Notes and instructions (remove before use) Sample Simple SOA Invest in debt reduction and residential property drafted by Terry McMaster This one deals with buying a residential property, with a tax twist connected to paying off part of a home loan and borrowing back the full amount of the new property. Again, its minimalist, and you should feel free to add to it as you see fit. This SOA springs from a discussion with an advisor regarding the mechanics of advising clients on residential property.
LIMITED SCOPE STATEMENT OF ADVICE ON INVESTING IN HOME LOAN REPAYMENTS AND BUYING RESIDENTIAL PROPERTY Prepared For: IMA WINNER Growth Investor DATE PREPARED: 6 AUGUST 2012 PROVIDED BY: IMA GOODADVISOR Authorised Representative No. 999999 IMA GOODADVISOR PTY LTD ABN 55 356 687 023 10 FIDUCIARY DUTY WAY CLIENTCOMESFIRST WA 6042 Tel: (08) 9123 4567 Email: ima@goodadviser.com.au Authorised Representative of: Dover Financial Advisers Pty Ltd AFS License No. 307248 71 Tulip Street, Cheltenham Victoria 3192
Scope of this statement of advice SOA and summary of advice This SOA confirms the advice provided at our meeting and contains the information you need to decide whether to rely on our advice. This is a limited purpose SOA and only covers the advice provided at our meeting. It does not discuss any other matter. This SOA discusses the investment of your recent inheritance of $300,000 and how you should invest this amount. It also discusses the purchase of a Melbourne residential property as a long term investment and the logistics and funding of this investment. Financial services guide FSG A FSG setting out the services we offer, our fees and the complaint process was provided to you at our meeting. Let me know if you need another copy. Your financial profile Your financial profile is as follows: Your net assets Home $800,000 Superannuation HESTA $326,000 Recent inheritance On deposit at 4% $300,000 Debt NAB home loan $400,000 Net Assets $1,226,000 Other relevant matters Age 43 Health Good Marital status Single Dependants None Income $90,000 a year Occupation Accountant Your risk profile We discussed the concepts of return and risk and you originally indicated that you are a growth investor, and in particular you are interested in investing in residential real estate using reasonable levels of debt. We considered this and, in summary, it is reasonable for your investment strategy should be orientated to growth assets such as residential real estate provided you understand and accept that real estate has a twenty year time frame and it is possible that it may fall in value in the short term. Economic theory and economic history predict it is probable, but not certain, that growth investments such as shares and residential will outperform bank deposits and similar low risk investments over the long term, say twenty years. This is the time frame we have in mind for you now. Page 3
Proposed residential property strategy We recommend you: (i) pay the $300,000 inheritance off your NAB home loan; (ii) borrow $600,000 from the NAB to buy a new investment property in, say, Glen Waverly in Melbourne or a similarly typical suburb; (iii) arrange for the NAB investment loan to be an interest only loan; (iv) use all available cash to pay off the remaining NAB home loan as fast as possible; and (v) do not pay any principal off the NAB investment loan until the NAB home loan is repaid in full, but make sure the interest on the NAB investment loan is paid each year. (vi) If you do this the advantages are: (vii) you acquire a sound long term property investment in Melbourne where: a. there is a shortage of residential property; b. the population is growing by about 100,000 new arrivals each year, most of whom are well educated and/or well shod and very home aspirational; c. stable rents can be achieved at a yield of about 3.2% a year; d. long term capital gains are expected; and (viii) as a secondary advantage, you minimise expensive non-deductible debt by paying off your $400,000 NAB home loan as fast as possible compared to the alternative of investing your inheritance directly in a new property. How can we help you We can help you by: (i) identifying a short list of appropriate properties, having regard to expected future capital gains; (ii) ascertaining recent comparable sales using the REIV data base, which is available to Dover Financial Advisers, to confirm that the price is reasonable and in line with market trends; (iii) organising pre-purchase checks, including an Archicentre Report, as needed; (iv) attending the auction to bid on your behalf; (v) liasing with the NAB for the repayment of the old home loan and the new investment loan; (vi) liaising with a conveyancer on your behalf; (vii) placing the property with an appropriate managing agent; (viii) engaging a quantity surveyor to prepare a depreciation report; (vii) liaising with your accountant to make sure the tax benefits are achieved including an adjustment to your pay as you go withholding amounts; and (ix) generally making sure all goes smoothly with the purchase and the finance. Page 4
