IWM Notee New

Kolej Profesional MARA Bandar Melaka Islamic Wealth Management Jan-Jun 2012
TOPIC 1 : OVERVIEW OF WEALTH MANAGEMENT 1.1 Introduction of Wealth Management
Introduction: Wealth management and financial planning are an expanding segment in the financial market. It is gaining recognition as a professional occupation. Increasing demands in recent years, particularly in the area of retirement planning, have been prompted by various factors as follows: 1. 2. 3. 4. 5. 6. The deregulation of financial market The opening of new investment opportunities Increased complexity in taxation matters An ageing population resulting in higher dependency rate Government encouraging financial self reliance Promotion of risk sharing portfolio investment: market linked investment and floatation of public companies shares 7. Increased trend towards stock market investing 8. Increased globalization of personal wealth creation Evolution of WM in Malaysia
The Wealth Cycle
The WM Service Offering in Malaysia
The need to have licenses to conduct sales of some instruments has made it necessary for the growth of this profession. A person is regarded as providing financial services if they are doing the following: 1. 2. 3. 4. 5. Give advice on financial products Deal in financial products Make a market in the financial market Operate a registered scheme Provide custodial service
Wealth management and personal financing planning are increasingly viewed as important as not many people save sufficient funds to meet their retirement requirements. This is made worse as marketing activities in the market, often encourage people to spend more and conversely, to save less. Wealth management and financial planning have attracted bigger attention recently due to: 1. More people are expected to retire, especially in the older groups and due to ageing population 2. Increase in longevity 3. Introduction of compulsory saving 4. A Greater range of financial assets to be chosen from In the background, is the process of the government and employers transferring the burden of taking care the old-aged staff to the employees themselves. Developments that have quickened the pace of growth and progress of wealth management & financing planning: 1. Increased market cycle higher volatility 2. Higher risks accompanied by higher returns 3. Benefits of diversification - better returns arising from spreading investments over asset classes 4. Growing investors quest for greater transparency 5. Rapid changes in legislations and economic scenarios that affect a persons tax and pension 1.2 Importance of Wealth Management vs Financial Planning Wealth management vs Financing Planning Definition: Generally, wealth management and financial planning are conceptually the same with the former being described as an advanced type of the latter. The important of wealth management and financial planning are:
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1. Minimize tax 2. Acquire reasonable returns on investment 3. Achieve financial independence on retirement 4. Provide financial security for family 5. Balancing current lifestyle with future lifestyle Role of Financial Planners Financial planners advise / help clients as follows: 1. 2. 3. 4. 5. Make informed decisions about money Protect income and assets Use money optimally Understand risk Develop a sound financial plan
1.4
Six (6) Steps Towards Creating a Financial Plan 1. 2. 3. 4. 5. 6. Gather qualitative and quantitative data Identify clients goals Analyse clients financial position and identify financial problems Prepare written recommendations statement of advice (SOA) Implement the agreed-upon plan Revise, reuse and maintain financial plan.
All these steps will be covered in greater details at a later part of this module (topic 13).
TOPIC 2: WEALTH MANAGEMENT UNDER SHARIAH 2.1 Source Islamic worldview of wealth management is derived from the Quran and Sunnah / Hadith. The need for managing wealth and planning for it, is amply demonstrated in Surah Yusof:47-49. The verses underscore the need for overcoming future uncertainty and hardships by having proper planning. Within the context of planning for avoidance of hardships and /or planning for continuous prosperity, the general view held that this task is a form of ibadah (worship) to God. It involves putting in efforts before reaping and enjoying the fruits of the efforts. In other words, one needs to sacrifice current comfort in return or greater benefits later. Similar, one has to spend wisely and save for a better future. Under shariah, wealth owned by a person is a trust from the God that must be managed wisely by him. Wealth is valued highly so much so that it is regarded as the adornment of life (Al Kahf:46). A hadith reflects the importance of wealth by narrating the following: It is better to leave behind your heirs rich rather than poor begging from others In another hadith, Luqman Al-Hakim advised his sons to strive hard to acquire wealth as without it, he would face difficulties insofar as his belief, intellectual stability and dignity / self esteemed is concerned. It implies that Muslims are encouraged to seek wealth and to be engaged in wealth creation activities. Islam demands that wealth to be spend wisely and prudently. Proper wealth management is, as such, obligatory for every Muslim. Wealth is a critical means to achieve success (Al-Falah) i.e. both good life in the world and life in paradise in the Hereafter. The importance and the benefit of proper spending of ones wealth are reflected in the rewards being promised by the God i.e. in the form of good life in this world and the avoidance of life in hell. As such, spending ones wealth wisely has a bearing on the quality of life of a Muslim. All of the above leads to the conclusion that Muslims should see the importance of proper wealth and financial planning.
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Function of an Islamic Financial Planner The basic function of a financial planner is providing financial plan to meet the clients financial goals. The plan should include strategies in managing financial affairs to meet pre-determined goals. For an Islamic financial planner, the function is the same as above except that the goals are guided by the shariah and the methods being must be shariahcompliant. The basic on which Islamic financial planning is built is in the shariah itself. A major activity in any financial planning is wealth accumulation. Shariah dictates how wealth is to be accumulated. In his pursuit of wealth, he should observed shariah all the time. The manner in which wealth is to be acquired has to be shariah compliant. As such, there must not be the presence of elements prohibited in Islam such as riba, maisir and gharar. The financial plan developed by an Islamic financial planner should avoid items that are wholly rejected by the shariah such as interest, brewery, pork, pornography and tobacco. The task of incorporating wholly shariah-compliant products in the plan is not the difficult as there are more shariah-compliant products available in the market.
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Zakat
One of the most important principles of Islam is that all things belong to God, and that wealth is therefore held by human beings in trust. The word Zakat means both 'purification' and 'growth'. Our possessions are purified by setting aside a proportion for those in need, and, like the pruning of plants, this cutting back balances and encourages new growth. Zakat is the amount of money that every adult, mentally stable, free, and financially able Muslim, male and female, has to pay to support specific categories people.
Arising from the need to observe shariah, an element necessary to be factored in the Islamic financial planning is the requirement to pay zakat. This wealth purification method is uniquely Islamic. No such requirement exists in the conventional financial planning.
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Protection from Harm via Takaful In protecting self and family against risk or loss of income, or against fire of contracts etc., an Islamic financial planning will encourage the clients to mitigate the adverse impact via the purchse of takaful products. As the underlying contracts of all takaful products are shariah-compliant, the use of takaful products will ensure that clients needs are fulfilled. Under the conventional financial planning, insurance products are used to mitigate the risks. Life insurance is not acceptable under Islamic financial planning as it has elements of riba, gambling and gharar which are deemed haram under the shariah.
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Time Horizon Whilst the scope of the conventional financial planning covers the period of up to the demise of the client, the Islamic financial planning goes beyond that. It impacts life in the Hereafter.
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Wealth Distribution Under conventional wealth management, the wealth owner can dictate the beneficiary of his wealth upon his death. He is assumed to have absolute ownership of the wealth. As under the shariah, the wealth owner is assumed to hold the wealth as a trustee, he is required to abide by the shariah in matters involving wealth distribution. As such, the Islamic financial planner should familiarize himself with the Islamic distribution concepts such as faraid (inheritance), wasiyah (will), hibah (gift) and waqf (charitable endowment). Conventional financial planning does not incorporate the requirement to observe the shariah compliant distribution method. The conventional financial planning objectives do not have consideration for socio-economic justice.
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Ultimate Objective Al Falah The ultimate objective of Islamic financial planning is the quest for Al-Falah to be successful in both worlds i.e. this world and Hereafter. Such as, embedded in the Islamic financial planning those important elements necessary to create a shariah compliant plan i.e. incorporation of zakat payments, takaful and avoidance of all non-halal elements from the plan. In conclusion, Islamic financial planning is not only unique but also more comprehensive than that of the conventional financial planning. The Islamic version has its core steeply embedded in shariah in all its elements i.e. creation of wealth, accumulation, purification, protection and distribution.
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Islamic Financial Planning in Malaysia Islamic Financial Planner (IFP) is the authorized executives that serve the retail segment of the Islamic financial market. The continued innovation of Islamic financial products and the growing demands of discerning Islamic retail clientele call for higher standard of competency and ethical practice of financial planning professionals. The introduction of ILP is to further strengthen Malaysias leadership in Islamic finance. Both Bank Negara Malaysia (BNM) and Securities Commissions (SC) recognize IFP. IFP is expected to be competent financial planner capable of meeting the financial planning needs of the consumer in conformity with Shariah Principles. He should be fully equipped with all the necessary knowledge of Islamic Financial Advisory for the retail market.
IFP is expected to function as follows:

1. 2. 3. 4. Guide the clients through the financial process. Advise clients on how they can achieve their financial targets. Introduce and monitor financial plan for the clients. Have clear appreciation of Islamic financial planning.
