CFP Certification (Australia): Financial Planning Principles and Practice

Domain focus

Financial Planning Principles and Practice is the integrating domain. The exam tests whether you can run a defensible advice process: establish the relationship, collect quantitative and qualitative data, identify goals, analyse gaps, develop prioritised recommendations, implement and review. It also tests the Australian best-interests and disclosure framework.

Core rules and concepts

The FPSB planning process is cyclical, not a product sale. Document the client's objectives, financial situation, needs, risk tolerance and risk capacity before recommending.
Under the Corporations Act 2001 (Cth), providers of personal advice to retail clients must act in the client's best interests (s 961B) and give appropriate advice (s 961G). Conflicts must be prioritised in the client's favour (s 961J).
A Statement of Advice must be clear, concise and effective; explain the basis of advice, fees, associations and risks; and prioritise actions. A Financial Services Guide is a separate disclosure document.
Cash-flow analysis is foundational. Identify surplus, debt service, emergency reserve, insurance gaps, tax position and superannuation capacity.
Recommendations should be sequenced: protect first (emergency fund, insurance), reduce expensive debt, then invest or contribute to super, then estate planning.

Worked example

A 42-year-old earns $130,000, has a $520,000 mortgage, $8,000 cash, no will and $180,000 in super. She wants to retire at 60. The planner should not start with a product. First, establish goals and risk capacity; analyse cash flow; build a three-to-six-month emergency reserve; check income protection and TPD inside or outside super; review the mortgage offset; then recommend salary sacrifice within the concessional cap and a will plus binding death benefit nomination. Each recommendation must be traced to a client objective.

Traps

Confusing risk tolerance (willingness) with risk capacity (ability to bear loss).
Jumping to a product before identifying the objective and gap.
Using a risk-profile score as the whole know-your-client process.
Failing to document why a recommendation is appropriate and how conflicts were managed.

Insurance Planning

Domain focus

Insurance Planning tests risk identification and the matching of cover to measurable needs. It covers life, total and permanent disability (TPD), trauma, income protection and general insurance, plus ownership, taxation and policy definitions.

Core rules and concepts

Use a needs analysis, not a rule of thumb: debts, income replacement, education, funeral and emergency costs, less existing assets and cover.
Life cover pays a lump sum on death. TPD pays on permanent disability under the policy definition. Trauma pays on specified medical events. Income protection replaces part of income after a waiting period and for a benefit period.
Policy wording controls outcomes: definitions of disability, exclusions, waiting periods, benefit periods, indexation, premium structure and renewal terms.
Ownership matters. Individually owned policies are simple and portable; super-owned policies may use concessional contributions but benefits are paid to the trustee and definitions or liquidity can be narrower.
The Insurance Contracts Act 1984 (Cth) imposes disclosure obligations. Non-disclosure or misrepresentation can allow the insurer to reduce or avoid a claim.
Review cover after marriage, children, debt changes, income changes and business succession events.

Worked example

A 38-year-old earns $120,000, has a $500,000 mortgage, two young children and $200,000 group life/TPD in super. Estimated needs: clear mortgage $500,000; income replacement $600,000; education $200,000; funeral/emergency $20,000 = $1,320,000. Less super cover $200,000 and cash savings $100,000 = $1,020,000 gap. The planner compares individually owned and super-owned cover, checks TPD definitions and income protection waiting periods, and documents why the recommended structure is affordable and appropriate.

Traps

Recommending the cheapest premium without checking definitions and exclusions.
Assuming superannuation cover is always adequate or portable.
Confusing trauma cover with TPD or income protection.
Replacing existing cover without comparing loaded terms, exclusions and grandfathering.
Ignoring underinsurance and the client's ability to maintain premiums.

Investment Planning

Domain focus

Investment Planning tests portfolio construction and the advice process around it: objectives, risk, asset allocation, diversification, product selection, taxation and review. It is not a stock-tipping domain.

