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CHAPTER 10 Investment Planning StrategiesINVESTMENT PLANNING PROCESSMajor StepsIdentify client’s goalsDetermine client’s risk toleranceArticulate client’s investment preferencesAnalyze client’s investment portfolioReorganize client’s investment portfolioDIFFICULTIES WITH GOAL SETTINGGoals change with timeHard to verbalizeLack of understanding in financial conceptsUnrealistic goalsSetting of Life CyclesAccumulation stage begins with the start of financial lifeAcceleration stage begins when investor enters peak earning yearsPreservation stage begins when investor starts preparing for retirement86614050609500What is the Consumer Life Cycle?6177480What is the Consumer Life Cycle?The process of thinking about and planning for our client’s “financial lives” happens over a long period of time. And their focus - their needs, their priorities, their commitments - all change throughout the various stages of their life cycle. It’s hard to think about things like wealth transfer and long-term care insurance when they’re starting their financial journey during the early phases of the life cycle. And, hopefully, managing debt or saving for their first home are probably not their #1 concerns when they’re nearing or well into their retirement years. And one of the wonderful things is that we can offer a wide range of products and services to our clients that can address their needs today, as well as their needs in the future when their life circumstances might change. This amounts to a “Total Life Solutions Package” that covers all the phases of their lives by focusing on the life cycle of their needs - aka, the “Consumer Life Cycle.” There are certain times when helping your clients make decisions for their financial future is especially important, but good guidance is necessary every step of the way if you want to help your clients reach their goals. One of the things that can help set you apart is to care about your clients today - as well as 5, 10 or 20 years from now when their needs may change.That said, let’s take a look at how you can apply the consumer life cycle concept to your everyday conversations with your clients.020000What is the Consumer Life Cycle?The process of thinking about and planning for our client’s “financial lives” happens over a long period of time. And their focus - their needs, their priorities, their commitments - all change throughout the various stages of their life cycle. It’s hard to think about things like wealth transfer and long-term care insurance when they’re starting their financial journey during the early phases of the life cycle. And, hopefully, managing debt or saving for their first home are probably not their #1 concerns when they’re nearing or well into their retirement years. And one of the wonderful things is that we can offer a wide range of products and services to our clients that can address their needs today, as well as their needs in the future when their life circumstances might change. This amounts to a “Total Life Solutions Package” that covers all the phases of their lives by focusing on the life cycle of their needs - aka, the “Consumer Life Cycle.” There are certain times when helping your clients make decisions for their financial future is especially important, but good guidance is necessary every step of the way if you want to help your clients reach their goals. One of the things that can help set you apart is to care about your clients today - as well as 5, 10 or 20 years from now when their needs may change.That said, let’s take a look at how you can apply the consumer life cycle concept to your everyday conversations with your clients.447675-18415000447675-20447000533400219075Consumer Life Cycle - An OverviewThis chart depicts a summary of the different “financial priorities” that might face a client at different phases of their life cycle - generally, ages 20 - 80+.Income Protection and Debt ManagementInvestmentsRetirement AccumulationWealth PreservationWealth TransferEach of the color segments reflects an approximation of when the focus of a particular need might occur in someone’s lifetime. The moderately shaded colors indicate that while it might not be a priority, it’s possible that someone might be thinking about these needs. And the light shading for all of the segments show a continuation through the entire life cycle. Just as no two people are the same, no two clients’ focus or priorities will necessarily be the same either. The main point of this exercise is not to lock anyone into an age-specific “profile,” but rather, to demonstrate that priorities and focus change over time. (Age is important, but so are “when” and “how” solution or money will be needed.)The needs-based solutions for those priorities must also be addressed and adjusted over time. The ability to offer clients an opportunity or product solution, no matter which phase of their life cycle they may be in… This is what we mean by a Total Solutions Package. 020000Consumer Life Cycle - An OverviewThis chart depicts a summary of the different “financial priorities” that might face a client at different phases of their life cycle - generally, ages 20 - 80+.Income Protection and Debt ManagementInvestmentsRetirement AccumulationWealth PreservationWealth TransferEach of the color segments reflects an approximation of when the focus of a particular need might occur in someone’s lifetime. The moderately shaded colors indicate that while it might not be a priority, it’s possible that someone might be thinking about these needs. And the light shading for all of the segments show a continuation through the entire life cycle. Just as no two people are the same, no two clients’ focus or priorities will necessarily be the same either. The main point of this exercise is not to lock anyone into an age-specific “profile,” but rather, to demonstrate that priorities and focus change over time. (Age is important, but so are “when” and “how” solution or money will be needed.)The needs-based solutions for those priorities must also be addressed and adjusted over time. The ability to offer clients an opportunity or product solution, no matter which phase of their life cycle they may be in… This is what we mean by a Total Solutions Package. -372280000center0Consumer Life Cycle - Income Protection and Debt ManagementWe generally think of this phase of the financial life cycle as starting in a person’s 20’s or 30’s. Most younger clients (let’s say, those in their 20’s) are just starting out. They might be starting a new job or career. They might be getting married or starting a family. Which means they