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Retirement Planning
Sunday, June 1, 2008
Take time to consider

No one can blame a financial institution, small or large, from developing products that have specific features. A financial institution’s business is no different from, say, a motor dealer. They both create products that have certain qualities and features, and spend money on marketing and then appoint salesmen. That’s business, but it can lead to “product proliferation.”

And that can be a problem. For example, take the case of a senior high level strategic consultant to a large financial institution. Despite excellent knowledge of the financial and investment industry, when it came to her own circumstances she had great difficulty in determining the best investment advice when she went on formal retirement.
Comments Ian de Lange, of Seed Investments, “Many investment products have valuable characteristics and may be attractive for a segment of your total portfolio. Investment products use various methods essentially to convert straightforward investments into something with a different payoff profile.”
This is done using a variety of tools including:
• More and more sophisticated and readily available derivatives.
• Utilising the tax arbitrage across individuals, trusts, companies, life companies etc,
• Using the balance sheet of a financial institution.
• Smoothing of returns
• Lock up terms
• Using leverage to enhance returns, etc

“Unfortunately,” he say, “while these products may serve niche requirements, assist in reducing risk to a total portfolio and genuinely have attractive qualities, they are too often sold to unsuspecting investors who in many instances don’t need the product.”
Some of the potential pitfalls to look out for include:
• The packager of the product will always build in a profit element for themselves.
• They will often package the product to appear very attractive – i.e. highlight the upside, use past performance and downplay the risks.
• Implement time pressures

“Remember, the one valuable ‘tool’ that investors have is time, Never be forced or rushed into making a decision.,” he advises. “Take your time to understand all the pros and cons of any product and how it fits into your total strategy.”
As investment advisors to high net worth clients, Seed Investments will always look at various products, “but only where they can truly add value to our client’s portfolio in excess of their costs.” More often than not building a diversified portfolio provides the same expected payoff profile with lower costs.

Copyright © Insurance Times and Investments® Vol:21.5 1st June, 2008
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