Financial Planning Allocation Framework

 

The Financial Planning Allocation Framework (FPAF) enables a family group to construct appropriate portfolios using all their assets, such as their home, mortgage, market investments and human capital (earning potential).  The resulting portfolios are designed to meet the family’s needs and preferences, as well as to protect the individuals from risk factors. 

 

Family groups have multiple values, needs and objectives that often conflict, or are unrealistic given their assets, cash flow and attitude towards risk or significant loss.  A family group’s ‘Portfolio’ can include several different kinds of related assets:

  • Personal

  • Market and

  • Aspirational assets.

 

Individual clients have a tendency, through the lack of knowledge, to take on too much risk in an attempt to reach their goals/ objectives and then are alarmed when markets fall, resulting in stressful decisions to realign to their personal comfort zone.

 

A Financial Planning Allocation Framework For The Family Group

 

Generally when we classify the risk of a client’s portfolio we consider only the funds to be invested,  for example superannuation/investment fund.  Based on a number of questions financial advisers classify the risk tolerance of the client and allocate a portfolio defined by its volatility and diversity of the underlying fund managers. This is suitable practice for certain client situations.

 

In contrast the FPAF identifies three very different risk dimensions and seeks to optimise all three simultaneously, known as ‘risk allocation’.

 

The FPAF expands the definition of portfolio to cover all assets and liabilities and is a holistic way of dealing with family’s wealth.  Our advice goes beyond portfolio risk to incorporate the likelihood of meeting goals, effective asset holdings combined with tactical strategies to assist the client to achieve their family wealth objectives.  It allows both the client and the adviser to think about the risks across the total portfolio and to provide alternatives in how to manage these risks and position the necessary protections, to maintain a minimum position, that may be required.

 

Our guiding principal:  Our Family group need to maintain their lifestyle and meet their financial obligations regardless of market conditions.

 

This guiding principal expands our definition of a client’s portfolio to the family’s assets and liabilities in the following categories:

  • Personal assets; home, mortgages inc debt, human capital (earning potential), insurances.

  • Market assets; including investment property, collectibles, shares, bonds and managed funds including debt.

  • Aspirational assets; business investments, employee share options, gearing strategies, speculative investments and any associated debt.  

 

These three categories provide guiding profiles in the management of the client’s assets:

  1. Personal Risk:         Protecting against fear and concerns about a dramatic decrease in lifestyle, being the family’s minimum acceptable wealth                                  level.

  2. Market Risk:            Ability to maintain standard of living and to grow wealth at a rate higher than inflation.

  3. Aspirational Risk:   The opportunity to substantially increase wealth and elevate lifestyle to work towards aspirational goals.

 

 

Client Risk Framework

 

The creation of wealth involves leverage (debt) and as our wealth grows we also use mobility to transfer assets and debts across different investment vehicles.  As an example when we first purchase a home we use debt, as our interest in business ownership develops we use the mobility of debt to fund other wealth creation activities. Wealth Creation and mobility are very different from those of wealth preservation which requires careful consideration to protect a standard of living and maintain pace with inflation and the eventual transfer to the next generation of the family.

 

A sound wealth strategy has to balance these different objectives and strategies setting in place your overall risk management:

  • Goals need to be met regardless of market performance or fluctuations.

  • Our future wealth discussions with family focus not only on what is likely to happen, but on the extreme events that may happen. For example lifecycle stage, weathering shortfalls, cash flow and event risks.
     

This defines a minimum wealth level for each Investor, being a number below which a client does not want to dip, either because it would cause a substantial negative impact on their lifestyle or goals would not be achievable.

 

Our framework for the family group:

  1. Define the location of assets as an efficient strategy to create and protect wealth;

  2. Protect the minimum level of Personal Assets so emotional mistakes do not jeopardise the client’s living standards,

  3. Define market assets, which are required to maintain lifestyle,

  4. Identify if more aggressive strategies that achieve higher and ambitious goals acquiring greater risk of total loss of a client’s funds can benefit and meet the higher goals to elevate their lifestyle.

  5. Identifies the location and effect of debt alongside the assets to determine the worst case scenario.

 

Therefore the allocation of these Risks precedes the asset allocation of the family’s funds by deciding how much risk the family can take, allocate funds prudently between the three categories, and then diversify within each.

 

 

 

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313 Burwood Rd Hawthorn Vic 3122

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