CFP- Level-1-IP (Global) Chapter 7-9

Investment Planning & Asset Management CFP Level 1 | Module 2 | Global India’s 1st & Largest CFP Education Provider Authorised by FPSB USA

Chapter-7 Wealth Management Friday, 15 July 2022 Investment Planning & Asset Management

Concept of wealth management • Wealth management is a broader concept than financial planning and it caters to High Net worth Individuals. • It is an investment advisory service that combines other financial services to address the needs of affluent clients. • It is a consultative process whereby the advisor gathers information about the client's wants and recommends a customised strategy with appropriate financial products and services. • A wealth management advisor or wealth manager is a type of financial advisor who utilizes the range of financial disciplines available, such as financial and investment advice, legal or estate planning, accounting, and tax services, and retirement planning, to manage an affluent client's wealth. • He charges fees for managing the wealth of affluent people. Wealth management practices differ depending on the nation. Friday, 15 July 2022 Investment Planning & Asset Management

Understanding Wealth Management • Wealth management is much more than just investment advice, as it can encompass all parts of a person's financial life. • The idea is that rather than trying to integrate pieces of advice and various products from a series of professionals, high net worth individuals benefit from a holistic approach in which a single manager coordinates all the services needed to manage their money and plan for their own or their family's current and future needs. Friday, 15 July 2022 Investment Planning & Asset Management

Wealth Management A competent wealth manager must be conversant with all component areas that impact a person’s wealth or financial well-being. These components include: 1. Principles, Process, and Skills 2. Financial Management 3. Tax Principles and Optimization 4. Investment Planning/Asset Management 5. Risk Management and Insurance Planning 6. Retirement Planning 7. Estate Planning and Wealth Transfer 8. Integrated Wealth Management (i.e., putting it all together) Friday, 15 July 2022 Investment Planning & Asset Management

Financial phases of Life It is also useful to look at a common framework for the financial phases of life. The four financial phases of life are: 1. Accumulation of wealth; 2. Protecting wealth; 3. Converting wealth to income; 4. Transferring wealth. Friday, 15 July 2022 Investment Planning & Asset Management

Wealth Management

Wealth Management The four financial phases of wealth management match up well with the financial planning competency areas. • Financial • Risk Management Management and Insurance • Investment Planning Planning • Tax Planning • Tax Planning Accumulating Protecting Wealth Wealth Transferring Converting Wealth Wealth to Income • Estate • Retirement Planning Planning • Tax Planning • Tax Planning

Wealth Management CERTIFIED FINANCIAL PLANNER Value-Added FPSB Accredited Financial Advisor FPSB Accredited Investment Advisor • Advisor-Centred Business Model • Client-Centred • Fee-Based • Commission-Based • Process-Driven • Transaction-Driven • Advice Business • Idea Business

Wealth Management As we can see from the integrated nature of financial planning and wealth management, it is often necessary to engage the advice or use of the services of other professionals in order to execute the recommendations of the plan. Three professional teamwork and collaboration skills highlight that is important that a financial planner: 1. Recognizes when to refer to qualified professionals to provide the necessary expertise; 2. Works with other professionals, as appropriate, to help implement the financial plan; 3. Co-ordinates and manages client interactions with other qualified professionals as needed. Friday, 15 July 2022 Investment Planning & Asset Management

Wealth Management Evaluate implications of concentration of a client’s investment holdings

Wealth Management Process It is one of the fundamental tenets of wealth management. A medical doctor follows a process flowing from intake, through examination and evaluation, to diagnosis and recommendation and/or treatment. Can we say we are Financial Doctors: Yes or No We are Wellness Experts for some and Financial Doctors for some In the same way, a wealth manager follows a process to be effective and efficient in serving clients. Wealth management shares the same six steps as the financial planning process: 1. Establish and define the relationship with the client 2. Collect the client’s information 3. Analyze and assess the client’s financial status 4. Develop the recommendations and present them to the client 5. Implement the client’s recommendations 6. Review and monitor the client’s situation Friday, 15 July 2022 Investment Planning & Asset Management

Wealth Management Process Friday, 15 July 2022 Investment Planning & Asset Management

Wealth Management Ultra High + $30M Net Worth More than Rs.225 $5M - $30M crores Very High Net Worth Rs.37.5 crores $ 1M - $5M to 225 crores High Net Worth $100K - $ 1M Rs.7.5 crores- 37.5 crores < $100,000 Mass Affluent Rs.75 lakh to 7.5 crores Retail Rs.75 Lakh

Step-1 Establish and Define the relationship with clients • Obtain the trust and confidence • Focus on client’s needs • Start with open questions • Make the client comfortable • Good communication skills required Friday, 15 July 2022 Investment Planning & Asset Management

