Financial and Investment Opportunity - Essay Example

? Financial and Investment Opportunity Affiliation Task A report assessment of individuals’ attitude towards risks, investment opportunities and suitable plan to match products and client’s needs Introduction Although many investors are familiar with the risk-reward concept, which equate high risk of a given investment to high return, many do not usually understand how to establish the height of risk their portfolios should endure. When assessing investment suitability, most advisers and investment managers take into consideration customer’s attitude to risk, but they fail to account appropriately for their capacity for loss. Therefore, this calls for financial consultants to assess the clients’ attitude towards risks during the evaluation of investments process using the most suitable tools. Discussion While assessing the individual’s attitude towards risks, the use of gender, age, parental background and even height is used to measure the willingness to take risks in general (Newell, Chan & Goodridge 2011, p 210-19). To better understand the attitude to risk by investors, data from previous research as well as field experiment, are used to assess these attitudes. The previous review is done in order to know the gaps to be filled while determining the attitudes towards risks. A random sample of clients that come to the bank as well as online banking clients are requested to fill in questionnaires. In this quest, to fill gaps, there are things that need to be taken in to consideration as the process of assessment is taking place. According to Mowbray (2011), gaps are bridged by focusing on some key themes such as the risk that a client is willing and able to tolerate, the client’s capacity for loss and identifying clients who are neither willing nor able to accept the risk of loss. Apart from that, the client’s requirements must be considered, and this involves collecting of information that includes the client’s investment knowledge, risk tolerance, investment horizon and the capacity to make regular contributions and meet extra collateral requirements where appropriate. Thereafter, every client’s information should be documented and appropriately updated on a continuous basis. In case a client does not give full information, it does not mean that the advisor cannot assess the client’s attitude towards risk. If the same advisor is not able to make the assessment, an explanation has to be made to the client on the limitation of assessment due to lack of information or the assumptions made in relation to advice given. After having the information of various clients, a hierarchy is developed to clarify their needs and the firm’s products. The upper levels of the hierarchy are solved to give a weighting scheme that determines the relative importance of each factor while determining the applicable portfolio. The lowest level of the hierarchy evaluates assets to give a portfolio applicable for a single investor’s problem (Bolster, Janjigia & Trahan, 1995). The most suitable portfolio is chosen by combining the local weights derived for every asset and weights given by the higher levels of the hierarchy (Saaty, 1980). The figure 1 below explains the hierarchy of needs and its possible matching products. Investment opportunities There are different types of investments and each work differently. The most common list of investments usually includes ISA, shares, unit trusts, property and shares and much more. This section describes the opportunities as well as giving advice to the clients while choosing investment that best suits their finances and other needs. The firm, as an investment bank, seeks to assist clients in raising capital by acting as the client’s agent in the securities issuance. The firm, also, can manage mergers and acquisitions for companies as well as provide subsidiary services, for example, derivatives trading, instruments of fixed income, foreign exchange, commodities equity securities and market making. Figure 1: Analytical Hierarchy Figure 1: Analytical Hierarchy, derived from Saaty (1980) In terms of National savings and investments, whether a client is taking a short-term saving or long-term investing, a clear explanation is available on what they need to think about especially when deciding on what to choose. The most important for every client is to make most of their money. National Savings are backed by the government, and this can only mean that a client’s money is secure, and moreover, there is no limit on the guaranteed amount. This means that a client invests in the products lend to the government, and in return, it is paid to the stock-market-related returns or premium bonds prizes, interests, all plus a capital guarantee (HR Revenue & Customs, 2012). An example of national savings is the Direct ISA that is tax free savings online and via a mobile phone. This gives the clients the expediency of running their account online and also over the phone. Because the bank is backed by HM treasury, a client’s confidence of security of their investment with the bank is 100%. In regard to investment in the Building society, the bank is one of the largest real estate equity firms with assets costing billions under its management. A client who wishes to invest in property is free to look at the diversity of the property on offer. The bank partners with other people around the globe. From the UK to the rest of Europe, USA, Asia and even Latin America, allow a willing and able client to choose and acquire quality and income-producing property at a desired location. The property is also improved on a regular basis to meet the ever changing needs of the customers. Lastly, the bank’s portfolios include the best properties in top locations around the globe. The firm also takes pride in the partnership it has