Tag: Wealth Management BMS Mumbai University Notes

Economic factors involve all the determinants of the economy and its state. These are factors that can conclude the direction in which the economy might move. Businesses analyze this factor based on the environment. It helps to set up strategies in line with changes.

Factors are affecting business:

• The inflation rates
• The interest rate
• Disposable income of buyers
• Credit accessibility
• Unemployment rates
• The monetary or fiscal policies
• The foreign exchange rates

The inverse relationship between the interest rate and bond prices can be explained by opportunity risk. By purchasing bonds, an investor assumes that if the interest rate increases, he or she will give up the opportunity of purchasing the bonds with more attractive returns. Whenever the interest rate increases, the demand for existing bonds with lower returns declines as new investment opportunities arise.

Interest Rate High ↑ = Asset’s Vale ↓

Interest rate risk analysis is almost always based on simulating movements in one or more yield curves using the Heath-Jarrow-Morton framework to ensure that the yield curve movements are both consistent with current market yield curves and such that no riskless arbitrage is possible. The Heath-Jarrow-Morton framework was developed in the early 1991 by David Heath of Cornell University, Andrew Morton of Lehman Brothers, and Robert A. Jarrow of Kamakura Corporation and Cornell University.

The risk of value depreciation of bonds and other fixed-income investments is known as interest rate risk. Primarily due to depreciation in their interest rates, this happens because of market fluctuations. Such risk affects many types of investments, though it primarily affects fixed-income investments like bonds and certificates.

Typically, with a rise in the interest rate of a bond or certificate, there is a fall in the price of all related securities. Additionally, opportunity cost increases too, along with a rise in their interest rate. Defined as the cost of missing out on better investment options, this opportunity cost is directly proportional to the interest rate risk.

There are a number of standard calculations for measuring the impact of changing interest rates on a portfolio consisting of various assets and liabilities. The most common techniques include:

• Marking to market, calculating the net market value of the assets and liabilities, sometimes called the “market value of portfolio equity”
• Stress testing this market value by shifting the yield curve in a specific way.
• Calculating the value at risk of the portfolio
• Calculating the multiperiod cash flow or financial accrual income and expense for N periods forward in a deterministic set of future yield curves
• Doing step 4 with random yield curve movements and measuring the probability distribution of cash flows and financial accrual income over time.
• Measuring the mismatch of the interest sensitivity gap of assets and liabilities, by classifying each asset and liability by the timing of interest rate reset or maturity, whichever comes first.

Types of Interest Rate Risks

There are quite a few types of interest rate risks, which must be noted by every investor, be it an individual or a firm. These are explained below in detail.

• Price risk

The risk of change in the price of an investment bond or certificate is known as its price risk. This leads to unforeseen loss or gains while selling security in the future.

• Reinvestment risk

The risk of change in their interest rate might lead to the selling of the securities. In turn, this can lead to a loss of opportunity to re-invest in the current interest rate. Known as reinvestment risk, these types of interest rate risk can be further divided into 2 categories.

Mitigate Interest rate Risk

Purchasing floating-rate bonds: Floating rate bonds, as suggested by its name, have a rate of interest, which is directly related to market fluctuations. It is advisable to invest in these securities since being related to the market fluctuations, the return on these investments go up and down too. These should also be bought in a healthy mix of long-term and short-term investments.

Safer investments: The safest option for investors who are trying to reduce the risks associated with interest rates is to invest in bonds and certificates, which have short maturity tenure. Securities with short maturity tenure are less susceptible to the fluctuations in interest rate. This method for interest rate management reduces the chance of being subjected to interest rate fluctuations since they have low maturity tenure.

Selling long-term bonds: A common method which is often used is that of selling the long-term bonds. This effectively clears up the investment funds for re-investment in bonds with higher returns, thus allowing investors to manage the interest rate risk better.

Hedging: Hedging is an option, which can be used successfully to reduce the risks related to interest rates. Generally referring to the purchase of various types of derivatives which are available, there are many ways of hedging.

Diversification: Among the different options that can be employed by an institution to manage the interest rate risk associated with them, one of the most effective options is to diversify their financial investments.

