Franz and Sophia Smith It is January 2010, and one of your current clients has referred Franz and Sophia to you. They have never had a nancial plan prepared for them before. They describe themselves to you as \"doityourself" investors in search of a second opinion, and explained that they had decided to come to see you because they heard you were a fee-forservice Certied Financial Planner (CFP). They say they're happy to pay your hourly rate in exchange for an unbiased opinion. While they are interested in any and all suggestions you might have for them, Sophia says that she is particularly interested in learning more about the different types of insurance coverage that are available to both individuals and to businesses. They have taken the time to prepare the attached net worth and cash flow statements in advance to help you better assess their nancial situation. PERSONAL INFORMATION Sophia (age 45) and Franz (age 4-4) live in a suburb of Tomato, Ontario. Sophia is in good health. but Franz was recently diagnosed with high cholesterol and a fairly serious heart condition. He stopped smoking as soon as he found out, which was about a year and a half ago. They have one child1 Max (age 14). who attends the local high school. Sophia and Franz have been married for seventeen years. Sophia was born in Canada and studied civil engineering at the University of Waterloo. She opened up a small consulting firm not long after graduation. Franz was born in Austria and moved here when he was just 20 to study and ended up deciding to stay. He became a Canadian citizen shortly before meeting Sophia and is now a fairly well established portrait painter. He works from a large studio that's attached to their home. He tells you he doesn't regret taking time away from his painting in order to look after Max when was very young. but he says he's happy to be at work full-time again. EMILQWIENT IE ERMATION Details of Sophie's Business Sophia started her consulting rm from nothing 14 years ago. It is a sole proprietorship. Three years ago she was able to hire a full-time assistant, Gawillo, to manage the ofce and handle some of the marketing work. Max also works in the ofce part-time after school. doing some ling, photocopying and other clerical work. The main ofce is located in downtown Toronto. where she rents space in one of the downtown ofce towers. This is where she meets all of her clients and does all of her work. Sophia tells you that she draws an annual income of $150,000 from the business. She drives their older car to and from work. and she also uses it to travel to see clients. Sophia says that she uses the car for business about 60 per cent of the time. She is thinking of acquiring a new vehicle, and is trying to decide whether she should lease or purchase it. Details of Franz's Business Franz describes himself as a post-postmodemist. You are not quite sure what this means, but you note that he uses unorthodox tools. such as a number of small trowels as well as his ngers. to apply globs of paint to the canvas. His work is not entirely to your taste, but obviously some people like it Franz tells you that he charges $15,000 for a portrait, and sells one every two months. After paying for materials and other business-related expenses. he says he usually clears about $70,000 a year. Franz's clients come to sit for their portraits in his studio, so he rarely needs to use the family car. In fact, he says he rarely travels outside the city except to attend the occasional artists' conference. He is very fond of his studio. which is a massive. cathedral-like room located in the back of their home. It accounts for about one-third of the house's total square footage. Franz and Sophia had their lZ-room home designed and built according to their specifications. and he says he thinks it's the best investment he ever made. Now that Franz has become established and is back at work full-time. he tells you he would like to start setting aside more money for his retirement. FINANM MITIQN Real Estate Franz and Sophia's home costjust $500,000 to build 10 years ago. but in today's booming real estate market, they estimate that it's worth at least $1 million. The home is located on a hectare of secluded. heavily-tread land just outside one of the northern Toronto suburbs. Franz and Sophia own the housejointly. Sophia's Investments, Registered Sophia holds the following investments in her self-directed RRSP: $100,000 in the Winklemeier Canadian Composite Index Fund $20,000 in the Winklemeier Canadian Blue Chip Fund $3,000 in the Winklemeier U.S.A. Blue Chip Value Fund Sophia says that, according to her most recent letter of assessment from the Canada Revenue Agency, she has $60,000 of unused RRSP contribution room left. Sophia's Investments, Non-Registered Sophia has two non-registered investment portfolios - one with the Hooplah mutual fund company, and another with the Rippov mutual fund company. Sophia tells you that the money in the Rippov account is actually an inheritance she received from her aunt Edna 10 years ago. $5,000 Hooplah Labour Sponsored Fund $20,000 Hooplah Canadian Small Cap Fund $10,000 Rippov European Bond Fund $50,000 Rippov T-Bill Fund Franz's Investments, Registered wol Hiher He holds the following investments in his RRSP with Thunderclap Investments: $20,000 Thunderclap Emerging Markets Fund $15,000 Thunderclap Precious Metals Fund He also has a spousal RRSP with Slowpoke Asset Management, which Sophia established for him last year: $5,000 Slowpoke Canadian Fund He says he's unhappy with the returns on the Slowpoke to date (it has not gained a cent, he says), and tells you he'd rather cash it in and invest the funds in his stock brokerage account. Franz's Investments, Non-Registered He holds only one investment in his discount brokerage account at the moment. He tells you he did some "housekeeping" last month, and sold the rest of his stock. He says he bought $10,000 worth of shares in the Flying Pig Software Company two years ago, and ended up selling them for $60,000. These funds are now sitting in cash, in his bank account, while he tries to decide what to do.The one investment in his discount brokerage account is: $18,000 Plummet Electric Car Company Inc. Franz is also an avid coin collector. although he admits that he is not as savvy as he might be. He purchased five Roman coins from a friend ve years ago for a total $25,000, thinking they were worth a great deal. In fact, demand for that kind of coin dropped signicantly in the market shortly after he acquired them. He was only able to sell the five coins for $5,000 late last year. Franz estimates that his coin collection is currently worth about $40,000. Liabilities Franz and Sophia have a mortgage outstanding of $200,000 on their home, currently xed at 6.75% interest with the XYZ Bank. They have been paying it down rapidly from the original $400,000 amount. It is coming up for renewal in another few months. They have shopped around and been offered a rate of 6.5% for another five-year period from a different bank. They've had their mortgage with their current bank since they rst built the house and are reluctant to leave. but they tell you they are seriously considering changing lenders in order to get the slightly lower rate. They also have an unsecured line of credit for $25,000. Sophia also took out an RRSP loan from her bank exactly one year ago and is paying 5% interest. The loan balance at the beginning of this month was $8,040 and will be paid off in another 48 months. Emmett Mogugmm Ten years ago, Franz purchased a small permanent policy with Schmetteriing Life Insurance for $20,000. It has a guaranteed insurabliity rider that allows him to purchase ve times the face amount in additional insurance every ve years. It has a cash surrender value of $3,000, and he is paying $60 monthly. Sophia has a T-100 life insurance policy that she bought from Longlife Financial shortly after Max was born. The face value is $250,000 and she has been paying a at monthly premium of $200. The policy has a cash surrender value of $250. When they arranged nancing for their home, Franz and Sophia tell you they also took out joint creditors' group mortgage life insurance through the XYZ Bank. RISK Pnomn Franz describes himself to you as an adventurous risk-taker when it comes to investing. He says he does not mind incurring a loss because he can always use it to offset gains in the future. Sophia, on the other hand, says she is a fairly conservative investor and does not like to see a great deal of volatility in her portfolio. She says she can accept a minimal amount of short term losses. but ultimately prefers slow, steady growth. GOALS Max shares his father's artistic talent and his mother's head for numbers. Franz and Sophia tell you he wants to study architecture at university when he nishes high school. Max's grades are very good. and he has already won several provincial awards and contests. It seems likely that he will be admitted to the program. Sophia and Franz would like your advice on how they can best nance Max's studies. They expect they will need to save $80,000 by the time he begins school. Sophia points out that she does not have any type of insurance plan at work at the moment, and she is interested in establishing one. Sophia tells you she would like coverage similar to the kind that is offered to corporate employees, including health, dental, life and disability insurance. She tells you that she would like to have the business pay the insurance premiums if that's possible. Franz still has a number of brothers and sisters in Austria, and he and Sophia have sometimes thought about moving there when they retire, although they are not sure how their retirement benets might be affected. rLLs AND POWERS or ATTORNEY Franz and Sophia tell you they do not have wills or powers of attorney. Franz says that he wants to make sure that, ifhc should became seriously ill. there are clear instructions in place saying that the doctors should allow him to die if he cannot live without the help of technical life support. He wants to know if this is normaily dealt with in the will, or somewhere else. Franz and Sophia Smith Statement of Net Worth at January 1, 2010 hoval of ASSETS Sophia Franz Total Liquid Assets Joint Chequing Account 300 $ 300 $ 600 Cash Surrender Value 250 3,000 3,250 Cash 10,000 10,000 Total Liquid Assets $ 550 $ 13,300 $ 13,850 Investment Assets Registered Assets 123,000 40,000 163,000 Non-Registered Assets 85,000 18,000 103,000 Coin Collection 40,000 40,000 Total Investment Assets $208,000 $ 98,000 $ 306,000 Personal-Use Assets Residence 500,000 500,000 1,000,000 Automobile 4,000 4,000 8,000 Personal Effects (owned jointly) 1,750 1,750 3,500 Total Personal-Use Assets $505,750 $505,750 $1,011,500 TOTAL ASSETS $714,300 $617.050 $1,331,350 LIABILITIES Short-Term Liabilities RRSP Loan $ 8,040 $ 8,040 Long-Term Liabilities Mortgage (Toronto) 100,000 100,000 200,000 TOTAL LIABILITIES $108.040 $100.000 $ 208,040 NET WORTH $606.260 $517.050 $1.123,310Franz and Sophia Smith Monthly and Annual Cash Flow as of January 1, 2010 Monthly Annually INCOME Sophia's Business Income $12,500 $150,000 Franz's Business Income 5,834 70,008 Total Income $18,334 $220,008 EXPENSES Taxes Sophia 4,550 54,600 Franz 1,575 18,900 Maintenance and Repairs Home 460 5,520 Home Insurance 215 2,580 Heating, Water and Electricity 790 9,480 Property Taxes 1,200 14,400 Automobile Insurance 175 2,100 Gas and Operating Expenses 300 3,600 Repairs and Maintenance 80 960 Life Insurance Premiums Sophia's Policy 200 2,400 Franz's Policy 60 720 Telephone 88 1,056 Food 435 5,220 Clothing 310 3,720 Personal Care 75 900 Entertainment 200 2,400 RRSP Savings - Sophia 1,100 13,200 RRSP Savings - Franz 400 4,800 Non-Registered Savings 2,500 30,000 Total Expenses $14.713 $176,556 Surplus $ 3,621 $ 43,452