The basic responsibility of an investment advisor is to make fund selection and asset allocation decisions designed to achieve the investment objective of each client. These decisions have become increasingly difficult for both individual and institutional investors due to the increased complexity and volatility of financial markets. Today the successful investor must possess expertise in many different disciplines including economics, finance, investments, statistics and accounting. Few individuals have the required knowledge, analytical skills and market judgment needed to compete in today’s marketplace.
Even if an investor has this broad background, few have the time, temperament and interest to successfully manage his or her own portfolios. Many investors believe their time is better spent focusing on career, family or other activities, rather than managing investments. Others repeatedly suffer losses or forego profitable opportunities by allowing emotions to cloud their judgment. Still others wish to secure a trusted advisor to assist their family in the event of their death or incapacity. For these reasons, and others, the best solution for many individual investors may be to retain a professional investment advisor.
Pension and profit sharing plans, in addition to being faced with the above difficulties, must deal with other complex issues. Under the Employee Retirement Income Security Act of 1974, commonly referred to as ERISA, an employer or trustee of such a retirement plan is a “fiduciary” if it has any authority over the management and administration of plan assets. A fiduciary is required to make decisions in a “prudent” manner and failure to do so subjects the employer or trustee to unlimited personal liability. Any fiduciary lacking the knowledge and expertise described earlier would have difficulty establishing that investment decisions were made prudently.
Consequently, hiring an investment manager is often viewed by the fiduciary as a prerequisite to limiting its liability for losses. When this factor is considered along with the desire for superior performance and the time limitation of most executives, the advisability of seeking a competent investment advisor becomes clear.
These are the steps to implementing a successful investment program
Describe your current ultraconservative, risk intolerant strategy
Determine the required rate of return
State long term objectives
It may take up to a year to find bargains and place your money where it is needed
Cash income, net of fees
Unrealized gains and losses
Expected interest and dividends over the next twelve months
Phase I Investment Plan
After careful consideration and consultation with the members of the Budget and Finance Committee and the Investment Adviser, we have determined that a prudent, first time asset allocation for “hatching our account” would be as follows:
• 48.7% ($950,000) money market accounts designated for current operating needs, and longer term funds invested as follows:
• 20.5% ($400,000) FDIC insured CD’s over 5 years
• 15.4% ($300,000) investment grade municipal bonds (insured)
• 5.1% ($100,000) managed corporate bonds (bond funds)
• 5.1% ($100,000) managed global bonds (bond funds)
• 5.1% ($100,000) managed real estate funds
Accordingly, we have selected a number of investments as shown in the attached Phase 1 Investment Plan.
The proposed investment plan produces estimated first year returns of approximately $52,000, which is a 2.67% return on the entire $1,950,000 balance of our potential investment funds.
The proposed investments were selected on the basis of their respective security, quality, rate of return, ease of exit and fees.
It is the objective of this proposal to gain approval to begin hatching our account by acquiring $1,000,000 in the proposed medium to long-term investment opportunities shown in the Phase I Investment Plan.