Setting short-term, midterm, and long-term financial goals is an important step toward becoming financially secure. If you aren’t working toward anything specific, you’re likely to spend more than you should. You’ll then come up short when you need money for unexpected bills, not to mention when you want to retire. You might get stuck in a vicious cycle of credit card debt and feel like you never have enough cash to get properly insured, leaving you more vulnerable than you need to be to handle some of life’s major risks.

Financial Goal planning refers to setting financial goals and developing plans to achieve them. Your financial goals can be short-term, medium-term, or long-term. Short-term goals can be achieved within a span of one to three years. Examples are building an emergency fund or investing for a vacation. The medium-term financial goals could be buying a car or an SUV.

The long-term financial goals usually take a longer span of 10-15 years or even more. Examples are planning for retirement, buying a home, or saving for your child’s education and marriage. You must always invest for your financial goals based on the time horizon and risk profile.

Financial goals such as children’s marriage, buying a house, or a car are high-value goals. You must plan and invest your money to achieve these goals over a longer period of time. Financial goal planning helps you decide where to put your money. You can select the best investments based on your risk appetite and stay on track to achieve your financial goals.

Financial goal planning helps you to get more organised with your money. For example, you would have to cut down on excessive spending to achieve a financial goal such as saving for your children’s higher education.

Annual financial planning gives you an opportunity to formally review your goals, update them, and review your progress since last year. If you’ve never set goals before, take the opportunity to formulate them so you can get or stay on firm financial footing. Here are goals, from near-term to distant, that financial experts recommend setting to help you learn to live comfortably within your means, reduce your money troubles, and save for retirement.

Short-Term Financial Goals

Setting short-term financial goals can give you the confidence boost and foundational knowledge you need to achieve larger goals that will take more time. These first steps are relatively easy to achieve. Though you can’t make $1 million appear in your retirement account right now, you can sit down and create a budget in a few hours, and many people may be able to save up a decent emergency fund in a year. Here are some key short-term financial goals that will start helping right away and get you on track to achieving longer-term goals.

Create an emergency fund

An emergency fund is money you set aside specifically to pay for unexpected expenses. To get started, Rs. 5000 to Rs. 10,000 is a good goal. When you meet that goal, you’ll want to expand it so that your emergency fund can cover greater financial difficulties, such as unemployment. If you didn’t have an emergency fund prior to the COVID-19 pandemic, you likely wished you did. And if you did have one, you may have tapped into it and need to replenish it.

Pay off credit cards

Experts disagree on whether to pay off credit card debt or create an emergency fund first. Some say that you should create an emergency fund even if you still have credit card debt because, without an emergency fund, any unexpected expense will send you further into credit card debt. Others say you should pay off credit card debt first because the interest is so costly that it makes achieving any other financial goal much more difficult. Pick the philosophy that makes the most sense to you, or do a little of both at the same time.

Mid-term financial goals

Typically, midterm goals take about five years to achieve. A little more expensive than an everyday goal, they are still achievable with discipline and hard work. Paying off a credit card balance, a loan or saving for a down payment on a car are all mid-term goals.

Long-term financial goals

This type of goal usually takes much more than 5 years to achieve. Some examples of long term goals are saving for a college education or a new home.

Homeownership

Buying a home is a common long-term financial goal. Whether you’re saving for a down payment or working to pay off a mortgage, homeownership is one of the largest financial targets to aim for.

Saving up a sizeable down payment is the best way to get a reasonable home loan. And if you save enough, you can avoid the cost of Private Mortgage Insurance, which will save you even more money.

Invest in a College Education

Unfortunately, due to the increasing cost of college, paying off student loans has become a modern long-term goal. Whether you’re a student paying off your own balance or a parent saving for your child’s education, college tuition is easily a substantial goal to base your budget on.

Retirement

• Estimate your desired annual living expenses during retirement. The budget you created when you started on your short-term financial goals will give you an idea of how much you need. You may need to plan for higher healthcare costs in retirement.
• Subtract the income you will receive. Include Social Security, retirement plans, and pensions. This will leave you with the amount that needs to be funded by your investment portfolio.
• Estimate how much in retirement assets you need for your desired retirement date. Base this on what you currently have and are saving on an annual basis. An online retirement calculator can do the math for you. If 4% or less of this balance at the time of retirement covers the remaining amount of expenses that your combined Social Security and pensions do not cover, you are on track to retire.