Process or Event? • Taking care of finances of individuals is a continuous process and not a one time transaction based event. • The process begins with establishing relationship with the prospective client & reaches final plan construction through various steps & again restarts with regular review & revision of the plan. Friday, 15 July 2022 Investment Planning & Asset Management

Initial Client Interview • Importance of ,“The initial client interview” • Opportunity to get to know the client • Relationship building • Trust • Inspire confidence • Confidence carries with it a sense of safety and security • Helps the client to be open, honest and frank Friday, 15 July 2022 Investment Planning & Asset Management

Initial Client Interview • Preparing for the Meeting: • Confirm details of the meeting and what you expect the client to bring to the meeting. • E.g. Investment certificates, Insurance policies, tax returns etc. • Indicate either verbally or in writing, an estimation of “How Long the meeting may take”. • Typically, comprehensive data collection can take up to 2 hours. • E.g. if the partner responsible for the domestic budget does not attend, the data you collect will probably be inaccurate and this will reflect in your advice. • Opportunity of assessing the qualitative / inferential data from the absent partner is denied. Friday, 15 July 2022 Investment Planning & Asset Management

Initial Client Interview • Projecting a professional image: • By holding the meeting in your office will help in keeping away domestic distractions that may exist in the clients home • You will have resources on hand if the need for specific information arises. • Research data • Computer software • Brochures / product information • Forms – data collection etc….. Friday, 15 July 2022 Investment Planning & Asset Management

Step Two: Collect the client’s information Collect Client’s information

Identify goals • Short term goals (0-2 years) • Medium term goals (2-5 years) • Long term goals (more than 5 years) Friday, 15 July 2022 Investment Planning & Asset Management

Types of Information Quantitative Qualitative Statements of Fact Relevant information Not factual in nature Friday, 15 July 2022 Investment Planning & Asset Management

Quantitative Information • Assets, Liabilities and Cash Flow information • Account statements (Bank account, Credit card, Investment statements and cash value in life policies • Loan statements (Home loan, Auto loan, personal loan, education loan etc.) • Insurance Policies and Employee Benefit Package • Income Tax statements • Employee pension statement if any • Estate and Legal documents • Business Documents (Financial statements, Income tax returns, employment agreements, leases etc. Friday, 15 July 2022 Investment Planning & Asset Management

Qualitative information • Risk tolerance • Attitude towards inflation protection • Financial strengths and weaknesses • Personal long term goals • Attitude towards accumulation of wealth • Taxation consideration • Liquidity consideration • Concern for leaving the estate for next generation • Attitude towards various sectors/investment types • Any hopes and fears • Ease of management Friday, 15 July 2022 Investment Planning & Asset Management

Collect Client’s information • The Right procedure to collect client information • Data collection forms • Being a good listener • Non verbal communication • Technical Skills • Risk Profiling

Collect Client’s information • Risk Profiling • To determine the type of investor the client is. • Conservative • Moderate risk taker • Aggressive risk taker • Risk profile can be done on the following 4 criteria: • Propensity –Inferential information • Capacity – the financial ability to take a risk • Attitude - willingness to take a risk • Knowledge – understanding of the risk Friday, 15 July 2022 Investment Planning & Asset Management

Analyze and assess Client’s Financial status • Analysis of client data /information: • Personal information • Age • Number of dependents • Insurance coverage • Health details • Habits • Occupational information • Nature of work done • Period of current employment • Employee benefits etc.. • Financial information • Asset – Liabilities • Sources of income • Expenses • Risk profile identification Friday, 15 July 2022 Investment Planning & Asset Management

Analyze and assess Client’s Financial status • Adequate insurances • Retirement planning • Proper Asset allocation • Liquidity provisions • Wills and powers of attorneys • Study the time horizon of investment matching with time horizon of goals • Assets are sufficient to cover liabilities • Scope for more savings by curtailing on non-discretionary expenses Friday, 15 July 2022 Investment Planning & Asset Management

Develop the recommendations and present them to the client The following things need to be kept in mind: • Clients Risk Tolerance • Assessment of Option • Research Analysis • Draft Financial Plan • Implementation of Plan • Monitor and evaluate soundness of Recommendation • Make recommendations to Accommodate New or Changing Circumstances Friday, 15 July 2022 Investment Planning & Asset Management

Develop the recommendations and present them to the client Check that you have all the information Secure the client’s current financial position Establish the client’s goal and financial concern Recommendations to meet client's desired future financial position

