Investment Management: Adding Value, Growing Client Wealth

Investment management is a service that helps investors achieve their financial goals and objectives through the professional management of their securities and assets. It involves buying and selling assets, developing short- and long-term investment strategies, creating a tax strategy, and managing asset allocation. Clients of investment managers can be either individual or institutional investors.

Investment management firms must hire talented professionals to deal with the various responsibilities involved in running the business, such as marketing, settling, and preparing reports for clients. They must also ensure they operate within legislative and regulatory constraints and properly record transactions and fund valuations.

The value that investment management adds for clients includes devising strategies and executing trades within a financial portfolio, as well as providing financial planning and advising services. Managers can help clients align their investments with their retirement and estate planning, as well as asset distribution.

Behavioural coaching

Emotional Support and Guidance

Financial advisors, acting as behavioural coaches, provide emotional support and guidance to their clients, especially during periods of market volatility and economic uncertainty. They help clients navigate through emotional market disruptions, keeping them focused on their long-term financial goals and making rational investment decisions.

Understanding Client Psychology

Behavioural coaches delve into the psychology of investing, recognising that investor emotions, biases, and cognitive errors can interfere with their financial choices. By understanding their clients' psychological makeup, coaches can develop strategies to align investments with their clients' retirement and estate planning goals.

Enhancing Client Communication

Effective communication is essential in behavioural coaching. Coaches need to actively listen to their clients to understand their unique situations, concerns, hopes, and goals. This information serves as a baseline for tailoring financial strategies and building trust.

Systems and Tools

Behavioural coaches employ various systems and tools to manage client behaviours and emotions. These tools help identify client needs, accelerate trust-building, and deepen client relationships. By implementing these systems, coaches can create predictable processes to address the diverse needs of their clients.

Alleviating Client Anxiety

Coaches aim to alleviate client anxiety by providing clear explanations of risk-reward scenarios, answering "what if" questions, creating panic-proof plans, and identifying volatility-managing investments. They help clients understand the impact of emotional investing and guide them towards making rational investment choices.

Boosting Client Loyalty

During times of market upheaval, behavioural coaches have the opportunity to build trust and boost client loyalty. They achieve this by offering sound advice, demonstrating their value, and showing clients how behavioural finance can impact their financial goals.

In summary, behavioural coaching within investment management adds value by focusing on the emotional and psychological aspects of a client's financial journey. Coaches support clients in navigating the complexities of investing, making rational decisions, and staying committed to their financial plans, even during turbulent market conditions.

Financial planning

A comprehensive financial plan will cover various aspects of a client's financial life, including cash flow, savings, debt, investments, insurance, and other pertinent elements. It is a dynamic document that evolves with the client's life, helping them navigate significant milestones such as marriage, parenthood, career changes, and retirement.

• Setting Financial Goals
• Cash Flow Management

Understanding cash flow is vital. Advisors help clients analyse their income, expenses, and spending habits to create a sustainable budget. A common approach is the 50/30/20 budget principle, allocating 50% of income to needs, 30% to wants, and 20% to savings and debt repayment.

Emergency Fund

Building an emergency fund is essential for financial resilience. Financial advisors typically recommend saving enough to cover at least three to six months' worth of essential living expenses, protecting clients from unforeseen financial setbacks.

Debt Management

Effective debt management is crucial for financial health. Advisors help clients develop strategies to eliminate high-interest debt, such as credit card balances, as quickly as possible. This improves savings, increases financial flexibility, and brings clients closer to their investment objectives.

Risk Management

Financial planners help clients identify and mitigate risks that could impact their financial well-being. This includes recommending appropriate insurance coverage, such as health, life, property, and liability insurance, to protect clients and their loved ones in case of accidents, illnesses, or other unforeseen events.

Retirement Planning

Retirement planning is a core component of financial planning. Advisors guide clients in maximising employer-sponsored retirement plans, such as 401(k)s, and provide strategies for tax-efficient investing through IRAs or similar vehicles to build a comfortable retirement nest egg.

Tax Planning

Minimising tax liability is an important consideration in financial planning. Advisors help clients identify tax credits and deductions and strategies like tax loss harvesting to reduce their tax burden and retain more of their income.

Estate Planning

Financial planners assist clients in creating estate plans to protect their heirs. This involves drafting wills, establishing trusts, and making other arrangements to ensure the client's assets are distributed according to their wishes upon their passing.

Portfolio management

Key Elements of Portfolio Management

• Asset Allocation: Diversifying investments across different asset classes, such as stocks, bonds, cash, and alternative investments, to reduce risk and maximise returns.
• Risk Management: Understanding and managing the risk associated with investments, including market fluctuations and volatility.
• Rebalancing: Periodically adjusting the portfolio to return to the desired asset allocation and maintain the original risk-return profile.
• Tax Efficiency: Considering the tax implications of investments and taking advantage of tax-advantaged accounts to minimise tax liabilities.
• Investment Horizon: Determining the appropriate time horizon for investments, with shorter horizons typically involving lower-risk strategies.
• Active vs Passive Management: Deciding between actively managing the portfolio by buying and selling assets or passively replicating the performance of a specific index or benchmark.
• Discretionary vs Non-Discretionary Management: Deciding whether to give a third party, such as a broker or financial manager, discretion to make investment decisions without explicit approval.