with Insurance Companies across the UK and other parts of the world. The insurance product team is an exceptional platform in the insurance sector. This team covers needs for traditional transactional reinsurance via the authorized FSA regulated and Lloyds accredited reinsurance broker. Since the firm has a strong relationship within the investment community, it is able to meet the client’s need for equity capital. The firm can position new clients with trading partners, capital and country of origin. For corporate access, the bank can manage insurance related corporate road shows for both large and small institutional clients in London. A Plan for the suitability of the above products for different clients Planning for suitability of products will involve advisors that meet directly with the bank’s clients to help match their goals with the available products. Each client’s portfolio is crafted based on detailed knowledge of the client’s financial situation. The data should contain knowledge on education funding, risk tolerance, cash-flow needs, time frame, goals, tax profile and wealth-transfer objectives. The process of using the client’s information to deliver targeted products to the client is termed as personalization (Peppers & Rogers, 1997). In this case, the use of a recommendation system will be efficient as product recommendations will be based on a client’s prior interactions with the firm. According to Mehrotra (2010), a plan has to include various things such as needs analysis. This requires the bank’s advisor to confirm their understanding of the client’s situation such as age, goals, assets as well as liabilities and what they want to achieve. An investment policy statement based on the client’s investment objectives and risk attitude should also be included. Mehrotra (2010) further iterates that the portfolios needs to be backed by research and that they need to be reviewed and re-evaluated at least once a year to ensure that all clients’ interests and expectations are well aligned with the existing products. This is done while maintaining constant communication with clients to ensure that any changes are captured (Dobson, 2010). The above considerations are filtered in the planning process, which starts with the collection of data from customers through questionnaires at the firm’s site or through the online platform. The firm has to obtain enough information about the clients before engaging in any transaction, while the client would like to get a personalized service by providing the needed data. In addition, the firm has to make it compulsory for clients to share useful information (Resnick & Varian 1997). Online survey seems to be more efficient as it has a low turnaround time, lower costs and due to its ability to reach busy people (Smith & Leign 1997, p 498). Next, the clients’ requirements are matched with the suitable product, targeted communications and personalized prices, which are based upon their preferences (Dert & Leegwater 2011, p 36). This matching is performed using a recommendation system that employs collaborative and content filtering, as well as rule-based techniques. The model that is chosen should maximize a client’s utility function given by, u = (x z), whereby x is the attributed product and z is the client’s characteristics. When making similarity between clients, a cosine function and a correlation coefficient factor are used. They are then customized using neutral networks and clustering techniques (Adomavicius & Tuzhilin 1999, p 379). The last stage is the evaluation that requires the development of appropriate methods of assessing the effectiveness of the planning program used. Tax free investment available for the taxpayers and its importance Tax free investment is something that every individual must seek (Abor & Bokpin 2010, p 195). Anyone can avoid paying 20 – 50% tax on their investments income and 18% on capital growth if they always take time to consider tax free investments. The following are types of these investments that can bring savings to the UK citizens. Child trust funds are tax free investments that are turned into a junior Isa on a kid’s 18th birthday. It comes in two forms; cash child trust funds (Ctfs). They are absolutely tax free and are based on share Ctfs, which as stocks and shares Isas, they are paid dividends after deduction of 10% tax. Another available tax free investment is the Individual Savings Account (ISA) available for anyone aged 18 and above. It also comes in two types; cash ISA, where one can invest ?5,640 in an ISA cash savings account during the 2012/2013 tax year, and shares ISA where one can invest ?11,280 in shares or preferably ?5,640 into cash ISA that do not have set up costs. Life assurance is another tax free investment allowing one to invest up to ?25 per month tax free into a 10-year investment plan. The investment is normally used to buy units in a fund whose performance is related to stocks. The shares and the charges are about 5% on the monthly premiums, 1.5% yearly management fee and a very small monthly fee. Pension tax relief is another tax free investment, whereby for every pound contributed by a UK citizen to a pension scheme of choice, there will be a 20% basic rate claim by the pension provider from the government (Franklin & Woodhead 1980). This only means that a person’s pension pot will have ? 