Oran Hall | Portfolio managers as option for personal financial solutions

Portfolio management companies may not be as prominent as stockbroking companies, but they play an important complementary role in the investment market place although they seem to be competing against them in some ways.

They go under several descriptions such as portfolio services companies, wealth management companies, and asset management companies.

Like the stockbrokers, they are licensed securities dealers and are, therefore, regulated by the Financial Services Commission. As such, they and at least one of their important principals must be licensed by the FSC. The requirement for licensees to meet the FSC’s fit and proper test requirements and to maintain a sound financial position is one way to give investors the confidence that their funds are safe and in the hands of competent people.

Unlike the brokers, portfolio management companies are not member-dealers of the Jamaica Stock Exchange. The meaning of this is that they cannot trade on the JSE and thus must have the stockbrokers execute their orders for listed securities.

As licensed securities dealers, they are able to offer to their clients a wide range of securities, including bonds, corporate paper, and money market securities. They offer securities denominated in Jamaican currency and foreign currency, thus adding diversity to their portfolios. Additionally, they draw their clients from Jamaica and from overseas, and, like stockbrokers, have both individual clients and corporate clients.

These for-profit companies operate largely on a fee-based basis, charging a percentage of the value of the client’s portfolio for their services. Naturally though, the clients also absorb the costs of executing transactions for their account. Stockbrokers, on the other hand, make a significant portion of their income from commissions earned on the execution of orders on the stock exchange.

When stockbrokers and other securities dealers deal in securities not listed on the stock exchange, they make money on the spread between the price they buy a security for and what they sell it for.

Portfolio management companies must do good research to be able to give meaningful advice to their clients and be very aware of developments in the financial marketplace to be of value to them. They must be able to do a credible evaluation of the profile and needs of their clients to give effectual advice and to invest their funds for them.

The employees given the above responsibilities must be registered by the FSC, which certifies that they are deemed competent to work in the securities industry.

Asset-management companies generally customise portfolios for their clients, but there is at least one that invests its clients’ funds in existing portfolios. Investors, nonetheless, have the option of choosing the type of fund into which to invest and the proportion of their funds that should be invested into each. The funds may be dominantly fixed income, equities, or balanced, meaning that they comprise several types of securities.

Customised portfolios generally tend to more accurately match the profile, including the goals and risk appetite, of the client. They are managed under a discretionary arrangement, which allows the company to make the investment decisions without reference to the client. The company provides periodic reports on the portfolio to the client with whom it may meet periodically for any necessary reviews and updates.

Some companies offer long-term savings accounts, which are five-year tax-free savings instruments that require that their holders keep the funds invested for five years and not withdraw more than 75 per cent of the annual interest earned. The maximum sum that can be invested in a year is limited to $1 million.

The range of products and services that portfolio-management companies offer is meant to assist their clients to realise a wide range of personal and financial goals. Their clients use their services to save and invest towards acquiring a home, to fund their education of themselves or that of their children or other family members, to buy other personal assets, and to prepare for a comfortable and stress-free retirement. It can be seen that some of these goals are short term, some medium term, and others long term.

Some companies offer loans to their clients to meet their liquidity needs, sometimes using their portfolios as security, thus making it unnecessary to liquidate a portion of their portfolio to address those needs. At the same time, some make it convenient to invest by accommodating facilities like salary deductions.

Portfolio-management companies, or whatever else they are called, although not spread widely across the country, are playing an important role in shaping and executing personal financial solutions for Jamaicans residing here and abroad.

Oran A. Hall, author of Understanding Investments and principal author of The Handbook of Personal Financial Planning, offers personal financial planning advice and counsel. Email: finviser.jm@gmail.com