might be buying their first home. Because this onslaught of “life growth” and new financial commitments, they typically don’t have large amounts of money to invest. This is the time when they should be learning how to manage debt. And a time when they should begin to think about income (term life insurance) protection, especially at the point when they get married and start a family. Because the biggest potential threat to clients in this early phase of the life cycle is loss of income - which would affect their ability to satisfy all of these new financial commitments.As we mentioned earlier, things like life insurance and debt management don’t go away later in life - they just might not be the primary focus. This is why the shading continues throughout the life cycle…020000Consumer Life Cycle - Income Protection and Debt ManagementWe generally think of this phase of the financial life cycle as starting in a person’s 20’s or 30’s. Most younger clients (let’s say, those in their 20’s) are just starting out. They might be starting a new job or career. They might be getting married or starting a family. Which means they might be buying their first home. Because this onslaught of “life growth” and new financial commitments, they typically don’t have large amounts of money to invest. This is the time when they should be learning how to manage debt. And a time when they should begin to think about income (term life insurance) protection, especially at the point when they get married and start a family. Because the biggest potential threat to clients in this early phase of the life cycle is loss of income - which would affect their ability to satisfy all of these new financial commitments.As we mentioned earlier, things like life insurance and debt management don’t go away later in life - they just might not be the primary focus. This is why the shading continues throughout the life cycle…132080-17653000center0Consumer Life Cycle - InvestmentsThe “Investment” phase is all about accumulating assets - usually as quickly as possible. This tends to begin during a period of “instant gratification” where saving for a new home, new car, advanced college degree, new business might all be important short-term goals. Clients should be maximizing their IRA contributions. They should be participating in an employer sponsored retirement plan, especially if the employer offers a contribution match. Clients can also start voluntary mutual fund accounts to help grow assets that they may need to use prior to retirement or for an emergency fund. Money market funds are especially useful for emergency funds or other short-term needs.As younger clients begin to age and their financial picture improves, they are able to focus more on future events like putting their kids through school, buying a second home, or increasing their savings for retirement. You can continue to help them manage their debt, and make sure they’re maintaining an emergency fund and still focusing on longer-term accumulation through strategies like IRAs and Mutual Funds. Maybe you can work with them to provide their first mortgage. You absolutely want to make sure that they have enough life insurance coverage to protect their families. (A variable annuity may also make sense with this age group as a result of an inheritance, the sale of property, or some type of transaction that results in the receipt of a lump sum, assuming short-term and medium-term needs are already met.)020000Consumer Life Cycle - InvestmentsThe “Investment” phase is all about accumulating assets - usually as quickly as possible. This tends to begin during a period of “instant gratification” where saving for a new home, new car, advanced college degree, new business might all be important short-term goals. Clients should be maximizing their IRA contributions. They should be participating in an employer sponsored retirement plan, especially if the employer offers a contribution match. Clients can also start voluntary mutual fund accounts to help grow assets that they may need to use prior to retirement or for an emergency fund. Money market funds are especially useful for emergency funds or other short-term needs.As younger clients begin to age and their financial picture improves, they are able to focus more on future events like putting their kids through school, buying a second home, or increasing their savings for retirement. You can continue to help them manage their debt, and make sure they’re maintaining an emergency fund and still focusing on longer-term accumulation through strategies like IRAs and Mutual Funds. Maybe you can work with them to provide their first mortgage. You absolutely want to make sure that they have enough life insurance coverage to protect their families. (A variable annuity may also make sense with this age group as a result of an inheritance, the sale of property, or some type of transaction that results in the receipt of a lump sum, assuming short-term and medium-term needs are already met.)19050-16573500center0Consumer Life Cycle - Retirement AccumulationBy the time clients have reached this phase of the life cycle, they’ve most likely built a financial foundation. This is the time when they really need to focus on retirement saving and planning. Are they looking forward to retirement? Or are they running scared? Do they even know about all the different options that are available to them?This is the point of peak earnings years. Clients may find that they can increase their tax-deferred earnings by investing in a Variable Annuity. They may be able to take advantage of the services offered by Pre-Paid Legal (like trusts, wills). Long-Term Care insurance may be another consideration – especially as they begin to experience the effects of the “sandwich generation.” And the closer the client gets to age 59? or retirement, protection of assets, and the preservation and transfer of wealth for future generations, tends to override their previous focus on accumulation. As we show here, the greatest potential threat during the “Accumulation” phase is the erosion of principal (due to market down-turns). Possible solutions: “Living Benefit” - principal protection guarantee, and “Death Benefit” - step-up death benefit. Outliving retirement savings to manage living expenses may also be a concern that can be addressed by annuities with guaranteed lifetime payout options through annuitization.020000Consumer Life Cycle - Retirement AccumulationBy the time clients have reached this phase of the life cycle, they’ve most likely built a financial foundation. This is the time when they really need to focus on retirement saving