Judy is aged 40, and Tom is aged 43. Judy is a stay-at-home mum, while Tom runs his own marketing
business from an inner suburban office, and they have two sons, aged 6 and 9. Judy and Tom recently visited Jack Wilner, a financial planner, to help sort out their financial affairs. Both Judy and Tom are quite conservative, and because of their lack of investment sophistication and requirement to preserve their capital, they are reluctant to consider anything too risky. After two short interviews,
one being online, Jack Wilner sent them a financial plan. Judy and Tom received no other documentation from Jack, nor did they complete any forms.

Tom's business produces an average annual net profit of $170,000 before tax. They own their own
house worth $1,150,000, which is subject to a mortgage of $435,000. They also have an outstanding
credit card debt of $7,000. Both Judy and Tom own their cars. The family's living expenses total
$90,000 p.a., including payment of a $30,500 p.a. annual mortgage payment. They expect their two
sons to remain dependent until age 21, at which time the living expenses will decrease by $15,000
p.a. for each child when they leave home. The couple would like to send the children to a private
school from years 9 - 12, which is expected to cost $20,000 p.a. for each child. In the event of the
death of either Judy or Tom, they estimate death and medical expenses to cost around $12,000. Tom
currently has a life cover of $150,000 in his superannuation fund (his current superannuation fund
balance is $295,000), while Judy has no life cover (but she does have a superannuation fund with a
balance of $155,000). The couple has no other personal insurance. Both of the couple's
superannuation accounts are invested in a growth fund with the following allocations: Cash 5%; Fixed
interest 25%; Australian shares 35%, Property 10%; and International shares 25%.

Tom's father passed away recently at age 67 due to heart disease, which seems to be a historical
problem in Tom's family. They inherited $50,000 cash invested in a savings account and set aside for
emergency expenses and to help with the education of their children.

Jack has recommended that they take out a margin lending facility totalling $200,000 and, together with their $50,000 savings account, acquire units in an international share fund for $250,000. Jack has argued that he relied on the yield curve as a leading indicator of economic activity.

Tom and Judy say they are uncomfortable with some of the recommendations and do not understand a number of the strategies. The financial plan contained no information as to risks or insurance. When they asked about the fees, Jack replied that the plan was absolutely free. All charges would be paid by the international share fund. Tom and Judy say that they don't understand what a margin loan is, and they are not sure whether investing in an international share fund is suitable for them. One of their friends told them that the fund has performed poorly over the past five years and has a very high fee structure.

 

1) Explain the various personal risks that the couple is exposed to and detail the various insurance
policies you would recommend for Judy and Tom to protect their personal risks?

2) Calculate how much additional life insurance might be recommended for Judy and Tom.
Assume that coverage is required through to current life expectancy (85 for females, 81 for
males) and ignore the adoption of the recommended margin lending strategy.

3) It is obvious that the financial planner has breached several ethical, professional, and legal
obligations. Discuss the major areas of non-compliance by the financial planner.