To qualify for IFP, the person must possess SPM plus relevant working experience in the financial services industry and undergo a 6 modules
exam-based certification programme:
Module 1: Fundamentals of Islamic Financial Planning
The objective of this course is to provide an overview of the IFP program and basic knowledge of being an Islamic financial planner. Module 2: Risk Management and Takaful Planning The objective of this course is to provide knowledge on risk management from conventional and Islamic perspective and its relation to Takaful, and to explain and familiarize with Takaful and its products and services. Module 3: Islamic Investment Planning The objective of this course is to equip candidates with knowledge and skills on investment planning focusing on Shariah compliant investment and contract
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Module 4: Zakat and Tax Planning The objective of this course is to equip candidates with knowledge on Zakat and Tax planning with focus on Individual taxation. Module 5: Islamic Estate, Retirement and Waqf Planning The objective of this course is to equip candidates with knowledge of Estate and Retirement planning from conventional and Islamic perspectives and the planning tools with special focus on Waqf (Philanthropy). Module 6: Financial Plan Construction and Professional Responsibilities The objective of this course is to equip candidates with adequate knowledge of a systematic process to gather, analyze and synthesize information from clients in order to develop and implement a comprehensive Islamic financial plan. IFP is similar to certified Financial Planner (CFP) awarded by financial Planning Association of Malaysia (FPAM) with the exception that ILP is wellversed in Islamic financial planning.
TOPIC 3: INVESTMENT Investment is defined as current commitment of money or other resources in expectation of reaping future benefits. In essence, a person sacrifices something of value today expecting to benefit from that sacrifice later. Alternatively, he is saving more today in expectation that he could accumulate sufficient funds to purchase / invest in those things that he could not otherwise purchase / invest. 3.1 Consideration Some of the more critical considerations in making an investment decision are as follows: 1. Objective The objective that a person has with regard to his investment has an important bearing on the type of investment chosen by him. If his main objective is producing a constant income annually, then the investment product best suited for him is an annuity and not the high-risk stocks and shares even though they yield higher returns. 2. Risk and Return The appetite of the client will be instrumental in the selection of the type of investment chosen. If he is seeking a superior rate of return, he must be ready to accept and shoulder a bigger risk level. This means that he must accept the possibility that his investment may result in a loss. Conversely, the scenario is different with someone who is conservative. He is more interested in protecting what he has. In this case, he should accept the fact that his investment may not result in superior returns. 3. Tenor The length of time a person intends to hold on to his investment has a bearing on his choice of assets. The longer the timeframe is, the more likely that he will get a rate of return on the basis that he absorb a higher risk level. Conversely, for a shorter investment period, return is normally less with the clients not willing to tolerate high risk. 4. Fund Size An investor with a fairly large amount of funds will be more ready to commit his money for investment into different investment types and instruments.
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3.2
Islamic Investment One of the critical tasks under wealth management in wealth accumulation. Investment is a major vehicle towards this end. Unlike saving, whose main action is preservation of wealth, investment function as a means to expand the existing wealth. In the quest to expand existing wealth, investment involves the process of risking the amount saved today in order to generate more wealth. Investment generates return in the form of dividends and capital gains. This way wealth is created. Islamic investment differs from conventional investment only in so far as the need to observe shariah principles is concerned. Among of the elements to be avoided under Islamic investment are: 1. 2. 3. 4. riba / interest gharar / uncertainty maisir / gambling arak / liquor
In addition to the above, investment that involves activities that are against the shariah such as pork, immoral activities are also to be avoided. In short, the Islamic wealth client who wish to make an investment will have to keep his wealth accumulation endeavours in compliant to the shariah. Investment must be made only in the ethical sectors. It cannot be made in activities such as pornography.
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Shariah Principle in Investment 1. Investment must not violate shariah principle and investor cannot place his money in companies that run business that is not in line with shariah such as riba, maisir and gharar. 2. The debt-to-equity ratio of a company should not exceed one third of the equity. (This is an opinion by a segment of the shariah experts, while others quote higher percentages)
3. Income from non-halal activities should not be more than 5% of total revenue. If it is more than 5%, it should be separated and cleansed accordingly.
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4. If the main business of the company is permissiable, its internal activities must also be shariah compliant e.g. a textile company is by nature shariah-compliant, however on a closer look, internal operation may be completely non-islamic. Due to the difficulty in ensuring a wholly shariah-compliant revenue, shariah recognizes the need for cleasing the non-shariah revenue.
Shariah governance within the ambit of corporate governance Corporate governance refers to the method by which corporation is directed, administered or controlled Since Islamic FI in many ways is similar to the conventional FI, the existence of a proper framework of corporate governance is a matter of dire necessity However, different from conventional FI, Islamic FI has the responsibility to ensure the compliance with the Shariah principles in its products, instruments, operations, practices, management etc Hence, Shariah governance is another component that is peculiar exclusively to Islamic FI
The importance of Shariah governance in Islamic banking & finance Shariah compliance is the backbone of Islamic banking & finance It gives legitimacy to the practices of Islamic banking & finance It also boosts the confidence of the shareholders and the public that all the practices and activities are in compliance with the Shariah at all times
What is Shariah Supervisory Board? An independentbody of specialised jurists in fiqh al-muamalat(Islamic commercial jurisprudence). However, the Board may include a member other than those specialised in fiqh al-muamalat, but who should be an expert in the field of Islamic financial institutionsand with the duty of directing, reviewing and supervising the activities of the Islamic financial institution in order to ensure that they are in compliance with Islamic Shariah rules and principlesThe fatwa and rulingsof the Shariah Supervisory Board shall be bindingon the Islamic financial institution
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Among common practice Appointment of In-house Shariah Supervisory Boardmembers Some Islamic financial institutions have established their own dedicated Shariah Review and Audit Departmentor unit to supportShariah Supervisory Board Main responsibilityof the SSB with the assistance of the department is on Ex-ante and ex-postShariah rulings, and Monitoringand supervising
Composition The AAOIFI Standard requires at least 3 individuals Legal/statutory requirement varies o From 1 individual, or o At least 3 individuals (Malaysia) In contemporary practice, most of the Islamic financial institutions appoint between 3 to 6 members to the Board
Qualification (MALAYSIA) A member of a Shariah Committee shall be an individual. A company, institution or body shall not constitute a Shariah Committee The member of the Shariah Committee shall at least either have qualificationor possess necessary knowledge, expertise or experience in: 1. Islamic jurisprudence (Usulal-Fiqh); or 2. Islamic transaction/commercial law (Fiqh al-Muamalat) 3. Paper qualificationon the above will not be mandatoryas long as the candidate has the necessary expertise or experience in the above areas
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Shariah screening methodology The Shariah screening process has been designed to satisfy three core principles. These principles are that the screening process should be: 1. Conservative The process is responsible for ensuring Shariah compliance of the stock universe covered. This responsibility is undertaken with the utmost seriousness both for the comfort of the users of the indices derived by FTSE from the screened universe but also as a core component of the groups business strategy. As a result the burden of proof is laid upon the process to demonstrate Shariah compliance for a company before it becomes part of the eligible universe. If the data to establish Shariah compliance is unavailable, no assumptions regarding the Shariah status of a company is made under any circumstances. In essence, all companies are non-compliant until shown otherwise. 2. Consistent We strongly believe that for the process to be valid it must be consistently applied over time and across geographies. With this in mind, Yasaar has sought to remove as much subjectivity from the process as possible. A rulesbased approach achieves this by keeping to strict, unchanging guidelines and not relying on the opinion of an individual at any particular time. To ensure consistency across the global securities universe, it is also necessary for these rules to be applied to a consistent global database. To achieve this, we work with an experienced company using some of the most respected sources of global data available. 3. Auditable The comfort of users of the screens is derived in part from the robust processes established but also from the knowledge that this process has been overseen and monitored by our Shariah Board. The Shariah Board monitors, reviews and audits the process at regular intervals. The screens are updated daily and audit trails of any changes in the Shariah status of companies are available to the scholars for review as well.
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TOPIC 4: TYPES OF INVESTMENT 4.1 Introduction
As the financial market now is flooded with Islamic instruments such as sukuk, NICD-I, Ba-I, halal stocks and shares, Islamic unit trusts, REITS-I and Islamic structured products, the task of choosing Islamic investment is not as difficult as before. There are many investment instruments available for the clients to invest their money. Among the common ones are as follows: 1. Stocks And Shares Stocks and shares are the most common means of money being invested by the clients. Most of the stocks and shares in the Bursa Malaysia are permissible in shariah, with the exception of those in the riba, maisir, gharar and liquor manufacturing activities. The risk in investing money in stocks and shares is high. However, the return on investment could be attractive. 2. Unit Trusts Unit trust is a portfolio of investment comprising shares, sukuk and money market instruments. This form of investment is pursued by the clients who believe in diversification of risk. They also believe that investment managers are better at handling their investment. Definition: Unit trust is investment instruments in which many investors who share similar investment objectives pool their resources together which are then invested by specified fund managers in specified or authorized securities. There is no profit sharing between the fund manager and the investors but a fee known as ujrah is incurred by the investor for the professional services under Al-wakalah contract. In the Islamic unit trust, there is usually a shariah panel (shariah supervisory board) which decides which share to fund by using the Activity or Structure Method. Aside al Wakalah agreement, Islamic unit trust also involves on indirect Musharakah system (equal to unequal share partnership) between investor and companies trading stocks or bonds. Capital gains and dividends are for investor but every purchase or sale of units, the company (fund manager) receives a fee. Any losses incurred due to adverse market conditions do not affect the shareholders wealth. There are two categories of unit trust in the market: a. Conventional unit trust b. Islamic unit trust
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Islamic unit trust contains shares and other financial instruments that are in conformity with the shariah. Most Islamic unit trusts run on the principle of mudharabah. Under this, the clients entrust their money with the investment management company. Profit generated out of this investment is shared between the clients and the company based on the pre-agreed profit-sharing ratio. Other fees may be imposed by the company. 3. Takaful Products The clients money also be invested in takaful products. Takaful works on two main principles: a. Mudharabah The mudharabah principles under this category is similar to the unit trust investment above. b. Tabarru Tabarru means donation. Takaful scheme will ensure that the insured be compensated for a certain calamity befalls on the insured and / or his family.
