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General Instructions

Read the case about Alexander Landon and Julia Cane that reflects an initial meeting with the couple who discuss their past financial issues as well as what they have planned for the future which includes a marriage. Following the case you will be asked to answer questions about the couples financial situation and be expected to relate it to a real world situation where you deal with a clients financial planning needs.

Format

The questions in this activity and on the exam will relate to the following components of a financial plan:

1. Review of Current Situation and Objectives

a. Family Demographics

b. Financial Goals

c. Overview of Current Finances

d. Investor Profile

e. Other Pertinent Financial Data

f. Potential Gaps

2. Financial Management Analysis

3. Retirement Planning Analysis

4. Risk Planning/Management Analysis

5. Tax Planning Analysis

6. Asset Management Analysis

7. Estate Planning Analysis

8. Recommendations and Implementation Strategies

Mathematical Calculations

As an advisor it is important that you have a good understanding of financial math and the use of

financial calculators to create accurate client advice. In this activity as with the exam it is required to

show the steps taken to arrive at conclusions.

APPLIED FINANCIAL PLANNING CERTIFICATION EXAMINATION

Case Scenario: Alexander Landon and Julia Cane

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Case Scenario: Alexander Landon and Julia Cane

Alexander Landon and Julia Cane have just concluded their first meeting with their financial advisor.

There is a lot of work to be done before they meet again next week.

Background

Alexander is 45 years old and a partner in a small business employing 10 people. The company has been

in existence for 12 years and offers maintenance contracts in the field of industrial ventilation. He and

his partner have funded the business rapid growth over the past few years by leaving earnings in the

business and advancing additional cash as required. Over the past year he drew a salary $92,750 (gross

salary, calculated on $68,500 net Ontario rates) from the partnership. Alexander expects that the he'll

be able to increase his drawings to keep up with the cost of living (inflation) going forward. By retaining

some earnings in the business, Alexander feels his partnership interest could grow at approximately 7%

per year - in line with his business' projected growth rate and his economic and industry outlook.

Alexander recently took out a $60,000 mortgage1 on his house to come up with his portion of a major

capital injection because he didnt want to cash in any of his investments. His deposits are locked in and

his mutual fund, which he purchased 6 months ago, is losing money. He knew if he sold units in the fund

now he would have a capital loss and he doesnt have any capital gains this year to offset them. Instead,

he is thinking of transferring these mutual fund units into an RRSP. Alexander doesnt have any firm

retirement plans and always presumed that his business would be the source of his retirement income,

but he has become concerned with the high level of taxes that he pays and is attracted by the tax refund

that an RRSP would give him. He has also heard that a universal life insurance policy is just as good for

retirement savings as an RRSP and plans to look into it.

With the rapid growth in their business, Alexanders partner has been pushing to incorporate the

partnership, but Alexander cant see any advantages in doing so. Incorporation is a costly exercise and

hed rather keep the business more personal. He hopes that his elder son, Alexander Jr., will join the

company when he graduates from community college with an engineering diploma in two years. The

firm has won so many new contracts in the last year that it can hardly keep up with demand and

qualified personnel are hard to find.

Julia, 42, is a part-time municipal librarian earning $38,000 before deductions with East Yorkton County. She inherited two historic properties from her parents several years ago in an up-beat neighbourhood and spends much of her spare time managing them. She handles all the maintenance and small repairs on the properties herself, even dangling from a rope tied to the roof of the Victorian brownstone last summer in order to paint the gingerbread cornice. Her philosophy has been to keep the buildings in top shape by reinvesting the cash flow and to steadily pay down the mortgage, so that when she retires in 18 years the buildings will provide her with a kind of retirement pension. Rents have risen steadily over

1 At 6%, amortization of 20 years

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the past 5 years, which would partially explain why her tax bill on net rental income has been rising. But

it still puzzles Julia as to why she has fewer and fewer deductible expenses each year. To keep her tax

bill down, she decided to charge her time as an operating expense and to take the maximum capital cost

allowance permitted by CRA.

Alexanders divorce from his first wife was made final 12 months ago. The courts ordered that he pay his

former wife $1,000 a month in spousal support payments for a 24-month period and a substantial

divorce settlement. He has paid most of the settlement, but knows that he must come up with the

remaining $37,500 very soon. He also pays $1,500 a month in child support for his younger son, Jack,

who just turned 5, and his 14 year old daughter, Cara. His family has moved back to the small town

where he and his wife were married 20 ago. Alexander has kept the former family home and expects

that Julia will move in after their marriage next month. One of the problems in their marriage had been

his ex-wifes recklessness with money and, while Alexander feels that she is a great mother, he wants to

ensure that should he die she never touches any of the money he leaves his children.