Corporations Act switching disclosure rules The Corporations Act requires additional information be disclosed if we recommend one financial product be replaced in full or part by another financial product. We have recommended that you dispose of a bank deposit and use the proceeds to pay off your home loan. Accordingly we confirm that: 1) the bank deposit was considered and its characteristics compared to repaying the home loan; 2) a number of alternative products were considered and we concluded repaying the home loan was the best alternative; 3) there are no costs other than those set out below under the heading Commissions and other costs ; 4) no significant potential benefits will be lost; and 5) there are no significant adverse consequences. Best interests duty and the appropriateness of our advice I/we believe this advice is in your best interests and appropriate to your circumstances, in that: i. it is fit for its purpose and is likely to satisfy your relevant circumstances and financial objectives; and ii. is likely to put you in a better position, according to the standard of a reasonable advice provider. If for any reason your are concerned that this advice is not in your best interests or is not appropriate to your circumstances and financial objectives you should not act on this advice and you should inform me/us of your concerns in writing immediately. Why is our advice appropriate to you and why it is in your best interests? Our advice is appropriate to you because investing in Melbourne residential property is a fundamentally sound strategy and it is consistent with your expressed preferences and conservative risk profile. The tax benefits, estimated to be about $8,000 a year, create an extra effective return and relieve your relatively high marginal tax rate of 40% plus Medicare Levy. You are employed as an accountant and are aware of how gearing works, and that a reverse gear is triggered if property values fall, ie your losses are increased. You have above average wealth, a reasonably high income and, at age 43, can recover from any short term drop in value. By making sure debt is managed sensibly and looking forward over a 20 year period risk lowered and this strategy emerges as a sensible strategy likely to produce sound after tax returns over the relevant period, in line with Melbourne property prices generally. Engaging us to manage the process keeps emotion and stress out of the equation and helps make sure you buy well and not above the market. Page 5
Property is not a financial product Property, including residential real estate is not a financial product and is not required to be provided in statement of advice format. However, we have set our advice out in statement of advice format to be consistent with our earlier advice on superannuation, and as part of our good practice policy. Commissions and other costs Our once off fee for attending the meeting and preparing this SOA is $500. If you engage us to implement the advice our fee will be in the range $5,000 to $6,000 based on the hour required to do the work, calculated at $150 an hour. Capacity in which advice is provided Dover Financial Advisers Pty Ltd ( Dover ) ABN 87 112 139 321 is the holder of an Australian Financial Services License AFSL 307248. Dover is located at 71 Tulip Street, Cheltenham VIC 3192. Ima Goodadvisor Pty Ltd ABN 55 356 687 023 and Ima Goodadvisor are authorised representative of Dover. Financial product advice is provided by Ima Goodadvisor in its capacity as an authorised representative of Dover Financial Advisers Pty Ltd and not in any other capacity. Ima Goodadvisor is the principal of Ima Goodadvisor Pty Ltd and also an individual authorised representative of Dover Financial Advisers Pty Ltd. Ima Goodadvisor is authorised to provide advice on financial planning, superannuation, managed investments, securities, self-managed superannuation funds, and personal risk insurance. The Corporations Act disclosure requirements: incorporation by reference The Corporations Act and good practice principles require us to disclose a number of matters that may impact your decision to act on our advice and your understanding of our advice. Paragraph 163 of ASIC s Regulatory Guide 175 (RG 175.163) allows us to incorporate these matters into this SOA by reference, in this case through this hyper text link: Additional materials incorporated into this SOA. We recommend you read this content. A copy of this information was provided to you at our meeting as part of our FSG and an additional copy is available on request. The next step You should read this SOA carefully and contact us if anything is not clear or requires further explanation. There is no problem with another meeting: just let us know. If you are satisfied with our advice and wish to proceed, please sign the client declaration and return it to us and we will implement our advice for you. Page 6
Client declaration I have received a Financial Services Guide, all documents incorporated into this SOA by reference and copies of all PDSs referred to in this SOA. I have read this SOA and I understand its content and accept its recommendations. I understand that comments on future performances are only a guide and no guarantee is given regarding future investment performance. I authorise my Adviser and Licensee to provide my personal details to the financial product providers. Signature Name of client Date Adviser declaration I declare that this Statement of Advice is an accurate and complete record of my advice. I declare that I only provided advice on products for which I am authorised to advise on and that these products are appropriate to my client. Signature Name of Advisor Date Page 7