4. Money Market Instruments There are quite a number of money market instruments available. Some of them are: a. Negotiable Certificate of Deposits (NCD) These are guaranteed by the bank and can usually be sold in a highly liquid secondary market, but they cannot be cashed-in before maturity. Due to their large denominations, NCDs are bought most often by large institutional investors. Institutions often use these as a way to invest in a low-risk, low-interest security.
b. Bankers Acceptance (BA) A short-term credit investment created by a non-financial firm and guaranteed by a bank. Acceptances are traded at a discount from face value on the secondary market. Banker's acceptances are very similar to T-bills and are often used in money market funds.
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c. Treasury Bills (T-bills) Bills issued by Treasury and sold to investor on a discounted basis. The proceeds of these bills are used with maturities of 3 months, 6 months and 1 year.
d. Malaysian Government Securities (MGS) / Sukuk Interest bearing long-term bonds issued by the Government of Malaysia for financing development expenditure.
An important attribute of all money market products is that there are highly liquid. They can be turned into cash almost immediately. As such, they are very useful in the management of liquidity. Normally, return of money market instruments is not as high as that under stocks and shares. The risk is there especially if there is a swing in the interest rate movement in the market.
4.2
Banking Products
Definition - goods and services produced by banks for customers. a)Saving account What Does Savings Account Means? -A deposit account held at a bank or other financial institution that provides principal security and a modest interest rate. -Example: Wadiah Savings Account-i Bank Islam offers Wadiah Savings Account facility for you to save your money. Based on Wadiah contract, this facility provides hassle free safekeeping of your money and allows easy access for withdrawals whenever needed. b)General Investment Account A general investment account-i is a form of savings kept with a banking institution for a stated period. The profit for a general investment account-i is generally higher than a normal savings account-i. Most banking institutions offer general investment account-i of various tenures to cater for the needs of consumers.
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c)Structured Products Definition- Structured products are synthetic investment instruments specially created to meet specific needs that cannot be met from the standardized financial instruments available in the markets. Structured products can be used: as an alternative to a direct investment; as part of the asset allocation process to reduce risk exposure of a portfolio; or to utilize the current market trend. d) Wealth Management Products A type of financial service that combines personal investments, tax planning strategies, estate planning and legal counsel. - Stocks and Stocks Trading - Equity Linked Investments -Structured Savings Products -Structured Investment Products and Derivatives -Foreign Exchange -Alternative Investments like private equity, arts, and etc.
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TOPIC 5: DIRECT INVESTMENT Investment can be undertaken via the following: 1. Direct Investment by an Individual The individual himself will be making decisions about where his funds are ultimately placed. He could place his money in fixed deposits/general investment account, shares, properties or some other forms of asset. Towards this end, he could make use of an intermediary e.g. brokers. The individual is directly in control of his investment and as such he is fully responsible for the outcome of his investment. 2. Indirect Investment An individual may assign a third party to undertake investment on his behalf. An example of this is unit trust investment. The individual has no direct control on the investment made as he has delegated it to the investment company. 5.1 Investment via Banks The elementary example of direct investment is by having an account with a commercial bank. This is where some surplus funds are kept. Most people have invested in property especially in their own homes. Some others are investing funds to gain rental income and capital gain. Another avenue to make direct investment is by buying shares directly from brokers. Direct investment with banks is mostly in the form of fixed deposits (FD) or mudharabah general investment account (GIA) and saving deposit. Those who want higher returns (which is normally accompanied by higher risk) will be investing in commercial papers such as bankers acceptances (BA) or Islamic BA. Alternatively a person can invest his money in long-term securities that pay regular interest / dividend. Debentures, unsecured notes, bonds and sukuk are categorized under this type of investment. There are two types of bonds: 1. Those issued by the government which carry no or little risk, and 2. Corporate bonds which carry high risk Due to the low level of risk, government-issued bonds normally yield lower returns. Conversely, bonds issued by corporate invariably command higher returns.
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5.2
Investment in Property Investment in property is one of the favourite investment avenues especially in home ownership category. Investors in property would normally look at both rental income and capital gain. Property market can be classified into several classes i.e. residential, commercial and industrial. The return from property investment usually depends on type of property, its location and cost of upkeep. Properties in prime location will enjoy good capital appreciation and rental income. Many investors start their property investment with their own homes, then they move on to other residential investments such as houses, apartments, flats and time-sharing rights. The advantages of residential investment are the ease with which it may be purchased, the relatively low down-payment needed and the ready access to bank loans. It is relatively easy to find tenants, and as such, flow of income could immediately start. The disadvantages of property investment are: 1. Related to the poor quality of tenants: usually led to high repair and maintenance costs. 2. High turnover of tenants Commercial and industrial properties may include shop-houses, premises in shopping complexes and office spaces. Depending on location, investment in commercial and industrial properties normally requires a bigger amount of investment. Return on investment and capital appreciation would normally be higher. Although investment in property normally results in a capital gain especially if the investors investment horizon is long term in nature, there are instances where losses are suffered as a result of selling the property at an inopportune time. Property investment is generally non-liquid as it normally takes time for property to be sold to the market. Apart from buying properties from the market and during new launches, an investor has the option to acquire them via participation in an auction. Depending on market condition, purchase of a property from an auction can be advantageous to the buyer as the price is cheaper. Purpose of Investment in Property 1. Steady income stream 2. Capital appreciation
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How to Avoid Making Costly Property Investment Blunders
Posted Date: Mar 01, 2008 By: Milan Doshi
Real estate investments enable you to accumulate wealth and to you attain your financial goals within a desired timeframe. Unfortunately, many novice investors who lack an understanding of the common real estate investment pitfalls can easily lose instead of make money. Before jumping in, its extremely important to understand and avoid the main causes of failure. These are: 1. Lack of Right Education The major cause of most real estate investment failures is probably careless investing. Many beginners start off by listening to friends and family members. They get free advice on what works and how to succeed. What they may not realize is that free advice can be very expensive. It may be the case of the blind leading the blind. Learning to invest from people who have only bought one or two properties in their lifetime via the trial and error method is time-consuming, frustrating and expensive. You pay with mistakes costly mistakes! One wrong property purchased can cost you thousands of dollars and may take a few years of your life to undo the damage done! With a small investment of time and money, you can easily avoid costly mistakes and reap profits from day one. Take the time and trouble first to read all the relevant property investment books and attend educational courses on this subject. After all, the best real estate you can ever invest is in the real estate between your two ears! You should also look for the right mentors who started at the same financial position as you - and who has achieved success with several properties. Learn from their experiences, avoid their mistakes and replicate their successes.
2. Inadequate Research Another major cause of real estate investment failure is inadequate research. While its not that difficult to find investment properties, finding the one that is profitable is another story. Many become so excited about owning a property that they get blind-sighted. They may buy a property that looks good on the surface rather than investing time and effort doing research. A savvy investor would usually watch the market for a few months before diving in. He would select a few specific locations and get to know it well. He would get to know all the negotiators specializing in that area and details of all properties available for sale and those that have been transacted in the last few months.
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By doing these, you will acquire a solid foundation needed to determine which properties and locations make investment sense. When the right property in the right location comes up at the right price, you would be able to confidently purchase it without any hesitation.
3. Emotion-Based Decisions The third major cause of real estate investment failure is emotion-based decision making. Successful investing is purely a numbers game and its done without any emotions. One of the biggest challenges a real estate investor has is in studying the numbers on each and every potential property. It takes discipline and experience to pass on properties that may look good initially, but dont stack up number-wise. Buying based on emotions or impulse can cost thousands of dollars, hours and headaches. Before investing in real estate, ensure purchase decisions are based not on emotional reasons, but on sound facts and figures. Whenever in doubt, its advisable to get appropriate impartial advice from other like-minded property investors.
4. Paying Too Much Another major cause of real estate investment blunder is paying too much for a property. Once the papers are signed, few things are worse than discovering you paid more than you should have. Paying in excess of a propertys worth requires time to recoup the extra expenses and lowers your return on investment. While individuals who buy property to live in are prepared to pay more for emotional reasons, investors should always aim to pay the fair or lower-thanmarket price. Its all about the numbers. Conduct thorough research on the area and compare prices to ensure you can get a decent return on investment. Also, get a valuation report before confirming your purchase price. In property investments, profits are made at the point of purchase, and not at the point of sale. Buying is entirely within your control, whereas selling a few months or even a few years down the road may not be entirely within your control.
