WEEK 10

Personal Financial Planning through Investment Planning & Management

Learning Objectives

• Understand investor risk and profile determination.

• Recognize the importance of asset allocation in the investment process.

• Analyze issues affecting investment performance.

• Evaluate consumer circumstances for recommending suitable products.

• Suggest appropriate investment product solutions based on specific consumer circumstances.

Overview of Investment Management

• Definition: Investment management involves managing a client's investments to achieve financial objectives.

• Purpose:

  • Maximize returns.

  • Match liabilities.

• Considerations/Constraints:

  • Time horizon

  • Liabilities

  • Liquidity needs

  • Risk aversion

  • Tax implications

  • Additional factors.

Approach to Fund Management

• Investment Policy/Strategy Development:

  • Establish clear investment objectives.

• Strategy Components:

  • Long-term strategic asset allocation options.

  • Tactical asset allocation when adjusting investment mix.

  • Performance benchmarks to assess success.

  • Stock selection based on research.

  • Evaluation of performance and strategy effectiveness.

Fund Performance Objectives

• Align investment performance with client circumstances.

• Conduct performance reviews to measure success.

• Portfolio rebalancing to maintain desired risk/return profile.

• Fund manager strategies may include:

  • Active investment

  • Passive investment

  • Hybrid investment approaches.

Asset Analysis Techniques

• Fundamental Analysis: Examining company fundamentals such as earnings and revenue.

• Technical Analysis: Using historical price data and charts to forecast future movements.

• Quantitative Analysis: Utilizing numerical and statistical models.

• Combination Approach: Integrating multiple analysis methods for informed investment decisions.

Asset Allocation

• Definition: The process of dividing investments among various asset categories.

• Key Factors in Allocation:

  • Personal circumstances and investment objectives.

  • Attitude to risk.

  • Income level and need for diversification.

  • Liquidity and accessibility of assets.

Asset Classes & Fund Composition

• Asset Classes: Historical performance might include:

  • Cash Deposits

  • Fixed Interest

  • Equities & Property.

• Fund Composition Types:

  • Managed funds

  • Collective investment schemes

  • Fund of funds

  • Index tracking funds

  • Assessing risk in selecting funds.

Client Circumstances & Objectives

• Affordability & Suitability: Ensuring investments match client’s ability to invest and relevant needs.

• Factors to Assess:

  • Wealth and investment exposure.

  • Lifecycle stage, e.g., SINKYs (Single Income, No Kids) & DINKYs (Dual Income, No Kids).

  • Timescales and attitude to risk.

  • Liquidity concerns and mortgage versus investment decisions.

Attitude to Risk

• Investor Risk Profile: Understanding individual risk levels:

  • Cautious

  • Cautious/Medium

  • Medium

  • Medium/Adventurous

  • Adventurous

Assessing a Client's Risk Profile

• Effective Method: Use a written questionnaire to gauge:

  • Tenure of investment.

  • Expected outcomes.

  • Existing investments and experiences.

  • Objective of investment and its size.

Meeting Client's Needs

• Customization of Portfolio Solutions: Match client investment needs with suitable product recommendations.

• Sample Asset Allocations: Understanding how existing portfolios may require adjustments (e.g., avoid churning and tax penalties).

• Client Understanding: Clarifying risks, charges, and potential reductions in yield.

• Periodic Reviews: Provide new portfolio solutions as needed.

Reporting to Clients

• Importance of Written Reports: Clear documentation of recommendations and records.

• Reports Should Include:

  • Statement of objectives.

  • Summary of income and assets.

  • Recommendations and product quotations.

  • Ensure reports are jargon-free!

Summary Points

• A diversified portfolio helps in managing risk through a range of investments across various asset classes.

• Assess previous investments carefully to determine which to retain or surrender, avoiding excessive trading (churning).

• Client risk profiles should be clearly understood, guided by questions about their experience, needs, and investment timelines.

• Consider personal circumstances, including age, wealth, and commitments, when designing investment portfolios.

• Risk tolerance should be categorized explicitly for better client understanding (cautious, medium, adventurous).

• Short investment time horizons typically favor lower-risk investments; utilize strategies like pound cost averaging.

• All recommendations should be documented in a precise report for client clarity and future reference.

Overview of Investment Management

Investment management involves overseeing a client's investments to achieve their financial goals. The primary purpose of investment management is to maximize returns while considering factors like matching liabilities and meeting the investor's specific needs. There are several key considerations and constraints when it comes to investment management, such as the time horizon, liquidity needs, risk tolerance, tax implications, and other personal factors. These elements are essential for shaping an investment strategy that aligns with a client's goals and circumstances.

