Benchmarks And Reviews

Question 1

Identify the importance of reviews in the financial planning process and how often should they be conducted?

Answer 1

1. Reviews should be conducted at least annually, though more frequent reviews can be scheduled with certain clients.
2. Reviews are essential to keep a portfolio aligned with the client’s objectives and changing investment perspectives.

Question 2

What are the purposes of conducting a review in the financial planning process?

Answer 2

1. Check for Changes:
   A. Ensure the client’s circumstances, risk profile, and objectives are up to date.
   B. Long-term plans require adjustments over time.
2. Monitor Investment Performance:
   A. Assess if the portfolio is meeting its goals and compare it against benchmarks.
   B. Determine if investments need to be adjusted if performance is not meeting expectations.
3. Rebalance the Portfolio:
   A. Portfolios tend to drift away from the original allocation due to varying returns of assets.
   B. Rebalancing involves selling some of the assets that have grown significantly and reinvesting in underrepresented assets.
   C. Take into account tax liabilities and charges involved in the rebalancing process.

Question 3

Benchmarks and Performance Measures

Differences between Absolute Return vs. Benchmarking when it comes to understanding how an investment is performing

Answer 3

1. Absolute return measures how the investment itself has performed.
2. Benchmarking compares the performance of the portfolio to an appropriate benchmark index to assess its relative performance.
3. It is important to compare a portfolio with a relevant benchmark, such as a similar investment or fund manager.
4. Avoid comparing a small-cap fund manager with a broad index manager, as their investment focuses differ significantly.

Question 4

Explain some good practices around choosing the right benchmark for comparison purposes to understand how your investment is performing

Answer 4

1. For comparisons with a benchmark - use a NEUTRAL, UNBAISED BENCHMARK made up of similar investment types
2. Market Indices are the most common type of benchmark.
3. Ensure the correct index is selected:
   A. A portfolio of UK stocks is best benchmarked against UK indices (UK stock market) like the FTSE 100 or FTSE All Share.

B. A portfolio of US stocks is more appropriately benchmarked against the S&P 500 index.

C. For portfolios of both equities and bonds, benchmarks like the Investment Association (IA) mixed investment benchmarks are used.