Introduction.

Risk analysis, risk assessment, and risk procedures are deeply rooted in investing and financing decisions. You cannot avoid risk; instead, you can identify, quantify, assess and minimize risk while taking on any investment. Risk identification, risk quantification, and risk assessment is the first stage of any investment procedure.

Risk profiling:

Risk profiling refers to a process that enables an investment advisor or financial planner to choose an appropriate level of risk for the client. Risk profiling is a combined product of three factors.

Different factors combine to affect risk profiling and suitability. Usually, a financial planner or manager gets the idea of “what worse could happen”? The following questions need to be answered.

⦁ Death:

What would happen in the case of the death of the bread earner? Funeral and other charges as well as cut on the income of the person.

⦁ Health issues:

Any health problems flowing through the generations in your family? Is there any risk of serious health injury among any of the family members? What would happen if health issues dent your earnings?

⦁ Employment loss:

To what extent are you dependent on your job? Is there any other source of income? What would be your earning source if you lost your job?

⦁ Marital/Family issues:

What would be the effect of your marriage breakup on your finances? How many dependents do you have? State-sponsored dependents as well as dependents on you.

⦁ Assets and properties:

How many assets and properties do you own? Are there any pledges or lines attached to them? How would you repay your loan attached to the property and what is the percentage of the loan?
Usually, investors are divided into six categories based on the risk-taking approach and growth and returns. Which are;
⦁ Conservative
⦁ Mediocre
⦁ Balanced
⦁ Growth
⦁ Aggressive
⦁ Very aggressive

Income and expenditure analysis:

While planning your personal financial goals and financial needs. One question is most important.

“How much is enough”?

Some people get engaged in financial planning and analysis very later in their age when there is less time in retirement, which results in higher contributions and more percentage of their income.

Currently, the client has the following incomes and expenses in progress as attached to annexure A.

Currently, the Client is earning almost 27,000 per year as salary excluding a bonus. The annual increase in salary is expected to be increased by 2.5% per year, equally matching inflation, along with a 12% increase after two years. All this shows that the client has enough money to spend and he can afford to take risks So I will assess and classify him with an aggressive approach. Mr. Kayle f has ample time left, i.e. almost 28 years, plus he is expecting a pay raise of 12% after graduation.
The only major expense in the upcoming years is his Master’s degree in HRM, which too will recover with a 12% pay raise in the coming years. He had to keep a plan for some out-of-pocket expenses and scenario planning in case of job loss and spare the remaining funds for investment.

Own assets in different classes and forms but not any investing account or share. Assets include;
Current account – HSBC £101,000
Saving account – HSBC £1,200
Premium Bonds £40,000 (initial) + £300 (6 months’ gains reinvested)
Life assurance See below
ISA’s None
Unit Trusts None
Car £40,000

Cash flow and scenario analysis:

Cash flow and scenario analysis refers to dealing in different domains and funds to meet different classes of liabilities, including;
⦁ Emergency fund & protection
⦁ Pensions(occupational pension & state pension)
⦁ Buying a house
⦁ Early retirement at the age of 60

Emergency fund & protection:

An emergency fund is a fund set out of your income and family income to meet life’s unexpected events. This fund will help you in bearing your expenses in the case of any unseen and sudden expenses, such as any major injury or any major repairs, or any other expense. The value and amount of this fund depend upon several factors such as your income, size of your house, your lifestyle, your total personal budget, and your current financial standing.

Several financial and management gurus suggest different levels of emergency funds; some suggest that you should have 8 months of income as an emergency fund. some suggest you should have 3 months of your income as an emergency fund; it depends upon your age bracket and your lifestyle.

As in the case of Mr. Jasmine, he has a yearly income of around £65,000, while a net income of around £32,850. As Mr. Kayle F, is currently single and has no immediate liability except which is also going to be settled in 15 months, further he has no plan of getting married any sooner I would suggest he separate income equal to 6 months as an emergency fund; this will help him to meet his household expenses as well as any major or unexpected outcomes.
The next question is in what form funds should be kept for an emergency fund. Several options are available, but preference should be given to the most liquidated sources, i.e. either a savings account or either in cash or money market funds or any precious metal.