Importance of Financial Planning

Financial Planning is process of framing objectives, policies, procedures, programmes and budgets regarding the financial activities of a concern. This ensures effective and adequate financial and investment policies. The importance can be outlined as:

• Adequate funds have to be ensured.
• Financial Planning helps in ensuring a reasonable balance between outflow and inflow of funds so that stability is maintained.
• Financial Planning ensures that the suppliers of funds are easily investing in companies which exercise financial planning.
• Financial Planning helps in making growth and expansion programmes which helps in long-run survival of the company.
• Financial Planning reduces uncertainties with regards to changing market trends which can be faced easily through enough funds.
• Financial Planning helps in reducing the uncertainties which can be a hindrance to growth of the company. This helps in ensuring stability an d profitability in concern.

Set financial goals

It’s always good to have a clear idea of why you’re saving your hard-earned money. Think it through using our financial goals worksheet.

Create a budget

Consider this your monthly cash flow and savings/investing plan. Give yourself permission to decide where and how to send your money with our budgeting worksheet.

Plan for taxes

It can go a long way toward helping you keep more of your money next year. Our tax planning worksheet will help you think through potential income tax credits and deductions.

Build an emergency fund

All the planning in the world won’t help if life throws you a curveball and you’re not prepared financially. That’s where an emergency fund comes in handy. Our calculator will help you decide how much you need.

Manage debt

Understanding and managing debt is a key part of creating a financial plan. Use our debt management worksheet to log your numbers and find the right balance.

Protect with insurance

Life can change in an instant. People with a good financial plan hope for the best, but plan for the unexpected. Insurance helps with that. Use our disability and life insurance worksheet to log your coverage and identify any gaps.

Plan for retirement

Even if it’s a long way off, think about what you want your money to do for you when you retire, and create a plan to make it happen. Our retirement savings checklist will help.

Create your personal investment Portfolio

Constructing your first investment portfolio is an achievement in itself. After all, it is your first step towards wealth accumulation. Building a portfolio involves distributing your investment amongst asset classes like equity, debt, and cash. It is known as asset allocation. Although equity is the best tax-efficient and inflation countering vehicle. However, putting all your money in equity isn’t a prudent move. You need to diversify the sums that are to be allocated in each asset class as per your investment goals. It is always wiser to be a long-term investor in order to accumulate greater corpus. Your investment horizon would ideally be around 10-15 years. Once you have constructed a portfolio, you need to rebalance it periodically to keep the portfolio risk within expected limits. This is relevant from standpoint of market fluctuations. At the very outset, you may decide the time intervals after which you will be rebalancing. You can do it once in every six months or a year.

Dealing with surplus cash judiciously

How you deal with the surplus cash determines your future. When you don’t have a plan, you are likely going to indulge in overspending. This money could have been used to make you financially self-sufficient. In the backdrop of inflation, everything is going to be costlier with each passing year. If you don’t invest, your money won’t grow to bridge the inflationary gap. You might have to work beyond your 70s to pay your bills. It’s like not being able to retire forever. Investing can be a great way to channelize the extra cash and counter inflation. It can be used to grow wealth and divert it to goal accomplishment. The earlier you start investing the better. Investing need not be a difficult and boring task. Perceive it as a bridge between where you are and where you want to be. Start with identifying goals like buying a car or planning for retirement. Categorise those goals into short-term and long-term. Goals that can be achieved within 1 to 3 years are essentially short-term. Goals that need a horizon of 3-5 years are called medium-term goals. Goals that require more than 5 years to achieve our long-term goals. Then identify your risk appetite i.e. the degree to which you are comfortable with a fall in the value of your investments. If you can digest say a 20% fall in the value of investments, you are a high-risk seeker. Else, categorize yourself as a risk-averse person. After identifying your goals and risk appetite, you can conveniently select the investment haven. A risk-seeker may go for a diversified equity fund. Conversely, a risk-averse short-term investor may go to a liquid fund or a balanced fund. Mutual funds have come up as the most versatile investment haven. You can start Systematic Investment Plan (SIP) at a nominal sum of Rs 500. Under SIP, a fixed amount gets deducted from your saving and is invested in mutual fund scheme of your choice.

