The Role of an Investment Advisor: A Report

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Introduction

Ms. Brianna Jump is a well-known WBA player. She has savings of about $7 million. She has never invested her money. Her friend advised her to seek out an investment advisor to help her invest her money. In this report, the author assumes the role of an investment advisor to Ms. Jump. The report covers, among others, the types of investments available for Ms. Jump, the role of regulatory agencies in the industry, and the best financial option for the client.

An Investment Report for Ms. Jump

Differences between Direct and Indirect Investment

Direct investment is also referred to as direct ownership. An example is when one buys a property or shares in a company (Santamaura 34). The advantage of this form of investment is that the investor has control over their money. Indirect investment entails giving money to someone else to invest it on one’s behalf (Rostad 145). An example is a fund or an investment trust. A real estate investment trust is such a plan.

Mutual Funds

A mutual fund is a company that receives money from different investors. It invests the cash in securities, such as stocks, bonds, and short-term debts (Laby 710). There are 3 types of mutual funds. The first is equity fund. Here, the investor makes an income. However, the risk of losing money is high. The second is income generating fund. A third example is money market fund (Santamaura 99). In this case, the individual invests in short-term fixed income securities. They include short government bonds, certificates of deposit, and banks (Barber and Odean 423).

Purchasing Mutual Funds

There are different ways of purchasing mutual funds. The first entails deciding on how much to invest and for how long (Boon 15). It is important to know the period that one is going to invest and what they are investing in. To this end, one needs to have financial goals. The objectives can help them manage and manage and understand the plan they have before investing in it. Another way of purchasing funds entails choosing the type of fund (Rostad 150). It is the ability and willingness to deal with risk. Determining the amount that one can risk helps in making decisions regarding the type of fund to invest in. An example is when one is considering a fixed income fund. Such a plan pays a fixed rate of return. Another point to consider is when shopping around to compare fees and performance. A point to note is that a mutual fund has a tax. Some funds attract higher charges than others. As a result, paying taxes reduces returns. The investor must know the fees they have to pay directly, which include sales charges, and what the fund is paying. Other costs include the management fees and operating expenses (Boon 10). The management and the operating costs make up a fund the management expenses ratio of a fund.

Another way of buying funds entails choosing a financial advisor or a mutual fund company. One should deal with registered firms and individuals only (Laby 720). The law requires any person providing advice concerning mutual fund to be registered by their provincial security regulator. The investor needs to understand how their advisor is compensated for selling them the mutual fund. The final point is to complete the application and buy the fund. The investor provides personal information on how much they know about investment and the risk they are willing to take. The law requires investment advisors to have this information before offering recommendation and advice. The investor then signs a form and keeps a copy of their files (Rostad 147).

Ms. Jump needs to know how stock exchanges operate. The client should understand that buying a stock can be compared to the purchase of a piece of a company. In most cases, shares are raised when a company is in need of cash (Boon 17). The process takes place through an initial public offering. Here, the price of the share is estimated based on the worth of the company. The number of shares being issued is also made clear. The benefit of this is that the company can keep the money invested while the shares are trading (Mastroyiannis 90). The traders and investors go on buying and selling the stock of the company on the exchange market. However, after the IPO, the company does not get any cash from this type of trading. The firm can only receive money from the IPO.

After the IPO, investors continue trading in the stock given that they hope the value of the company will rise over time. The investors will make money if the perceptions concur with the drifting market. A market can be regarded as a pool of investors who predict the rise and fall of the prices. It is hard to predict if the market will rise or fall. However, in many cases, the prices do rise. Many investors buy shares hoping that the stock may rise at one point (Santamaura 45). People invest in different companies to ensure diversity. The reason is that well established firms pay dividends to the shareholders.

A buyer and a seller are needed for stock trade to take place. The prices of the shares may be determined by the two parties if they are aggressive enough. However, all investors are said to have the same agenda. They buy so that they can sell their shares at another point in time (Laby 712).

Stock exchanges operate through volumes. A volume is the number of shares that change hands in a day. A stock with a higher volume is more appealing to investors. The large amount of money invested in the shares show that it is easy to sell and buy them (Santamaura 92). There is another group of people known as market makers. They sell and buy when the number of shares is low.

It is important to have a bottom line. A stock is issued by companies to raise cash. The shares then continue to trade to enhance exchange. The value of the stock may rise over time. They hold additional benefits given that some companies pay out dividends, making such shares attractive (Boon 11). It is why the investors continue buying shares even when the value of the stock goes down.