Pensions:

After setting up your emergency funds. The next step is to plan for your post-retirement earnings and how you would live after retiring from the profession and job. pensions funds and calculation of pension calculation are very difficult to calculate due to various factors such as inflation, the last salary of your career, your age of retirement, or early retirement. Several options are available for establishing a pension after your retirement including estate pension, occupation pension, and voluntary pension. Occupation pension is further divided into defined contribution plan and defined benefit plan.

Pension funding varies based on your lifestyle, your way of living, your expected income, and your choices. Four steps of pension planning are:

⦁ Identify the type of pension plan needed
⦁ Estimate funds required at the time of retirement
⦁ Interest prevailing and forecasted
⦁ Identify monthly contributions

After setting up an emergency fund & protection, Mr. Kayle F needs to find a way of getting pensions after retiring from the profession. We will recommend him pensions plans based on interest rates, contribution percentage, and current salary.

Mr. Kayle F should find an investment in a plan which gives more interest than average inflation and had a rate, of return equal to or greater than the mortgage rate which is 6.5%. Employer will contribute 3# of gross salary towards pension fund so I would suggest Kayle F to invest in a defined benefit plan instead of defined contribution so he would give fix periodical payment to match your post-retirement expenses and you would never be on the edge of bankrupt.

Buying a house:

Buying and financing your home is one of the most significant and biggest financial decisions you could ever make So you should take all the reasonable steps to ensure that you get the cheapest financing facility as well as your favorite house. Before deciding on a housing loan, you should save enough to pay the down payment of your home loan and you should get yourself free from other loans, i.e. credit card and mortgage to secure enough funds to pay the housing loan.

Financing agencies consider various factors before approving your home loan I.e. your credit score, your other liabilities, your approved exposure, age of your job and stability, and ability to repay.

Currently, a good apartment has a financing range of between 20-30 years and it costs around 50-60 lac GBP. Generally, your agencies allow 35-40% of your income as home rentals to get your apartment in your name. Mr. Kayle F should repay all the credit card loans, wait for another 15 months to repay the mortgage on care as well as consider economic conditions which expect interest rates to fall and then apply for home financing on which interest rate should not exceed the current interest on t-bills as it is a long-term investment, average loan and interest expense combine should not be more than 30% of your net income including bonuses and tax deductions and advance payment should not be more than 5% of the value of your home. Kayle F also needs to keep a check on inflation in housing prices, which is more than the general inflation of 2.5%.

Early retirement at the age of 60:

When people do want to retire at an early age, they should develop an ambition and vision to retire early at the very early stages of their life and career. Should follow an investment strategy named FIRE: Financial independence retire early. This strategy needs heavy funding at later stages of your career as well; you need to be financially stable to think and decide about early retirement. Another factor of early retirement is you will not be medically insured and you won’t be covered under medical insurance till the age of 65 in case of any emergency or medical illness. You have to find a way to cover the gap. Another factor that needs to be answered is to pay all of your loans and settle your liabilities five years earlier than regular, as well as you have to do all the expected tasks before retirement, such as major repairs, replacing your car, and completing renovations and other work.

Mr. Kayle F should also choose a plan from social security which is most suitable for early retirement as early receiving of benefits can reduce their benefit up to 30% So he should choose from the list which starts an early return. He should also create and plan for a 10-year buffer zone between his retirement age, i.e., 60 and 70 years; to avoid a mishap, he should invest in a high return, a high-risk plan which gives him at least a 15-20% return for the next 28 years.

