1 Other Areas of Financial ServicesFundamentals of Financial Services Other Areas of Financial Services Chapter 7

2 Key Topic Areas Fund Management Retirement Planning

3 Starter You have saved up £2,000 through your part time work. You want to invest this money. Which investment would you consider from the following: Invest in Tesco shares Invest in UK government bonds Put towards your retirement Keep the cash in your mattress at home Continue saving to purchase a property

4 Starter You have saved up £2,000 through your part time work. You want to invest this money. Which investment would you consider from the following: Invest in Tesco shares Invest in UK government bonds Put towards your retirement Keep the cash in your mattress at home Continue saving to purchase a property How did you come to your decision? What further information would you require to make a better decision?

5 Lesson Objectives By the end of the lesson: Everyone MUST be able to:Define FUND MANAGEMENT Define RETIREMENT PLANNING Most SHOULD be able to: Explain how COLLECTIVE INVESTMENT works including comparison with direct investment, pooling, diversification and expertise. Explain the three different types of pension plans.

6 Fundamentals of Financial ServicesFund Management

7 Fund Management This is where a firm creates an investment fund for its clients, which will enable those clients to invest together, sharing in any gains made or losses. This can be illustrated by the following diagram:

8 Fund Management Investments in the EconomyCOLLECTIVE INVESTMENT SCHEME The fund manager will decide where to invest client money. Investments in the Economy Services Agriculture Manufacturing

9 Case Study: Harris Harris is a recent graduate with a good job. He is smart but knows little about investment, and he has been told it would be sensible to invest a modest amount of around $100 per month into equities, hopefully to enable him to afford a house one day. He particularly likes shares in technology companies as he feels technology is where the potential growth is. The current share prices are as follows:

10 Share Prices With his $100 what shares can Harris buy?Apple is trading at a price of $110 per share Facebook is trading at $76 per share Google is trading at $522 per share Microsoft® is trading at $42 per share Students to have a think about where Harris could invest his $100. Give students two minutes to think about the options. With his $100 what shares can Harris buy?

11 Are there other companies he could benefit from investing in?Case Study: Harris Harris has two options: He could buy two shares in Microsoft ® and be left with $16 He could buy one share in Facebook and be left with $24. First month choice of investments is restricted to Microsoft and Facebook. Harris’ knowledge and expertise is limited. He has only looked at these 4 technology companies as these are the only ones he knows about. Things to consider… He would have to wait for 2 months before he has sufficient cash to buy a single share in Apple He would have to wait 6 months before he could buy a single share in Google – and that is assuming Apple’s and Google’s share prices stay at less than $200 and $600 respectively. Are there other companies he could benefit from investing in? To invest in Apple or Google he will have to wait as their share price is too high.

12 Direct Investment Cash Shares Direct Investment When Harris is making the decision of where to invest himself, this is known as Direct Investment, as illustrated in the diagram.

13 Indirect Investment FUND Cash Indirect Investment Shares All of these difficulties could be addressed if Harris chose to invest in a COLLECTIVE INVESTMENT SCHEME, i.e. indirect investment whereby a fund management company makes the decisions on where the investment from Harris would be best placed.

14 Indirect Investment: DiversificationWith a collective scheme Harris can benefit from diversification: The more companies’ shares, held the greater the spread of potential risk for the investor i.e. they have avoided putting all their eggs in one basket. If one company performs poorly, another may perform better. This is a key advantage of a fund, as the fund is gathering lots of individual investments and therefore is able to invest larger sums of money in a variety of different company shares. So if Harris were to invest in a “technology fund” he would be able to resolve the issue of being restricted with his investments.

15 Indirect Investment: Purchase a Proportion of a ShareIt would also solve the second issue as now being part of a fund means he would have access to a proportion of the Apple and Google shares in the fund. Apple 1 Share Google 1 Share Harris’ proportion of the Apple Share Harris’ proportion of the Google Share

16 Indirect Investment: The Apple & Google FundA fund manager has set up a fund to invest in the best-value technology companies, and advertises for investors. Each investor is only asked to invest $100. The fund manages to attract 1,000 investors – a total of $100,000. The fund manager feels that current best value shares are those of Apple and Google. He feels slightly more positive about Apple and uses the money to buy 600 Apple shares (costing $110 each) and 65 shares in Google (costing $522 each). The remaining money in the fund is kept on deposit for the moment, ready to spend when the right opportunity arises. The fund’s investments are: Investment Share Price Number of Shares Total Apple $110 600 $66,000 Google $522 65 $33,930 Cash n/a $70 $100,000

17 Indirect Investment: The Apple & Google FundEach investor’s $100 is now invested in Apple and Google, despite the fact that one individual Apple or Google share is too expensive for $100 to purchase. Assuming Harris uses his $100 to invest in this fund, he would now own 1/1,000th of the fund, which effectively means he has 60% of an Apple share and 6.5% of a Google share, plus a little bit of cash. The fund has essentially allowed Harris and the other 999 investors to purchase a portion of an Apple and Google share. Investment Share Price Number of Shares Total Harris’ Investment Apple $110 600 $66,000 $66.00 Google $522 65 $33,930 $33.93 Cash n/a $70 $0.07 $100,000 $100

18 Indirect Investment: Access to ExpertsIt would provide Harris with access to a group of professionals at the fund management firm who can advise on investment decisions. They have the financial knowledge and expertise to make informed investment decisions. They will constantly monitor the firms within specific industries to ensure they are able to offer funds made up of a diverse range of companies.

