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"TAMRIS" - Setting standards

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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 negotiation process.

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 equities?

  • 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 assets

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 average movement.

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 selection.

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 appropriate expertise.

Block 4 – Investment discipline

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 managing it?

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 expertise.

Block 6 – Wealth forecasting

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 depletion.

Block 7 – Risk assessment

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 manager.

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.