Maintain a personal balance sheet

Having a personal balance sheet helps to know what you own and what you owe! It’s a pretty powerful tool to take your finances to the next level. It’s a statement wherein you can jot down your assets and liabilities. The difference between your assets and liabilities shows your personal Net Worth. Before getting started, pull together your bank statements and other proofs of the liabilities. Then list down your assets like the bank balance, all investments, home value, and value of other assets. Take a sum of all the assets to arrive at the total value of your assets. Afterward list down your liabilities like the car loan, home loan, credit card balances and remaining balances in other loans. The sum of all the liabilities will show the value of the money you owe. When you subtract the value of liabilities from assets, you get your Net Worth. Ideally, it needs to be positive which means money you own is greater than the money you owe.

Regulate your expenses wisely

If you are living paycheck to paycheck and find yourself struggling for money even before the month ends, then chances are you are living way beyond your means. Maybe there are a lot of unplanned expenses! These might be leaving you with no money for the necessities. But there’s a way out of this. Try making a budget. Unless you have a budget before your eyes, you won’t be able to control your cash flows. A budget simply shows how much money you have coming in and how those funds are spent. Start by categorizing your expenses into fixed and variable; urgent and non-urgent; necessities and luxury; avoidable and unavoidable. In this way, you will create a full inventory of expenses in front of you. The more you convert things from abstract to physical, the better you will get a hold of them. You can create a hierarchy of needs and decide which one’s to address first. It’s all about prioritizing. You need to accept that you have got limited resources and unlimited wants.

Manage your Money

Managing one’s money need not be boring. It’s not rocket science and you need not be from a financial background. You only need to show a bit of commitment. Deciding to save is the first step towards money management. Saving money can be the powerful tool towards greater financial independence. Imagine yourself borrowing from a friend for that urgent visit to the doctor! In case you don’t have any friend, then you might have to swipe your credit card. And you know credit card is the most expensive form of debt. Repeat this a few more times and you end up in a debt trap even before you realize that. You may have many financial goals in your mind. Like buying a vehicle or the latest smartphone or wealth accumulation. In all these situations, you need money.

Cutting Expenses

Determine where you might be spending too much. Are you splurging on entertainment? What about your car payments, vacations, or food?

It’s important to look for ways to save, but balance is also crucial. Your goal isn’t to eliminate every fun activity but to control your spending to free up some of your income for savings.

A properly framed code is, in effect, a form of legislation within the company binding on its employees, with specific sanctions for valuation of the code. It may be a document which may outline the mission and values of the business or organization, how professionals are supposed to approach problems, the ethical principles based on the organization’s core values and the standards to which the professional will be held.

Wealth Managers abide by the following:

• To act with integrity in fulfilling the responsibilities of your appointment and seek to avoid any acts, omissions or business practices which damage the reputation of Quays Wealth Management Ltd and the financial services industry.
• To act honestly and fairly at all times when dealing with clients and to act in the best interests of each client and treat them fairly.
• To treat people fairly regardless of age; disability; gender reassignment; pregnancy and maternity; marriage and civil partnership; race; religion and belief; sex; and sexual orientation.
• To observe applicable law, regulations and professional conduct standards when carrying out financial services activities.
• To observe the standards of market integrity, good practice and conduct required or expected of participants in markets when engaging in any form of market dealings.
• To only make recommendations that are suitable, appropriate and that puts the interests of the client first.
• To attain and actively manage a level of professional competence appropriate to your responsibilities and commit to continued learning to ensure the currency of your knowledge, skills and expertise.
• To decline any engagement for which you are not competent unless you have access to such advice and assistance as will enable you to carry out the work competently, and act in the clients best interests.
• To uphold the highest personal and professional standards.
• To act with fairness, integrity and courtesy in all business activities.

Compliance with Applicable Rules

Members shall know and comply with the provisions of the laws, regulations and self-regulatory rules as well as all internal rules of their employer that are applicable to their activities. Members must comply with the provisions of laws, regulations and rules enacted by self-regulatory bodies. They must also abide with the internal guidelines issued by their employer.

