In a previous article, we introduced the
CFA Institute Investment Foundation Program (Read
more here). It is a free program
designed for anyone who wants to enter or advance within the investment
management industry, including IT, operations, accounting, administration, and
marketing. Candidates who successfully
pass the online exam earn the CFA Institute Investment Foundations Certificate.
There are total of 20 Chapters in 7
modules, covering all the essential topics in finance, economics, ethics and
regulations. This series of articles
will highlight the core knowledge of each chapter.
Chapter 16 provides an overview of the
investors and their needs. The learning outcome of chapter 16 is as follows:
·
Describe
the importance of identifying investor needs to the investment
·
process;
·
Identify,
describe, and compare types of individual and institutional investors;
·
Compare
defined benefit pension plans and defined contribution pension plans;
·
Explain
factors that affect investor needs;
·
Describe
the rationale for and structure of investment policy statements in serving
client needs.
The investment industry provides a range
of services—including financial planning, trading, and investment management—to
a wide variety of clients. Individual investor clients range from those of
modest means to the very wealthy. The investment industry also provides
services to many types of institutional investors, such as pension funds,
endowment funds, and insurance companies. Because investors are all unique, it
is important to understand each of their specific circumstances in order to
best meet their financial needs. It is not possible to act in a client’s best
interests if those interests are not understood and incorporated into the
chosen investment strategy.
Clients differ in terms of their
financial resources, personal situations (if they are individual clients),
objectives, attitudes, financial expertise, and so on. These differences affect
their investment needs, what services they require, and what investments are appropriate
for them. For example, elderly clients with significant resources may be very
concerned with estate (inheritance) planning, but elderly clients with modest
resources may be more concerned about outliving their resources. A shortfall in
investment returns may have significant consequences for the latter but have
less impact on the former.
Individual investors are often
differentiated based on their resources. Most will have relatively modest
amounts to invest. Other, more affluent individuals will have larger amounts.
The term “retail investor” can be used to refer to all individual investors,
but it is common to use the term to refer to individual investors with modest
resources to invest.
Many investment firms make a distinction
between their retail clients, more affluent clients with larger amounts, and
high- and ultra-high-net-worth investors with the largest amounts of investable
assets.
Retail investors are by far the most numerous type of
investor. They buy and sell relatively small amounts of securities and assets
for their personal accounts. They may select investments themselves or hire
advisers to help them make investment decisions. They also may invest
indirectly by buying pooled investment products, such as mutual fund shares or
insurance contracts.
The investment industry provides mostly
standardised services to retail investors because they generate the least
revenue per investor for investment fi rms. Many retail investment services are
delivered over the internet or through customer service representatives working
at call centres.
Wealthier investors or high-net-worth
investors, generally receive more personal attention from investment
personnel. Their investment problems often involve tax and estate planning
issues that require special attention. They either pay directly for these
services on a fee- for- service basis or indirectly through commissions and
other transaction costs.
Very wealthy individuals or ultra-high-net-worth
investors usually employ professionals who help them manage their investments,
future estates, and legal affairs. Th ese professionals often work in a family
office, which is a private company that manages the financial affairs of one or
more members of a family or of multiple families. Many family offices serve the
heirs of large family fortunes that have been accumulated over generations. In
addition to investment services, family offices may provide personal services
to the family members, such as bookkeeping, tax planning, managing household
employees, making travel arrangements, and planning social events.
Wealthy families often have substantial
real estate holdings and large investment portfolios. Th e investment
professionals who work in family offices generally manage these investments
using the same methods and systems that institutional investors use. They pay
especially close attention to personal and estate tax issues that may
significantly affect the family’s wealth and its ability to pass wealth on to
future generations or charitable institutions.
Institutional investors are organisations that hold and manage
portfolios of assets for themselves or others. Th ere are many different types
of institutional investors with varying investment requirements and
constraints. Institutional investors may invest to advance their mission or
they may invest for others to meet the others’ needs. Institutional investors
that invest to advance their missions include pension plans, endowment funds
and foundations, trusts, governments and sovereign wealth funds, and non-
financial companies. Institutional investors that invest to provide financial
services to their clients include investment companies, banks, and insurance
companies.
Defined benefit pension plans promise a defined annual amount to
their retired members. The defined amount typically varies by member based on
such factors as years of service and annual compensation while employed.
Typically, employees do not have the right to receive benefits until they have
worked for the company or government for a period specified by the pension
plan. An employee’s rights are vested (protected by law or contract) once they
have worked for that period.
In a defined contribution pension
plan, the pension sponsor typically contributes an agreed- on amount—the
defined contribution—to an account set up for each employee. Employees also
generally contribute to their own retirement plan accounts, usually through
employee payroll deductions. Th e contributions are then invested, normally in
funds that the employee chooses from a list of eligible funds within the plan.
Th e plan provides enough choices of funds to allow employees to create a
broadly diversified portfolio. Th e sponsor generally limits the choices to a
set of mutual funds sponsored by approved investment managers. Th e pension
plan sponsor should also ensure that the fees charged on the funds are
reasonable. At retirement, the balance that has accumulated in the account is
available for the employee.
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