and planning. Are they looking forward to retirement? Or are they running scared? Do they even know about all the different options that are available to them?This is the point of peak earnings years. Clients may find that they can increase their tax-deferred earnings by investing in a Variable Annuity. They may be able to take advantage of the services offered by Pre-Paid Legal (like trusts, wills). Long-Term Care insurance may be another consideration – especially as they begin to experience the effects of the “sandwich generation.” And the closer the client gets to age 59? or retirement, protection of assets, and the preservation and transfer of wealth for future generations, tends to override their previous focus on accumulation. As we show here, the greatest potential threat during the “Accumulation” phase is the erosion of principal (due to market down-turns). Possible solutions: “Living Benefit” - principal protection guarantee, and “Death Benefit” - step-up death benefit. Outliving retirement savings to manage living expenses may also be a concern that can be addressed by annuities with guaranteed lifetime payout options through annuitization.158115-19939000center0Consumer Life Cycle - Wealth PreservationAs clients approach or settle into retirement, the primary focus is on maximizing and conserving the assets that they’ve worked so hard to accumulate. They’re worried whether they’ve accumulated enough money to sustain them for the rest of their lives.This phase presents another opportunity to talk to clients about guarantees offered through annuities, including guaranteed lifetime income. Because health is a big concern, Long-Term Care insurance might be something else you can discuss. You can also mention the importance of making sure wills are up to date, and that beneficiary designations are in order. Pre-Paid Legal might be something that could benefit clients in this phase.020000Consumer Life Cycle - Wealth PreservationAs clients approach or settle into retirement, the primary focus is on maximizing and conserving the assets that they’ve worked so hard to accumulate. They’re worried whether they’ve accumulated enough money to sustain them for the rest of their lives.This phase presents another opportunity to talk to clients about guarantees offered through annuities, including guaranteed lifetime income. Because health is a big concern, Long-Term Care insurance might be something else you can discuss. You can also mention the importance of making sure wills are up to date, and that beneficiary designations are in order. Pre-Paid Legal might be something that could benefit clients in this phase.241935-2209800011176021590Consumer Life Cycle - Wealth TransferThis is the time in their lives when providing for the ones they leave behind may become more important than their own needs. While this is never a pleasant conversation to have with someone, it’s important that the conversation happen. And sometimes it’s easier to talk with a non-family member, or a trusted representative, than to a stranger.Have your clients thought about who will receive their assets when they’re gone?Do they have a will?Have they considered how much of the value of their estate might be eroded by estate taxes?Have they thought about how their heirs will be able to pay those estate taxes?020000Consumer Life Cycle - Wealth TransferThis is the time in their lives when providing for the ones they leave behind may become more important than their own needs. While this is never a pleasant conversation to have with someone, it’s important that the conversation happen. And sometimes it’s easier to talk with a non-family member, or a trusted representative, than to a stranger.Have your clients thought about who will receive their assets when they’re gone?Do they have a will?Have they considered how much of the value of their estate might be eroded by estate taxes?Have they thought about how their heirs will be able to pay those estate taxes?Basic Investment ObjectivesLiquidityCurrent incomeInvestment growthDiversification & Asset Allocation ModelAAM provides a system for diversifying a portfolio among three asset classes to optimize portfolio return for a given level of riskImportant to Differentiate Between Growth and Value InvestingTax ConsiderationsReturns on investment products can be classified as:taxabletax-deferredtax-shelteredtax-freeWhat do these mean?Taxable – dividends and capital gains of stocks etc.Tax-deferred – earnings on retirement accountsTax sheltered – investment in securities that may create low or negative income but larger cash flowsTax-free – there is no tax if you buy Treasury securities and there is no local tax; buy municipal bonds and there is no federal taxes; buy municipal bonds from your state and there are no taxes (fed or state)Investors should attempt to maximize after-tax returnsTime HorizonTime is of essence in selecting right investmentProduct choices are shaped by time remaining for reaching investment goalsClassification of various investments into short-term, medium-term, and long-term is essentialInvestor should understand the trade-offs associated with these investments83121522479000Investment ReturnRisk and return are positively relatedPlanner should select products that optimize portfolio return for investor’s desired level of riskRisk tolerance level is generally a subjective measureThis level may change due to change in net worth, income, investment knowledge, and sophisticationWhat is risk tolerance?An individual’s perception of how they are impacted by risk.Very often ignored or not considered.Planners need to express the importance of the concept and how it impacts investment choices and outcomes.Prioritizing GoalsInvestor should be assisted in prioritizing investment goalsFrequently not consideredEmergency fundsRetirement Children’s educationOther potential needsPlanner should attempt to meet these goals through construction of target investment portfolioINVESTMENT PORTFOLIO CONSIDERATIONSCash Reserve And Emergency FundsIncome FlowGrowthLong Term Growth And Tax AdvantagesReal Estate InvestmentsTax-sheltered InvestmentsHard AssetsMiscellaneous InvestmentsTarget Investment PortfolioPORTFOLIO REORGANIZATION: BASIC STEPSReallocation of percentage distribution of various classes of investments based on a change in economic conditionsChange in investment strategy due to change in client’s investment goals because of changes in life cycle, investment needs, time frame, and tax considerationsChange in product selection due to change in client’s risk tolerance level ................
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