100,830 School fees (sinking fund) or lump-sum = = 4,564 per annum, 35,547 Life Insurance = nil Retirement objectives minimum) per annum = 13,322 (as a

10 Other Issues As they are currently structured, Paul and Linda s marginal rate of tax is applied on earnings above 53,800. If the rental income was allocated to Linda (no CGT implications), then the maximum threshold of 65,600 could be applied. This would have the effect of reducing income tax by 2,478 (11,800*41%-20%). This would increase their cash-flow surplus to 32,973. By making Linda a shareholder (>20%) of the company, the couple would be able to avail of two lots of retirement relief on the eventual disposal of the business. The couple are drawing unnecessary income from the business, and paying the highest rates of marginal tax. They enjoy a very healthy cash-flow surplus, however, the surplus is costing circa 30k per annum in income taxes and related levies. This is an unnecessary expense. Into the future, as tax-relief changes minimise the amounts that company owners can accumulate within their pension funds, it may well be appropriate for Linda to become an employee of the company to allow maximisation of contributions to pension funds Impact of recommendations Exisiting Surplus 30,495 Adjustments: Transfer of rental income to Linda 2,163 Income Protection - 2,400 Reduced salary - 30,000 Reduced Tax 15,000 Nursing Home fees - 5,656 Education fees - 4,564 Adjusted Cash-flow position 5,

11 Potential Risks Paul & Linda s retirement plans, and indeed their current lifestyle is very much predicated on the continued success of Paul s company. It would be prudent to transfer personal wealth to other structures such as pension funds and assets in personal names, in order to minimise their financial exposure to the company. If interest rates increase, it will have an adverse impact on the costs of purchasing their properties. That tax rates will increase dramatically in coming years, reducing their disposable income. That tax relief on nursing home costs is altered, thereby making it more expensive to fund the costs out of Paul and Linda s cash-flow What is involved? Detailed cash-flow modelling Capital and Income tax estimation Sinking fund analysis for nursing home and school fee costs Accumulation of assets pre-retirement Decumulation of assets post-retirement Asset Allocation strategy and portfolio construction

12 Typical features in a Financial Plan Current Overview Record the Facts Set out the objectives Tax Calculation Cash Flow Balance Sheet Asset Allocation Summary Typical features in a Financial Plan Risk Profile Protection Investment Retirement Options Estate Planning

13 Typical features in a Financial Plan Identification of Issues/Problems Recommended Strategies Trade -off Analysis Impact of the recommendations Disclaimer /Fee section Sample Financial Plan

14 What are the implications for Business Models Transactional Relationship Interviews 1 to 2 4 to 6 Process driven by. Needs based Objective driven Focused on.. Product Strategy Payment Commissions / Fees Commissions / Fees Business transacted 1/2 Multiple Advice Old Model ADVISERS SUPPORT

15 Professional Services Model FINANCIAL PLANNERS Paraplanners Customer service Compliance Training SUPPORT Technical support Specialised IT Resources a barrier to entry? How does the financial planner get paid? 100% commission Hybrid commission / fee models 100% Fees How is income collected Client writes cheque? Collected from product commissions? Cost to client (VAT considerations) Process of evolution not revolution With or without regulatory influence?

16 Key Success Factors 1. Business Model 2. Charging model 3. Service offering 4. Team Approach Client Service Proposition 1. What are your core services? 2. Offering a comprehensive service or a set of packaged products? 3. When did you last ask your clients what they wanted? 4. When you undertake an annual client review what do you review?

17 The Professional services model Has Five Key components: 1. Fee based/full time recovery no longer working for free 2. Career progression partnership/equity opportunity 3. Team work delivers consistent service 4. Clarity of offering and product allows focus on what you do best 5. Technical expertise and qualifications based it s what our clients expect How many Clients? Segment your client bank Determine your offering Disengage those that do not suit your client service model Watch your cash flows. Disengage systematically (Evolution not revolution) Design your practice around your new client profile

18 Practice Conflicts Information v Advice Responsibility for strategic and tactical Asset Allocation Tax Advice V Regulatory Compliance Holistic Advice V Restricted Advice Payment (Fees V Commission) Product Manufacture V Product Distribution Certified Financial Planner Professionals Numbers in Ireland No. CFP professionals * 250* Growth 0 +31% +35% +25% * Estimates

19 The commodity that clients value most is our knowledge and wisdom Thank You