FINANCIAL PLANNING ASSOCIATION OF MALAYSIA

Updated on 08/02/2007

FINANCIAL PLANNING ASSOCIATION OF MALAYSIA

CFP SYLLABUS

MODULE 1 FOUNDATION IN FINANCIAL PLANNING

Course Objectives

This course is designed to enable candidates to develop a clear appreciation of financial planning. Candidates are provided with an outline of each of the major concerns of a financial planner to prepare for the extensive study to be covered in the other courses of the CFP program. The entire program prepares candidates to be a competent financial planner capable of meeting the financial planning need of the consumers.

Course outline

PART 1: AN OVERVIEW

Topic 1.1: The Financial Planning Industry in Malaysia

• The development of financial planning in Malaysia worldwide • Users of financial planning services • Providers of financial planning services • The range of financial planning services • The profile of a competent financial planner

Candidates should understand the factors affecting the development of financial planning, the demand for financial planning services and the rapid growth of the independent financial planning industry. Candidates should also understand the whole range of products required to meet the different needs of the consumers and to achieve a balance portfolio.

Topic 1.2: Regulatory Controls and Practices Affecting Financial Planning

• Bank Negara • Bursa Malaysia and Securities Commission • KLOFFE, KLCE and MESDAQ • Labuan and offshore investment • Professional code of Ethics and Licensing • LIAM/PIAM/FMUTM • Relevant guidelines (acts) issued by the Securities Commission

(SC) AND Bursa Malaysia

Candidates should understand how various regulatory controls affect the activities of a financial planner and how to minimize the risk of legal action in the course of providing financial planning services. The relevant guidelines (acts) therefore are necessary to be covered in the topic in order for candidate to understand how various regulatory controls may affect the activities of financial planner.

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Topic 1.3: The Nature and Scope of Financial Planning

• Definition of financial planning • Process of financial planning

- Budget Planning - Managing cash flow and basic assets - Risk management and insurance planning - Investment planning - Tax planning - Retirement/estate planning - Islamic products and their uses in financial planning

• The trade-off concept • The objectives of financial planning • Marketing a financial planning business • Risk profiles of investors

Candidates should understand that to be competent financial planners, they must know how to integrate different disciplines into a comprehensive plan. In order to do so, they should develop skills and adhere to processes, including environmental analysis, investment analysis, spreading of risk, in matching clients' needs and objectives. Topic 1.4: Analytical Tools for Financial Planners

• The time value of money I: Rudimentary Concepts and Applications

• The time value of money II: Advanced Concepts and Applications • Insights on Risk Tolerance in Financial Decisions • Understanding and using business statistics • Financial modeling with spreadsheets

Compiling a financial plan involves the use of problem solving techniques and requires skill in processing and analyzing data. Candidates should therefore develop the necessary analytical skills required by financial planners.

Topic 1.5: Information Technology

• Development and definition of information technology • IT as a financial planning tool • Basic of computer hardware and software • Tax incentives for users • Common problems encountered by users • Selection of wares and proper training

The growth and development of the IT industry in Malaysia is highly encouraged by the government and hence, bound to impact the financial planning community. Candidates should therefore be conversant with the IT development in the country and have a working knowledge of the essential IT tools in financial planning practices.

Topic 1.6: Effective Communication in Clients Counseling

• Types of structured communication

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• Basic of financial counseling • Profile of financial counseling • Essential communication principles

Effective communication is the foundation stone in effective clients counseling. Candidates should understand the various principle and development of effective communication to enhance their overall skills as a financial planner.

PART 2: THE ECONOMIC ENVIRONMENT AND ITS EFFECTS ON FINANCIAL PLANNING

Topic 2.1: The economic system

• The basic economic structure • The basic demographic structure • The role of government • The role of the private sector • Investment Incentives

Candidates should gain an appreciation of the basic economic and demographic structures of Malaysia. It is important to understand how the government manages the economy to provide economic growth and development, and the role of the private sector in the functioning of the economy.

Topic 2.2: The economic environment

• Economic growth • The business cycle • Inflation • Economic indicators

Candidates should understand factors affecting economic growth and how they will in turn affect investment returns and how important it is to the financial planning industry. Likewise, it is important to understand the behavior of the business cycle which influences the timing of investments, the effects of inflation on financial planning and the usefulness of economic indicators in identifying the phase of the business cycle in which the economy resides.

Topic 2.3: Government policy

• National savings • Exchange rate policy • Fiscal policy and taxation • Monetary policy and interest rates • Wages policy • The NDP and NEP

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• EPF • Exchange Controls • Islamic practices and policies

Candidates should understand the principles guiding the government's fiscal, monetary, exchange rate and wages policies in managing the economy. Further, candidates should also understand the role of the EPF in providing for social security and how the various EPF schemes affect national savings and investments.

PART 3: RISK MANAGEMENT AND INSURANCE PLANNING

Topic 3.1 The concept of risk

• Definition of risk • Categories of risk • Risk identification • Risk evaluation

Candidates will be introduced to the two broad categories of risks - "speculative risks" and "pure risks", and the necessity of identifying and evaluating risks in financial planning.

Topic 3.2: The management of risk

• Risk avoidance • Risk control • Risk financing • Risk transfer through insurance

Candidates should understand the various methods of handling risk including how risk can be avoided, reduced, eliminated, financed, retained an transferred through insurance.

Topic 3.3: The insurance industry

• The regulators • Professional bodies : MII/NAMLIA • The operators

Candidates should have a good knowledge of the Insurance Act and how the regulators monitor the sound operation of the insurers. Candidates should also understand how the professional bodies attempt to maintain the professional standard of insurance agents and brokers.

Topic 3.4: Types of insurance cover

• Life insurance • Health and disability insurance • General insurance • Commercial insurance

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• Islamic insurance • Education planning

Candidates should understand the different types of insurance covers that are available and the ways in which these covers can be used effectively for risk management. Different types of insurance can be used to protect loss of income as a result of death, sickness or disability and to protect property loss due to fire or motor accident. Topic 3.5: Insurance Pre-Contract Studies

PART 4: INVESTMENT PLANNING Topic 4.1: Concepts of investment

• Objectives and rewards of investing • Concept and advantage of portfolio investment • Definition of risk and importance of risk management

Candidates should understand the need for investment to achieve financial goals and the advantages of portfolio investment in spreading risk.