Principle of Professional Ethics

Members shall exercise their profession in an independent, diligent and professional as well as ethical manner. They undertake in all cases to give priority to the interests of the clients and commit to treat them fairly. The principles of professional ethics can be divided into four fundamental principles:

• Integrity: Members must preserve their professional and personal integrity.
• Independence: Members must exercise independent and objective judgment in their professional activities.
• Loyalty and priority of the clients’ interests: Members owe a duty of loyalty to the clients. They must under all circumstances give priority to the clients’ interests and ensure that they are treated fairly and equitably.
• Professionalism and diligence: Members must always act as qualified professionals and perform their activities with the diligence required from qualified professionals.

Duty to Inform the Employer

Members shall inform their employer that they have to comply with these Rules of Conduct and Fundamental Principles of Professional Ethics. As a general rule, members should inform their employer that they are a member of the Association of International Wealth Management and are therefore bound by these Rules of Conduct and Fundamental Principles of Professional Ethics.

Conflicts of Interests

Members shall avoid any situation of conflict with interests of clients. If a conflict cannot be avoided, priority has to be given to the interests of the clients. Members treat the interests of clients and investors in accordance with the principle of equal treatment. Members have to disclose any fact affecting their objectivity and their independence.

Duty of Information

Members must ensure that the information they provide to clients and investors is clear, timely and accurate. They are prohibited from promising a given return.

Compliance with Applicable Rules

Members shall know and comply with the provisions of the laws, regulations and self-regulatory rules as well as all internal rules of their employer that are applicable to their activities. Members must comply with the provisions of laws, regulations and rules enacted by self-regulatory bodies. They must also abide with the internal guidelines issued by their employer.

Sanctions

The effectiveness of regulating professional conduct by professional standards arises from the existence of efficient penalties, recognized as such by and in the profession.

Code of ethics

Diligence

Provide professional services diligently. Diligence requires fulfilling professional commitments in a timely and through manner, and taking due care in planning, supervising and delivering professional services.

Competence

Maintain the abilities, skills and knowledge necessary to provide professional services competently. Competence requires attaining and maintaining an adequate level of abilities, skills and knowledge in the provision of professional services. Competence also includes the wisdom to recognize one’s own limitations and when consultation with other professionals is appropriate.

Fairness

Be fair and reasonable in all professional relationships. Disclose and manage conflicts of interest. Fairness requires providing clients what they are due, owed or should expect from a professional relationship, and includes honesty and disclosure of material conflicts of interest.

Integrity

Provide professional services with integrity. Integrity requires honesty and condor in all professional matters. Financial Planning professionals are placed in positions of trust by clients, and the ultimate source of that trust is the Financial Planning professional’s personal integrity.

Confidentiality

Protect the confidentiality of all client information. Confidentiality requires client information to be protected and maintained in such a manner that allows access only to those who are authorized.

Professionalism

Act in a manner that demonstrates exemplary professional conduct. Professionalism requires behaving with dignity and showing respect and courtesy to clients, fellow professionals, and others in business-related activities, and complying with appropriate rules, regulations and professional requirements.

Objectivity

Provide professional services objectively. Objectivity requires intellectual honesty and impartiality. Regardless of the services delivered or the capacity in which a financial planning Professional functions, objectivity requires Financial Planning professionals to ensure the integrity of their work, manage conflicts and exercise sound professional judgment.

Client First

Place the client’s interests first. Placing the client’s interests first is a hallmark of professionalism, requiring the Financial Planning professional to act honestly and not place personal gain or advantage before the client’s interest.

Wealth Management is an investment advisory service that combines other financial services to address the needs of affluent clients. Using a consultative process, the advisor gleans information about the client’s wants and specific situation, and then tailors a personalized strategy that uses a range of financial products and services.

Data Gathering: Establishing details about your assets and liabilities, income and expenditure. Understanding arrangements already in place and attitude to investment risk.