The Importance of a Prospectus

The prospectus provides information (Barber and Odean 433). It gives an outline and a description of a company that is selling shares. It captures all the offers made, including its assets, aspirations, and activities. The document also has a part titled ‘certain considerations’ (Mastroyiannis 95). It is a statement of any risks that may face the firm and force it to suspend its operations, harming the investment of the shareholders.

A prospectus also contains offering information. For example, a prospectus for a bond offering gives information about the security (Laby 770). It highlights the number of stock on offer and their prices. It also gives a headline of how the security will be available for purchase. There is also a section on mutual fund operations. It captures the objectives and leadership. Here, the prospectus details the performance of the fund (Boon 17). It includes recent financial reports. A prospectus also provides information on the intentions of the fund. In addition, it provides the basic rules of investment that keeps it moving. Mutual funds fees, expenses, and guidance are other details provided by a prospectus. To this end, individuals are informed about their duties as shareholders (Rostad 150). In some cases, the document provides the audience with advice on tax obligations. The tax burden is tied to the number of shares owned in a firm.

Brokerage Accounts

A cash account

In this account, the investor has to pay for the full amount of securities purchased (Boon 12). The individual is not allowed to borrow cash from the broker to pay for any transactions made in the account.

Margin account

The account is different from the others given that the brokerage firm can lend the investor money to buy securities. The securities purchased are used to secure the loan (Rostad 150). Like any other loan, the investor incurs interest costs when buying security on margin.

Margin Trading and Short-Selling

Margin trading is one of the strategies used by investors to access the stock market. It involves borrowing funds from a stockbroker to buy shares (Rostad 150). One benefit of this form of transaction is that it allows the investor to purchase more stock than they can afford under normal circumstances. Short selling is closely related to margin trading. It involves the sale of securities that are not owned by the person selling them (Rostad 145). In other words, the individual sells shares that they had borrowed. A major benefit of this is that it helps the investor to speculate. As such, they can sell the stock hoping that its price will decline. They can then buy the stock at a lower price, making a profit.

Why Ms. Jump should invest in Financial Assets

Affordability

In contrast to public opinion, financial assets are affordable. For example, Ms. Jump may only need a minimum of UGX 100,000 to invest in a government treasury bond (Laby 740).

Liquidity

Financial assets are more liquid compared to land and houses (Barber and Odean 430). She can quickly recover her money when she needs it. To this end, she can easily buy and sell her financial assets when she needs to. An example is when she decides to sell her piece of land. It may take long before she gets a customer. On the contrary, if she feels like selling her shares, she could take 2 to 5 days to get an interested client.

Accessibility

If Ms. Jump decides to buy land, it may take her a lot of time to get a good piece. The reason is that there are a lot of things that have to be done before such a property is sold (Rostad 150). On the contrary, buying financial assets like shares may only involve finding a stockbroker, opening up a free securities central depository account, depositing her money, and placing an order (Rostad 150).

Flexibility and diversity

Ms. Jump does not need to invest all her money in the financial assets. Using an investment graph, it is apparent that people with longer investment margins should have a significant diversity to stock (Santamaura 100).

The age of the investor

Ms. Jump has the appropriate age for financial investment. Her exposure to stock may increase her balance during retirement (Santamaura 45).

Potential for growth

The stock has a large potential for growth. For example, in the US, the value of stock has consistently increased over the years (Laby 723). As such, Ms. Jump is assured of the investment she is going to select.

Types of Mutual Funds

Money market funds

Here, the individual invests in short-term fixed income securities. They include government bonds, treasury bills, and bankers (Boon 10). They are safe investment plans. However, their returns are low compared to other types of investments.

Fixed income fund

The investment has a fixed rate of performance. It includes government bonds and high-yielding commercial bonds (Santamaura 78). I will recommend Ms. Jump to invest in this fund. The reason is that she is assured of an income on a regular basis.

Equity funds

They are other options. They entail buying a stock. The main aim of this investment is to increase the wealth of the investor at a faster rate (Rostad 150). However, there is a higher risk of Ms. Jump losing money, so it is not recommended.

Balanced funds

It is the fourth type of funds. It entails investing in a wide array of assets. It can also be a fixed income security (Santamaura 72). I will recommend her to use this fund given that the returns are higher than the risks.

Index funds

The fund tracks the performance of a particular index (Boon 16). The index affects the value of the asset.

Specialty funds

The funds include focused investment. They focus on such ventures as real estate and commodities (Rostad 148). The fund is recommended to this client.

Fund-of-funds

Ms. Jump can also invest in these funds. Here, the aim is to put money in other funds (Mastroyiannis 95). I recommend this fund because allocations and diversification are easy for investors.