Topic 4.2: Primary investment

• Overview of equity market • Overview of debt market • Overview of the foreign exchange market • Overview of Islamic investment products namely banking

products, investment products, Takaful (insurance) products and investment-linked products

• Overview of the property market • Factors to consider in comparing primary investments

Candidates should understand the two basic primary investment markets - the equity market and the debt market - where investors make their own decisions and invest directly in them. In making decision, it is important to know and compare the difference in the risk-return trade-off for the different types of primary investments.

Topic 4.3: Managed investments

• Unit trust • Property trust • Equity trust • Mortgage trust • Life insurance

Candidates should understand the advantages and disadvantages of managed investments vis-à-vis primary investments. It is important to know the

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various types of managed investments so that financial planners are able to select the ones that match their clients' needs.

Topic 4.4: Unit Trust Pre-Contract Studies

PART 5: INCOME TAX PLANNING

Topic 5.1: Basic income tax concept

• Basis of assessment • Residency • Calculation of gross income • Deductions • Reliefs • Tax computation • Real property gains tax

In advising how financial goals can be better achieved through minimization and deferment of income taxation, candidates should have a good understanding of the definition of income, types of income and how deductions and rebates can help to alleviate the income tax burden.

Topic 5.2: Income tax planning

• Income splitting • Income deferral • Insurance premiums and benefits

Candidates should understand that significant savings could be made through income splitting, income deferment or acceleration of deductible claims. In addition, candidates should know the taxation treatment of insurance premiums and benefits.

PART 6: RETIREMENT PLANNING/ESTATE PLANNING Topic 6.1: The retirement planning process

• Estimate the amount of income needed during retirement • Replacement ratio method • Expense method • Evaluate the current resources • EPF savings • Non-EPF savings • Formulate strategies for filling retirement income deficit • Syariah Law in relation to estate planning

Financial planners should be able to help clients estimate the amount of retirement income required so as to maintain a certain standard of living during retirement. They should be able to identify the resources available and recommend a financial plan to meet that need. Financial planners should know the advantages and disadvantages of the various retirement planning instruments.

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Topic 6.2: The estate planning process

• Definition of estate planning • Role of an estate planner • Techniques for preserving wealth • Role of life insurance in estate planning • Types of trusts • Taxation of trusts • Wills

Candidates should understand that planning for conservation and distribution of a client's accumulated wealth at time of death is an important part of overall financial planning and should be coordinated with other facets of the total plan. It is important that the candidates gain knowledge of the various techniques that can be used to preserve a client's wealth.

PART 7: THE BASIS OF A FINANCIAL PLAN

Understanding the client The data gathering process Financial analysis of data Understanding strategies to meet needs Plan preparation Plan implementation The review process Candidates should understand the basic mechanics of a financial plan. The process should be emphasized, as each step from the data fathering to review is essential to the successful implementation of the financial plan.

PART 8: FPAM CODE OF ETHICS

A high ethical standard is the hallmark of a professional financial planner. Candidates should and be able to quote the principles and rules of the Professional Ethics for Certified Financial Planner Licensees of FPAM.

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Financial Planning Association of Malaysia Recommended Reading List for Module 1 – Foundation in Financial Planning Part 4 – Investment Planning

Type Title

Book Block, Hirt (2005), Foundations of Financial Management, 11th Edition, Mc Graw Hill (2005) Kapoor, Dlabay, Hughes (2204), Personal Finance, 7th Edition, Mc Graw Hill (2004) Brigham, Houston (2004), Fundamentals of Financial Management, 10th Edition, Thomson South-Western (2004) Harrison (2002), Personal Financial Planner, 2nd Edition, Prentice Hall (2002) Ross, Westerfield, Jordan (2006), Corporate Finance Fundamentals, 7th Edition, Mc Graw Hill (2006) Gitman (2006), Principles of Managerial Finance, 11th Edition, Pearson Addison Wesley (2006) Brealey, Myers, Marcus (2004), Fundamentals of Corporate Finance, 4th Edition, Mc Graw Hill (2004) Lee Hock Lock (2001), Financial Security in Old Age -Whither The Employees Provident Fund of Malaysia?, Pelanduk Publications (2001)

Type Title

Articles

60 short essays compilation in ‘Investing Your Savings”, a book written by Yeoh Keat Seng

Type Organization Web Address

Webs

Federation of Malaysia Unit Trust Managers Bursa Malaysia Securities Commission of Malaysia Bank Negara Malaysia Relevant Journals

www.fmutm.com.my www.klse.com.my www.sc.com.my www.bnm.gov.my www.ssrn.com

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http://www.fmutm.com.my/

http://www.klse.com.my/

http://www.sc.com.my/

http://www.bnm.gov.my/

http://www.ssrn.com/


MODULE 2 RISK MANAGEMENT AND INSURANCE PLANNING Course Objectives This course is designed to help candidates understand the fundamental concepts of risk management and insurance and gain the knowledge about various personal insurance products, both life and general, which are related to financial planning. The candidates are expected to be able to apply these concepts and understanding formulating appropriate financial plans in servicing their clients. Course Outline

Topic 1: Fundamental Concepts in Risk Management

• Differences in human attitudes toward risks • Various methods of classifying risks • Risk management methods • Insurance as a risk management technique

Candidates should be able to understand the different attitudes of humans toward risks – risk aversion, risk neutral and risk loving attitudes – and how these attitudes affect individuals in making decisions in handling risks. Candidates should know how to classify risks into pure, speculative and insurable risks. They should also know how to implement appropriate risk management techniques to different types of loss exposures.

Topic 2: Insurance Fundamentals

• Concepts of insurable risk • Mobility/morbidity • Pricing fundamentals • Insurance company crediting methods

- New premium - Investment income using premiums

• Identification of life, health, household, motor and other risk exposures - Analysis of present coverage - Loss of income to family - Final expenses

Candidates should understand the fundamentals of insurable risks among pure risks, how mobility and morbidity tables work in pricing life and health insurance products. Candidates are also expected to understand how insurance companies reflect their investment income using premiums in pricing various insurance products and how they credit or debut the initial premium to arrive at the gross premium.