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5. Lack of Direction and Commitment One more cause of real estate investment failure is lack of direction and commitment. Treat your real estate investments as a serious business and not a hobby. Hobbies dont make much money, businesses do! If you treat real estate investing as a hobby that you indulge in whenever you feel like it, youll get hobby results. If you set aside the time and treat is as a business, youll be able to earn a profitable outcome. For example, one of my seminar graduates made over RM1 million in profits by flipping over 10 properties in the last 5 years. He treats his property investments as a serious business sideline and his goal is to flip a minimum of 2 properties each year. 6. Neglecting Inspections The sixth major cause of real estate investment failure is neglecting inspections. Buying old properties are riskier, compared to buying brand new from a reputable developer. Obviously, the older the property, the greater the risks. But the risk factor can be reduced when you take all the necessary precautions and budget additional expenses for repairs. Professional inspections are a must when investing in real estate. You may find properties that seem like bargains to the untrained eye, but an expert inspector could discover thousands of dollars in repairs that are necessary to keep the property running. While inspections do add one more cost to the investment equation, theyre necessary to the successful real estate investor. Milan Doshi, a seasoned speaker who has been running seminars on personal money management, property and stock market since 1998, gives a step-by-step guide on assessing risks, looking for bargains, the potentials of choice locations and the need to evaluate cash flow and rental returns short and long term. Characteristic of Property The principal characteristics of property are as follows : It is real, physical brick & mortar Due to its scarcity property prices are always on the uptrend Property investment is always illiquid Entry costs & exit costs are always high It is expensive to maintain Diversification in property is limited due to its high prices Property market values are not subject to daily valuation
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Direct vis--vis Indirect Investment in Property Direct property investment takes place when a person owns the property by buying it directly and he is the registered owner of the property. Direct property investment can be broken into various classes ie : Residential property Retail Commercial Agricultural Industrial
Indirect property investment are investment which result in property being owned via a third party eg : Real Estate Investment Trust (REITs) 0 both Listed and Unlisted on Stocks Exchanges Property Securities Funds Unlisted Trusts that hold investment in Listed Property Trusts Mortgage Funds Trusts that hold Mortgages over Properties Mixed Funds Funds that hold some Properties plus Other Assets Private Property Syndicates Small group of Investors pooling Funds together to purchase Properties
Residential Property A mixture of the following reasons have seen the investment in residential property grew rapidlny which have resulted in a significant rise in their prices : Limited supply of land zoned for residential development Increased cost of developing residential units Easy availability of credit to purchase houses
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Commercial Property This is largely the domain of institutional investors and high net-worth individuals (HNWI) as the amount of money needed is normally beyond the reach of individual investors. Commercial property comprises a wide range of real estate : Central business district (CBD) Regional centres Offices Retail Industrial factory Warehouse Infrastructure Hospitality Leisure
Each of them has its own unique risks that investors will have to brace themselves when they decide to invest in them. Unlike investment in residential property, purchasing a commercial property requires in-depth knowledge in local geographic areas, trend in consumer demand & labour supply, lease agreements, zoning, restrictions and redevelopments potentials. Normally the rate of return on commercial property is better to that of residential property. Rental income from commercial property is of a higher quality ( it has a built-in rent increases ) and superior vis--vis residential property.
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TOPIC 6: PROPERTY FUNDS Generally property funds are pooled investments where the assets are divided into units. Investors are unit holders & beneficial owners of the properties with the legal owners being the trustee. i. Real Estate Investment Trusts (REITs)
A REIT is a special type of mutual fund or stock exchange. Like other mutual funds, REITs allow small investors to participate with a low minimum investment. However, whereas other mutual funds invest only in financial instruments, REITs also invest in real estate and/or mortgages. So, it is a vehicle which mobilizes funds from the unit holders comprising individuals and companies for investment in real estate. Income generated by REITs came from rents on real property and/or interest payments on mortgages and will pass through shareholders. Unit holders in REITs receive dividends & capital gain raising from the rise in the market value of the units.
ii.
Unlisted Property Trusts (UPTs) UPT is not listed on the stock exchange. They are an open-ended investment vehicle which means new units can be issued. An open-end(ed) fund is a collective investment scheme which can issue and redeem shares at any time. An investor will generally purchase shares in the fund directly from the fund itself rather than from the existing shareholders. Proceeds from new units can be used to purchase new properties. UPTs are smaller in size vis--vis REITs. Being unlisted, unit holders in UPTs face higher level of risks with unit holders being unable to sell their units and the possibility of losses being incurred by them due to selling pressure. To mitigate liquidity risk, UPTs invest in REITs.
iii.
Property Syndicates Due to high prices of commercial properties, an individual investors hope to gain from capital appreciation is by pooling their funds together to form a property syndicate. Normally, the syndicate has a short life-span, i.e about 57 years. They gang up to buy a particular property & exit a few years later.
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iv.
Property Securities Funds (PSFs)
PSFs investment funds in REITs and other types of property funds. As such, PSFs are more liquid. They are good insofar as assisting investors in diversifying their money. v. Mortgage Funds
Mortgage funds are listed funds which hold mortgages against property. Mortgage Funds enable investors to invest in a fund which holds a number of mortgages. Returns to the investors are in the form of fixed interest rate based on repayments by the mortgagors. Usually, Mortgage Funds hold first time mortgages up to 65% Loan to Valuation Ratio (LVR) in order to minimize default risks.
vi.
Mezzanine Funds
This is generally a risky investment by an investor. Mezzanine funds lend money to developers who need money over & above those that they already borrowed from banks. As this carries more risks interest rates charged by mezzanine funds are higher than normal. vii. Hybrids Funds
A hybrid fund is the type of funds that invests in a mixture of units in REITs, UPTs, Syndicates etc. A hybrid fund may also borrow money from banks to improve earnings to the unit holders.
viii.
Advantages in Investing in Property Fund Investment in property funds allow investors to diversify their risks both by asset class & geographical location. Investors share the dividends and capital appreciation that comes with owing units in the property funds. This is almost hassle-free investment in property as maintenance and other functions rests with responsible entities (RE) which comprise large corporations or managers.
Another advantage investing in property is the steady stream of income derived from property portfolio. Research shows income derived from property funds is much less volatile vis--vis investment in shares.
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TOPIC 7: INVESTMENT IN SHARES Shares are commonly called common stock and equities. Investment in shares has become more popular especially in market that have seen steady rise in shares prices. Most of the time, buying shares via initial offers (IPOs) would result in good capital gains. This is due to the fact that IPO shares are generally underpriced. The participants in the equity market comprise listed corporations, investors and brokers. Corporations are mainly interested in rising capital. They use the secondary market to purchase shared in other companies either for reasons of strategic alliance, takeover or merely for investment purposes. Investors buy shares in companies for their dividends and capital appreciation. On the other hand, speculators are those that buy and sell shares with quick profit being their main intention. Arbitrageurs are those that buy & sell simultaneously similar financial assets in different shares markets to profit from unequal prices. Hedgers are those that hold two or more financial assets in the expectation that offsetting price movements will eliminate risk. All this participants perform useful functions within financial markets. They provide depth in buying and selling shares which tend to make markets more efficient. Prices are easily available in the markets.
What is initial public offering?

initial public offering (IPO), is the first sale of stock by a formerly private company. It can be used by either small or large companies to raise expansion capital and become publicly traded enterprises. Many companies that undertake an IPO also request the assistance of an Investment Banking firm acting in the capacity of an underwriter to help them correctly asses the value of their shares, that is, the share price.
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7.1 Nature Of Stock Market Shares can be sold in private by owner himself or via a broker appointed by the owner himself or via a broker appointed by him. However most of the trading is done on the stock exchanges. Most trading is executed by members of the exchange on behalf of the clients. The share prices are determined by the interaction of demand and supply of the counter in the market. Many factors are likely to affect demand and supply of shares and hence, share prices in the market as follows :
1.Profit reports -A financial statement that summarizes the revenues, costs and expenses incurred during a specific period of time - usually a fiscal quarter or year. These records provide information that shows the ability of a company to generate profit by increasing revenue and reducing costs. The P&L statement is also known as a "statement of profit and loss", an "income statement" or an "income and expense statement".
2.Earning & dividends Dividend-paying stocks need earnings sufficient enough to support paying investors. Beyond that, you should evaluate if the following stocks will give you the best return given your risk and time horizon. 3.Quality of management -Because people run companies, any investment opinion about a company is an opinion about the likely outcome of the combined efforts of the people who work for and manage it. -Investors can easily familiarize themselves with the backgrounds and qualifications of the managers of the companies they invest in by checking their biographies on company Web sites or in the annual proxy statements sent to shareholders 4.Industry events The demand and supply of the shares increase when the rapid growth in the industry but decrease when the industry becomes less important in the economy.
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5.Changes in prices of inputs/materials -Share prices change because of the demand and supply concepts -If people wanting to buy stocks exceeds the amount of people wanting to sell stocks, then the price is driven up because demand is exceeding supply. On the other hand, if more people are wanting to sell their stocks than people are willing to buy them, the share prices falls because supply is exceeding demand. These basic concepts are fundamental to understanding how the share price fluctuates 6.Foreign exchange -the foreign exchange market is a global, worldwide decentralized financial market for trading currencies. -The primary purpose of the foreign exchange is to assist international trade and investment, by allowing businesses to convert one currency to another currency. -depreciation in the currency has carried with it the downfall of the stock market. -Fluctuations in exchange rates are usually caused by actual monetary flows as well as by expectations of changes in monetary flows caused by changes in gross domestic product (GDP) growth, inflation interest rates and etc.