Conclusion and recommendation:

The client has enough funds in the current account to finance the initial investment, plus he should transfer his funds from the current account to the investment account to

As Mr. Kayle F wants more travel in the upcoming years along with his graduate degree, as well as financing for his home and paying off the credit cards, and running finance I would suggest the following plans and steps for him;
⦁ Create an emergency fund from his salary account for 6-8 months as he is going to get admission to university so he needs additional funds to meet his expenses.
⦁ Transfer his funds in his current account to any saving account or in the form of any other liquid asset which also gives returns
⦁ Visit different pension planners and schemes.s and intuitions to decide about an adequate pension strategy and scheme
⦁ Visit different banks and talk about your credit rating and score as well as interest rates and choose wisely a 20 years mortgage plan having interest not more than 4.5%i.e. less than 10 years of the loan.
⦁ Choose a pension institution that gives benefits before the age of 65. Get an insurance plan to cover the gap of 5 years between health insurance schemes and your retirement age.
⦁ Financial planning should give recommendations about any associated companies and pension schemes with good returns.
⦁ I had suggested a more aggressive strategy for investing and financing their future goals and in ads as 15%-20% risk in opposition to 85% growth for their 60% of the investment.
⦁ For the remaining 40%, he should invest one hyper-aggressive scheme which gives a 25-30% return.
At last financial planners and institutions don’t enforce or ask to enforce their recommendations, and the decision rests with the client to either accept the proposal or reject the proposal.

References

⦁ CFA, A., 2020. Investment Risk Profiling: A Guide for Financial Advisors [WWW Document]. CFA Institute. URL https://www.cfainstitute.org/en/research/industry-research/investment-risk-profiling (accessed 12.9.21).

⦁ financial planning [WWW Document], n.d. . Jama Punji. URL https://jamapunji.pk/financial-planning/retirement-planning (accessed 12.9.21).

⦁ Fowler, J., 2021. Why an Emergency Fund Is More Important Than Ever [WWW Document]. Investopedia. URL https://www.investopedia.com/financial-edge/0812/why-an-emergency-fund-is-important.aspx (accessed 12.9.21).

⦁ How to Assess a Financial Client’s Risk Profile – dummies [WWW Document], n.d. . dummies. URL https://www.dummies.com/careers/how-to-assess-a-financial-clients-risk-profile/ (accessed 12.9.21).

⦁ Kagan, J., 2021. Retirement Planning [WWW Document]. Investopedia. URL https://www.investopedia.com/terms/r/retirement-planning.asp (accessed 12.9.21).

⦁ Kurt, D., 2021. Emergency Funds [WWW Document]. Investopedia. URL https://www.investopedia.com/terms/e/emergency_fund.asp (accessed 12.9.21).

⦁ Maverick, J.B., 2021. The Importance of a Client’s Risk Assessment [WWW Document]. Investopedia. URL https://www.investopedia.com/articles/investing-strategy/082916/importance-clients-risk-assessment.asp (accessed 12.9.21).

⦁ Napoletano, E., 2020. How To Retire Early: A Guide To Early Retirement [WWW Document]. Forbes. URL https://www.forbes.com/advisor/retirement/guide-to-early-retirement/ (accessed 12.9.21).

⦁ Scenario Analysis [WWW Document], n.d. . Corporate Finance Institute. URL https://corporatefinanceinstitute.com/resources/knowledge/modeling/scenario-analysis/ (accessed 12.9.21).

⦁ The importance of matching income to expenditure [WWW Document], 2015. . University of Cambridge. URL https://www.finance.admin.cam.ac.uk/policy-and-procedures/financial-procedures/chapter-2-budgetary-planning-control/monitoring-and-6-1 (accessed 12.9.21).

⦁ The importance of planning: How cash flow analysis can help – Holden & Partners [WWW Document], 2019. . Holden & Partners. URL https://www.holden-partners.co.uk/the-importance-of-planning-ahead-how-cash-flow-analysis-can-help/ (accessed 12.9.21).

⦁ Williams, T., 2021a. 6 Prerequisites for Buying a House [WWW Document]. Investopedia. URL https://www.investopedia.com/articles/personal-finance/091415/5-financial-prerequisites-buying-house.asp (accessed 12.9.21).

⦁ Your Risk Profile [WWW Document], n.d. . Canaccord Genuity Wealth Management Australia Logo. URL https://www.canaccordgenuity.com/wealth-management-australia/investment-management/your-risk-profile/ (accessed 12.9.21).

 

 

Annexure-A

Outgoings

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