Topic 3: Legal Principles in Insurance

• Law of contract in general - Offer and acceptance - Consideration - Intention to create legal relation

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- Legal capacity • Law of tort – negligence

- Elements of a negligent act • Legal aspects of insurance contracts

- Basic components of an insurance contract - The law of agency applied to insurance - Principle of utmost good faith (misrepresentation and misstatement) - Duty of disclosure - Effects of nondisclosure and misrepresentation

Candidates should be able to identify the elements for a contract to be valid. They also need to understand what negligence is and how to prove the presence of a negligent act in liability insurance. Further, they must understand the legal applications and consequences of the law of agency, principles of utmost good faith, especially regarding misrepresentation, misstatement and duty to disclosure.

Topic 4: The Role of Insurance in Financial Planning

• Assistance in protecting the client’s real value of assets through the eroding effects of inflation

• Insurance as a mechanism for risk transfer • Five focal points of a financial planner

- How financially independent and risk averse a client is - How much capital is needed to produce income to support his family in

the event of the client’s death or disability - How much capital is required to retire debts - How much capital is required for emergency liquidity reserves - How much capital would be provided from other sources

Candidates should know how insurance works as a risk transfer mechanism, how it protects clients from experiencing erosion of real value of assets due to inflation effects. Candidates must then be able to thoroughly describe how insurance works as a means to fill the gaps between the current asset position and the desired amount of wealth that can secure the client and his family financially in the event of death or disability of the client.

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Topic 5: Factors Affecting Insurance Needs

• Factors affecting life and health insurance needs - Death - Disability - Critical illness/dread disease - Educational funding - Estate duty - Debt retirement - Personal financial guarantees

• Analysis of life insurance needs

- Human life value approach - Life insurance needs approach - Capital needs approach

• Business uses of life insurance

- Key person indemnification - Debts canceling - Retirement % death gratuities funding - Business continuation funding

Candidates are asked to identify factors affecting life and health insurance needs at various stages of clients life and to advise how to apply these identified factors into financial planning. For this, candidates should be able to apply various methods of calculating financial needs of each client using human life value approach, the needs approach and capital needs approach. They must also be familiar with the advantages and disadvantages of each approach.

Topic 6: General Insurance Policy Analysis

• Buying general insurance for financial planning • Homeowner and property insurance • Automobile and umbrella liability insurance • Liability insurance • Other property insurance • Use of property and liability insurance in businesses • Travel insurance • Golf insurance • Maid insurance

Understanding general insurance policies in personal lines is important in financial planning since the absence of an appropriate insurance coverage may deprive clients of necessary financial resources in the event of losses due to the occurrence of losses in these lines. Suitably, candidates should know the scopes of coverage, exclusions and endorsements in each of homeowner insurance, automobile and umbrella coverage insurance, other property insurance and liability insurance policies. Candidates should also be able to advise on the coverage amount for each of these policies as a means to secure current and future financial assets of the client. Additional information (Motor Insurance), NCD protector to maintain the NCD status, Premium payment by installment through credit card and Value added service - tow truck service. This is to reflect the latest changes to motor insurance in the country.

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Topic 7: Life Insurance Policy Analysis

• Types of life insurance products - Term insurance - Disability insurance - Critical illness/dread disease insurance - Whole life insurance - Endowment insurance - Single premium insurance - Investment linked insurance

• Why life insurance works

- The power of compounding interest: Rule of 72

Various life insurance products exist, each with unique characteristics. Candidates should thus know the main features of term insurance, whole life insurance and endowment insurance, be able to compare premium payment methods. They should also be able to advise clients on the use of disability insurance as well as dread disease insurance either as a stand-alone policy or as a part of other life insurance policies.

Topic 8: Comparing Life Insurance Products

• Life insurance policy selection - Term life insurance vs. whole life insurance - Participating vs. non-participating - Traditional plans vs. investment linked life insurance plans - Trust vs. non-trust policies

• Methods of analyzing life insurance policy illustrations • Concept of bonuses

- Reversionary - Performance - Terminal - Maturity

• Policy discontinuation

- Surrenders - Paid-up policies - Non-forfeiture options - Effect of Bankruptcy - Vanishing premium concept - Permission to terminate

• Miscellaneous - Lost or destroyed policies - Suicide clause - Children’s policies and vesting age

• Disclosure requirements • Insurability and non-contestability

Candidates are expected to advise clients on the differences in buying term and investing the difference from purchasing participating whole life insurance and

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investment linked insurance. Candidates must also be familiar with various provisions in each type of life insurance, especially regarding provisions in handling bonuses, settlement options, nondisclosure provision, and other miscellaneous provisions.

Topic 9: Annuity Policy Analysis

• Types of annuities - Immediate - Deferred

• Structured settlements

Annuities are now well utilized as a means to maintain living standards after retirement. As such, candidates should be able to identify the main features of each type of annuity products with respect to premium payment options, settlement options, and multiplicity of lives insured

Topic 10: Health Insurance Policy Analysis

• Medical expense - Types of coverage - Disability income - Long-term care

• Determination of appropriate coverage

As the population ages, the issues of having an appropriate health insurance plan become more important. Candidate must, therefore, be able to advise clients on why a client may need additional health insurance coverage. In order to secure financial stability of the retiring client, candidates should be able to advise how to utilize long-term case coverage, which gradually becomes available in the local market.

Topic 11: Legislation Affecting Insurance Business

• The Life Insurance and Finance Industry - Life and general insurance - The savings industry and all related participants as a whole

• Trust

- Legal effect of a will vs. nomination of beneficiaries in a life insurance policy contract

- Trust policies vs. non-trust policies - Assignment of policies - Effect of trust policies on Muslims - Effect of trust policies in estate duty

• Malaysian Income Tax Act

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- Income taxation of life insurance - Treatment of insurance premiums in relation to personal income tax - Service Tax, e.g. assignment to trust corporation

Candidates should gain the capacity of analyzing how the financial services industry functions, how the insurance sector plays in harmony with other financial services sectors. Candidates are also expected to gain the knowledge about the application of Shariah law with respect to its effect on trust and non-trust policies. Further, they must be familiar with the effect of income tax regulation and estate duties on the final wealth of each client.

