Page 245 - DMGT515_PERSONAL_FINANCIAL_PLANNING

Personal Financial Planning

Notes Selecting Specific Investment Products

Having decided on asset allocation and selected the investment types, the next step in the
process is to nominate specific investment products for the person. There is a requirement to
thoroughly understand the operation of the various investment products available and how
they will affect a person’s financial well-being.
As we know the methods of investment fall basically into two categories:

1. Direct investment such as investment into bank accounts, term deposits, and direct
shareholdings.
2. Indirect investment through professional fund managers.

There are many advantages and disadvantages associated with both methods of investment. In
summary, however, a person who has limited financial knowledge, a limited amount of funds
to invest and a desire to have minimal direct control is probably better suited to using managed
(indirect) investment products.
The main disadvantage of managed investment products relates to fees and charges compared
to direct investment. However, this aspect varies with the amount of investment capital that is
being used.

Once again, the products recommended should be based on proper qualitative and quantitative
research. There are many providers of research and this form of independent analysis will assist
in substantiating specific investment recommendations to the person.
In selecting investment products to make up the person’s portfolio, consider the following four
principles:

1. Quantify the risks, returns and time frame of the specific investment products.
2. Select in the portfolio some products that will provide immediate access to cash if an
unforeseen financial emergency occurs.

3. Apply the principle of risk spreading amongst all asset classes.
4. Devise the appropriate terms for individual investment products to meet the person’s
liquidity requirements.

At this stage in your course, we don’t expect you to have an in-depth knowledge of the vast
number and diversity of investment products available on the market. However, you should
establish professional practices that will help you gather, collate, store and analyse this product
information.

Bringing Strategies together in the Written Financial Plan

The competent financial planner will take the information gained from the initial person meeting
and data collection form to develop strategies and recommendations that are agriculture a
written plan. The written plan, by necessity, must clearly substantiate the rationale for the
recommendations. The plan must be written in such a way that the person will be able to fully
understand the advice.
The benefits of using financial planning software should not be underestimated. These packages
are useful in developing models and assessing the merits of various strategies. However, one
should not forget that they are essentially mathematical tools and are provided to determine the
potential outcomes of proposed strategies. Financial planning software, in isolation, should not
be viewed as a tool for the creation of a financial plan.

240 LOVELY PROFESSIONAL UNIVERSITY