7.Interest rate level -An interest rate is the rate at which interest is paid by a borrower for the use of money that they borrow from a lender. -Risks of investment: There is always a risk that the borrower will go bankrupt, abscond, die, or otherwise default on the loan. This means that a lender generally charges a risk premium to ensure that, across his investments, he is compensated for those that fail.
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7.1.1 Analysis Of Shares In order to choose a share over others, an investor will have to conduct the following on the companies : 1.Liquidity -refers to how easy it is to buy and sell shares without seeing a change in price. If, for example, you bought stock ABC at $10 and sold it immediately at $10, then the market for that particular stock would be perfectly liquid. If instead you were unable to sell it at all, the market would be perfectly illiquid. Both of these situations rarely occur, so we generally find the market for a particular stock somewhere in between these two extremes. 2.Capital structure -In finance, capital structure refers to the way a corporation finances its assets through some combination of equity, debt, or hybrid securities. A firm's capital structure is then the composition or 'structure' of its liabilities. For example, a firm that sells $20 billion in equity and $80 billion in debt is said to be 20% equityfinanced and 80% debt-financed. 3.Profitability -as market share increases, a business is likely to have a higher profit margin. -advantages of large market share are greatest for businesses selling products that are purchased infrequently by a fragmented customer group. 4.Dividends -Dividend per share (DPS) is a simple and intuitive number. It is the amount of the dividend that shareholders have (or will) receive for each share they own.
DPS = dividends paid number of shares in issue

-Most companies avoid dividend cuts unless their financial condition demands it or there has been some other change in the business or its capital structure. As a result of this, increases in the dividend are taken to be a sign that the management is confident that the new level can be maintained or improved on.
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5.Market valuation - is the total market value of a company, calculated by multiplying the price of its shares on the Stock Exchange by the number of shares outstanding. -In financial markets, stock or shares valuation is the method of calculating theoretical values of companies and their stocks or shares. The main use of these methods is to predict future market prices, or more generally potential market prices, and thus to profit from price movement. 6.Risk -In the shares or investment, high risk will give the high return and low risk will give the low return. 7.Technical analysis -Technical analysis is a financial term used to denote a security analysis discipline for forecasting the direction of prices through the study of past market data, primarily price and volume. Shares in companies are bought and/or sold if analysis conducted shows that they are generally favourable and are expected to appreciate in market value.
7.1.2 Accessing The Share Market Individual investors can access the share market via stockbrokers who will buy and sell shares on their behalf. Shares can now be bought and sold online via internet. Most brokers insist that the clients hold funds in the accounts accessible by the broker for any buy transactions. Buy transactions must be settled by the third day after the transaction or a substantial fine is levied.
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TOPIC 8: INDIRECT INVESTMENT Indirect investment is the term used to describe a scenario when investors place their funds with fund managers who use investment vehicles such as unit trusts, managed investment schemes and superannuation funds to consolidate the investors funds and then invest the pooled funds according to their own stated strategies. 8.1 Managed Funds Managed investment funds gained impetus from the development of the unit trusts which offered a vehicle for the funds of many small investors to be pooled so that relatively large assets can be owned. Managed funds have evolved into investment vehicles that allow investors to choose fund managers and asset types to make either periodic payments or lump-sum contributions to maintain their desired levels of risks in their investment portfolio. 8.2 Characteristics Of Managed Funds A managed fund is a purpose-built, where the rules and regulations for the operation of the fund are established prior to the actual solicitation of funds from investors. Investors in managed funds become unit holders in the fund through the purchase of units in the fund. markets. Managed funds provide investors with pooled investment structure, where the funds so collected are being invested in the wholesale financial One of the benefits of managed funds is lower cost associated with investing, due to the spreading of investment across different asset classes. One of the important attributes of managed funds is that they are being managed by professional managers/investors. Managed funds allow ordinary investors to gain access to highly specialized assets and investments such as in industrial property, office building and index fund. Most of the managed funds are listed in the stock market to facilitate trading for the units between unit holders. This enhances liquidity.
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8.3 Structure Of Managed Investment Scheme/Unit Trusts The key characteristic of a unit trusts the pooling of small investment amounts into larger funds to enable benefit scale to occur in investing. The fund manager would then be able to invest in the wholesale market at a relatively lower cost and would potentially yield better returns. Unit holders are the investors in the fund/scheme. They are the beneficiaries of the fund. However they do not own the assets of the fund. They are simply investing in the funds assets to generate a return. Unit holders receive a certificate detailing the number of units they have purchased and the purchase cost. Management Company: The management company is the promoter of the fund to the public and provides investment expertise to manage the fund and has primary responsibility of investing the funds according to the objectives. The management company also acts as the Registrar of the fund maintaining the records of the unit holders.
Trustee: The trustee can be the Public trustee of Malaysia or any independent trustee of Malaysia or any independent trustee companies. A trustee generally reputable financial institution appointed by a deed of Trust to look after the interest of the unit holders.
Investors or unit holders: The providers of funds purchase of unit trusts from the management company would expect to receive benefits from the investment. They also can sell the unit trusts back to the management company.
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Advantages of unit trusts: Diversification Many investors lack sufficient resources to establish an adequate diversification on their own. By owing shares in unit trusts Management Company, diversification is obtained by the investor. Funds with the variety of objectives We have seen different types of funds are created for different investment objectives. So investors should have no problem finding funds that meet their own objectives in term of return and risk.
Record keeping services Unit trusts management companies perform various services for their shareholders. The management company maintains and administers the records of shareholders activity for a given year. Professional management Fund manager who are knowledgeable about investment, with good track records of performance, high integrity, etc. are employed to give the best recommendations on portfolio of securities to invest. High liquidity Unit trust can be bought and sold easily. Thus they do not suffer from liquidity risk. Affordability Only a small amount of money is needed to participate in a portfolio of investment which enjoys the same benefits as in direct investment which requires large amount of capital.
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Disadvantages of unit trusts: Load fee This is sales charge added to the funds NAV when unit trust is sold. It is as high as 10%. Under the new guidelines, the bid and offer price is determined by the management company and disclosed in the prospectus. The fund manager may adjust the prices as he thinks fits. High annual expense The operating expenses like accounting, legal, postage, management fees have to be borne by the investors. The management fees forms the largest component of the expenses thus reducing the profit to the investors.
Transaction costs Management companies must also pay transaction costs to buy and sell securities even though they trade in large blocks. This discourages trading unless the potential profit is substantial.
8.4 Unit Trusts As A Diversification Tool Investing in unit trusts provide investors with greater of assets for a given capital size. Bu owning unit trusts, investors can build a diversified portfolio of investments because they are accessing more than one investment in more than one asset class. The main asset classes are cash, fixed deposits, property and equities. Generally, unit trusts invest heavily in financial assets (mainly shares) and a small amount in property and mortgages. 8.5 Benefits Of Diversification Diversification is the spreading of investment across different asset classes with a view to generate sustainable profits/earnings. Overall, the yield expected out of a successful diversification strategy is consistently good profitability. Through unit trusts, investors can achieve diversification across managers, across investment sectors and across countries.
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8.6 Unit Prices Investors buy units in a unit trust. Units are segments of ownership of asstes in the fund. (NAV): NAV = (Fund Asset Fund Liabilities)/No. of Unit Issued As such, a unit price is the value of the funds assets less its liabilities, divided by the number of unit issued. This is know as the funds Net asset Value
Back to Basics Understanding Managed Funds By Michael Lannon Last year was a good year for investors in the share market. However it is important to not lose sight of the basics of investment. This month we look at managed funds. From young investors starting out to seasoned investors that are running their own super fund managed funds can be a key ingredient in a well diversified investment portfolio. Many Australian investors need to increase their exposure to International shares and managed funds are the ideal vehicle to achieve this diversification goal. The following should help you to understand the key facts about managed funds. What is a managed fund? A managed fund is a pool of money invested by many people who have similar investment goals. A professional fund manager invests the funds money on behalf of its many investors according to stated investment goals. For example, a share funds objective may be to outperform the overall share market over five years, while a fixed income fund might aim to provide investors with regular monthly income that offers a higher return than the current interest rate. Note: Managed funds can be either superannuation funds (managed funds in which you invest your super contributions) or ordinary or non-super funds (managed funds in which you invest money from other financial resources). Each type has different investment features and tax consequences.
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What are the key benefits of managed funds? Investing in managed funds has many benefits, including: Access to a wider range of investments Pooling your money with other investors means you have access to investments that are not normally affordable or available, such as commercial property or international shares. Diversification Managed funds can invest in a large number of investments across a wide range of asset classes. This results in a level of diversification that would be difficult to achieve on your own. Funds that suit you There are a large number of superannuation and ordinary managed funds available, and each follows a carefully selected investment strategy. With the help of a financial adviser, or through your own research, you should be able to find managed funds that suit your personal financial goals. Expert management Fund managers use a range of investment resources, skills, and experience to protect your money. This means you can rest easy, knowing your money is in good hands. Regular investment option Most managed funds offer the convenience of a regular investing option, such as automatic withdrawals from your bank account. This feature makes it easier to achieve your investment goals with less time and effort. Why not
consider investing your new tax cut this way?
