IT And Financial Services

The work of a financial advisor is to help people make the right decisions in regards to their finances and help them to make wise investment decisions that will guarantee the maximum returns, manage their cash flow and plan for the future. However, before guiding a client, a financial advisor is should have a knowledge about their clients’ financial position so that they can advise them accordingly and asses if they are headed in the right direct financially. Therefore, before advising Leonard and Penny, there is need to discern their financial position, so that the financial advisor can advise them accordingly on how they can exploit various financial avenues to their advantage and expand their financial capabilities in future.

Penny and Leonard financial position elements

Assets

1. Their salary is classified as revenues

   Leonard -$42,000

   Penny -$68,000

2. House on a mortgage worth $200,000
3. Cash after selling penny house $85,000
4. Current account obtained after deducting current liabilities from current assets £25,000
5. Shares 5,000 HSBC, 10,000 Tesco, 10,000 Aviva
6. NIC contributions -According to rates in UK 2018-19 Penny 2%*68,000=£1,360

   Leonard 12%*£42,000=$5,040

Total assets = £451,400

Liabilities

Income tax Leonard lies in the bracket 20%* £42,000=£84,000

Penny lies in the bracket 40%* £68,000 =£27,200

Card debt - £24,000

Mortgage loan (£200000-$100000) = £100,000

Total liabilities =£211,200

£451,400-£211,200=£240200

Penny and Leonard's financial position gives a positive figure indicating that assets exceed liabilities, which means that they are financially stable. There is a high possibility that they will achieve their ambitions as long as they can invest wisely; meaning that they should invest more on assets, and reduce on liabilities.

Financial plan

A proper financial plan should include, cash flow planning, retirement preparation, investment scheduling, revenue planning, education savings, and estate investments, which are discussed in details in the subsequent sections.

Cash flow planning

Penny and Leonard current financial position indicates that if they maintain their annual cash flow and invest wisely, there is no doubt of succeeding in the future. They should also use techniques like pound cost averaging; this strategy decreases exposure to deteriorating markets and investing a large sum in such markets. The outcome of pound cost averaging is that the costs incurred while acquiring market stocks will average out eventually. In some months the stocks purchased will be sold at a higher value, if the markets are doing well, while in other times, they will be offered at a lower value due to various factors that might negatively affect the market (Diebold, Schuermann, & Stroughair, 2000). Penny and Leonard should adequately prepare for such circumstances, by increasing their savings, and ensure that their main source of income is stable as compared to their expenditure and costs incurred.

Retirement planning

Both Penny and Leonard should consider joining the Additional Voluntary Contributions (AVC); as members of any Additional Voluntary Contributions (AVC) scheme, they can supplement their company’s pension to increase their income when retired. Since the average life expectancy in the United Kingdom is increasing, saving money in several pension plans is an excellent way that can assist an individual in establishing a larger pool of funds for their retirement (Mazzucato & Macfarlane, 2017). Penny should use the dividends from the shares she owns 5,000 shares in HSBC, 10,000 shares in Tesco, and another 10,000 shares in Aviva to pay insurance, protection, pensions for future security. Besides, she should consider channeling the money she pays to NICs every month to a pension scheme. With a proper pension plan, their life is after retirement is secured, and so is their finance, and their ability to satisfy their needs, when are no longer receiving an active salary or wage.

Investment planning

Leonard should sell his flat at the current market price that is £300000. After selling he is supposed to take £100000 and clear outstanding mortgage debt of his flat. The remaining £ 200000 should be used to buy another flat. In return, he will be free of house debt and will be owning a house of his own. The $85000 acquired after selling Penny’s flat should be invested in different types of shares. These shares will start generating income inform of dividends and bonuses; this will also supplement their annual income, further fortifying their income.

Leonard and his wife should have a different monthly saving account instead of having a joint account. This will motivate them to save and avoid unnecessary spending. They should start investing as soon as possible because they already have a stable income. Roberts (2017) writes that in situations where individuals have extra money in their savings account that is capital that is enough to cater for their needs for at least six months and they would wish to see their initial capital growth in the long term, then one should prioritize investing the capital. The appropriate investments would depend on how one is ready to take risks versus their financial capability to fund an investment.

Penny and Leonard hope that any income, interest, and dividends from savings should be pulled together into their fixed account but that is not the case. Instead, they should re-invest it putting into consideration that their main goal is to retire from their various professions having used their savings and capital as a means to give them the necessary fulfillment and security they needed. In case they decide to reinvest their dividends or spend them, they should not blame themselves for any action. Instead they should rethink about any decision they make rationally and be contented with their final decision (Calcagno & Monticone, 2015). Even so, they should always prioritize reinvesting their dividends when the market is recovering from a crash, since it can lead to recovering their net worth easier and faster than in other means, as much as this is a risky affair.