Benefits of Portfolio Management for Clients

• Expertise: Professional portfolio managers have the knowledge and experience to navigate the complexities of the financial markets and make informed investment decisions.
• Risk Management: By diversifying investments and regularly monitoring and adjusting the portfolio, managers can help clients manage risk and protect their investments.
• Goal Achievement: Portfolio management helps clients work towards their financial goals, whether it is capital preservation, income generation, or maximising returns.
• Time and Effort: Clients can save time and effort by delegating the management of their investments to professionals, allowing them to focus on other priorities.
• Tax Efficiency: With a better understanding of tax implications, portfolio managers can help clients structure their investments in a tax-efficient manner.

Risk management

Developing Risk Management Strategies:

Investment management firms work closely with clients to understand their risk tolerance and develop tailored risk management strategies. This involves assessing the client's investment goals, time horizon, and financial situation to determine the appropriate level of risk for their portfolio. By incorporating risk management into the investment strategy, firms can help clients balance the potential for gains with the potential for losses, ensuring that short-term volatility does not derail their long-term financial objectives.

Diversification and Asset Allocation:

Diversification is a key risk management tool used by investment managers. By allocating client assets across various investments, such as stocks, bonds, mutual funds, and ETFs, investment managers reduce the impact of any single investment on the overall portfolio. Diversification helps to lower the overall risk by ensuring that a client's investments are not overly concentrated in one particular area. This strategy also allows for a smoother ride during market fluctuations, as losses in one investment may be offset by gains in another.

Regular Portfolio Rebalancing:

Investment managers monitor client portfolios regularly and make adjustments to maintain the desired asset allocation. Over time, certain investments may outperform others, causing the portfolio to drift away from its target allocation. Rebalancing involves periodically buying or selling assets to return the portfolio to its intended mix. This discipline helps manage risk by ensuring that the client's portfolio remains aligned with their risk tolerance and investment goals, reducing the potential for excessive losses.

• Tax-efficient Strategies:
• Behavioural Coaching:

Effective risk management also involves managing client behaviour and emotions during volatile market conditions. Investment managers provide behavioural coaching to help clients avoid impulsive investment decisions driven by fear or greed. They guide clients to stay disciplined and adhere to their long-term investment strategy, preventing costly mistakes that could impact their financial goals. This aspect of risk management is often overlooked but can have a significant impact on investment outcomes.

Due Diligence and Research:

Investment management firms employ rigorous due diligence and research processes to assess and manage investment risks. They conduct in-depth analysis of financial instruments, market trends, and individual investments to identify potential risks and opportunities. By staying informed about market dynamics and economic factors, investment managers can make more informed decisions to protect client portfolios from significant downside risks.

In summary, investment management firms add value for their clients through comprehensive risk management strategies. By understanding client-specific factors, employing diversification and asset allocation techniques, regularly rebalancing portfolios, incorporating tax-efficient strategies, providing behavioural coaching, and conducting thorough due diligence, investment managers help clients navigate the complexities of investing while managing risk effectively. These risk management practices contribute to the long-term success and financial security of their clients.

Tax strategy

Tax planning is a crucial aspect of investment management, enabling clients to minimize their tax liability and maximize their returns. Here are some ways in which investment management adds value to clients through tax strategies:

• Tax-aware investment management: This involves actively maximizing the after-tax returns of an investor. The goal is to postpone the realization of taxable gains, especially short-term gains, while maximizing realized losses. This strategy requires the involvement of tax professionals who can advise on the tax implications of different investments and help structure portfolios accordingly.
• Separately Managed Accounts (SMAs): SMAs allow each security to be treated independently in a tax-aware manner. They provide investors with separate statements listing the investment in each security, offering more flexibility and control over tax management compared to mutual funds.
• Tax-loss harvesting: This strategy involves selling securities at a loss to offset gains elsewhere in the portfolio, reducing the investor's tax liability. This can be done throughout the year to maximize the after-tax value of the portfolio.
• Long-term capital gains: Investment management can help clients benefit from lower tax rates on long-term capital gains. By holding investments for more than a year, they can take advantage of lower tax rates, which are typically 0%, 15%, or 20%, depending on the investor's tax bracket.
• Tax-efficient investments: Advisers can guide clients towards tax-efficient investments, such as tax-managed funds, exchange-traded funds (ETFs), municipal bonds, and certain types of government bonds. These investments trigger fewer capital gains and are more tax-efficient.
• Retirement savings plans: Contributing to retirement plans like Traditional IRAs or 401(k)s is a popular tax-saving strategy. These plans allow individuals to reduce their taxable income by the amount contributed and provide tax-deferment on investment growth.
• Tax gain-loss harvesting: This strategy involves using portfolio losses to offset overall capital gains, reducing tax liability. Short and long-term capital losses are first used to offset capital gains of the same type, and any excess losses can be carried forward to future years.
• Behavioral coaching: Advisers can add value by helping clients avoid making impulsive financial decisions. This may include preventing clients from selling investments at the wrong time or guiding them towards more tax-efficient strategies.
• Access to tax planning services: Investment advisers often have access to specialized tax planning services that can benefit clients. These services can provide guidance on tax-efficient investments, retirement plans, and strategies to minimize tax liability.

Frequently asked questions