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Investor protection Ordinary or non-super managed funds are operated by a responsible entity, which protects the interests of all investors. Responsible entities are regulated under the Corporations Act and administered by the Australian Securities and Investments Commission (ASIC). Superannuation funds are managed by a
trustee, who protects investors retirement savings and is subject to

regulation under both the Superannuation Industry (Supervision) Services Act and the Corporations Act.
How do managed funds work? When you invest in a managed fund, you buy units of ownership in that fund, which is similar to buying shares in a company. As the value of the funds investments rise or fall, the funds unit price moves accordingly. So this means the value of your investment will rise and fall as well, and you may achieve capital growth (or loss) when you sell your units. Managed funds also generate income in the form of distributions, which are paid on a regular basis normally monthly, quarterly or half-yearly. Each distribution is based on the earnings of the managed fund, which can come from share dividends, rent from property, interest from fixed income investments and any capital gains realised on these assets. Investors in an ordinary or non-super managed fund can either accept the income from distributions as cash or reinvest it in the fund. However, superannuation funds will always reinvest distributions, as they are designed to help build your retirement savings.
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Which funds may be right for you? If you decide that managed funds can help you achieve your investment goals, the next step is to choose the funds in which you should invest your money.
Investment Tips
Managed funds can be a cost-effective way of diversifying your investments while gaining access to professional investment management skills. By choosing to reinvest the income from your managed fund, you can benefit from the effects of compounding returns. How do managed funds differ? The primary distinction is between superannuation and ordinary or non-super funds. Managed funds can also differ in their asset allocation strategy, or how their assets are invested in order to achieve their investment objective. The role of the fund manager Before looking at other differences between managed funds, its important to explain the important role fund managers play in whether funds achieve their investment objectives. Not only does a fund manager ensure that a funds assets are invested in the type of individual investments that fit the funds investment strategy, they must also keep an eye on the overall asset allocation of the fund. This requires the fund manager to focus both on individual investments in the fund, as well as maintain a big picture view of the funds holdings.
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TOPIC 9: MANAGING PERSONAL RISK VIA INSURANCE An important element of a financial plan is its ability to provide financial security against known risks such as death and permanent disability. As such, in developing a financial plan, it is important to analyze and understand the risks and examine ways to minimize or eliminate them. 9.1 Risk Risk insofar as an individual is concerned, can be categorized into 2 i.e : (a) Speculative risk - A category of risk that, when undertaken, results in an uncertain degree of gain or loss. All speculative risks are made as conscious choices and are not just a result of uncontrollable circumstances.
(b) Pure risk - A category of risk in which loss is the only possible outcome; there is no beneficial result. Pure risk is related to events that are beyond the risk-taker's control and, therefore, a person cannot consciously take on pure risk.
Opening up a business involves speculative risks as the business has 2 outcomes i.e succeed or fail. Pure risk arises where there is only a possibility of loss. provide coverage against pure risk. Pure risks exist in quite a number of forms: Personal Illness, death, incapacity and unemployed Property Fire, accident Liability Losses suffered due to legal issues Insurance companies
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9.2 Management Of Pure Risk Management of pure risk (in an individual) is an adoption of the risk management as per the practice applied in the corporations. This is the risk that is peculiar to an individual. The process involved in managing pure risk is largely similar to that being practiced by the corporates in managing their risks ie:
Identify & evaluate potential risks sources of possible losses Manage the risks How to minimize losses & measures taken to address losses & avoid future losses Constant review of the programme of managing pure risk so as it continues to be relevant
9.2.1 Identification Of Personal Risk Premature Death Prolonged illness/injury High medical cost
Premature Death The financial effect of a premature death depends on whether the person is the sole income-earner of the family, size of the family and financial needs of the family. If reliance on the persons income is high, there is a need to arrange for insurance coverage to insulate the family from the risk. Prolonged Illness/Injury Financial needs of a person with prolonged illness/injury will be high especially those that self employed and those without insurance cover. Those that are employed are normally provided with medical benefits by the employers. High Medical Costs It is big burden to a person when faced with high medical costs. If he is employed, workers compensation insurance will take care of the burden.
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Business Risks One of the business risks faced by a partner to a partnership is the need to come up with money to take over the deceased partners share of the business. The partner may not have the money. 9.3 Evaluation Of Personal Risks To arrive at the amount to be insured the following have to factored in : Costs involved in premature death Amount needed by the dependents after premature death Amount needed after disablement
On a premature death, a certain set of expenditure has o be incurred ie: Burial expenses Medical care expenses before death Settlement of debts Estate administration costs
Costs incurred by the dependents upon a premature death include : Costs in bringing up dependents ie food, lodging, education and related costs. Dependents may include older relatives. Provision for possible disablement of the income-earner should also be made. This includes: Medical expenses Costs associated with disability Income to support dependents
An insurance policy which covers both the lump sum need for fund in a premature death and the need for recurring income after the death of the income earner, has to be bought. The total and permanent disablement (TPD) extension od a life insurance policy could meet these needs.
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As a rule of thumb, a person with an annual income of RM40,000 and the markets return on investment is 6%, the necessary sum insured is about RM670,000 or (RM40,000/0.06) 9.4 Risk Management Of A House A house is subject to a range of perils ie. fire, storm, burglary and earthquake. When assessing the appropriate amount to be insured, the value relates only to the building. Land is excluded as it would not normally suffer from fire. As the house/building depreciates in value, the main factors that keep the value increasing are the land itself, renovation & improvements made to the premises and the house contents. In arriving at the amount to be insured, the property covered by the policy normally will be valued at the replacement value price.
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TOPIC 10: RISK MANAGEMENT AND TAKAFUL Under conventional system, wealth protection is undertaken through the purchase of insurance policy. However, under Islamic wealth management and financial planning, wealth protection is carried out through participation in a takaful scheme.
Under both insurance and takaful, the client will be the beneficiary for the sum assured, should an accident happens. Although the function of both insurance and takaful is the same, they have fundamental differences both in term of concept and practices.
Risk is the possibility of suffering from harm/loss. Risk can be assessed both qualitatively and quantitatively. Types of risk include credit risk, forex risk and political risk. Risk could also be classified into pure risk and speculative risk.
Pure risk is a category of risk in which loss is the only possible outcome and there is no favourable outcome. Examples of pure risk are fire, flood and earthquake. Speculative risk, on the other hand, has three outcomes i.e. loss, gain, and breakeven. Outcome of an investment belongs to speculative risk.
10.1 Managing Risk Risk management process involves the following : a. To establish types of risk b. To define the risk and parameter of the risk c. To assess the risk d. To manage the risk via avoidance, sharing, reducing or transferring to a third party. e. To monitor and review of the action taken.
In the above process, insurance and takaful become relevant as an instrument to manage the risk. Generally, for most people, managing risk is a simple process i.e. buying an insurance or takaful and pay its premium monthly. However, serving the protection needs of high net-worth individuals (HNWI) is complicated and more of the than not, requires customization arising from their individuals unique attributes.
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10.2 Risk Mitigation Via Takaful Islam encourages effort to mitigate risks. A hadith amply illustrated the need to do something first before leaving the fate to the God. Under Takaful, tabarru (or donation) is the core concept. Tabarru means an undertaking by a participant to relinquish as donation, a certain portion of his takaful contribution. Thus, this enables him to fulfil his obligation to mutually help and guarantee the well-being of fellow participants. Tabarru concept eliminates the element of uncertainty from the takaful contract. The sharing of surplus or profit may only be known after the obligation to help fellow participants has been fulfilled. As such, takaful operation may be envisaged as a profit sharing business between takaful operators (acting as management company) and the participants. Takaful operators earn his income from two sources i.e. in management fees and profit from pre-agreed contract with the participants. 10.3 Why A Client Need A Takaful There are a number of reason why a Muslim needs to have a takaful coverage. All of them are in relation to the fulfilment of the maqsid-al-shariah as follows: i.To protect his religion ii.To protect his family iii.To protect life iv.To protect intellect v.To protect wealth vi.To protect honour/dignity
10.4 Recent Development Unlike insurance, takaful is all about co-operating among participants to help each other against a defined loss. It is about risk-sharing solution and not risktransferring process as it is generally understood in the conventional insurance business. Currently, a lot of emphasis is placed on the introduction of hybrid products in the form of investment-linked insurance and takaful. In hybrid products, risk and investment are bundled together resulting in products with elements of capital protected, capital guaranteed and guaranteed returns are churned out in the market. Hybird products are normally introduced to the more sophisticated customers e.g. HNWI is respond to their more sophisticated needs. Normally this segment of the customers would prefer capital protection in addition to the possibility of a higher rate of return.
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TOPIC 11: ESTATE PLANNING CONVENTIONAL Estate planning is a means to protect and maximize net assets available for distribution to chosen beneficiaries. Financial planners task is to ensure that the client has an appropriate estate plan. They should know when it is appropriate to consult solicitors, accountants and trustees.
11.1 Financial Planners Obligations 11.1.1 Identify clients objectives and wishes 1. Knowing the clients objectives and wishes is the first step in the estate planning process 2. Who does the client want to benefit from the estate and how much each will get? 3. Who will control family business? 4. Who will take care disabled beneficiaries? Or beneficiaries with financial risk e.g due to impending bankruptcy process or drug-related problems.
