Professional Documents
Culture Documents
Invest Chapter 4
Invest Chapter 4
Planning Finances
We have already reviewed some of the short and long-term needs that people usually
save for, such as retirement or higher education. You may find that a client requires
some basic financial-planning assistance in order to set specific, realistic, yet,
challenging financial goals. Once those goals have been identified you will gather
information about how achieve them. This is an extension of the Know Your Client
rule.
The information acquired helps you, as the agent, to understand your clients
financial position, including:
Insurance and investments that are in place;
Insurance and investment needs;
Debt obligations;
How much money is available for investment;
Which investments meet client objectives.
You will need to review tax returns, insurance policies, and wills and estate plans and
learn about your clients risk tolerance and lifestyle.
Quantitative information (such as amounts held as assets, liabilities, income, cash
flow, etc.) and qualitative information (such as lifestyle choices) will be required to
determine whether the objectives can be met. This will enable you to satisfy the
needs of your client with the appropriate product(s).
The process of developing strategies appropriate to the objectives of your client
results in recommendations that form a plan of action for the client. Implementation
of the plan becomes essential for the client to realize his or her goals.
You should monitor your clients ongoing needs through periodic reviews that take
into account any change in your clients financial situation.
Copyright 2011 Oliver Publishing Inc. All rights reserved. 239
LLQP
The time value of money shows that it makes more sense for a person to receive
$1,000 today, rather than wait to receive the same $1,000 ten years from now. This is
because the $1,000 invested now at 5% would be worth $1,628.89 in ten years,
because of interest earned and compounding. Also, inflation will reduce the value of
the $1,000, so that its purchasing power in ten years will be less than it is today.
Why is the time value of money important to financial planning?
A
B
C
D
It allows agents to determine how much money they will make from a clients
investments over specific periods of time.
It gives agents the ability to guarantee investment growth projections.
The time value of money allows clients to decide how rich they will be by the time
they retire.
Clients can decide on the amount and results of their savings and the amount of
money that will be available to them in future.
Present value of
money
The present value of
money is the amount
that must be invested
today to yield a certain
amount at a future date.
The present value of a single sum begins with determining how much money is
required at a future date. It shows how much must be invested now to grow to that
amount. Working backwards from a future date is called discounting.
LLQP
The formula for the present value of a single sum will reveal the amount to be
invested today to achieve the amount needed in the future:
present value (PV) =
For example, how much would you need to invest today in order to have $100 in two
years time? Lets say current two-year interest rates are 6.25%, compounded
annually.
PV
100
(1 + .0625)2
=
100
(1.0625 x 1.0625)
=
100
1.1289
= $88.58 must be invested today
Key
100(+/)
6.25
2
COMP
Press
FV
i
n
PV
Display Shows
100
6.25
2
$88.58
A higher interest rate with more discounting periods will produce a smaller present
value number. Conversely, lower interest rates and/or fewer discounting periods
produce a larger present value number.
Key
2,000(+/)
4.5
3
COMP
Press
PV
i
n
FV
Display Shows
2,000
4.5
3
$2,282.33
If you deposited $5,000 in a GIC that was paying 4.5% interest annually, how much
money would you have in 10 years?
A
B
C
D
$8,150.15
$7,965.00
$7,779.20
$7,764.85
LLQP
+ FILE
See file 41
for more details on
the taxation of
investments.
Dividends
Corporate dividends are a share of profits that have been earned by the corporation.
They are distributed to shareholders on a pro-rata basis. Dividends are paid at the
discretion of the board of directors of the company; they are not guaranteed.
Dividends from Canadian corporations receive preferential tax treatment, whereas
dividends from foreign corporations do not.
Capital Gains
Some investments that produce capital gains are stocks, mutual funds (when the fund
invests in investments that earn capital gains), and segregated funds (also when the
fund invests in investments that earn capital gains).
Capital gains are also earned on mutual funds and segregated funds when units are
sold at a higher price than that at which they were purchased.
Yield to Maturity
The yield to maturity refers to the rate of return anticipated on a bond if it is held to
its maturity date. These returns are most accurately sourced from a published bondyield table or a financial calculator.
LLQP
High
RISK
Low
High
Inflation
Inflation erodes the real value of an investment. For example, if an investor receives
6% interest rate on an investment and the inflation rate is 2%, the nominal rate of
return is 6%; the real rate of return is 4% (6% 2%).
When tax is deducted, the real rate of return after taxes is determined. It is the
actual amount left in the pocket of the investor. The formula for the after-tax real
rate of return is:
(nominal interest rate x (1 marginal tax rate) inflation rate
(1 + inflation rate)
For example: an investor earns 6% on an investment, the inflation rate is 2%, and the
investor has a marginal tax rate of 40%. The investors after-tax real rate of return is:
6% x (1 40%) 2%
1 + 2%
= 1.6%
1.02%
= 1.57%
Inflation is cyclical; that is, the rate of inflation rises and falls according to a number
of economic factors. When inflation rates rise, so too do interest rates, and if they
climb too high, eventually a recession can result. Over the last ten years, the inflation
rate in Canada has averaged just less than 2%.
Fiscal policies
Determine how
the government
will raise income
through taxation
and how the
government will
spend that
income.
LLQP
Monetary policy
How the
government
manages the
money supply
If a client is risk-averse, investments that guarantee capital and offer a fixed rate of
return represent the best choice.
It is if the net return of the investment meets or exceeds the combined effects of
inflation and taxes over the term of the investment.
Guaranteed investments should always form part of an investment portfolio, but the
amount allocated to such investments will depend on the goals of the individual
investor and the time required to meet those goals.
All of these answers