It is important for each and every individual to have a financial plan designed to meet his/her present and future financial goals.
Financial planning is the process of meeting the individual's life goals and objectives through the proper management of finances. The hard-earned money and wealth that an individual saves over time is often a considerable part of the individual's legacy and so deserves proper attention.
Whereas financial planning can be helpful for individuals who have accumulated wealth or who are just starting to save some money, more sophisicated wealth management services are more appropriate for the individual who has already accumulated a substantial amount.
Wealth management services are offered by most financial institutions and the minimum amount of investible assets to be eligible to participate for this service differs from one institution to another. Most institutions provide high net worth individuals with additional services such as free credit cards and special privileges specifically designed for this niche market.
While some customers rely on their own experience and may be successful investing on their own, most investors prefer to have the peace of mind of having a financial adviser to focus and professionally manage their investment needs. A financial adviser provides customers with many benefits, including the time to pursue their day-to-day business requirements, daily needs and the comfort of knowing that their hard-earned money is in good hands. Furthermore, professional financial advisers can leverage the considerable information and analytical resources of a large organisation.
The thing to remember is that wealth management is an individually-designed process, a personalised service, not a product. It is built on professionalism, trust and a long-term relationship. The central part of wealth management services is the relationship between the service provider and the individual investor.
The financial adviser takes time to get to know the individual using a structured approach, asking questions and listening carefully to the clients' requirement and objectives. The customer's profile emerges from these questions and covers the age, status, financial standing and circ*mstances, income and expenditure, liabilities, risk tolerance and investment objectives.
Some investors are willing to assume some risk and understand that they may be rewarded with higher returns. Others prefer the security of cash deposits in the bank. However, the majority of investors fall somewhere in between these extremes. The customer profile indicates the investment objectives and the customers risk appetite at a point in time. These elements are essential in determining the most appropriate asset allocation model for each individual customer.
An asset allocation model is an investment strategy thoroughly researched by financial institutions. Such strategy enables the financial adviser to spread investments across various classes, including money market instruments, fixed interest securities, equities, commodities, property and hedge funds. An asset allocation model ensures that investments are spread across non-correlated asset classes or sectors, and are not concentrated in one or two types of stocks. While one can never eliminate completely the risk of fluctuating prices in the financial markets, the asset allocation model seeks to limit fluctuations in the total portfolio value and provides a more consistent return by spreading investments. In simple terms, an asset allocation model seeks to implement the ancient wisdom of not putting all your eggs in one basket. Based on the asset allocation model, the financial adviser builds the investment strategy and recommends the specific investments.
The agreed investment strategy becomes the blueprint for structuring the portfolio. Subsequently, the preservation of the capital and achieving the right return, whether income or growth, becomes the priority.
Whether the investor is interested in planning for retirement, children school fees, preserving of the assets for future generations, or just receiving financial assistance, wealth management financial advisers are dedicated to achieving the clients' goals. Ongoing communication with the customers and prudent investment decisions are fundamental for a long-term relationship.
Many financial institutions offer wealth management services to their more affluent customers. The aim is to build a tailor-made portfolio of investments to best suit the customer's financial needs, objectives and risk tolerance. Whether opting for individual bonds, equities, funds or structured products, the investments recommended are thoroughly researched by the adviser and the institution.
A financial adviser operating with an "open architecture" and providing "best of breed" financial solutions indicates that the financial adviser is not a tied agent and is authorised to offer independent financial advice, that is, to provide advice and make readily accessible financial products of various other financial institutions which would best meet the client's objectives. This gives comfort to customers as the financial products offered are based on a wide selection of the best performing products offered by third party providers.
Ultimately one must ensure that investments recommended, whether they are direct investments, collective investments schemes, or hedge funds, have been thoroughly researched to ensure that they are appropriate and in line with the customer's risk appetite and stand up to the scrutiny of strict selection criteria of the more renowned financial institutions.
The level of market risk may be reduced by distributing the investments into difference asset classes that are non-correlated financial instruments. Non-correlated implies that the financial instruments are different to a degree that they will not all fall in value at the same time. A financial adviser should aim for a scenario where when one set of instruments falls, a complementary set of instruments is known to rise, thus providing a degree of stability to the overall portfolio. Even further diversification may be built into a portfolio by investing in different countries, markets, sectors, industries, securities and currencies. The goal here is to protect the value of the overall portfolio against a drop in price in a single security and/or a market sector downturn.
The portfolio can be adjusted and re-balanced to meet the individual specific needs, as these may change from time to time. In today's complex market, asset management has become more challenging as the quantity and selection of investment instruments have grown. Financial advisers nowadays have a wide range of investment instruments to select from. These range from cautious investments such as high quality bonds to more complex derivative instruments, such as hedge funds and fund of funds.
Once the investment strategy, respective asset allocation and investments are in operation, monitoring and reviewing of the portfolio is crucial to ensure that the portfolio is performing as close as possible to the investor's expectations and objectives. Markets are dynamic, volatile and subject to fluctuations. In order to maximise returns and benefit from the market opportunities, portfolios need to be periodically reviewed and re-balanced. In fact, two factors which influence the investment plan and strategy are the changes in the individual's personal objectives and changes in market. The more aggressive a portfolio is, favouring growth as opposed to income, the more frequent monitoring should be.
In some cases, individuals may want to retain some control over their investments. In this case, advisory services are the answer as they give the investor control over investment decisions, while keeping him or her informed about market trends, any volatility in the capital markets and opportunities as they arise.
At the other end of the scale are discretionary portfolio management services, whereby the customer places complete trust in the financial adviser who takes over management of the portfolio on the basis of an agreed investment strategy and objectives.
It is important to highlight that contrary to a trust scenario, legal ownership of client's holdings are retained by the client himself/herself.
The portfolio management service is ideal for clients who want freedom and either have no time or lack the expertise to follow their investment and react accordingly. Movements in the portfolio will be based on the sole discretion of the portfolio manager and the investor will not necessarily be informed of every change in the investments comprising the portfolio.
It will be entirely up to the portfolio manager to ensure that the portfolio remains in line with the agreed strategy and delivering the right return, by transacting on behalf of the customer and exploiting market opportunities as they arise. After a predetermined period of time, full reporting of the transactions and movements in the portfolio will be discussed between the investment manager and the customer.
• Mr Tabone is a senior relationship manager for personal wealth management at Bank of Valletta Plc.
