Investors’ Needs

Question 1

There are three main factors that determine the importance of an investor’s needs and objectives regardless of whether it’s an individual or institutional client.

What are the three main factors?

Answer 1

1. Return requirement.
   Desired outcome for the investment, such as accumulating a specific amount of money by a particular time e.g., £500,000 by retirement
2. Risk tolerance.
   How much risk the investor is willing and able to accept in pursuit of returns.
3. Time horizon.
   Length of time the investor plans to keep their money invested.

Question 2

How does return requirement impact investment decisions and how is it prioritised?

FACTOR 1: return requirement

Answer 2

1. The return required is calculated based on the time horizon and investment goal.
2. If the desired return seems unachievable, the adviser may suggest adjusting the goals or extending the time horizon.
3. Longer the time horizon = lower the return will need to be to meet the same investment objective in absolute terms.
4. More risk the investor is able to take = higher the return the investor is likely to achieve
5. PRIORITY- Return requirement is a key factor and often influences the approach to risk and time horizon.

Question 3

How does risk tolerance impact investment decisions and how is it prioritised?

FACTOR 2: risk tolerance

Answer 3

1. It’s influenced by psychological factors, and can be assessed through questionnaires to understand the investor’s comfort with risk.
2. Generally, longer investment horizons allow more risk tolerance, but this doesn’t always mean the investor wants to take on more risk.
3. PRIORITY- Risk tolerance often impacts investment decisions, determining the types of assets or strategies chosen. It needs to be balanced with return requirements.

Question 4

How does time horizon impact investment decisions and how is it prioritised?

FACTOR 3: time horizon

Answer 4

1. A short-term horizon (e.g., saving for school fees) leads to a need for lower risk and more liquidity.
2. A long-term horizon (e.g., saving for retirement) allows for more risk and less immediate concern about liquidity or short-term market fluctuations.
3. PRIORITY- Time horizon typically determines the overall investment strategy (e.g., more conservative for short-term needs, more aggressive for long-term goals).

Question 5

Apart from return requirement, risk tolerance, and time horizon, investors have other important considerations that affect their financial decisions

What are some examples of other considerations?

Answer 5

1. Liquidity.
   The ability to quickly access cash without significant loss is crucial, particularly for individual investors
2. Tax.
   The tax treatment of investments can impact returns and should be considered when making investment decisions.
3. Religious or ethical beliefs.
4. Conflicting Financial Goals.
5. Changing Circumstances.

Question 6

Apart from return requirement, risk tolerance, and time horizon, investors have other important considerations that affect their financial decisions

CONSIDERATION 1: Liquidity

Answer 6

1. Liquidity needs increase as the investment horizon nears its end (e.g., approaching retirement).
2. Some investors always maintain a portion of their investments in liquid assets for emergencies.

Question 7

Apart from return requirement, risk tolerance, and time horizon, investors have other important considerations that affect their financial decisions

CONSIDERATION 2: Tax

Answer 7

Financial advisers help clients choose tax-efficient investment vehicles (e.g., ISAs, pensions).

Question 8

Apart from return requirement, risk tolerance, and time horizon, investors have other important considerations that affect their financial decisions

CONSIDERATION 3: Religious or ethical beliefs

Answer 8

1. Investors avoid certain investments based on ethical, religious, or personal values (e.g., no investments in arms manufacturing or fossil fuels).
2. Socially Responsible Investing (SRI) and ESG (Environmental, Social, and Governance) investing allow investors to align portfolios with their values.

Question 9

Apart from return requirement, risk tolerance, and time horizon, investors have other important considerations that affect their financial decisions

CONSIDERATION 4: conflicting financial goals

Answer 9

1. Investors may face conflicts between goals, such as:
   • Paying off debt vs. contributing to a pension scheme.
   • Funding school fees vs. saving for retirement.
2. Prioritization is key, as delaying certain investments (e.g., pensions) may harm long-term financial stability.

Question 10

Apart from return requirement, risk tolerance, and time horizon, investors have other important considerations that affect their financial decisions

CONSIDERATION 5: changing circumstances

Answer 10

1. An investor’s financial situation and priorities evolve over time due to life events (e.g., marriage, job changes, inheritance).
2. Regular reviews and adjustments are essential to align the investment strategy with new needs.