Topic 12: Evaluating Life Insurance Companies

• Margins of Solvency • Valuation of Assets and Determination of Liabilities • Statutory Returns • Regulatory Framework for Investment Linked Life Insurance Policies • Selecting a financially sound insurance company

Candidates are expected to identify financially stable insurance companies, monitor their soundness in insurance and investment operations. For this, candidates must be familiar with existing government regulations and be able to apply these regulations in evaluating each insurance company’s performance.

Topic 13: Consumer Protection and Life Insurance Industry Codes of Practice

• Minimum Standards for Agents and Agency Systems • LIAM /PIAM Code Of Ethics • The Insurance Act 1996 • Regulatory Controls: Qualitative Control Guidelines (QCG) for agents

In addition to abiding by the government regulation, self-policing the financial planning service practices by member financial planners is very important. Accordingly, candidates should be familiar with both government regulations in marketing and advising financial service products to clients and existing code of ethics adopted by professional insurance organizations.

Topic 14: Additional topics

• Bancassurance - its role, Conventional/Takaful Insurance vs Bancassurance and Threat & challenges. The important role played by bancassurance in distributing insurance products through collaboration with insurance companies.

• Include Takaful Insurance - Surah which justified insurance contract and practice, Surah Anas bin Malik (verse 11), Surah Abu Huraira (verse 12). This is to enable CFPs to help their Muslim clients have a better

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understanding of insurance and financial planning (haram & halal issue) by using these Surahs as their term of reference.

• Include also Education funding - bank loans, Perbadanan Tabung Pendidikan Tinggi Nasional (PTPTN) loan. Besides child education policy, clients would appreciate if CFP can give information on the current funding available for their children. This will be value added information.

• Include Takaful products - Takaful Family Insurance and Takaful General Insurance. CFPs should know the range of Takaful insurance products available in Malaysia

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Financial Planning Association of Malaysia Recommended Reading List for Module 2 – Risk Management and Insurance Planning Books 1997, Insurance Act, 1996 (Act 553) & regulations, K.L. International Law Book Services Baldwin, Ben G; 1996; The complete book of insurance – the consumer guide to insuring your life, health, property and income (rev. edition), Irwin, Chicago Brownlee, Ken; 2001; Winning by the Rules: Ethics and Success in the Insurance Profession; National Underwriter Company Diacon, S. R., Carter, R. L.; 1992; Success in Insurance – 3rd edition; John Murray; Great Britain Dr. Mohd. Ma’sum Billah; 2003; Islamic Insurance (Takaful); Ilmiah Publishers, Kuala Lumpur Dorfman, Mark S.; 1978; Introduction to Insurance Practice; Prentice Hall, Engelwood Cliffs. Hastings, W. J.; 1993; Business Finance for Risk Management; Witherby Co. Ltd, London Head, G. L., Hor II, S.; Essentials of Risk Management – 3rd edition; Insurance Institute of America, Pennsylvania Hiew Kum Yuen; Understanding Life And Medical Insurance Policy In Malaysia Mehr, Robert I, 1986; Fundamentals of Insurance – 2nd edition; Irwin, Illinois Staff of Jardine Insurance Brokers; 1998, Risk Management – Practical techniques to mininimise exposure to accidental losses – 2nd edition, Kogan Page Ltd, London Trieschmann, James S.; 2000, Risk Management & Insurance – 11th edition; South Western College Publication. Trieschmann, James S.; Gustavon, Sandra,G. ; 1995, Risk Management & Insurance – 9th edition; International Thomson Publishing; Cincinnati, Ohio Vaughan, Emmett J, Vaughn, Therese M.; 1996; Fundamentals of risk and insurance – 7th edition; John Wiley & Sons Inc, New York

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Websites Amanah Raya (Official Trustee) – www.arb.com.my Asia Insurance Review – www.asiainsurancereview.com Bank Negara Malaysia – www.bnm.gov.my Chartered Insurance Institute, United Kingdom – www.cii.co.uk General Insurance Association of Malaysia – www.piam.org.my Life Insurance Association of Malaysia – www.liam.org.my Malaysian Insurance Institute – www.insurance.com.my National Insurance Association of Malaysia – www.niam.org.my

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http://www.arb.com.my/

http://www.asiainsurancereview.com/


http://www.cii.co.uk/

http://www.piam.org.my/

http://www.liam.org.my/

http://www.insurance.com.my/

http://www.niam.org.my/


MODULE 3 TAX PLANNING

Course Objectives

The Tax Planning Module aims to further your existing knowledge and skills in the area of Taxation Planning by providing an overview of the major components of taxation. The unit deals with consideration of income tax and other forms of taxation. Case studies of different tax scenarios are also analyzed in the module.

Topic 1: Introduction to Taxation

Topic 1 contains a brief outline of the law of income taxation in Malaysia and a discussion of some basic concepts in Income Tax Law. This topic also discusses the liability to Malaysian Income Tax, which is determined by the source of the income and the tax resident status of the individual deriving the income. Double taxation arrangements with a foreign country will also be discussed. The topic also covers changes in accounting periods and the liability or otherwise of foreign income remitted to Malaysia.

Topic 2: Income

Topic 2 distinguishes income from capital and assessable income from exempt income. There will be discussions on the territorial impact of income tax in Malaysia and specific income items such as gains or profits from employment, dividends, interests, income from trade and other chargeable income, such as pension and annuities, Employee Share Option Schemes (ESOS). An up-date should be made in respect of the conditional exemption now available to Gratuity. The treatment of basis year losses and losses brought forward is also covered.

Topic 3: Deductions

Topic 3 examines deductions and how they are defined in the Malaysian Income Tax Act. A knowledge of deductions is crucial in taxation planning. Maximizing allowable deductions reduces tax liability. The topic presents a list of expenses and investigates the treatment of each as a potential deduction. The topic continues with a study of the concept of personal relief and rebates which are those deductions that are automatically granted to taxpayers according to their circumstances such as child relief, relief for dependent relatives, deductions for life insurance and contributions to approved pensions, provident funds or societies. Lastly, the topic concludes with a detailed study of capital allowances and how they are computed.

