<![if !vml]><![endif]>The investor education series
“Building Blocks” discusses the following areas and is
designed to give the investor basic education in the key
areas which will affect their decisions over how their
portfolios are managed. Better knowledge of these areas
will also empower investors in the wealth management
Block 1 -
Understanding the basics - cash, fixed interest
securities and equities
Most people would believe
that cash is the most secure investment, followed by
fixed interest investments. Most people would believe
that equities are high risk investments.
What people do not
appreciate is that the return on cash and fixed interest
investments are all components of the return on equity
capital. This has a big influence on the risks of each
investment over time. In fact, cash and fixed interest
investments are exposed to the same economic risks as
equities over the long term.
This building block deals
with the following issues.
The nature of cash, fixed
interest investments and equities over time.
Why do you buy
Why do you
hold cash and fixed interest?
Why are equities
high risk investments in the short term?
Why are cash and
fixed interest investments higher risk than
equities over the long term?
What is inflation
risk, what is economic risk?
If you do not understand the
basic nature of assets, you will not be able to properly
assess your aversion to risk, nor will you be truly
comfortable with your portfolio as it reacts to changing
market values over time.
Block 2 – The
relationship between financial needs and your investment
For individuals with
financial demands on their investments, the allocation
between cash, fixed interest and equities depends on the
size and timing of their financial needs over time.
Building block 2 discusses
the ways in which your investments can be managed to
meet your financial needs over time, given the nature of
cash, fixed interest and equity investments.
It also discusses the
importance of structure in terms of planning and the
performance and cost benefits to the individual.
Block 3 - What is
risk and what is risk aversion?
The investment industry’s
definition of risk is related to how the price of an
investment moves on a monthly basis relative to its
The risk to which an
investor is more concerned about is the risk of a stock
market crash, or severe and prolonged falls in the
values of investments and, the effect of these falls on
their financial security.
This section discusses how
portfolios can be structured to manage these risks and
what the average investor should be looking for from
their financial advisors.
It also tells an investor
how to assess their attitude to these risks so that the
portfolio is capable of managing these risks and their
aversions to these risks.
It is important that an
investor actually understands what being conservative
and aggressive actually means and how these different
stances affect the risk and return of their investments
and the structure of their portfolios.
Most financial risk
assessment questionnaires are designed to fulfil
compliance requirements and rudimentary portfolio
Block 3a –
Standard industry risk assessment
This takes the investor
through the standard industry risk assessment and gives
advice to investors about what they need to understand
and be careful of.
The major problem with the
standard industry risk assessment is that it is designed
for the retail product distribution and concentrates on
a limited area of risk. It also requires a high level of
expertise to complete since it often asks the investor
to make decisions about the portfolio structure they
want, decisions which should really be made by the
Block 4 –
Buying and selling equities
is to many a dark art. While it takes more resources and
expertise than the average individual possesses, the
basics of investment discipline are capable of being
understood by all.
In fact, understanding
investment discipline is key to understanding what your
advisor does, what you actually want and whether there
is a potential relationship between you and a
prospective asset manager.
This section discusses the
pros and cons of index versus active investment, asset
allocation and the benefits of overseas investment.
Should you be going for a
growth investment style, a value investment style, can
you accept an aggressive investment approach or should
you be invested conservatively?
Are you the type of investor
who should be invested in index funds and what type of
manager should you be looking to for active management?
What is global
diversification, what are its benefits, is it right for
you and if so how much and what is the best way of
It is important that the
investor understands the risks of each investment style
and whether or not they are able to accept these risks.
This talk also discusses the
type of investment disciplines that you need to be
looking for in your asset managers and the resources
they should be providing to back up their asset
management decisions. One size does not fit all.
Block 5 –
Efficient portfolios versus asset management expertise
This discusses the pros and
cons of standard industry solutions to portfolio
management versus the benefits of portfolios structured
with a direct relationship to asset management
Block 6 – Wealth
After constructing a
portfolio to meet your short term financial needs and
risk/return objectives, the most important part of the
wealth and asset management service is what the industry
terms wealth forecasting.
This talk discusses some of
the decisions that investors will need to make when
working out what they need to spend over time. It will
discuss how the risks of capital depletion can be
managed and what their advisors should be doing in
managing this risk.
It will also discuss what
the individual investor should be demanding in terms of
the planning and management
of their financial needs over time and the disciplines
used by the advisor to manage the risks of capital
Block 7 – Risk
This takes the individual
investor through an actual risk assessment and risk
profiling process. At the end of this the investor will
have a guide as to what their attitudes to risk are and,
what they will need from their advisor in terms of a
portfolio structure and its management to meet their
needs over time.
Block 8 – Asset
and wealth management selection
This discusses the
development of a wealth management mandate for the
individual investor (the parameters in which your wealth
manager will need to operate relative to your financial
needs, risk and performance preferences) and the
criteria needed to select an effective wealth and asset
How should they report and
explain performance, are they adept at managing your
asset allocation and personal liabilities, what should
they be doing for you?
Is the manager right for
you, how much should he be charging and how will this
relationship affect your other financial relationships?
Block 9 –
Reporting and monitoring
How do you monitor your
wealth and asset manager’s performance, portfolio
structure, planning and management? This talk educates
the investor about what their wealth manager should be
providing and how to interpret it.