Core rules and concepts

Start with an investment policy statement: return objective, risk tolerance and capacity, time horizon, liquidity needs, tax position and constraints.
Diversification reduces unsystematic risk; systematic or market risk remains. Correlation between assets drives diversification benefits.
Asset allocation is the primary driver of portfolio risk and return. Cash, fixed interest, property, equities and alternatives have different expected returns, volatility and liquidity.
Risk has two sides: willingness (tolerance) and ability (capacity). A long horizon and stable cash flow can raise capacity, but not necessarily tolerance.
Australian tax affects outcomes: individuals and trusts may access the 50% CGT discount for assets held over 12 months; super funds may access a 33 and one-third percent discount; franked dividends carry franking credits.
Fees compound against the client. Compare management costs, transaction costs, advice fees and tax costs.

Worked example

A 30-year-old has $50,000 to invest, a 30-year horizon, stable income and a moderate risk tolerance. She also needs a $15,000 emergency fund. The planner first confirms the emergency reserve, then builds a diversified growth-oriented portfolio, for example 70% growth and 30% defensive, using low-cost broadly diversified vehicles. The rationale is horizon and capacity, not recent performance. The planner documents that a market fall does not trigger a change in strategy unless goals or capacity change.

Traps

Chasing past performance or selecting a product before setting the asset allocation.
Treating a questionnaire score as a complete risk assessment.
Ignoring fees, tax and liquidity.
Overconcentrating in employer shares or one property.
Using borrowed money without assessing margin-call and cash-flow risk.

Retirement Planning

Domain focus

Retirement Planning tests the transition from accumulation to retirement income: superannuation preservation, contribution caps, tax concessions, account-based pensions, the Age Pension and drawdown sustainability.

Core rules and concepts

Preservation age depends on birth date; it is 60 for people born on or after 1 July 1964, with earlier ages for older cohorts.
Concessional contributions include employer SG and salary sacrifice. For 2024-25 the cap is $30,000; the non-concessional cap is $120,000, with bring-forward availability depending on total superannuation balance.
The transfer balance cap limits how much can be moved to the retirement phase; it is indexed and has personal cap consequences.
Account-based pensions have minimum annual drawdowns that rise with age. Income from a taxed super fund is generally tax-free from age 60.
The Age Pension age is 67. Entitlement depends on the income and assets tests, with deeming and taper rules.
A transition to retirement income stream can supplement reduced work income, but special tax rules apply and lump-sum access is restricted before retirement.

Worked example

A 62-year-old earns $100,000, has $800,000 in super and wants to reduce to three days per week. She has reached preservation age. The planner models a transition to retirement pension at the 4% minimum ($32,000) to replace part of her reduced salary, while checking that salary sacrifice plus SG does not exceed the $30,000 concessional cap. The planner also models the Age Pension at 67 and the long-term drawdown, rather than assuming the super balance alone will last.

Traps

Exceeding concessional or non-concessional caps and triggering excess contributions tax.
Ignoring the transfer balance cap when starting pensions.
Assuming the Age Pension is automatic or ignoring the assets test.
Drawing less than the minimum pension amount.
Treating a transition to retirement pension as unrestricted lump-sum access.

Tax Planning

Domain focus

Tax Planning tests the identification and management of tax consequences across advice areas: income tax, CGT, superannuation, trusts, companies and GST. The exam rewards correct treatment, not avoidance schemes.

Core rules and concepts

Assessable income includes salary, business income, interest, rent, dividends and net capital gains. Deductions must be incurred in producing assessable income or allowed by law.
Marginal rates apply progressively, plus the Medicare levy. Tax offsets reduce tax payable, not taxable income.
CGT applies to assets acquired after 20 September 1985. The cost base includes acquisition costs, incidental costs and improvements. Individuals and trusts may access the 50% discount for assets held over 12 months; complying super funds may access 33 and one-third percent.
Franking credits attach to franked dividends and can reduce tax; refundability depends on the entity.
Structure matters: individual, partnership, trust and company have different rates, distribution rules and asset protection. Personal services income rules can restrict splitting.
Superannuation has concessional and non-concessional caps. Contributions tax and Division 293 tax can change the benefit of salary sacrifice.

