Wealth management is the proper handling of assets, liabilities, and investment. It has broad definition and objectives that are divided into different categories. These policies are become useful guidelines for effective financial management, asset allocation, and mining of unique investment concepts. It is also referred as one of the most systematic way of private banking because of dealing two types of client. The institutional client of which is best represented by a pension plan and the non-institutional one which can be referred as individual policy. Both of these accounts require keen wealth management and highly organize guidelines to prevent over-reaction. These are the “Investment Policy Statement” referred as blueprint or layout policy for the portfolio. Second is “Portfolio Management”, this is to determine and assess the terms of asset allocation. Third is “Selecting Investment Managers” for investment policy implementation. Lastly is the “Philosophy, Process, and People”, these 3 P’s are keystone to evaluate the effectiveness of investment policy, terms used by the financial managers, and performance of the team or investment staff.
An “Investment Policy Statement” is a highly-organize financial guidelines of which has detailed and strategic plan for the portfolio process. It includes and emphasizes the five important parts of the policy. First is the “Client Description and Goals” of which stated clearly the main purpose of the policy and range of implementation. Moreover, a form of recommendation to the next level rather than a piece of guaranteed statement. It is generally a list of assumption five or more years to come. Where in based on the assumption, one can project a certain circumstances and at the same hand will offer a possible solution.
The client’s goal is not necessarily fancy but must be accurate and concise with possible to direct recommendation. In designing a certain strategy, the objectives and investment constraints are mainly considered in the process. The financial statement and risk tolerance are also measured to determine whether the policy created is applicable or requires revision. In line with the process, a concrete context is also added to back up the investment strategy and to prove the empirical hypothesis.
Second part is the investment objectives of which have detailed assumptions for short and long-term statement. Typically, this is a list of future expenditures such as funding the children’s education for college, retirement plan, and other vacation expenses. Together with these, the financial statement, risk tolerance, and the capacity to bear the possible outcomes are considered. This is to illustrate the future outcome of a certain assumption. If somehow the policy created is not applicable, the wealth financial manager can still make an adjustment to fit in your financial capacity. In addition, to clearly established the risk tolerance and the ability to take risk significantly in a long-term process.
Apart from that, it is also important to educate clients about the possible risks even the policy created is certainly suitable. They should be reminded that the standard goals are not achievable in a short-term investment but rather long-term basis. In which, half of the proportion is uncertain. Third part is the investment constraints of which involves in liquidity of which clearly identify the investor’s needs of cash. However, there are certainties do not required to be prioritized then it’s referred as liquidity constraints.
A financial timeline is also observe in the process or referred as time horizon. If the clients have enough time horizons, they have long chances to redeem from losses or have the ability to take long time risks. Tax considerations are also included in the investment portfolio. They should focus on “tax-deferred investment”, this is to prevent from continue spending of supposedly income. Apart from that, the legal and regulatory factors can also affect the investment flow. Therefore, it is also an investment constraints that client should be considered. Normally, the yearly trust distribution is no more than 10 percent. If certain cases arise, then there is a great chance to loss or deficit.
Fourth part is the “strategic asset allocation”. The goals should have the most concise and applicable techniques. In which, the policy is primarily based on expected returns of a certain asset. Wherein, the investment returns are divided into four categories. The capital preservation is the maintaining capital of which has the same amount to the inflation rate while the capital appreciation is the investment that requires growing rather than preserving it. It is expected to exceed from the inflation rate or the capital base.
Current income is another category of return investment of which deals on generating objective incomes. This is to sustain from living expenses and other basic, living necessities.
And lastly the total return investment of which the capital appreciation continues to expound and increase. Thus, it results to higher income and tendency of re-investing.
If the client has succeeded to identify the difference of return investment, then certainly he is ready to make the strategic asset allocation. To simplify this portfolio process, it needs to be divided into more comprehensive category such as cash, stocks, and bonds. These give us a better illustration of the income and probably reduce risks from losses.
In-order to have effective investment policy, the client should have knowledgeable wealth manager. This is to make sure that he is capable to execute the policy and educate the client as well. The financial manager must have solid background about the scope of his work, which includes expertness on investment options. The individual management is focus on “each asset class” and categorizes in three different parts such as individual, separate, and unified accounts. On the other hand, the pooled management is usually covering the mutual funds, hedge and other related vehicles.