Julia was widowed 3 years ago and has one child of 24. Kelly works for a small courier company where

she earns the minimum wage. Julia worries about her daughters future she abandoned university

last year and now appears to waste what little money she has on visits to the casino. Kelly persuaded

Julia to co-sign her apartment lease and credit cards as guarantor. Julia felt this was a better alternative

to having Kelly rent one of her own apartments. Alexander doesnt get along well with Kelly and voiced

his criticism quite openly when she dropped out of university. It started him thinking about his own

childrens education. Although he hasnt started saving yet, hes determined to send his 2 younger

children to university, all expenses paid. When questioned further, he thought this would cost about

$18,000 each year for a 4-year undergraduate degree starting at age 19. He made it very clear, however,

that these funds must go toward their education or he wants his investment back.

Julias husband died with no insurance. While she was able to support herself well enough by living

modestly, she never wants to feel that insecure again. Julia favours a conservative approach where

financial affairs are concerned, including savings and investments. Along with the rental properties, she

inherited a small investment portfolio from her parents and has added to it over the years. She invests

her money in short-term GICs, but is disappointed with the low interest rate they pay. A treasury bill she

had purchased 6 months ago for $49,580 recently matured at $50,000. Shes not sure what return she

earned, but thinks it must have been even less than the rates she is currently earning on her deposits.

She would like to earn a higher return on her investments, but doesnt know where to start, so has left

the Treasury bill proceeds un-invested for the time being.

East Yorkton Country offers a benefits package that includes life, disability and health insurance, as well as a defined contribution pension plan. Julia has life insurance coverage of 4 times her salary ($38,000 of coverage is free, the balance costs her $250 a year in premiums). Her daughter is named as beneficiary in the event of Julias death. The municipality also offers a weekly indemnity plan at full salary lasting for 6 months, at which point long-term disability coverage would apply that would pay 2/3 of her gross

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income to age 65 (or retirement). This coverage is not indexed to inflation and premiums are paid by her employer, but treated as a taxable benefit to Julia. The policy covers total disability under a own occupation clause for two years, with an any occupation clause applied thereafter. Julias group health plan covers 80% of prescription drug costs in excess of a pre-determined deductible, $200 of eye glasses every two years, and 50% of dental work to a maximum of $2,000 per person. The municipality has matched Julias $2,500 a year contribution to her pension plan for the last 5 years, as they did the $1,500 contribution she made for the 5 years prior to that. All contributions are invested in long-term Government of Canada and provincial bonds. The average growth rate on these combined contributions has been 5% per year. Alexander and Julia are still young and are currently focused on their short-term financial needs.

However, they do realize that they need to start thinking more about retirement. Julia feels that her

pension plan is well run and assumes that she'll have a good sized pension available by the time she is

60 years old. Alexander loves working with his business, but he knows that the long hours will eventually

catch up with him. He plans on transitioning the business around the same time that Julia would retire

and begin receiving pension payments. He hopes that Alexander Jr. will follow in his footsteps and be up

to the task of managing the business by then. They figure that once their debts are paid off and they

don't need to save, they could live on 70% of their current income (adjusted for cost of living increases).

They both don't want to rely on any government programs in retirement as they are not sure they will

still be in place when they retire. Any additional income could be considered a windfall and could help

with their estate or be donated to charity. Both Alexander and Julia are healthy and they see no reason

why they couldn't enjoy a long, happy and healthy retirement together.

Alexanders life insurance coverage is private a $150,000 term-to-100 policy he purchased 15 years

ago when Alexander Jr. was 3 years old. Alexander hates paying insurance premiums and has reduced

his house and truck coverage to the minimum. His partner is more conservative and insisted they buy a

small-business package that covers their business assets and liability.

Several years ago, Alexander purchased a somewhat run down vacation cottage for $5,000 that is a two-

hour drive from the city. Until his divorce, he and the family vacationed there regularly. Now that the

children will probably not use it any longer, he plans to sell it to his brother for one dollar. He feels this is

a good way to get around the tax problems and legally transfer ownership to his brother. It needs a lot

of fixing up and Alexander just doesnt have the time. His brother is a carpenter by trade and is thrilled

by the challenge. Alexander recently cancelled the insurance on the cottage because he doesnt expect

to use it anymore.

Prepare Alexander and Julias financial plan. In view of their pending marriage, expected to cost

$25,000, they have asked you to treat them as a married couple. Alexander intends to make all his

assets joint with Julia once they marry so that she can claim all the investment income. He has also

asked you whether he should hold onto his mutual fund. If its done no better than average, he doesnt

think he wants to keep it.