100 for every ?80 put into the pension scheme. Basically, the government tops up all the contributions (HM Revenue & Customs 2009). Conclusion Although people are faced with risks to loss on investments and a lot of taxes related to investments, understanding the amount of risk to bear is crucial. Getting financial advice should also come in handy. Moreover, there are tax free investments that they can engage in (HM Revenue & Customs 2012). Task 2 Capital gain tax is tax that a person pays on profit or gain made on the sale, give away or at the disposal of an item (Walton 2010). It usually applies to assets owned by an individual, such as property or shares. In addition, there is a tax-free allowance and some reliefs that may bring down a person’s capital gains tax bill and sometimes, there may be no tax to pay at all. Capital gain tax for Mr. X is calculated by subtracting capital losses from capital gains. Capital gains ? (31,000 + 24, 000) = ? 55,000 Capital losses (?7,000) ?48,000 Capital loss brought forward (?10,000) ?38,000 Annual Exempt amount (?10,600 ?27,900 Capital gain tax 28% ? ?27,900 = ?7,812 Notes The amount to be taxed has to be as low as possible and all the losses made in the current year, and those brought forward have to be subtracted. Since the amount after the subtraction is still higher than the Annual Exempt Amount of ? 10,600, this amount is again subtracted. Mr. X is a higher rate taxpayer making him pay tax at a rate of 28% on his gains (HM Revenue & Customs 2010). Personal tax liability is tax on an individual’s income. In the UK, personal income is based on different criteria, from age, marital status to whether one is a resident, nonresident or domiciled. In the case of Mr. Y, his tax liability will be calculated as follows: Trading profits 36,535.00 Add taxable incomes Net employment income 8,495 Savings income 2,800 Dividend income 1,800 13,095.00 49,630.00 Add taxable expenses Qualifying interest 1,000.00 50,630.00 Personal allowance (6,475.00) Adjusted taxable income ?44,155.00 The tax rate applied for this amount is: The first 1 – 37,400 (20% ? 37,400) ?7,480 The rest of the amount 40% ? 6,755 (44,155 – 37400) ?2,702 Tax liability ?10,182 Net income is arrived by subtracting PAYE from employee income, or numerically, it is ? 8,495 (?9,000 - ? 505) Mr. Y has an income that is less than ?100,000, therefore, he will be given personal allowance of ?6,475, which is not taxable and need to be deducted from the above. Gift aid is not included as it is a charitable contribution and a mechanism by HMRC to provide tax relief. Tax relief reduces donor’s tax liability on the income from which the gift is made. After paying ?10,182, Mr. Y remains with ?33,373 (44,155 – 10,182), which he then contributes ?1,560 and the final amount reduces to ?32,413. The amount contributed to charity is grossed up to ?1,950 (125/100 x 1,560). The increase of ?390 (1,950 – 1,560) is the amount of donation that HMRC recognizes for tax purposes, which is later claimed back by charities from HMRC (Gift Aid made simple 2001). Mr. X with a property income worth ? 45,000 and his wife Mrs. X with no income will have their income tax liability calculated as follows: Income 45,000 Married couple allowance (2,670) ?42,330 The basic rate for this amount is 20% percent, therefore, the tax liability will stand as ?21,165, calculated from 50% ? ?42,330. The couple seems to be taxed a lot on their property income, and the best ways to trim down this sum is through the following methods. One of the best methods that should be employed is the ‘Rent a Room’ scheme that earns up to ? 4,250 tax-free. This involves letting furnished accommodation in one’s own home. If they decide to let jointly, the figure will be halved. The second best method of slashing on property tax bill is by claiming costs as revenue costs, although at times, determining whether a cost is of a capital nature or not is easy, while at times it can be difficult differentiating the two costs. While replacing rotten single glazed windows with UPVC double glazed ones, there is no need to classify these costs under capital cost as it can be offset by the rental income. Therefore, classifying cost as a revenue cost improves on the couple’s cash flow since they will pay less property tax than usual (Weller, n.d.). The other method of reducing property tax bill is through proper claim of their dependants. Every dependant lowers the amount of money the couple has to pay on their taxes. Moreover, each child who is their dependant can earn them up to ?1,500 (Bowman 2009). In addition, if Mr. X can switch the ownership of the property to his wife’s name because she could be in the lower rate of the taxpayer or her tax rate is nil. This will only mean that there will be a significant reduction in property tax liability attributed from the nil rates. This is a good strategy because Mrs. X does not earn any income and any tax liability can be completely wiped out (Weller, n.d.). References Abor, J & Bokpin, GA 2010, Investment opportunities, corporate finance, and dividend payout policy: Evidence from emerging markets, Studies in Economics and Finance, vol. 27 no. 3, pp.180 – 194. Adomavicius, GA & Tuzhilin 1999, User profiling in personalization applications through rule discovery and validation, Fifth ACM SIGKDD Internet, Conf. Knowledge Discovery and Data Mining, pp. 377–381. Bolster, P, Janjigian,V & Trahan, E 1995, Determining Investor Suitability Using the Analytical Hierarchy Process, Financial Analyst Journal, vol. 12 no. 2, pp. 35-41. 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Peppers, D & Rogers, M 1997, Enterprise One to One, Currency Doubleday, London. Resnick, P & Varian, H 1997, ‘Recommender Systems’, Introduction to special section of Communications of the ACM, vol. 40 no. 3, pp. 14-15. Saaty, JK 1980, The Analytic Hierarchy Process, McGraw-Hill, London. Smith, MA & Leigh, B 1997, ‘Virtual subjects: Using the Internet as an alternative source of subjects and research environment’, Behavior Research Methods, Instruments, & Computers, vol. 29 no. 1, pp. 496-505. Walton, KMA 2010, Tolley’s Capital Gains Tax 2010-11, viewed 10 May 2012 Weller, A, UK Tax advice & consultancy, viewed 10 May 2012, < http://www.property-tax- portal.co.uk/consultancy_arthur.shtml>. Read More