I am interested in a fee-based wealth management service. What can I expect from the service offered by your company?
At the heart of our philosophy is the relationship between investment risk and your personal financial needs. We define risk as being the effect of stockmarket, economic and inflationary risks on the ability of your assets to provide the required amounts of income and/or capital in the fore-seeable future.
You may be interested principally in the stream of income that can be generated from your assets or in the capital growth that can be achieved for future income generation. Alternatively, you may require a combination of the two.
You therefore have present and future needs, all of which have to be met efficiently. This means avoiding the need to realise an investment at a time when its price may be depressed by ensuring that a sufficient amount is retained in a deposit account. In meeting your shortand long-term needs, we have to ensure that neither objective works to the detriment of the other and that the structure of the portfolio is capable of meeting both.
In the long term, the main risk affecting an investment is inflationary risk. Over such a timescale, equities have historically provided most inflation protection while the spending power of money held on deposit has been reduced. To protect your long-term financial needs, you must have sufficient exposure to investments which provide a hedge against inflation as well as offering good prospects for growth.
On the other hand, the main short-term risk affecting your investments is stockmarket risk. This may be the result of normal fluctuations in market prices or the effect of a stockmarket crash on an investor's short-term financial security. However, this is only a risk if you need to withdraw capital during the period when share prices are depressed. If you have a portfolio structured so that it does not rely on equities to provide income or capital on a day-to-day basis, the risk of stockmarket investment reduces significantly.
In managing your portfolio, we need to ensure that you have sufficient non-stockmarket assets to enable it to weather both a stockmarket crash and a recession. We work on the basis of having the correct amount of low-risk assets, such as cash and fixed-interest investments, to ensure that your capital and income requirements can be met without having to touch the equity part of your portfolio during a period of recession or poor stockmarket performance.
On average, a stockmarket crash has occurred once in every five to seven years, with a serious crash of the magnitude of that experienced in 1973/74 occurring once in every 15 to 20 years. We need to ensure that every portfolio can cope with this risk.
During periods of significant stockmarket and inflationary risk, equities are more risky than cash for investment periods of less than eight years while, beyond an eight-year period, cash becomes more risky than equities.
By managing all your investment assets, we are able to monitor the balance of the portfolio between cash, fixed-interest investments and equities on an ongoing basis to ensure lifetime financial security as well as capital growth.
If we were to manage just the equities, it is very likely that we could be working for clients whose financial security would be severely affected in the event of a stockmarket crash. This is not just a risk to you but is also a risk to ourselves. As investment strategists, we believe we have both a moral and a legal responsibility to ensure that our clients' financial security is protected, to the best of our ability, from natural investment risk.
Integral to total asset management is the management of cash. Unfortunately, cash is often relegated to the position of a secondary asset class, whereas it is arguably the single most important asset within any portfolio.
It is important to manage the level of cash within a portfolio to ensure there is sufficient to meet both your regular and one-off expenditure. Part of our service is to calculate the levels of cash required to meet these needs over time and to match the maturity dates of fixed-interest investments, such as Government securities, to times when cash is liable to run out or further expenditure needs are expected to arise.
Finally, we allocate funds to stockmarkets in the proportions which we feel offer the best long-term prospects for returns, based on an analysis of economic trends and current stockmarket valuations. Such stockmarket investment as we do undertake for clients is usually placed within pooled funds in order to reduce risk further through diversification.
By managing all of your invested assets, we should not expose you to undue investment risk. Without knowing the full picture, efficient risk management is not possible.