Diversify-by-investment fund

The fund is also recommended. Funds with a wide range of investment plans will allow Ms. Jump to expand her portfolio (Rostad 148). I will recommend her to use this fund.

The Role of FINRA

Investor protection and education

The group helps investors through research and teaching (Barber and Odean 440). Its website has educational modules that cover different investment topics. It also holds arbitration programs that allow investors to engage brokers and other registered representatives and their firms in discussions, especially during disputes.

Broker-dealer registration

All companies wishing to sell securities in the US must be registered with FINRA (Laby 756). The registration makes them to be recognized as licensed broker-dealers.

Securities licensure and exams

FINRA has more than 600,000 employees in the US (Laby 756). The entity requires investments to go through checkups to monitor any criminal activities. In addition, the agency ensures that the firms are licensed before they are allowed to conduct any transactions in securities.

How SEC Helps Investors

According to Boon, SEC helps investors by requiring all companies to disclose important information to the public (9). As such, investors can judge if the securities are safe for investment. In addition, the agency enhances the disclosure of information pertaining to securities laws. As such, it protects investors who interact with organizations and individuals dealing with securities (Santamaura 99).

Asset Classes that are Important for Ms. Jump

If Ms. Jump is willing to risk more with the goal of achieving high returns on her investment, then her portfolio must have more equities. As she gets older, the thirst of risk will most likely decrease (Santamaura 92). The rule is that the percentage of fixed interest securities she will be holding at any given time should be the same with her age.

Equities are mainly shares of ownership in a company. As long term investment, equities can generate higher returns than saving in a bank or a fixed account (Santamaura 100). As such, they will help Ms. Jump achieve her objectives. Fixed interest offers predictable income for investors. It also aims at diversifying one’s investment portfolio. Another class is property. Investing in a commercial property can generate revenue as part of an equal investment portfolio (Laby 756). Another class of is multi-assets. It entails investing in a wide range of assets. It will offer Ms. Jump a diversified blend of equities, cash, and currencies in a single investment port (Santamaura 10). Ms. Jump can also focus on convertibles. They are hybrid securities. She can use the equities and bonds to diversify her portfolio.

Differences between a Full Service and a Discount Broker

A full service broker offers a wide range of investment products (Mastroyiannis 96). They include derivatives and insurance. They are also able to access the companies they are investing in and conduct research on them. In addition, they provide such services as personal advice. They also offer advice to people going on retirement about their planning and tax obligations. As a result, their wages are higher compared to discount brokers. Full service brokers are compensated based on how much they trade. On their part, discount brokers are paid based on ratings. Discount brokerage firms charges a flat commission. In addition, they give investment advice. Their charges are low because they offer few products (Laby 766).

The Concept of NAV

Today, net asset value (NAV) is highly preferred by retail investors. An example is when an investor operating in equity markets tries to gauge the worth of the asset (Laby 712). However, Ms. Jump should ignore this concept when making her investment decisions. Instead, they should focus on the performance of the fund.

How a Broker Generates Money

A broker generates money in different ways from the investors in their book. For example, they charge for advice. They also have referral bonuses and commissions (Rostad 154). It is important for Ms. Jump to know this. With this knowledge, she will have information on how her money is being used.

A Short Sale

It takes place when one sells a property at a lower price than its average value (Laby 721). An example is when a home is listed for sale at a price that is lower than the mortgage it has. Homeowners may opt to sell their homes cheaply to avoid foreclosure.

Conclusion

Ms. Jump needs to start investing her money. I recommend that she start investing in mutual funds. Such an investment will help her secure her money and future. It will also increase and diversify her sources of income.

Work Cited

Barber, Brad, and Terrance Odean. “Are Individual Investors Tax Savvy?: Evidence from Retail and Discount Brokerage Accounts.” Journal of Public Economics 88 (2003): 419-442.

Boon, Tan, Savings, Investment, and Capital Flows: An Empirical Study on the Asian Economies. 2000. PDF file. Web.

Laby, Arthur. “Selling Advice and Creating Expectations: Why Brokers should be Fiduciaries.” Washington Law Review 87.707 (2012): 707-776. Print.

Mastroyiannis, Anastasios. “Current Account Dynamics and the Feldstein and Horioka Puzzle: The Case of Greece.” The European Journal of Comparative Economics 4.1 (2007): 91-99. Print.

Rostad, Knut. “Strengthen Disclosures by Limiting their Role in the Delivery of Investment and Financial Advice.” Review of Banking & Financial Law 30 (2010): 141-154. Print.

Santamaura, Carol. Choosing the Right Investment Advisor: An Essential Step on the Road to Financial Freedom, Bloomington: iUniverse, 2011. Print.

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