Penny and Leonard should also consider investing in shares, cash, property, and fixed interest securities. Shares –this involves buying a stake in a company whereby you will be earning dividends and bonuses, cash–this involves savings in a financial institution such as banks and investment companies, property –investing in real estate, whether it is commercial or residential as long as at the end of the month, one will be rewarded with rent, fixed interest securities (bonds) - loaning capital to a private entity or a state owned company. In all these circumstances one is expected to get some form of return in terms of profits, intrests and bonuses.

In this case, I would advise the couple to take the amount obtained in the balance sheet (£240200) and divide it by two. Half of it ought to be deposited in a bank account, and the other half allocated to shares, property, bonds, and cash.

Cash - 10%*£120100=£12010

Property-50%*£120100= £60050

Bond -10%*£120100=£12010

Shares -30%*£120100=£36030

Income tax planning

Penny should consider venturing in Tax-Free commodities. These are merchandises with 0% VAT (for example, zero-rated foodstuff, publications, children's clothes, and exempted goods such as aiding equipment for the disabled people). Other commodities include; new or used cars, Unmounted gemstones, mail order commodities such as internet sales, and merchandises that have been partly used within the European Union like perfumes (De Sio, Franklin, & Weber, 2016). The couple should also consider venturing into investments with low tax rates such as energy saving/green energy equipment, medical equipment and shares.

Education planning

Leonard and penny should each open a fixed deposit account to mature in five years’ time. They should be depositing money on a monthly basis to be used in the future to cater for their children’s fees and other expenses while in school because the two agreed to have kids in 4-5 years to come. They should also consider taking insurance policies for their children to secure their education and future, even in case where one of them or all of them dies.

Estate planning

After owning a house for himself as discussed in the section above, Leonard should consider insuring his house against any risks that might lead to the loss of the property. Besides, Leonard can also join real estate saving plans, to help him acquire extra properties, which he can later sell and harness more profit. As much as real estate has an increasing value, the couple should try as much as possible not to take another loan or debt for the purpose of financing another real estate project, lest they go back to the cycle that they were in initially.

Section II

Adjustments

The £85000 acquired after selling Penny’s flat should be invested in different types of shares. The shares will start generating income inform of dividends (Zeff, 2016). Penny should also keep track of spending using credit cards. She should avoid the costly fee and interest by paying her credit cards on time, maximizing her credit card payments, checking credit card statements regularly, and ensure that she only uses the credit cards when necessary.

Leonard should invest at a rate 12.0% rate of his gross salary to securities and leave one-off tax-free lump sum payment and AVC facility, through Prudential PLC to cater for the pension scheme. AVC facility still will contribute a lot to his pension scheme because he has 29 years to retire. Leonard and penny should each open a fixed deposit account to mature in five years’ time. They should be depositing money on monthly basis to be used in future to cater for children’s fees and other expenses while in school because the two agreed to have children in 4-5 years to come Money that was obtained after selling Penny’s flat can be invested in securities that have higher positive percentage index because it will bring in a higher profit margin. Invested trust is a Public limited company while OEIC is an investment company: it holds shares of other companies purely for investment purposes.

Meaning and difference between investment trust and OEIC fund.

An investment trust is based in UK/overseas (depending on the investment trust) while OEIC fund is based in the UK. An investment trust is a Listed share that is traded on a stock market, while OEIC fund is unlisted share (a share that is not enumerated on an exact stock market). Investment trusts are listed on regulated stock exchanges dealing prices (Zeff, 2016). Thus, they are subject to a 'bid-offer spread.' This is the variance between the value at which shares can be traded and bought and can change throughout the day while OEIC fund usually has a single price, on a given day, associated with the share whether buying or selling (Whitney, Hara, & Whitney, 2018). The couple should consider, investing in the investment trust of their choice, in accordance to their future and the assets they need to acquire.

Solution to Penny’s complains on high tax

Penny thinks that she pays a higher tax; the information below should guide her.

Suitable Tax-free products

Penny wanted to know about tax-free products. The below information covers duty-free products;

Persons eligible for tax-free products include, permanent residence person in a non-EU country, and a European Union inhabitant is planning to leave the UK for a point outside the European Union by the end of the third month after the month when they purchased the goods. He or she must stay out of the European Union for 12 months.

