This is the modelling of an individual's financial needs over time and requires the following information. Present and future expenditure needs - current expenditure, planned expenditure in retirement. Present and future sources of income - earned income, expected pensions, rental income etc. Size and timing of future liabilities - cost of replacing cars, large holidays, home renovations, weddings, schooling and university, tax, property purchase. Size and timing of expected future capital - inheritance, maturing life policies
This information is fed into a financial model. Out of this model comes a profile of the individual's long term financial needs. The profile shows either a surplus (income and capital added to portfolio), or a deficit (income and capital to be withdrawn from the portfolio) and is the most important determinant of portfolio structure. It should also be in today’s money. This profile is important in that it allows you to bring all an individual's financial needs together. Structuring a portfolio based on one profile is much easier. Centralizing the management of all assets and all needs is also the most effective method of managing risk and return. Why? All objectives combined and can be managed within the one centralised portfolio structure. This is simpler, more cost effective, more efficient than the segregation of school fees, retirement planning and income drawdown and the associated individual planning, calculations etc. But, the ability to do so requires a system that can integrate the management of assets and the management of financial needs. If your manager does not have such a system the only way they can deal with each objective is to run each portfolio separately.  |