Worked example

An investor sells an investment property for $700,000. Cost base is $450,000, including purchase costs and improvements; the property was held for five years. The capital gain is $250,000. As an individual, the 50% discount reduces the net gain to $125,000. If the investor's marginal rate including Medicare is 39%, illustrative tax is $48,750, before considering other income, losses or offsets. The planner documents the cost base and timing rather than treating the sale price as the gain.

Traps

Confusing the 50% CGT discount with a 50% tax rate.
Forgetting to add incidental costs and improvements to the cost base.
Assuming the main residence exemption covers all land or all periods.
Ignoring franking credit refundability and trust distribution rules.
Recommending a structure without checking PSI, CGT and superannuation consequences.

Estate Planning

Domain focus

Estate Planning tests how assets pass on death and incapacity. It covers wills, intestacy, executors, testamentary trusts, superannuation death benefits, powers of attorney and tax consequences.

Core rules and concepts

A valid will must meet state or territory formalities: writing, signature and witnessing. An executor administers the estate and obtains probate where required.
Intestacy rules apply if there is no valid will or a residue is not disposed of. Blended families and dependants can create family provision claims.
Superannuation is not generally an estate asset. The trustee pays a death benefit to a dependant or legal personal representative under the trust deed and nominations. Binding nominations constrain the trustee; non-binding nominations do not.
Death benefit tax depends on the recipient and the source of the benefit. Lump sums paid to dependants are generally tax-free from taxed sources; payments to non-dependants can be taxed.
Testamentary trusts can provide flexibility and income-tax planning, but must be established by will and administered correctly.
Powers of attorney and guardianship deal with financial and personal decisions during incapacity; they do not replace a will.

Worked example

A widow has a $1.2 million home, $400,000 in super and two adult children. Her will leaves the estate equally, but her super fund has a non-binding nomination to one child. The planner explains that the trustee may follow or reject the nomination; a binding nomination or reversionary pension may better align the outcome. The planner also checks whether a testamentary trust is appropriate, and whether the home passes under the will or by survivorship.

Traps

Assuming the will controls superannuation.
Using an invalid or expired binding nomination.
Ignoring tax on death benefits paid to non-dependants.
Failing to plan for blended families and family provision claims.
Overlooking incapacity documents and assets held jointly or in companies or trusts.

Professional Conduct and Regulation

Domain focus

Professional Conduct and Regulation tests the ethical and legal framework around advice: best interests, conflicts, licensing, disclosure, conduct standards and record keeping. It is examined through scenarios, not definitions alone.

Core rules and concepts

Personal advice to retail clients must satisfy the best-interests duty (Corporations Act 2001 (Cth) s 961B) and appropriate-advice obligation (s 961G). The safe harbour in s 961B(2) requires evidence of the client's objectives, financial situation and needs, and a reasonable basis for the advice.
Conflicts must be prioritised in the client's favour (s 961J). Conflicts include commissions, in-house products, referral payments and ownership incentives.
An Australian Financial Services Licence is required to provide financial product advice. Authorised representatives act under an AFSL and must comply with its conditions.
Retail clients receive a Financial Services Guide, and personal advice requires a Statement of Advice. Product disclosure uses a PDS and target market determination.
The financial advisers' Code of Ethics requires trustworthiness, competence, honesty, fairness and diligence, with specific standards on conflicts, client information and records.
Record keeping must evidence the client relationship, advice basis, fees and review.

Worked example

An adviser recommends an in-house managed fund that pays a trailing commission. The client's objectives could also be met by a lower-cost option. The adviser must identify and manage the conflict, disclose the remuneration, compare the options on the client's objectives, and recommend the option that is in the client's best interests. If the conflict cannot be managed, the adviser should avoid the recommendation or refer the client. The file must record the comparison and rationale.

Traps

Treating disclosure of a conflict as sufficient without changing the advice.
Recommending a product because it is on the licensee's approved list.
Failing to show how the advice is appropriate to the client's objectives.
Using inaccurate or incomplete disclosure documents.
Not keeping contemporaneous records of the advice process.