Annual Reports and Financial Publications - Article Example

Question 1(a): The primary sources of financial information available to investors and financial advisors include: Annual Reports SEC filings Annual Reports: The Annual Report to Shareholders is the principal document used by most public companies to disclose corporate information to shareholders. It is usually a state-of-the-company report including an opening letter from the Chief Executive Officer, financial data, results of continuing operations, market segment information, new product plans, subsidiary activities and research and development activities on future programs. Annual Reports are probably the best single source of information on public companies. (University of Pittsburg, 1) Financial Publications: Financial Publications like The New York Times, The Wall Street Journal etc are another useful source of financial information for investors. These are ideal sources of financial information not only because of their high standards of reporting but also because a large portion of the publications are dedicated to business. These are widely recognized financial periodicals which are known for their high quality, up to date financial information, and are often considered useful daily sources of information by business-persons, accountants and financial specialists alike. In addition to this, these periodicals are in publication for many years and are institutionally recognized sources of financial information. On a more generic note, other sources of financial information include: Newspapers Television Internet Other sources e.g. clicked-on banners Question 1(b): The greatest threat that financial investors face when it comes to the use of internet as a source of financial information is speculation. News can be generated on the internet merely on happenstance which leads to several problems faced by the investors. For that matter, Trent Hamm comes up with a simple solution: “If a claim is made in a personal finance book or magazine that piques my interest or might be the basis of a personal finance choice of mine, I generally don’t immediately trust it; instead, I seek out supporting sources. If I continue to find the same idea expressed from a lot of different sources, I usually trust it.” (Hamm, 1) Another problem faced by investors is the severe lack of security due to “phishers” who have infiltrated the internet. In the corporate environment, one simple slipup could compromise an entire network, spark financial fraud, or even lead to industrial espionage. (Check Point, 1) Question 2(a): According to Wikipedia, a financial adviser is a professional who renders investment advice and financial planning services to individuals and businesses. Ideally, the financial advisor helps the client maintain the desired balance of investment income, capital gains, and acceptable level of risk by using proper asset allocation. Financial advisers use stocks, bonds, mutual funds, REITS1, options, futures, notes and insurance products to meet the needs of their clients. (Wikipedia, 1) Therefore, the basic function of financial investor can be defined as the intermediary present to align the needs of the client with the investing opportunities that are present in the market but are unknown to the client. Due to this, financial advisors play a pivotal role in determining the direction and amount of money that is invested. They are usually paid in a basic fee plus commission package; however, clients do tend to change this structure in accordance with their liking and the investment that they are making. Question 2(b): According to experts at Wharton and a survey of advisors and clients, trust is the foundation of the advisor–client relationship (Wharton, 1). They have demarcated trust into 3 categories: Trust in Technical Competence & Know How: There are certain components to trust that every client, consciously or even instinctively, looks for in a financial advisor. First, by and large, investors are looking for someone whose level of competence inspires trust. In other words, an investor generally seeks an advisor who is experienced and knowledgeable, one who can help the investor make, or single-handedly make on the investor’s behalf, difficult financial and personal decisions. (Wharton, 1) Trust in Ethical Conduct and Character: While many advisors tend to think of trustworthiness as simply a function of personal and/or industry ethics, experts believe consumers distill this level of trust into one basic yet critical question: “Do I trust you not to steal money from me?” (Wharton, 2) Trust in Empathic Skills and Maturity: The final element of trust focuses exclusively on the interpersonal relationship. Dr. James Grubman, one of only a handful of specialized psychologists who provide wealth counseling and training services to financial professionals and their clients, confirms that there is a third dimension of trust present in every successful advisor-client relationship. (Wharton, 2) Question 2 c (i): 1. The level of investment that the client is willing and able to make? 2. The desired liquidity and accessibility of the investment made? 3. The financial risk tolerance of the client? Question 2 c (ii): The level of investment that the client wishes to make is very important as that would determine what type of financial assets and/or investing opportunities are open for the financial advisor to pursue for the client. The desired liquidity of the investment i.e. how quickly can the investment made be turned back into cash and accessibility of the investment that is made is very important as that would also streamline the financial assets that can be invested upon, as assets with less liquidity would automatically be deemed unusable in a case where high liquidity is required. Financial risk tolerance, defined as the maximum amount of uncertainty that someone is willing to accept when making a financial decision, reaches into almost every part of economic and social life. Although the importance of assessing financial risk tolerance is well documented, in practice the assessment process tends to be very difficult due to the subjective nature of risk taking. Carducci and Wong (1998) reported the findings from a study that attempted to identify personality factors that determine financial risk taking in everyday money matters. They concluded that persons fitting the Type A personality trait tended to take greater risks than those more closely aligned with the Type B personality profile. (Grable, 1) Question 3: Monitoring ratios on a regular basis provides insight into how effectively a business is being managed. Investors/Lenders also evaluate risk by using several sets of ratios; ratios of assets to liabilities, and ratios of lender-investor dollars to owner-investor dollars. Recognize that ratios are only indicators and that only management can tell the full story about a business. The more adept management is at explaining financial ratios to their Investors/Lenders, the better they will understand your business. Key Indicators are: Liquidity: Financial ratios in this category measure the company's capacity to pay its debts as they come due. Safety: Financial ratios in this category are indicators of the businesses' vulnerability to risk. Creditors to determine the ability of the business to repay loans often use these ratios. Profitability: The ratios in this section measure the ability of the business to make a profit. Efficiency: Also called Asset Management ratios. Indicator of how efficiently the company manages its assets. (College of Charleston, 1) These financial ratios can immensely assist a financial investor when undertaking financing decisions for a client. Firstly, financial risk tolerance of the client and the risk of the investment that is made can be matched against each other with the help of these ratios, so the investor can assure the client about the level of his financial risk. Secondly, these ratios also help the financial advisor in aligning the interests of the client with the performances of the investing opportunities that are present to the client i.e. if the client is interested in a high rate of return over a longer period then using profitability and liquidity ratios, the investment opportunity that is in line with their needs can be identified for them by the financial advisor. Suffice to say, financial indictors help the financial advisors align the requirements of the clients with the performance of the investors. Bibliography: 1. University of Pittsburg. “Sources for Corporate Financial Data”. 2008. August 29, 2008 2. Hamm, Trent. “What Financial Information Sources Do You Truly Trust?” The Simple Dollar. 2006. August 29, 2008 3. Check Point Software Technologies. “Phishing: Dangers of Internet Identity Theft”. Redwood City: Check Point Software Technologies, 2006. 4. Wikipedia, The Free Encyclopedia. “Financial adviser”. 2008. August 29, 2008 5. Wharton, University of Pennsylvania. “Bridging the Trust Divide: The Financial Advisor-Client Relationship”. Pennsylvania: University of Pennsylvania, 2006 6. Grable, John E “Financial Risk tolerance and the Additional factors that Affect Risk in Everyday Money Matters”. Kansas: Journal of Business and Psychology Vol. 14, No. 4, Summer 2000 7. College of Charleston. “Financial Ratios and Quality Indicators”. South Carolina: College of Charleston, 2008 Read More