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Topic 4: Tax Planning & Tax Offsets

In Topic 4 the unit moves on to a discussion of specific areas of tax planning. Although a thorough knowledge of tax rates, income, deductions and administration is all part of effective taxation planning, in this topic we look in more depth at some areas that may be considered in minimizing and deferring tax liability – dividend implication, gearing, and other areas where careful placing of funds can diminish the overall tax burden. Transfer pricing and cross-border transactions” and the various kinds of insurance deductions should also be covered.

Topic 5: Administration of the Taxation System and Tax Audit

The administration of the taxation system is scrutinized in Topic 5. As a Financial Planner, you should be acquainted with the requirements for the preparation of taxes and be familiar with the procedures of the Inland Revenue Board – rules for keeping records, filing returns, notice of assessment, objections to assessments and negotiating settlements are discussed. Public Rulings should also be covered.

Topic 6: Taxation and Employee Provident Fund

In Topic 6, the elaborate system of legislation entitled Employee Provident Fund Act is discussed. The Employee Provident Fund is designed to encourage employers and their employees to contribute from their current earnings for future benefits. Other approved pension or provident fund schemes are discussed and the tax aspects thereof.

Topic 7: Taxation Aspects of Business Succession Planning

This topic investigates the fundamental taxation implications associated with the structure of vehicles that are used to operate businesses. The topic explores the taxation issues that have the greatest effect on a business and will largely concentrate on issues of planning for the protection and succession of the capital value of a business and the interests of the business owners. We will discuss the taxation aspects that affect the income and capital assets of common business structures. Taxation considerations for sole proprietorships and partnerships will also be discussed. The tax planning aspect should also include companies and other ways of legally reducing the impact of taxation.

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MODULE 4 INVESTMENT PLANNING

Course Objectives

To understand the concepts of risk and return, the financial markets and instruments, and the basic concepts and tools of asset valuation and portfolio management. The aim is to be able to evaluate alternative investments, the advantages and disadvantages, and to make suitable investment recommendations to clients. Course Outline

Topic 1: Basic Concepts of Investment

• Return (dividend, interest, capital gain), Holding Period Return (HPR),Annualized HPR and the measurement of historical return and expected return

• Risk (business, market, economic, political, etc.), division of risk • Adjusted rate of return (real rate of return considering inflation) • Risk-return relationship - using model (CAPM) 1 and graph (Security

Market Line - SML), risk-profiles of investors and risk-return trade off on different asset classes

• Importance of risk management - concept of diversification • Other factors that affect investments such as cost, liquidity and taxation

Candidates should be able to understand the concepts of risk and return in regards to investment, to broadly rank the various types of investments according to the general degree of risk and to briefly evaluate the investment instruments in regard to their costs, liquidity, safety and taxation.

Topic 2: Financial Mathematics and Statistics

• Time value of money (simple and compound interest, present and future value, annuities) - Application of TVM on financial or investment decisions

• Basic statistical concepts (data collection and presentation, mean and standard deviation, probability theory and distributions)

• Computation on ‘missing cash flows’

Candidates should be able to understand and calculate simple interest, compound interest, present value, future value and annuities. Candidates should also be able to have knowledge of elementary statistics, data collection and analysis, mean and standard deviation, probability theory and distributions.

1 CAPM refers to Capital Asset Pricing Model in which systematic risk of an investment is determined using beta (β)

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Topic 3: Financial Statement Analysis

• Accounting concepts and principles • Balance sheet (analysis of inventories, working capital, fixed asset, long-

term liabilities, off-balance-sheet activities) • Profit and loss statement • Financial statement analysis could also include Economic Value Added

(EVA) - measuring the performance of management and Market Value Added (MVA) – measuring market value less capital invested in a firm

• Cashflow statement • The commonly used financial ratios (return on investment, return on

equity, inventory turnover ratio, current ratio, debt equity ratio, etc.), price ratios (Price Earnings Ratio, Price over NTA ratio etc)

Candidates should be able to understand the major accounting rules and principles and to read and interpret the financial statements. Candidates should also be able to calculate and analyze the various key financial ratios and know how to use these ratios to compare companies and note the limitations of financial ratios.

Topic 4: Investment in Shares

• Types of shares • Structure of the Bursa Malaysia • Trading mechanisms (how to buy and sell share, settlement procedures,

costs, liquidity) • Public listing of companies • Takeovers and mergers • Other international markets and instruments • Factors to consider when investing in foreign markets (currency risk,

liquidity, custody, taxation, etc.) • Discussion on functions of stock market to the economy, the concept of

primary market (Initial Public Offering) and secondary market, component stocks of the Kuala Lumpur Composite Index

• Differences between various indices available for benchmarking (including the Syariah Indices)

• Theoretical x-price of shares after the implementation of rights or bonus issue or both, stocks split, stock dividend and risk in investing in stocks

Candidates should have a working knowledge of the Malaysian stock market and instruments, how share are listed, bought and sold, the types of shares and investment instruments available, and the effect of bonus issue, right issue and takeover on stock prices. Candidates should also have a reasonable understanding of other major international stock markets and instruments. Candidates should be able to know the use of market indices and the various methods of constructing market indices.

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Topics 5: Basics of Equity Valuation

• Fundamental analysis (sector/industry analysis, company analysis) • Basic valuation tools (P/E, dividend yield, P/NAV, etc.) • Technical analysis (major chart patterns, support and resistance,

trendline and channels)

Candidates should also be able to have a working knowledge of the analysis of equity, able to calculate P/E, dividend yield, P/NAV and use these ratios to compare companies and note the limitations in using these ratios. Candidates should also have a basic understanding of technical analysis. Traditional and operational approaches to fundamental analysis would form an important part of the topic.

The discussion on equity valuation is to be expanded to two models, namely the Present Value Model and Relative Valuation Model. Present Value Model can be further divided into 1) Dividend Discount Model (DDM), also known as Gordon Growth Model and 2) Discounted Cash Flow (DCF) Model. Due to the importance of expected dividend in company valuation using DDM, while dividend payment depends on growth of a company, the discussion on growth can be further divided into constant, zero and non-constant growth. The Relative Valuation Method, apart from comparing between companies in the same industry, should also compare the valuation of a company with industry average.