Develop the recommendations and present them to the client • Investing for growth –young investor • Investing for liquidity-Need based • Investing in debt/income funds-older investor • Asset allocation depending on age, income, risk appetite • Depending on type of investor-conservative, moderately conservative, Balanced, Moderately aggressive, aggressive • Plan should be in written form ---Why? Friday, 15 July 2022 Investment Planning & Asset Management

Implementing the client’s recommendations • Filling of forms • Enclosure of cheque and deposit of applications • Going for insurances • Preparation of wills and power of attorneys • Checking with clients about receipt of Account statements etc. Friday, 15 July 2022 Investment Planning & Asset Management

Monitor and Review the client’s situation • Why review necessary • Micro level changes • Macro level changes • Introduction of new products • Strategic Asset allocation is going towards achievement of goal • Rebalancing required if any Friday, 15 July 2022 Investment Planning & Asset Management

Macro Level Changes • Share markets may rise or fall in India or Worldwide • Interest rates may change in India or worldwide • Taxation legislation may change drastically • Value of currency may change favorably or unfavorably • Inflation may rise or fall • Economies will move in cycles • Investment performance of companies may change depending on performance of economy Friday, 15 July 2022 Investment Planning & Asset Management

Micro Level changes • Income level may change calling for review • Annual Living Expenses may increase • The client may get promotion and increase in salary income • The client may start earning more through business income • Changes in financial goals • Changes in the risk tolerance level • Client may get sudden wealth or he may lose wealth in any calamity • The client may sometime suffer injury and disability Friday, 15 July 2022 Investment Planning & Asset Management

Concentrated Investment Holdings Individuals and Families may have concentrated investment holding due to two reasons: 1. Large ownership percentage or value of a private company; 2. Large value of ownership in an employer public company through stock savings or options. Friday, 15 July 2022 Investment Planning & Asset Management

Wealth Management Concentrated Investment Holdings For many individuals, the biggest asset they own is their house. This may not be the case for owners of privately held companies where the value of their ownership is their most valuable asset. It is therefore important for a financial planner or wealth manager to have some basic understanding of business valuation and the ownership succession process. An owner selling their business often represents a significant liquidity event that requires an integrated planning approach. Friday, 15 July 2022 Investment Planning & Asset Management

Concentrated Investment Holdings “Exit Strategies for Business Owners” lists five key points on preparing for ownership succession. 1. Begin the process early, ideally 2 or more years prior to sale or succession. 2. Be aware of the ownership succession alternatives that are available, and carefully consider the pros and cons of each. 3. Succession alternatives include  a transition of the company to family members,  a sale to management, or  a sale to financial investors or a strategic buyer. 4 Recognize the personal, company, and environmental factors that influence the ideal timing for ownership succession. 5 Undertake operational and financial structuring to make the company attractive to prospective buyers and realize on additional sources of value. 6 Structure personal and business affairs to help ensure a tax-efficient transition. Friday, 15 July 2022 Investment Planning & Asset Management

Wealth Management Family Succession Strategic Buyers Management and Financial Investors 1. Conduct an annual 1. Conduct research to identify assessment of the near-term a sufficient number of qualified 1. Understand the sources of and longer-term viability of the buyers. financing available and what family business. different types of financial 2. Control the amount and investors look for in a 2. Ensure that key points of nature of information company. shareholder agreements are conveyed to buyers. 2. Recognize the payoffs and clearly documented and risks of using debt to finance a signed off by all parties. 3. Consider the terms of the management buyout (MBO). 3. Implement a governance deal as well as the stated structure that promotes purchase price. 3. Actively manage the conflict transparency and of interest that MBO’s create accountability 4. Ensure that the letter of for management. 4. Manage the transition with intent (LOI) is clear and management, customers and comprehensive. 4. Consider the ability of a suppliers. financial investor to be a good 5. Manage the operations of business partner as well as 5. Create a mechanism to the business through to the amount they are willing to afford liquidity for family closing. invest. members desiring an exit. 5. Understand the financial dynamics of an MBO and how all parties can realize value in the process. “Exit Strategies for Business Owners”

Wealth Management Financial statement ratios are useful as a quick way to compare an aspect of one business with others like it. Ratio analysis can be classified under four major headings: 1. Liquidity ratios, such as the current ratio and quick ratio, determine whether a company can meet its obligations as they come due. 2. Activity ratios, such as accounts receivable turnover and inventory turnover, determine how rapidly assets move through the company, including how quickly inventory is moving out the door, and how quickly payments are received. 3. Profitability ratios, such as EBITDA (earnings before income taxes, depreciation and amortization), return on capital and return on equity (ROE) measure performance and how profitable the company is, and what sort of return the company is getting on capital and equity. 4. Leverage ratios, such as debt-to-equity and debt-to-capital, measure the extent to which a company uses debt financing. Friday, 15 July 2022 Investment Planning & Asset Management