• Assets (and their fair market value)
• Liabilities
• Monthly Cash Expenditures
• Income Tax Situation
• Wills and Trusts
• Insurance Contracts
• Retirement assets

Goal Setting: Establishing your goals and aspirations for the short and long term. Understanding your commitment to meeting your objectives

Define the terms of engagement: Wealth Manager for providing his services has to define the terms of engagement, the service deliveries and the fees the wealth manager is going to charge the client for his services.

Identification of Needs: We will analyze your current position and assess any gaps in your situation. Next, identify what needs to be done to meet your objectives. Once the objectives have been identified, we begin the process of analyzing your financial information to develop a strategy for your individual financial plan. We pay particular attention to those areas of your plan of utmost importance to you.

Report Preparation: Our analysis and recommendations are presented in a written report. This forms the basis of a formal review at which we agree on an action plan. Upon completion of analysis, we can provide an outline of an overall strategy.

Analyzing the opportunities and challenge: Analyzing the opportunities and challenges is explaining the client the risk factors associated with each investment alternative that the wealth manager purposes.

Implementation: The best plan is worthless without proper implementation so in this critical step we walk with you to put the plan in action. Effecting the plan will invariably involve new and changed arrangements. We liaise with providers and other professionals to implement the agreed plan.

Review and Revision: Wealth management is a long-term plan that requires regular annual review. Changes in your circumstances are considered as well as fund performance.

Being upfront from the very beginning is key to managing client expectations. Set out your rules of play before you take on any work, and agree on your process together. If you can’t guarantee something, be clear about it it’s always better to under promise and overdeliver. Remember that many clients don’t actually know much about the creative process at all, so take this chance to be clear about what you can and cannot promise, e.g. writing a great promotional article doesn’t mean it’s definitely going to get a great placement.

Managing client expectations is one of the most difficult and often frustrating aspects of the financial planning business. Although many clients can be quite reasonable when they lose money in their investments, there will invariably be a few who are determined to vent their frustrations at you, either via telephone, other correspondence, or in person.

The wealth management landscape is constantly evolving. Today’s investors have high expectations, demanding anytime, anywhere access to accounts and information, while expecting frictionless speed of updates and requiring greater transparency.

However, there are a number of things that advisors can do to help prevent most of these outbursts; and that’s by helping clients create expectations within the bounds of reality. It sounds almost too simple, but when clients are better educated about what they can expect from their investments and their relationship with their financial planners they are less likely to be outraged by things that are beyond the planner’s control.

Client Profiling

Customer profiling is the practice of organizing customers into specific groups possessing similar goals or characteristics. A customer profile can be based on a number of identifiers including demographics, location, hobbies, preferred social media channels, likes/dislikes, buying patterns, psychographics and credit background. Assigning every customer, a profile allows organizations to target products, services and communications in a consistent manner that resonates to a group of customers.

Client profiling is a useful concept that helps in establishing a relationship with the client. It helps in figuring out the financial personality of the client. While clients within each profile may be dissimilar, they can be broadly identified as following types:

Relationship clients

These people want to form a bond with someone whom they trust. They tend to be easy to talk to at the initial meeting. Much of the interaction is informal and conversational. Getting to know these clients as individuals is of utmost importance. They want to feel comfortable. They tend to be very good, long-term clients and very nice to work with.

Fear-based clients

These people tend to have very little financial experience or have had bad financial experiences. These clients are also reliant upon financial advisors. They often need educating, although they may seemingly not want it. The job of the financial advisor is not to take care of them but rather to work with them. They have to be helped in gaining confidence in the money arena.

Curious clients

They are working with financial advisors because of time constraints. They take a great interest in what a financial advisor does. These clients would have formed their opinions through what they have read or heard. They often will continue to focus on items that validate their thinking and they are knowledgeable.

Greedy clients

These are often the clients who are only interested in some in-articulated and ever-changing objectives, usually measured by short-term results. They may appear to be charming initially because they are often marked by high energy and a quick mind.

Benefits of customer profiling

• The ability to tailor marketing efforts to relevant audiences.
• Personalization of customer experiences to increase brand loyalty.
• Can provide a more holistic view of market potential.
• Improved customer satisfaction
• Increased response, click or open rates.
• More potential customers, prospects and customer types are identified.
• Increased sales and revenue.