Topic 6: Investment in Bonds or Fixed Income Securities

• Basic characteristics of bonds (coupon, maturity, duration, modified duration, yield, convexity, estimation on new bond price and volatility on changes on interest rates using Modified Duration)

• Types of bonds (government, corporate, mortgage-backed securities, asset-backed securities, zero-coupon)

• Primary and secondary markets • Major rating agencies and how bonds are rated • Yield curve • Calculation of bond’s value and yield, calculation of yield to call, call price

and the concepts of premium, discount, par on bonds, current yield and capital gains yield

• Factors affecting bond prices (interest rate, inflation, exchange rate, credit, liquidity)

Candidates should be able to understand what are bonds, the various types of bonds available to investors, how bonds are traded, the major participants in the bond markets, bond rating, and the difference between high-grade bonds and junk bonds. Candidates should be able to have a basic knowledge of how bond’s value and yield are calculated, and factors affecting bond prices.

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Topic 7: Derivatives

• The characteristics of financial futures • Types of futures contracts (index, interest rate, etc.) • General Discussion on derivatives contracts • Trading strategies (speculating, hedging and arbitraging) • The basics of options (call, put, strike price, in-the-money, out-of-the-

money) • Characteristics and basics of convertibles and combination securities • Types of margins • Option Moneyness2, intrinsic value and time value • Warrants (equity warrants and call warrants) using Black Scholes Option

Pricing Model (BSOPM) • Risk management via hedging covering hedging ratios and contracts

Candidates should be able to understand what are derivatives, able to distinguish between speculation and hedging, and know the risks involved in derivatives.

Topic 8: Unit Trusts

• Concepts of units trusts (trust deed, role of manager, trustee, unit holders)

• Benefits of unit trusts • Types of unit trusts available • Regulation of the unit trust industry • Risk classification • Performance comparison (absolute, risk-adjusted, Sharpe ratio, Micropal

ranking, Treynor ratio, Jensen Alpha and Risk Adjusted Performance (RAP))

• Pricing and costs (front-end fee, realization charge, load vs. no-load, management fee, expense ratio)

• How to select unit trusts - (NAV) of unit trust fund, benchmarking used in comparing unit trust funds performance, general performance of local unit trust funds, factors influencing funds performance, differences between unit trust fund (offered by unit trust management company) and investment-linked fund (unit trust fund that managed by insurance companies - refers to fund with insurance protection offered to unit holders), unit trust funds offered by third-party providers

• Unit splits and dividends • Advantages of dollar cost averaging • Implications of tax and inflation on unit trust investment • The Unit Trusts Guidelines which have direct impact on unit trust industry • Withdrawal procedures involving withdrawal of savings by depositors from

their Employees Provident Fund (EPF) accounts to approved investment management companies for investing in unit trust funds

• Understanding the operations of Syariah based unit trusts • Understanding the Code of Ethics which govern the unit trust industry and

standards of professional conduct • Servicing and marketing unit trusts

2 Option Moneyness (OM) refers to whether the call is profitable when exercise. OM can be divided into in-the money (ITM), out-of-the money (OTM) or at-the-money (ATM). The FPAM syllabus only mentioned ITM and ATM and it is suggested the term OM to be used in the syllabus

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Candidates should be able to understand the benefits of investing in unit trusts, the different types of unit trusts, and how to analyze, compare and choose unit trusts that meet client’s requirement taking into consideration client’s objective, risk tolerance and time horizon. The tax and inflation implications of investing in unit trusts should also be considered.

Topic 9: Real Estate

• Basic characteristic of real estate as an investment • Valuation techniques commonly used in real estate • Real estate cycles • Factors influencing prices of real estates • Concept of property trusts • Real Estate Investment Trusts (REIT) available for investment on Bursa

Malaysia as alternative to real estate investment

Candidates should have an overview of the characteristics of real estate investment, the return and the risk, the real estate cycles, the concept of property trusts, so that they can advise clients considering including real estate in their investment portfolios.

Topic 10: Basic Concepts of Portfolio Management

• Asset allocation process (setting objectives, identifying constraints, assessing opportunities, determining asset mix, etc.)

• Different investment styles (top-down vs. bottom-up, active vs. passive) • Efficient market theory • Risk/return analysis • Concept and benefits of diversification • Efficient frontier • Performance measurement (benchmark, performance attribution analysis) • Capital Asset Pricing Model, classes of assets in portfolio management,

investment mandate for portfolio managers according to policy statement, trade-off between risk and return among different asset classes in portfolio, computation of market indexes, performance measurement according to Tracking Error – applies only on Index Fund i.e. passive management fund, expected return of portfolio, risk on expected return of portfolio – covering two asset class and three asset class portfolio, and computation of portfolio beta.

Candidates should be able to have a basic understanding of the portfolio management process, the importance of diversification among different asset classes, characteristics of the efficient frontier, the different investment styles of professional fund managers and how to evaluate performance.

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Financial Planning Association of Malaysia Recommended Reading List for Module 4 – Investment Planning

Type Title

Book Block, Hirt (2005), Foundations of Financial Management, 11th Edition, Mc Graw Hill (2005) Kapoor, Dlabay, Hughes (2204), Personal Finance, 7th Edition, Mc Graw Hill (2004) Brigham, Houston (2004), Fundamentals of Financial Management, 10th Edition, Thomson South-Western (2004) Harrison (2002), Personal Financial Planner, 2nd Edition, Prentice Hall (2002) Ross, Westerfield, Jordan (2006), Corporate Finance Fundamentals, 7th Edition, Mc Graw Hill (2006) Gitman (2006), Principles of Managerial Finance, 11th Edition, Pearson Addison Wesley (2006) Brealey, Myers, Marcus (2004), Fundamentals of Corporate Finance, 4th Edition, Mc Graw Hill (2004) Lee Hock Lock (2001), Financial Security in Old Age -Whither The Employees Provident Fund of Malaysia?, Pelanduk Publications (2001) Corrado, Jordan (2005), Fundamentals of Investments, Valuation and Management, 3rd Edition, Mc Graw Hill (2005) – Module 4 only Jones (2004), Investments Analysis and Management, 9th Edition, Wiley (2004) – Module 4 only Reilly, Norton (2003), Investments, 6th Edition, Thomson South-Western (2003) – Module 4 only Reilly, Brown (2003), Investment Analysis and Portfolio Management, 7th Edition, Thomson South-Western (2003) – Module 4 only Bacha, Obiyathulla (2002), Financial Derivatives : Markets and Application in Malaysia, UPM Press (2002) – Module 4 only

