Preparing a Financial Plan

10 years ago:

Joe was 23, he was studying journalism at the University of Westminster in London. Joe hoped to graduate that year and be able to start working shortly after that.

10 years on…:

You are a financial advisor who works for an independent institution and Joe is one of your clients, you have to produce a report with a financial plan used to advise Joe on how best to manage his finances (property, investment and pension) according to the two circumstances (scenarios) below:

1. Joe is now 33 and works as a free-lance journalist for a national newspaper in London. He is satisfied with the way his career has progressed, although he started working later than expected, when he was 27. His job is relatively safe. His annual salary varies between £50,000 and £65,000, he currently rents a small flat in Greenwich for which he pays £1,800 a month in rent.

Joe is considering buying his own place.

Working as a freelancer, Joe is not in any occupational pension scheme, nor in any personal scheme, he would like to start contributing to a private pension but he is wondering whether they are good value for money and if that would allow him to live comfortably once he retires or whether he would be better off with alternative arrangements such as buy a property to let or investing in a mutual fund.

Joe has a credit card on which he pays 38% APR and which he rarely uses. He also has £54,000 in a saving account from which he receives 1% annual interest rate and £25,000 in another saving account from which he receives 1.5% but has no access to the money for 3 years. He would like to earn more interest on his savings as well as gain accessibility to them but does not know how, he is willing to take more risk. Joe is planning to get married next year.

(45 marks)

• Joe is 33 now and a well-known journalist, he has been working hard since graduating and he has now worked for many UK broadsheets, he is currently employed by the Financial Times. His annual salary is £85,000, he is in his employers DC pension scheme.

He owns and lives in a small property in Wimbledon, however he now needs to move into a bigger place as his two children are 2 and 5 need more space. He hopes that both his children will go to University.

All his savings (£50,000) are in a savings account which provides him with 0.8% interest a year. He is very risk averse but would like higher interest on his savings as he is becoming concerned about how to pay for his children’s education.

Joe also owns an expensive vintage car he rarely uses and would be willing to sell.

He is also paying a mortgage (£1000 a month), he has an interest-only mortgage and does not realise that in 8 years he will have to pay back the capital he borrowed which amounts to £240,000.

(45 marks)

Required:

For both scenarios above advise Joe on how best to manage his savings, property and pension contributions in order to maximise his wealth in the medium term (next 5 to 10 years) and in the long term (20 to 25 years).

Please take into consideration his personal circumstances as well as his attitude to risk, you need to provide your own assumptions on salary growth, inflation rates, expected return on investments.

Tax implications should NOT be included.

Marking guide:

45 marks will be awarded for complete answers to each section of the report.

The two sections of the report, financial planning for each scenario, must include: management of 1) property, 2) savings and investments and 3) pensions.

Another 10 marks will be awarded for presentation. Good quality presentations will typically include the Harvard Style Referencing, use of formal academic language, a good flow of paragraphs and sections within the report, all figures and tables labelled at the top and with the data source at the bottom. A brief introduction and conclusion should be included.

For full marks students must provide:

Realistic additional assumptions on Joe’s present and future (i.e. future earnings), real-life examples of mortgage and interest rates, expected rates of return on specific investments, expected pension contributions and incomes.

A structured financial plan that matches the client’s profile and objectives is required, together with an explanation of the plan which you are advocating.

The strategy should quantify the extent of improvement in the client’s finances following your advice, the plan / report should analytically examine the recommended products in terms of risk and return

Marking Criteria

1. Address the client’s financial needs.

• State and justify all assumptions.

• Demonstrate familiarity with the relevant literature and products.

• Attempt to apply concepts and theory to the case study

• Demonstrate evidence of wide reading (all definitions provided, values and data sources must be referenced, please avoid Investopedia)

• Endeavour to high quality presentation with good use of punctuation, spelling and grammar.