19 Fund Management: SummaryThis will enable the fund to benefit from DIVERSIFICATION benefits that might not be available to individual direct investors. Money is POOLED from a variety of investors into a single fund. BENEFITS The fund is run by a professional FUND MANAGER, who will be best placed to select the stronger investments. Fund investors are effectively able to BUY PORTIONS of individual shares.

20 Check your learning: EXIT PASSComplete a 1:2:1 EXIT CARD Identify 1 area that you already knew about Identify 2 new things you have learnt today Identify 1 area you would like to know more about

21 Quiz Questions

22 Which of the following is an alternative way of describing investment through a collective investment scheme?   A   Indirect investment   B   Direct investment   C   Value investment   D   Alternative investment

23 Which of the following is not a way that funds aim to reduce investment risk?Diversification of underlying investments   B   Insure against losses   C   Access to investments not available to smaller individual investors   D   Professional management

24 Fundamentals of Financial ServicesRetirement Planning

25 Quick Think… What is the retirement age in the following countries for men and women? Country Men Women USA UK China India Mexico Philippines

26 Quick Think… What is the retirement age in the following countries for men and women? Country Men Women USA 66 UK 65 62.33 China 60 50 India Mexico Philippines

27 What is Retirement Planning?It is the “putting away of money” to use up in retirement. Retirement is when an individual is no longer required by law to continue working. The retirement age across many countries has increased over time due to: Improvement in healthcare Medical advances

28 Pension Sources There are three key pension sources available:Personal Pension Provided by the individual Employer-Sponsored Pension Provided by the individuals employer State Pension Provided by the State

29 Personal Pension SchemesTypically made available by banks, insurance companies and fund managers. The individual sets aside a proportion of their monthly salary into a pension scheme, which the pension scheme then invests into shares, bonds and other financial assets. The expectation is that the money contributed to the scheme PLUS the potential growth in the value of the investments will provide the individual with enough money for a relaxed retirement. More Money Invested PLUS Early Investment = Comfortable Retirement Monthly Salary Personal Pension Contribution

30 Employer-Sponsored PensionIf an individual works for a firm, it is common for the firm to provide a pension scheme. This is used to: Attract good quality staff Encourage them to stay The employer sponsored pension could be one of the following: Fully Funded Scheme Contributory Scheme Paid for completely by the firm Combination of employer contribution and individual contribution

31 State Pension Schemes A number of countries around the world, provide pensions to their citizens. This is known as a state pension scheme. However, these schemes tend to pay a very small amount. A state scheme in most cases must be supplemented by an additional source of income or additional pension plan (either individual or employer-sponsored) if a more comfortable retirement is desired.

32 State Pension Schemes UK Case StudyCircumstances Basic State Pension weekly rate for 2015/2016 Maximum qualifying years £115.95 Married man, woman or civil partner (using his wife's, her husband's or civil partner's National Insurance record) £69.50 Current State Pension Current State Pension is made up of basic State Pension and additional State pension. If you are a man born before 6 April 1951 or a woman born before 6 April 1953 then you may be eligible for the current State Pension. New State Pension - what is the rate? If you are born on or after 6 April 1951 (man) or 1953 (woman) you may be eligible for the new State Pension. The full amount of new State Pension will be £ a week Under the new system, from April 2016, the actual amount will depend on your National Insurance record. You could receive a higher or lower amount. https://www.nidirect.gov.uk/articles/state-pension-and-pension-credit-rate

33 Stretch & Challenge Additional Reading/Research: Winners and Losers Under the New State Pension (4th April 2016) Using this article as a basis, and conducting some of your own research draw up a case for and against the new state pension scheme introduced by George Osbourne in March 2016. Who are the winners under the new state pension scheme? Further/additional articles that could be used to support this research into the UK State Pension are as follows: Article on “Budget 2016: What will the chancellor do to pensions?” Article on “Winners and Losers under the new state pension” Article on “Should I top up my state pension?” Article on “UK State Pension Age” What are the issues under the new state pension scheme?

34 Plenary Identify THREE key words you have learnt from this session.Explain them to your neighbour. Article on UK State Pension Age

35 Plenary Have you met the learning objectives? Assess your learning, using your learning objectives sheet. Article on UK State Pension Age

36 Quiz Questions

37 Which of the following is not a normal provider of personal pension schemes?Fund managers  B   The state  C   Banks  D   Insurance companies

38 Which sort of pension scheme would be most suitable for a self-employed person hoping for a comfortable retirement? A   State pension scheme B   Employer-sponsored non-contributory scheme C   Personal pension plan D   Employer-sponsored contributory scheme