11.1.2 Identify assets available for distribution The listing of asset available for distribution is necessary. This includes insurance policies and financial assets.
11.1.3 Identify tax implications on the estate Tax has to be factored in estate planning so as to minimize it and to maximize assets for distribution purposes.
11.1.4 Ensure a valid and up-to-date will is executed A valid will will incorporate the appointment of an executor to carry out the instruction contained in the will. Only the current will will be used as the document to distribute the assets. To ensure problem-free execution, the will should also address the potential claims on the estate by the disgruntled beneficiaries.
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11.2 Making A Will Estate planning starts with a will. A will specifies how property is to be dealt with after the death of the will-maker. A will essentially provides directions about who the will-maker wants to receive his assets and nominates the person who will be responsible for executing the instructions. Although a will serves the need of people, making a will is not required by law. The person making the will is known as the will-maker or testator. The will shall have the following: 1. Must be in writing, signed by the will-maker in the presence of witnesses. At least two witnesses are required. They must be independent of the willmaker and they must not be beneficiaries. 2. It is better for both the will-maker and the witnesses use similar pen when signing so as to avoid possible future issues on the time the will was signed. 3. The main body of the will will set out all his wishes. Details written elsewhere and not being referred to in the main body will not form part of the will. Similarly details written after the signature of the will-maker may not form part of the will. 4. As a will is an important document, a validly constructed documents is necessary. As such, it is better to have a solicitor to be involved. It is a good idea to have a will signed in front of solicitor. In choosing and appointing a executor, the following need to be looked into: 1. The person should be younger than the will-maker and/or his health is better than that of the will-maker. 2. He has to do the job competently. 3. He has the time to carry out his duty. 4. He is fair and impartial. 5. He must be trustworthy. The executor must be briefed about his role and to have him informed about where the will is and where important documents are kept. It is always a good idea to appoint an alternative executor.
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11.3 Who can make a will Anyone with testamentary capacity and over 18 can make a will. Testamentary capacity means he understands : i. ii. iii. iv. v. vi. The nature of making a will The nature of property The claims of potential beneficiaries The person has no mental disorder Some individuals with no testamentary capacity can have his will challenged Financial planners are advised to establish testamentary capacity when they are finalizing a will from an elderly client . A doctors statement about the health of the client could strengthen the will.
11.4 Appointment of An Executor An executor is the person appointed in the will to look after and distribute the assets in accordance with the will-makers wishes after his death.
Functions of an executor include : 1. 2. 3. 4. 5. 6. 7. Funeral Manage legal and financial affairs Obtain grant of probate Locating , protecting , and insuring estate assets Pay debts with proceeds from the estate Distribute assets to beneficiaries Defending the will if challenged
11.5 Grant Of Probate Probate means proof of the will. By obtaining the grant of probate, it confirms that the will is valid. By having the probate, the executor has the authority to proceed to take hold of the assets and distribute them to the beneficiaries. On death of the will-maker, his assets will be automatically frozen and cannot be dealt with by anyone other than the personal representative upon presentation of a document stating Grant Of Probate.
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Grant Of Probate is awarded by the Supreme Court. Supreme Court confirms that the will is valid, the executors appointment is endorsed and the will-makers assets and liabilities are confirmed. Grant of Probate is not required if the value of the estate is below a certain level. A minor amendment or adjustment can be prepared in the form of a little will or a codicil. A codicil must similarly be signed by the will-maker and the witnesses. If a major amendment needs to be made, it is advisable to rewrite the will.
11.6 Letter of Administration (LA) LA is granted by the court when a person dies without a will . LA gives court authority to a person to carry out the function of administering the estate . LA is also issued in the case where the executor has died and no replacement has been named in the will.
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TOPIC 12: ASSETS TO BE SPECIFIED IN THE WILL For estate planning , assets of the will-maker can be classified into 2 : 1. Estate Assets Assets in the form of goods & chattels and property owned solely and independently by the will-maker. 2. Non-Estate Assets These are assets that are jointly owned and controlled through and independent business structure eg: family business or trusts. Only those classified as Estate Assets can be included in the will.
Assets that cannot be included in the will are as follows : Bank account in joint names Jointly owned properties Life assurance where there is a nominated party Assets held in trust or in a family company
12.1 Right of Beneficiaries Beneficiaries have the right to have the estate administered properly and the right to their allocation in accordance with instruction in the will. His right to the allocation as per the will shall only occur after the executor has discharged his duty and the titles have passed to the beneficiaries. Before his happen. Once distribution has taken place, the executor could not demand the beneficiaries to return their assets even if there is debt that has not been settled by him . In this case, he has to pay the debt himself. Beneficiaries can bring the executor to court to apply for a Grant of Probate if the executor fails to lodge the same from the Probate Office within the statutory timeframe.
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12.2 Contesting a Will As a general rule, a will-maker can choose the beneficiaries of his estate to whomever he wishes. However, some classes of beneficiaries can contest th will if they feel they have been inadequately provided for. In reality, a disgruntled beneficiary of potential beneficiaries has limited scope to challenge a will. He could challenge the validity of a will via the following routes : Lack of testamentary capacities of the will maker Undue duress to the will-maker Incorrect execution
If the challenge mounted to the will is successful, the will become void. The court may decide that the estate be distributed in accordance with any earlier valid will. If there is no valid will, it will be distributed in accordance with the applicable laws of intestacy. Alternatively, the disgruntled beneficiaries or potential beneficiaries can mounted a challenge on the will on the ground that inadequate provisions for certain beneficiaries. This stems from the notion that it is beneficial for the country that the relations of the deceased are properly maintained and supported out of the proceeds of the estate. These people have the right to make claims for a share or an increased share, of the estate. This is called TFM or Testators Family Maintenance proceedings. Who actually could mount a challenge on the will based on TFM depends on the jurisdictions will-maker resided. To be able to prepare a good estate plan, the financial planner should alert the willmaker about the possibility of a challenged to their wills. One suggestion for the will-maker to include a share of the estate to the particular person.
12.3 Dying Intestate In case where the person dies without a will, the estate of the deceased goes to the following; The entire estate goes to the surviving spouse, if there are no children. The entire estate will be split between the surviving spouse and the children. The estate will be divided equally among the children, if there is no spouse. The estate will be given to the parents if there is no spouse and children. The estate goes to the surviving siblings, if there is no spouse, no children and no parents. The estate goes to government if there is no surviving spouse, children, parents and siblings.
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Dying intestate will result in distribution of estate being not accordance to the wishes of the deceased. Dying intestate could have even worse ramifications in the case where both husband and wife die at the same time. The law recognizes that the older of the couple to have been died earlier. In this event, the estate of the elder spouse will past firstly to the younger one. The estate of the spouse will then include both their assets. It is possible that this assets are distributed the younger partners next of kin and nothing will go to the family of the older spouse.
Islamic Estate And Waqf 12.4 Definition Estate literally means properties or possessions. Estate planning means planning for distribution of properties/possession upon the death of the client. It originates from the clients need to signify his love and care for his dependents in the event of his death. This is especially critical in cases where dependents consist of infants, elderly parents and disabled children. As such, having a plan would ensure the continuity of the dependents livelihood and well-being. Waqf means charitable endowment. As such, Islamic estate and Waqf are primarily concerned with the plan for managing assets/possessions to be left behind by the client upon his death. Due to its significant benefit, planning for estate waqf is regard as an act of worship/ibadah. Planning for ones estate takes a higher level of importance as it normally takes a long period of time for the properties of the deceased to be finally distributed to the dependents. Without proper planning, the deceaseds assets will be frozen by law for a considerable period of time. Obviously, this will adversely affect the well-being of the dependents.
12.5 Need For A Will Generally, it is not obligatory for a client to have a will. However in cases where the client has properties and/or dependents, it is highly recommended that he should write a will. One particular hadith propagates the need to have a will that he who does that, will have peace of mind. Another hadith urges Muslims to urgently write down his will. Muslims should not allow 2 nights to pass without having his will written down. In writing a will , the client is bound by two basic rules i.e (i) he could not bequest his possessions to his legal heirs and (ii) bequest should not exceed one-third of the estate after debts are settled. In short, he is prohibited from having a will that is not in line with shariah.
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In writing a will, the client should also cover his debts. A good financial planning should deal with all material issues comprehensively. This includes legal suits, both prevailing and potential (if any) , matrimonial assets etc. As mentioned earlier, complications will arise when a person dies intestate. The process to get the letter administration (LA) from the court to unlock the deceaseds estate will take considerably longer time, vi-a-vis the short time taken in cases where there is a will document. A will specifies who will inherit the clients property, names a guardian for children , and designates an executor who will handle the financial affairs of the clients when he dies. A person of 18 years old and above can write a will. A person can always change his will. He can write as many wills as he wants provided they are signed by him. If a person dies without a will (or intestate), his assets will be distributed according to the state law, regardless of his wishes.
A will have to contain the following:
a. Whom will you name executor b. Who will receive your property c. What happen if the will writer is disabled or unable to act on his own
12.6 Waqf Planning
Whilst estate planning deals with plans to bequest possessions to the clients dependents, waqf planning deals with plans that directly benefit the client himself in the Hereafter. As such, the objective of undertaking a waqf planning is to achieve success in both worlds, i.e this world and the Hereafter. A unique element about waqf planning is that the client wants these benefits to accrue to him on a recurring and perpetual basis. A client can create a waqf during his lifetime or upon his death by using the onethird portion for the bequest.