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Alexander Landon and Julia Cane Cash Flow Information

Alexander Julie

Net income, after all deductions and taxes Employment income $26,600 Partnership drawings $68,500 Net rental income

2 0

Investment income 1,750 1,830 Expenses Personal living expenses (excluding mortgage, rent of $7,800 a year and support payments) 50,000 21,000

2 Gross rental income is $46,800 a year.

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Net Worth Information

Alexander Julia Personal bank accounts $7,200 $52,700 GICs

3 - Julia 55,000

GICs4 - Alexander 30,000

Saxon Equity Mutual Fund5 204,250

Partnership interest6 305,900

Rental properties7 425,700

House8 175,600

Furnishings and household9 $21,000 $12,000

Vacation cottage10

15,000 Jewelry

11 10,300

Automobiles12

20,100 7,400 Personal credit cards 18,650 0 Mortgage on rental units

13 187,645

Assumptions

Inflation: 2%

Real Return Rates

o Liquid Assets (Cash & Equivalent) 0%

o Fixed Income 2%

o Equity 5%

o Alexander's business 5%

3 Face value. Original 180-day maturity, yielding 2%. 45 days remaining.

Face value. Original five-year maturity, yielding 4.0%, compounded semi-annually. 4 years, 45 days remaining.

5 Adjusted cost base of $235,000. Fund beta of 0.30. Annual rates of return (YEAR 5 is the latest):

YEAR 5 YEAR 4 YEAR 3 YEAR 2 YEAR 1

4.9 22.2 17.8 12.8 -5.1

5-year return on S&P/TSX Total Return = 1.71%. 6 Adjusted cost base.

7 Municipal valuation.

8 According to mortgage appraiser.

9 Replacement value.

10 Alexanders estimate.

11 At cost.

12 Alexander owns a 3-year old Dodge pickup, while Julia has a 5-year old Honda Civic.

13 At 6%, 13-year amortization period.

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Risk Profile Questionnaire

1. What is your primary goal in making an investment?

Alexander Julia

Emergency fund

Home purchase

Education

Retirement savings

Tax savings

Emergency fund

Home purchase

Education

Retirement savings

Tax savings

2. Keeping in mind your primary goal, how long do you plan to keep your money invested?

Alexander Julia

Less than 3 years

3 5 years

5 10 years

More than 10 years

Less than 3 years

3 5 years

5 10 years

More than 10 years

3. What is your primary investment objective?

Alexander Julia

Safety of investment above all

Some safety of investment with a

higher investment return

A balance of modest investment

return and high long-term growth

A high investment return above all

Safety of investment above all

Some safety of investment with modest

investment return

A balance of modest investment return

and high long-term growth

A high investment return above all

4. Keeping in mind that a higher rate of return entails higher risk, what is your comfort level with

risk?

Alexander Julia

I would rather preserve my income

and accept predictable returns.

Im willing to accept somewhat higher

risk, in exchange for higher returns.

Im willing to accept a high level of

risk, with the opportunity for

significantly high returns.

I would rather preserve my income and

accept predictable returns.

Im willing to accept somewhat higher risk,

in exchange for higher returns.

Im willing to accept a high level of risk,

with the opportunity for significantly high

returns.

5. How would you feel if your investment dropped in value by 15% over a course of a year?

Alexander Julia

I would find it unacceptable.

I would be moderately concerned.

I would find it unacceptable.

I would be moderately concerned.

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I would watch my investment closely,

with the expectation that it will

recover over the long term.

I would not be concerned about short-

term fluctuations, because Im

investing for the long term.

I would watch my investment closely, with

the expectation that it will recover over

the long term.

I would not be concerned about short-

term fluctuations, because Im investing

for the long term.

6. How would you describe your level of investment knowledge?

Alexander Julia

I have little to no investment

knowledge.

I have a basic understanding of the

difference between stocks and bonds.

I have a moderate understanding of

the different investment options and

levels of risk.

I have extensive knowledge and a

thorough understanding of investment

options and strategies.

I have little to no investment knowledge.

I have a basic understanding of the

difference between stocks and bonds.

I have a moderate understanding of the

different investment options and levels of

risk.

I have extensive knowledge and a

thorough understanding of investment

options and strategies.

Risk Profile

Alexander, as an entrepreneur, is willing to take risks by investing in his business. This indicates a general tolerance for risk. On the other hand, like many entrepreneurs who start a business in a risky, specialized area, he may prefer to offset that risk by buying conservative investments. Alexanders responses to the risk profile questionnaire, however, support the former view.

Based on her conversation and her responses to the risk profile questionnaire, Julia is conservative in her financial outlook and investment choices.

Investment Knowledge

The couples investment knowledge is somewhat low, as indicated by the risk profile questionnaire results and by the following:

Treasury bill and GIC investments

Investment in a single mutual fund

Comments such as Julias admission that she doesnt know where to start looking for higher

investment returns

Investment Involvement

The couples investment involvement is low, as indicated by the following:

Alexanders full-time engagement with his business

Upcoming marriage and professional activities

Low investment knowledge

There is potential to increase involvement, as Julia may have more time and interest in making investment decisions.

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