The main task of a financial planner is to manage assets from wealthy clients. Considering the task at hand that entails management of long term investment of clients of up to $100, 000, which can be planned in terms of investment alternatives, account management, the state of the economys effects on assets management, impact of estate, and other tax considerations to provide optimal financial outcomes are as discussed hereunder.
Investment alternatives imply other key areas, in which clients can inject their finances and come out with maximum returns at minimum risks. The core aim of any investment is to obtain profits. If a sound investment fails to provide the requisite profits, which may enable it to pay for its employees, enable its expansion, purchase of stock and settlement of taxes and loans, then such an investment is subject to dissolution or sell off. Investment alternatives tend to identify the areas to best place assets so as to maximally eliminate the chances of uncalculated risk (Arffa, 2001).
Moreover, under the investment alternatives, investment diversification is a key. Investment diversification is creating an investment portfolio in order to reduce risks. It is a simple concept that avoids placing all your eggs in one basket; that is, investing in one key area of economy, which optimizes financial risks. Investment diversification spreads risks in different investment areas. An individual can invest in bonds, stocks and derivatives. If one fails, then others might be well off thus spreading along the risk.
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However, an investor may also reduce risk by including both bonds and cash. Cash is a short time reserve, which can be used in case of emergency. It can also be used to make easy payments or in the event of selling off assets in order to make payments. Cash can be easily liquidated in a transaction. Bonds, in other words, place some form of financial securities because there are rules involved in accessing them. Bonds are not as easy to access as compared to liquid money (Arffa, 2001).
Consequently, an individual can also invest in both stocks and bonds. Balancing between investment in both bonds and stocks is advantageous but it depends on an individual temperament; that is, whether an individual is aggressive or conservative. Aggressive investors emphasize on the investment more in stock than in bonds while conservative investors prefer investing more in bonds than in stock. An investment compost of both bonds and stocks provides some form of risk and reward ratio, which is important in investment diversification. To add up, stock offers an opportunity for choice by an investor. An individual investor can choose a style; for example, focusing on the mid- or small-caps. Stocks can be further categorized into growth, value, foreign or domestic stock. Bonds also offer a choice for diversification. Risk and ability of an investor always dictate the investment option available.
Nevertheless, real estate investment, hedge funds, and art are examples of modern investment options available as opposed to the investment in stock, bonds and cash, which are considered as traditional. Both the traditional and modern investment methods provide a chance for diversification. Many investment options to choose from make diversification appear simple but it is not as simple as may be implied. Many investment options are disadvantageous because they may lead to diversification of a portfolio, which negatively impacts on returns.
To sum up, investment alternatives are numerous but the choice of such depends on many things; for example, on an individual temperament, investment financial options, level of investment experience, etc. All these factors will dictate an individual investment mix, be it investment in bonds, stocks, cash, or real estate, as discussed above. An accurate investment mix enables an individual investor to obtain maximum returns with minimal risk. The challenge has always been choosing the appropriate investment mix.
Presumably account management strategies are also very important in financial planning. Account management strategies can be sub-divided into active and passive strategies. Passive management strategy is where an individual investor invests in large sectors of economy. His/her plan is long term; that is, he/she aims to make long term profits as opposed to the short term profits. An individual investor heavily invests, and just like other investors, his/her main aim is profit maximization. Passive management makes no difference between attractive securities and those that are not attractive.
On the other hand, active management may be described as an attempt to apply intelligence in making the financial markets better. Unlike passive managers, active managers pick attractive stocks, bonds and choose when to move or to quit the market. Active management is a modern concept, where active managers do extensive research and aim towards profit maximization just like passive management.
Active management is as a result of research by major financial investors like banks, while passive management is as a result of research by universities. This makes active management very appealing, hence the returns that come about from active management are higher than passive management strategies.
Moreover, a term Index investing comes about as a result of active and passive management. Index investing is a form of passive investing, where portfolios are based upon securities targeting some sectors constructed by a committee.
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To sum up, an individual investor wants to realize maximum profits. This individual is deemed to bend more towards active management strategies. It has demerits which include heavy injection of finances towards the market research, but it results into accurate market research. For instance, an individual investor can have the knowledge of when to pull out of the market or to get into business. This reduces possibility of risks that can ensure. Active management is thus a sure account management strategy (Stephenson, 2005).
Not forgetting that the state of economy is a major determinant of investment level and greatly affects asset management in a country. These among other things are affected by the inflation level, political stability in the country, policy measures, and the rule of law, as discussed below.
Inflation is the level, at which the money in an economy compare to other currencies in the world market. High inflation level impacts negatively the management of assets. Investors shy away from investing heavily in countries with high inflation levels. This is because the returns realized from investing in such countries are minimal as compared to the risks. The risks overweigh financial benefits so realized. Low inflation rates, on the other hand, encourage heavy investment and asset management. An investor is always willing to place his/her money where there is a surety in profit realization other than where the probability of obtaining a loss is so high. Low inflation rate economies provide the best environment for ample financial management and heavy investment.
Secondly, political stability refers to the state of economy in terms of politics. It refers to how secure a country is, and whether or not the country can support business. Politically stable economies support investment because investors are sure that their stocks, bonds, and cash are secure. Their stock can reach their target group as opposed to the politically unstable economies. Political stability enables investors to predict market trends and the level of income so expected.
Third, policy measures by banks, such as central banks, determine the investment level. Loose bank policies tend to encourage high investment levels; such include rates imposed by banks, such as lending rates. Low interest on loans encourages investments, whereas high interests on loans tend to discourage investments. Individuals are always targeting when the interest loans imposed by banks are low in order to invest.
Lastly, the law enacted by governments, such as parliament, affects investment. The government can impose heavy taxes on imports, impose heavy taxes on businesses, and this has an effect of discouraging investment. Those investors that deal in export and import are more likely to get discouraged by high tax imposed by the government and are more likely to get off business because of such terms. They would rather invest in another area of economy with low tax to be sure of maximal profits (Stephenson, 2005). This is more likely to be an area, where the environment is good for business. Investment is likely to be successful in economies, where laws and government regulations encourage investment and promote self-employment as compared to the economies, where both local and international investors feel harassed.
From the above it is evident that the state of economy is very important in asset management. The inflation rate, political stability, policy measures, and the law greatly influence the investment because of the profit realized in such. Low inflation rate, policies that tend to attract investors into the market, and political stability are the best environment for business to operate and investment tends to thrive under such an environment.
More to this, the impact of estate and other tax considerations to provide optimal financial outcomes is also of utmost importance to investment in an economy. Tax can make investors move out of business with bonds, stock and cash that they have invested. Tax rate is controversial and has broad effect on business.
Optimal financial outcome can be realized when the tax rate is low and a business can thrive under such an environment. Over-taxation has an impact of cutting into the profits from a business and this would lead to investors shifting to other businesses, which are more bearable, or quitting from business. The government should therefore impose realistic taxes on goods and businesses, which would attract investors into the market. Under-taxation is equally dangerous to the clients. The taxes imposed in the market should toil to make equilibrium in the market such that the supply and demand are almost in equilibrium. Such a scenario is a perfect investment environment (Stephenson, 2005).
The estate equally plays an important role in determining investment. For example, should the estate deal in stock that can be afforded by the target group, more profits would be realized because the market is available. On the other hand, an estate located at a prime location, which can be accessed by all means of transport, has an effect of creating an enabling environment for business to thrive (Stephenson, 2005).
In conclusion, investment is best where there are numerous investment alternatives, but coupled with investment experience, there is active account management, there is political stability and the tax rates are favorable to both the clients and investors.