They should note that managing investments is a long-term process and requires a lot of capital. In most instances, service providers are likely to demand a fee for their services (Agostino, Arnaboldi, & Azzone, 2018). Such expenses can reduce the expected returns that one will receive. Therefore, one should ensure they have knowledge on the market dynamics before making an investment decision, to avoid using the services of agents and brokers or any other intermediary that would demand for payment or commission.

Use of information technology in shares investment

Technology has dramatically changed the securities market. Currently, mutual funds are exploiting the internet to interact with investors and to allocate shares. Investors can also use the same platform to communicate with each other at a pocket-friendly cost. Therefore, both Penny and Leonard can also exploit the internet to create secondary trading markets for otherwise illiquid stock without losing money to distributors or intermediaries.

Contacting the security companies

In a case where the couple decides to contract a company, they should note that every registered company has its website where one can find all the information related to their operations. All the services and products they offer will be clearly stated. If a security company is selling a share, one will be able to find it their website, and confirm with them by either emailing or contacting their secretary through the number indicated in their website (Scotford & Bowman, 2016). This makes work easier for all the parties involved, and hence one does not need to incur cost traveling to their offices, and it saves time.

How to monitor investments

Assess the portfolio's performance

In case Leonard and Penny want to monitor their investments; they should start by confirming their respective portfolio's returns. For them to achieve this goal, they should analyze whether their portfolio is in tandem with the needs of their goals. They should also consider the returns from the portfolio in comparison with the initial investment and expected returns.

Evaluate your Asset Allocation

They should also check whether their portfolio is diversified enough in terms of funds and assets classes. The performance of different assets and investments can change; therefore after some time, the worth of the initial portfolio could change.

Evaluate future goals

The reason anyone would be investing is to achieve their goals. Therefore, Penny and Leonard should have clear goals and a track of how they will achieve them.

Recommendation

Penny and Leonard should use this financial advice during investment and during portfolio diversification. If their current financial position is managed appropriately, their ambitions will come true. They should always look for viable avenues that would mininimise their expenses, invest in high return projects, and establish various pension plans. Penny should also reduce her expenditure on credit cards and as a business woman she should diversify her investments so that incase one gives her a low return or fails to pick up, she will have a backup plan and gain from other investments in the portfolio. The couple should also insure their properties, business, and take a life policy (education) for their children, and insure their health. They should also avoid debts, especially when they can save and purchase in cash.

Conclusion

Investments are just like any other venture that are guided by the ‘law’ of the higher the risk, the higher the return. There are a lot of uncertainties in the market and one is never guaranteed of the anticipated profits or returns. For example, share prices are continuously fluctuating in the stock exchange market, and therefore, one can never be sure of when to sell or buy shares. Leonard and Penny should therefore expect such uncertainties and embrace them as entrepreneurs.

References

• Agostino, D., Arnaboldi, M., & Azzone, G. (2018). Social Media Data Into Performance Measurement Systems: Methodologies, Opportunities, and Risks. In Handbook of Research on Modernization and Accountability in Public Sector Management (pp. 254-275). IGI Global.
• Calcagno, R., & Monticone, C. (2015). Financial literacy and the demand for financial advice. Journal of Banking & Finance, 50, 363-380.
• De Sio, L., Franklin, M. N., & Weber, T. (2016). The risks and opportunities of Europe: How the issue yield explains (non-) reactions to the financial crisis. Electoral Studies, 44, 483-491.
• Diebold, F. X., Schuermann, T., & Stroughair, J. D. (2000). Pitfalls and opportunities in the use of extreme value theory in risk management. The Journal of Risk Finance, 1(2), 30-35.
• Mazzucato, M., & Macfarlane, L. (2017). Patient strategic finance: opportunities for state investment banks in the UK. UCL Institute for Innovation and Public Purpose, working paper. https://www. UCL. ac. UK/bartlett/public-purpose/wp2017-05.
• Roberts, J. (2017). In times of geopolitical and economic instability, how can innovative technologies drive new revenue opportunities for institutions and research funding in the UK?. Insights, 30(2).
• Scotford, E., & Bowman, M. (2016). Brexit and Environmental Law: Challenges and Opportunities. King's Law Journal, 27(3), 416-419.
• Whitney, G., Hara, S., & Whitney, L. (2018). Study on risks and opportunities of digitalization for financial inclusion. The perspective of vulnerable users in Estonia, Italy, and the UK with a focus on groups covered by the European Accessibility Act. Financial Services User Group (FSUG), (78).
• Zeff, H. B. (2016). Risks, challenges, tradeoffs, and opportunities in dynamic, adaptive water supply systems(Doctoral dissertation, The University of North Carolina at Chapel Hill).