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Type Title

Book 3Damodaran (2002), Investment Valuation, Tools and Techniques for Determining the Value of Any Asset, 2nd Edition, Wiley (2002) – Module 4 only

Articles

60 short essays compilation in ‘Investing Your Savings”, a book written by Yeoh Keat Seng

Type Organization Web Address

Webs

Federation of Malaysia Unit Trust Managers Bursa Malaysia Securities Commission of Malaysia Bank Negara Malaysia Relevant Journals

www.fmutm.com.my www.klse.com.my www.sc.com.my www.bnm.gov.my www.ssrn.com

3 A highly recommended book for valuation of any assets

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http://www.fmutm.com.my/

http://www.klse.com.my/

http://www.sc.com.my/


http://www.ssrn.com/


MODULE 5 ESTATE PLANNING AND RETIREMENT PLANNING

Course Objectives

The duties of a Financial Planner are certain to include preparing provision for administration of the affairs of a client by someone other than the client. The area of estate planning is an essential part of a financial plan. The discussion focuses on all the key aspects of estate planning, including the 1958 Distribution Act (Revised 1997), Syariah Law (Faraid), Will Planning, Use of Power of Attorney, Rights of Beneficiaries and Trusts affecting both business owners and individuals. PART I: ESTATE PLANNING

Topic 1: Estate Planning Fundamentals

• The concept of estate planning • The estate planning process: Accumulation, conservation and distribution

of the estate • The estate planning team • Types of property: Business and individuals, probate and non-probate

items • Overview of the tools used in estate planning • Taxation implications of estate planning

Estate planning is an important part and subset of financial planning both for individuals and business owners. Candidates should have a basic understanding of the concepts and planning process of estate planning. Topic 1a: Wills and Will Planning

• The development, purpose and definition of a Will • Types of Wills • Law of testacy and intestacy: Distribution Act, 1997, Probate and

Administration Act, Wills Act 1959, Islamic law of inheritance • Preplanning considerations in Will planning • Steps and legal requirements in Will planning • The probate and administration process • Will planning for business owners

Will planning is fundamental to the estate planning process. Candidate should be well versed in the concepts, legal requirement and procedural aspects in Will planning for the individuals and business owners of various types of businesses.

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Topic 2: Trusts

• The characteristics and components of a trust • Methods of classifying trust

- Express trusts - Resulting trusts - Constructive trusts - Statutory trusts

• Types of trusts and their characteristics - Fixed trusts and their characteristics - Living trusts vs. Discretionary trusts - Living trusts vs. Testamentary trusts - Revocable trusts vs. irrevocable trusts - Funded vs. Unfunded trusts

• Application of trust instruments in estate planning • Taxation of trusts

Trust instrument is another important tool of estate planning. Candidate should be familiar with the various types and uses of trust instruments to meet the estate planning needs of the client.

Topic 3: Powers of Attorney

• Definition and characteristics of Power of Attorneys • Simple vs. Durable Power of Attorney • The Power of Attorney Act, 1949 • Duties and powers of the Attorney-in-Fact • Procedural aspects of the Power of Attorney

A Will is useless if the individual is still alive but is incapacitated. Under such circumstance, the durable power of attorney comes in useful in handling the affairs of the disabled individual. Candidates should be familiar with various types and uses of the power of attorney to meet the estate planning needs of the client.

Topic 4: Duties and Power of the Personal Representative

The personal representative of a deceased client may have various duties, either in the capacity of personal representative or in the subsequent capacity of trustee. The duties of a personal representative are a follows:

• To arrange for the funeral • To prove the Will it any • To administer the estate personally • To collect or get in the assets of the estate and preserve them from harm • To ascertain and pay the debts of the estate and apportion the burden of

their payment amongst the beneficiaries • To keep accounts and records of all dealings with assets and liabilities of

the estate • To distribute the net assets of the estate to the persons or entities to

receive them

The first part of this topic considers the fourth of those duties, the duty of the personal representative to collect the assets of the estate, and also refers to the last duty, the duty to distribute them. The second part of this topic turns to the

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power to invest, and covers the “prudent person” test and the system of “authorized trustee investments”. The duty to collect and the power to invest have been selected as the topics in the administration of estates that are most closely related to the practice of Financial Planners.

Topic 5: Rights of Beneficiaries

The Financial Planner should understand the difficulty of deciding between complaints that are groundless and should not be pursued but where the clients understanding of the problem can be aided, and those which have a basis worthy of further investigation by a solicitor, where referral is appropriate. A general knowledge of the rights of beneficiaries in different circumstances should assist the Financial Planner in the decision-making process.

Topic 6: Special Estate planning issues for business owners

• Types and characteristics of businesses • Business continuation problems of owners: Death, disability and

retirement • Solutions to business continuation problems: The buy-sell concept • Types of buy-sell plans • Valuation of businesses: Methods, discount factors and selection • Funding options: Valuation principles, role of business insurance and tax

issues • The keyman factor in business owners and non-owner-employees:

Approved and non-approved schemes. • Taxation implications of estate planning for business owners

Owners of different businesses face additional problems in planning for their estate. An example would be the business continuation issue. The candidates should be conversant with these problems and the types of solution available to best solve these problems.

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PART II: RETIREMENT PLANNING In Malaysia, the Employee Provident Fund (EPF) is a significant source of income for retirement. Unlike some western countries, private pension is uncommon in Malaysia, due mainly to the high EPF contribution rates and to the little (or no) tax incentive given to contributions and investment incomes of private pension schemes. In addition to the EPF, Malaysians commonly use non-specific investments (i.e. investments the objectives of which are not explicitly linked to retirement funding) such as properties, to fund their retirement needs.