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Reason for not having Estate Plan Most often, the reason for not having Estate plan are as followers:(i) (ii) (iii) (iv) (v) Perceptions that faraid will take care the distribution of assets. Lack of consciousness of important of the Estate plan Lack of money to pay for Estate plan Reliance on someone in the family to take charge of distribution of assets Negative perceptions of assets
C. Assets that can be distributed a. goods , asset belonging of the decreased which were acquired though halal b. depts , rental of often that have not been paid to decreased c. dividend generated from assets of the decreased d. EPF e. insurance / policy f. Bank deputy
D.Assets that cannot be distribute 1) Asset that have been donated by the decreased before his death 2) Asset that have been sold 3) Assets that have been classified as waqf 4) Assets held in trust for somebody else 5) Income from pension 6) Borrowed assets 7) Joint name
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TOPIC 13: DEVELOPMENT OF PERSONAL FINANCIAL PLAN (PART 1)
Personal financial plan (PFP) provides a framework for people to effectively their finances towards achieving their goals and objectives. This is achieved via financial planning process which uses a systematic & organizes approach to preparing financial plan for client. The planning process should start with the detail of the clients goals and objectives, followed with the design of the appropriate strategies and recommendations. The recommendation segment should describe the manner through which the clients goals & objectives can be achieved. Subsequently, a framework is established from which the planner intends to put the plan into action. Continuous effective communication with the client is vital towards making the plan achieving its targets.
A PFP involves many different disciplines i.e investment, insurance, taxation, saving retirement and estate planning. A comprehensive analysis of all these disciplines will have to be undertaken before a typical financial plan is being produced.
A financial plan which is known as a statement of advice (SOA) details the main requirements that a financial advisor should describe in a statement when providing financial advice to the clients. The advice may not necessarily contain specific proposals it could be in the form of a general strategy or simply an analysis of issues.
13.1 Financial Plan (FP) or Statement of Advice (SOA)
A financial planner will have to provide his clients with a SOA that contains sufficient information to enable people to make an informed decisions as to whether the advice is appropriate or otherwise. It is vitally important that the plan is specifically tailored towards meeting the needs of the clients. SOA can be both short and long- depending on the clients requirements. It can be a request on research in a particular product or market. At times, financial planner is not required to provide advice or recommendations. He is merely required to carry out a particular transactions. It is prudent on the part of the financial planner that a warning about the limitations of his advice be communicate to the clients.
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13.2 Financial Planning Process It has been a universally accepted norm that there are 6 steps needed to come out with a FP or SOA for a client. These 6 steps will be discussed below . These steps will repeated each time a review is conducted on the FP or SOA. The review could be a pre-programmed review or due to changes and adjustments in the market place and/or the clients goals and objectives have undergone a significant refinement. 13.2.1 Data/Information Gathering About Clients Central to the preparation of a FP/SOA is meeting the need of the clients. As such, understanding the many categories of clients seeking financial planning advice is essential. The clients comprising young, middle-aged, single, retired, investors, savers, high net-worth individuals (HNWI), etc. They can be categorized into 4 phases of their life: Saving, investment, and protection Phase Accumulation, consolidation, and wealth creation Phase Pre-retirement Phase Retirement Phase
The financial planners task is to gather sufficient information both quantitative and qualitative about the client. This information can be obtained directly from the client himself via a series of interviews and questionnaires and/or to conduct research on his background etc. Vital information such as his income, employment/employer, insurance coverage, dependents, and state of health are examples of basic data needed to start an analysis about the client. A good financial planner should be able to look beyond the quantitative information provided. He should be good at gathering qualitative information as well. At this stage of the planners job, he should be able to measure the clients risk appetite. 13.2.2 Identify Clients Goals And Objectives Subsequent to gathering information about the client from the client himself and from other sources, the financial planner help the client to come up with his goals and objectives. When necessary, the planner should help the client to make sensible evaluation about choices and assist them in prioritizing his goals and objectives. Among matters to be discussed and resolved with the client are: Identification of priorities Financial needs and sociological needs Hidden needs Lifestyle & life-cycle requirements
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All these needs will have to measure against the constraints faced by the client in terms of opportunity costs, trade-off between competing objectives and ethical issues.
13.2.3 Analysis Of Clients Financial Position An analysis is made both quantitatively and qualitatively based on data and information that has already been gathered. Analysis of the clients financial position normally covers the following: Risk Profile Cash inflow and outflow Income tax Projected income and return on capital Retirement income and capital projections Comparison between proposed strategies and Risk tolerance
Base on the above the financial planner should be able to construct a pro forma balance sheet income statement and cash flow statements. With goals and objectives being contrasted with projected financial position, it is natural that there would be trade-off between competing plans.
13.2.4 Prepare Written Recommendations The financial planner will proceed with preparing written recommendations based on analysis performed on quantitative and qualitative data and information available about the client. A financial planners recommendations are usually based on a number of assumptions. As such, it is important that these assumptions need to be reasonable. Areas requiring reasonable assumptions include: Tax-rates Interest/dividend rates Life expectancy of the client Income and return on capital
13.2.5 Implement Agreed Upon Plan At this stage the planner may need to refer the client to solicitors, brokers and accountants. The planner and the client must reach and agreement on how the recommendations and strategies contained in the FP/SOA are to be implemented. A timetable should be established for each stage of implementation. A clear and thorough records are maintained and the client should be kept informed about reviews and of his responsibility for record maintenance.
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13.2.6 Review OF FP/SOA At a certain interval, the clients financial position should be reviewed to ensure strategies and recommendations contained in the FP/SOA remain current and up-todate. In the review stage, option is open to redo the planning process, of necessary. Changes in the laws, rules and regulations may prompt a review to be initiated. A written agreement setting out the role and responsibilities of the planner should be in place. They include the frequency of the review of the plan, nature and extent of the review process offered, role of the planner in arranging investment portfolio and communication with fund managers and amount of fees and commissions chargeable for each review.
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TOPIC 14: DEVELOPMENT OF PERSONAL FINANCIAL PLAN (PART II) 14.1 Ethic & Legal Compliance The basis of the client-planner relationship must be of mutual trust with both parties acting ethically and professionally. Financial planners are expected to perform their works professionally, mindful about their fiduciary obligation to the clients. They have to look after the interests of the clients without bias and conflict, and in the manner that establishes trust, confidence and discretion.
For this, the planners need to: 14.1.1 Know their clients As the planners must ensure that the recommendations are appropriate to the objectives and financial needs of their clients, they should undertake the tests on the following rules: Know your client Know your product Match the clients needs with appropriate products
In order for these rules to be observed, the planners responsibilities include proper record-keeping on data secured from the clients, minutes of meetings with client, etc. Even telephone conversations should also be kept.
14.1.2 Disclosure Of Remuneration Planners are expected to undertake a full, transparent and frank disclosure of remuneration. This is because the clients are demanding an increasing level of integrity, honesty and transparency. The planners have the obligation to disclosure fees, commission and any material interest that may result from their recommendations.
14.2 Format Of Financial Plan (FP)/Statement Of Advice (SOA) To be effective, the FP/SOA should contain the following: Executive summary State relevant facts and assumptions Outline personal details, financials, objectives and goals Disclosure all fees and commissions Prepare recommendations with justifications to be supported with projections and calculations.
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Although there is no standard template/format required for SOA, the closer the contents of SOA to the specific needs of the client, the better will be its value to the client. As such, the contents of the SOA will depend on the client who will be making use of it.
14.3 Developing Appropriate Strategies The FP/SOA should incorporate strategies to meet the clients specific short-medium and long-term objectives. Assuming a comprehensive FP/SOA is required by the client, all financial plans and strategies will have to put in place e.g cash flow, income tax, risk management and insurance, investment, retirement plan and estate plan.
14.3.1 Cash Flow A number of issues have to be resolved with the clients including the ability of the clients to stay within the budget.
14.3.2 Risk Management & Insurance A comprehensive FP/SOA will contain review of risk faced by the clients such as: Types of life insurance Types of general insurance
The plan should identify insurance deficiencies and accordingly to make arrangement to eliminate the deficiencies.
14.3.3 Investment Planning The planner needs to consider the clients risk profile before coming up with selection of investment products and appropriate assets allocation. Before doing so, he should consider the clients current investment and his goals and objectives.
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14.3.4 Estate Planning The financial planner needs to communicate the importance of estate planning to the clients. The following will have to the subjects of discussion with them: Creation of a will Appointment f an executor Business succession planning Ensure support for children and dependents uninterrupted Distribution of investment, insurance houses and other assets
14.4 Review And Maintenance Periodic review of the FP/SOA has to be predetermined up-front. The charges relating to it also has to be spelt out. Periodic review of FP/SOA would bring to light the following : Appropriateness of clients goals and objectives Result of investments made and other strategies implemented Examine current risk profile of the client Discuss recent changes in laws, rules and regulations
Review of FP/SOA at half-yearly interval is considered adequate.
END OF MODULE
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Kolej Profesional MARA Bandar Melaka Islamic Wealth Management Jan-Jun 2012

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