Purpose of Investment Management

The main objective of investment management is to maximize returns while managing risk and matching the client’s liabilities. This involves making decisions that balance various factors, including risk, return, and the client's specific financial needs. Investment managers also consider the investor's time horizon and liquidity needs to create a plan that can meet both short-term and long-term goals.

Approach to Fund Management

The approach to fund management begins with the development of an investment policy and strategy. First, clear investment objectives are established, which serve as the foundation for creating an appropriate investment strategy. This strategy typically includes long-term strategic asset allocation and, when necessary, tactical asset allocation to adjust the investment mix in response to market conditions. Performance benchmarks are established to assess success, and stock selection is based on extensive research to ensure the right investments are made. Evaluating the performance and effectiveness of the strategy over time is crucial to ensuring the strategy is on track.

Fund Performance Objectives

Investment performance should align with the client’s circumstances and goals. Fund managers regularly conduct performance reviews to assess how well the investments are performing relative to the established objectives. Rebalancing the portfolio is often necessary to maintain the desired risk/return profile and ensure the portfolio remains aligned with the investor’s goals. Fund managers may use different strategies, including active investment (actively selecting and managing investments), passive investment (tracking market indices), or a hybrid approach that combines both strategies.

Asset Analysis Techniques

Several techniques are used to analyze assets, each with its approach. Fundamental analysis focuses on a company’s fundamentals, such as earnings, revenue, and overall financial health. Technical analysis, on the other hand, uses historical price data and charts to predict future market movements. Quantitative analysis employs numerical and statistical models to guide investment decisions. Many fund managers use a combination of these techniques to develop a more comprehensive view of potential investments.

Asset Allocation

Asset allocation refers to the process of dividing investments across various asset categories such as equities, fixed interest, and cash deposits. The key factors that influence asset allocation include personal circumstances, investment objectives, risk tolerance, income level, and the need for diversification. A well-balanced asset allocation helps ensure that an investor's portfolio is in line with their goals while managing risk appropriately.

Asset Classes & Fund Composition

Different asset classes perform differently depending on market conditions, and historical performance can provide insight into potential outcomes. Common asset classes include cash deposits, fixed interest investments, equities, and property. When selecting funds, investors can choose from various types of fund compositions, including managed funds, collective investment schemes, funds of funds, and index-tracking funds. Assessing the risk of these funds is an essential part of the selection process.

Client Circumstances & Objectives

A critical aspect of investment management is ensuring that the investments are suitable for the client’s circumstances. This involves assessing factors such as wealth, investment exposure, and life stage (e.g., single-income, no kids (SINKYs) or dual-income, no kids (DINKYs)). The time horizon and attitude to risk also play a significant role in designing a portfolio. Liquidity concerns and the balance between investment and mortgage decisions must also be taken into account.

Attitude to Risk

An investor’s risk profile is a crucial consideration in investment management. Risk profiles can vary from cautious to adventurous, with different strategies suited to each profile. Some investors may prefer low-risk investments that protect their capital, while others may be more willing to accept higher risks in exchange for the potential for higher returns. Understanding the investor’s risk tolerance ensures that investments are made in line with their comfort level and financial objectives.

Assessing a Client's Risk Profile

To assess a client's risk profile, investment managers often use a written questionnaire that evaluates factors such as the tenure of the investment, expected outcomes, and the client’s experience with previous investments. The questionnaire helps the manager understand the client's preferences, objectives, and risk tolerance, which informs the investment strategy.

Meeting Client's Needs

Once the client's needs and risk profile have been understood, a customized portfolio solution can be created. It’s important to ensure that the recommendations align with the client’s goals and are tax-efficient. Periodic reviews should be conducted to adjust the portfolio as needed and to ensure that it remains appropriate over time. The goal is to avoid unnecessary trading that could lead to tax penalties or suboptimal investment outcomes.

Reporting to Clients

Clear and transparent communication is essential in investment management. Providing clients with written reports is crucial for keeping them informed about their investments. Reports should include a statement of objectives, a summary of income and assets, and recommendations for any adjustments. These reports should be jargon-free to ensure that clients fully understand their financial situation and the performance of their investments.

Conclusion

In summary, investment management is a comprehensive process that involves understanding a client’s financial goals, risk tolerance, and personal circumstances. By employing various strategies, analysis techniques, and asset allocation approaches, investment managers create portfolios that are aligned with the client’s objectives. Regular reviews, customization, and clear communication through reports ensure that clients stay informed and their investments remain on track to meet their long-term goals.