This course is designed to enable candidates to develop suitable retirement plans for clients. The course covers how to analyze clients' retirement needs and the ways in which these needs can be met through various investment vehicles. Social security schemes such as the EPF and private pension schemes are also discussed.

Topic 1: Introduction

• The importance of retirement planning • The retirement needs analysis

- Determination of financial objectives at retirement - Calculation of retirement fund to meet objective - Availability of non-funded “safety nets” - Construction of monthly budget - Analysis of current asset, liabilities and retirement expenses - Inclusion of inflation factor in calculation of retirement expenses

• The underlying principle of retirement planning • The present and future demographic of Malaysia • The effect of changing demographic on retirement planning • Importance of starting early for retirement planning using numerical

examples.

Topic 2: Investment for Retirement

• Importance of time horizon and impact on risk • Discounted cash flow calculations • Typical assets classes and their uses • Portfolio theory applied to retirement planning

- Asset/liability modeling - Diversification - Taxation - Asset allocation

• Property as an asset class - Characteristics - Taxation

• Risks • Returns on available assets for investment in retirement

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Topic 3: Retirement Schemes

• Types of retirement plans • Approved and Non-Approved schemes • Deferred compensation schemes • Benefit design • Funding of benefits • Security of Fund • What adds up to a comfortable retirement? • Tax considerations • Likely developments • Defined-Contribution Plan and Defined-Benefit Plan

Topic 4: The Employee Provident Fund (EPF)

• History and development • Features of the Scheme • Benefits under the Scheme • Relevant legislation and guidelines • Allowable investments – rationale, characteristics and applicable

regulations • Future role • Details of % contribution in Account 1, and 2 of EPF scheme and details of

withdrawal for allowable investment by depositors from Account 1

Topic 5: Retirement Income Streams

• Lump sum versus income streams • Vehicles providing income streams

- Annuity - Deposits - Dividends – shares, unit trusts - Property

• Types of annuities - Annuity rates - Income considerations

• Tax Considerations • Advantages and disadvantages of the streams for retirees • Preference shares, guaranteed unit trust funds, Real Estate Investment

Trust (REITs), Malaysian Savings Bond • Discussion on immediate annuities and deferred annuity and to recognize

how annuities provide financial security.

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Topic 6: Role of Financial Planner in pre-retirement counseling

• Analysis of key factors affecting plan selection - Lifestyle - Aspirations - Family circumstances - Insurance - Taxation

• Integration of retirement plan with retirement needs • On-going needs for financial planning through retirement • Working during retirement, living on retirement income, the effect on

retirees due to mismatch between retirement plan and retirement needs.

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Financial Planning Association of Malaysia Recommended Reading List for Module 5 – Estate Planning and Retirement Planning ● Lee Hock Lock (2001), Financial Security in Old Age -Whither The

Employees Provident Fund of Malaysia?, Pelanduk Publications (2001)

● Kapoor, Dlabay, Hughes (2004), Personal Finance, 7th Edition, Mc Graw-Hill (2004)

● Harrison (2002), Personal Financial Planner, 2nd Edition, Prentice Hall (2002)

● Distribution Act 1958 (amended 1997)

● Intestate Succession Ordinance (1960) Sabah only

● Probate and Administration Act 1959

● Wills Act 1959

● Inheritance (Family Provision) Act 1971

● Islamic laws of inheritance

● Power of Attorney Act 1949

● Intestacy Law of Distribution Act 1958 (amended 1997)

● Trustee Act 1949

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MODULE 6 FINANCIAL PLAN CONSTRUCTION AND PROFESSIONAL RESPONSIBILITIES

Course Objectives

The financial plan construction process needs to be meticulously considered. A systematic process to gather raw data, analyze the information, recommend strategies and eventually implementing the plan is required in order to determine the clients' hidden and known objectives/ this chapter prepares the planner to be competent in all aspects of plan construction. In order to prepare a comprehensive financial plan, it is vital to be familiar with all aspects of financial planning which includes risk management and insurance planning, tax planning, retirement and estate planning as well as investment planning. Therefore, it is imperative to be familiar with the syllabus of Modules 2 to 5 of the Certified Financial Planner certification examinations.

The regulatory environment: An overview

• Understanding the regulatory environment • The need for higher professionalism • Creation of the virtuous cycle

Understanding the client

• Comprehension of clients’ needs • Understanding why the client is seeking your advice • The financial and non-financial consideration of a financial plan • Sieving out hidden agendas that client may have

The process of data gathering

• The importance of proper records • The legal aspects of knowing your client • How FPAM assess compliance • The importance of due diligence in data gathering • Essential considerations of client data sheets • Risk assessment

Financial Analysis of data to determine investment strategy

• Ascertaining the client’s present financial position • Determining the client’s objectives • Analyzing the client’s risk profile • Identifying the client’s risk profile • EPF considerations • Taxation consideration

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Strategies to meet needs

• Asset allocation strategy - Factors affecting asset allocation - The need for diversification - Portfolio guidelines - Provision for “worst-case” scenarios

• Selection of investments - Factors to consider - Making sure the client understand the characteristics of his portfolio

• The basis of recommendation of products • Possible legal implications

Plan Preparation

• Essential elements of a standard financial plan • The format • Consideration when preparing and presenting a plan • Securing the client’s approval and implementation agreement

The plan implementation process

• Implementation agreements • The legal considerations • Use and extent of disclaimers • Compliance measures to adopt when handling cash, cheques and paper

securities • The documentation process • The importance of good records keeping

Financial plan review

• Justifying the need of a review and components of a review • Reviewing the health of the portfolio

- Criteria - Factors to assist in the identification process - A systematic investments redemption process

• Establishing an agenda for the review • Tools to aid the review process Dealing with client complaints • A professional approach • How disputes arise • A dispute resolution process

The FPAM code of ethics

• Refer to the FPAM Professional Ethics for Certified Financial Planner Licensees

The importance of continuing education

Documents

FINANCIAL PLANNING ASSOCIATION OF MALAYSIA