Wealth Management Balance Sheet Assets = Liabilities + Equity Liabilities Assets Equity Analyze a company’s financial statements

Wealth Management Non-Current Assets Balance Sheet Property, Plant, and Equipment Assets Intangible Assets Current Assets Goodwill Cash Financial Assets Accounts Receivable Inventories

Wealth Management Income Statement Revenues – Cost of Goods Sold = Gross profit – Other operating expenses = Operating income or EBIT – Interest expense = Earnings before tax – Tax expense = Net income

Wealth Management 1. Liquidity Ratios Liquidity ratios measure the ability of a company to meet its current financial obligations. How many times a company’s current liabilities are covered by current assets and components of current assets is the key analytical factor. Liquidity ratios include the following: Current ratio ������������������������������������������ ������������������������������������ ������������������������������������������ ������������������������������������������������������������������ Current assets are comprised of cash and equivalents, receivables, inventory and any other current assets the firm may have. Quick ratio (acid test) ������������������������������������������ ������������������������������������ − ������������������������������������������������������ ������������������������������������������ ������������������������������������������������������������������ Inventory is removed in the “quick” ratio, since it may take time to sell the inventory, and this measure is concerned with the ability to raise cash “quickly.”

Wealth Management 2. Activity Ratios These are also known as operating efficiency ratios and measure how well the company is utilizing its assets. The most important of these ratios measure how quickly a company converts its current assets (accounts receivable and inventory) into cash. Other activity ratios measure the ratio of sales to noncurrent assets, especially fixed assets. Inventory turnover ������������������������������ ������������������������������������������ ������������������������������������������������������ Accounts receivable turnover ������������������������������������ ������������������������������ ������������������������������������������������ ������������������������������������������������������������ As with most ratios, industry comparisons are more important than absolute standards.

Wealth Management 3. Profitability Ratios Profit margin ratios. Three profit margin ratios are most commonly used. In each ratio, net sales is in the denominator, the numerator is : (1) gross profit (gross profit margin), (2) operating profit (operating profit margin) and Net Sales (3) net profit (net profit margin). Less Cost of sales Equals Gross profit margin Less Operating expenses Equals Operating profit margin Less Income taxes and interest expense Equals Net profit margin

Wealth Management The terms EBIT and EBITDA have become popular in recent years. EBIT (earnings before interest and taxes) can be considered equivalent to operating profit margin. EBITDA (earnings before interest, taxes, depreciation and amortization) can be considered equivalent to cash flow from operations. The steps to calculate EBITDA: 1. begin with income before taxes as reported; 2. add back depreciation and amortization, as these are non-cash items; 3. add back (deduct) other non-cash items such as losses (gains) on the sale of fixed assets; 4. add back interest expense. The enterprise value of a business is determined on a ‘debt free’ basis, and therefore interest is added back; 5. add back (deduct) unusual or non-recurring expense (income) items; Friday, 15 July 2022 Investment Planning & Asset Management

Example Assume the following for Company ABC: pretax income reported at £3.2 million in the most recent fiscal year which is likely for future years; interest expense reported at £800,000 and depreciation and amortization of £2 million; £10 million of interest-bearing debt outstanding. Assume that following an analysis of Company ABC’s operations, risks and growth prospects, an EBITDA multiple of 5x is considered appropriate. Calculate the shareholder value using the multiple of EBITDA methodology for business valuation. Friday, 15 July 2022 Investment Planning & Asset Management

Wealth Management  pretax income reported at £3.2 million in the most recent fiscal year which is likely for future years;  interest expense reported at £800,000 and depreciation and amortization of £2 million;  £10 million of interest-bearing debt outstanding.  Assume that following an analysis of Company ABC’s operations, risks and growth prospects, an EBITDA multiple of 5x is considered appropriate Pretax Income £3,200,000 Adjustments: £2,000,000 Add: depreciation and amortization £800,000 Add: interest expense £6,000,000 EBITDA 5X EBITDA Multiple £30,000,000 Equals: Enterprise Value £10,000,000 Deduct: Interest bearing debt outstanding £20,000,000 Equals Shareholder Value

Wealth Management Return on Equity Ratios The ROE is one of the most important ratios because it reveals a lot about how well a company is managed. Equity is what investors have committed to fund a company— how well management is employing investors’ funds is critical information to investors. ROE = ������������������������������������������������ ������������������������������ ������������������������������ − ������������������������������������������������������ ������������������������������������������������������ ������������������������������������ − ������������������������������������������������������ ������������������������������