Case Study – Peter

Peter, 54, an experienced investor and business owner, was considering an investment opportunity

The Question

Peter, 54, an experienced investor and business owner, was considering an investment opportunity. “I’m thinking of investing in a structured product. What do you think?”

Peter went on to explain that his private bank had e-mailed him a product which was described as being an extremely attractive investment opportunity. He understood that structured products provided a high degree of capital protection. He approached us for a second opinion because he was unsure if it was the right thing for him.

Following our analysis we were able to explain the potential value of the investment within the context of Peter’s overall financial life. This short-term investment problem had already led Peter to reflect on the far more important question of how he was managing the rest of his wealth.

The Real Issue

What started as an investment discussion quickly turned to Peter’s business and lifestyle. “I want to be ambitious in my business but how do I protect my lifestyle if the business struggles?”?

Peter retained on deposit cash to support the business’s future growth. His investment portfolio was predominantly invested in equities. While Peter was confident that the investment in his business was the right decision, he also knew that he would need to rely on his personal investments to support his lifestyle over the next few years, while the business grew. As we discussed Peter’s personal, business and financial situation, he became anxious.  Peter became less concerned about the detail of investing in structured products – indexes, counter parties, high water marks – and described what really mattered to him. This was the tipping point in the discussion. Peter’s goal was to engineer a portfolio that protected his lifestyle if the business struggled.

Our Approach

We ran multiple personal cash flow scenarios, changed assumptions (economic and business). We also altered the asset allocation of investments so Peter could see how changes would potentially affect either his business and/or his lifestyle?

We looked at strategies that could help lower all the risks to Peter’s lifestyle – not just the risks removed by investing in a structured product. We provided various solutions including increasing his cash position, reducing personal debt, lowering his equity allocation and diversifying equity risk. We scenario-tested each of these strategies under different market and personal conditions. The different scenarios allowed Peter to see the possible outcomes of different alternatives and make a more informed decision.

Based on our recommendation, Peter decided to reduce the debt on his family home using a flexible mortgage (thus allowing future access to capital), increase his fixed income position, lower his equity position, and re-allocate his equity holdings to a strategy designed to dampen the effect of market volatility on his personal portfolio.

He chose not to invest in a structured product because he did not want to tie up his investment capital and decrease his liquidity. This strategy was broad, diverse and took into account both Peter’s business and lifestyle goals.

Outcome

Peter went forward with his ambitious plans to expand the business. He backed away from the structured product and decided to manage and prioritise liquidity in a more conservative, less volatile approach.

As a result, Peter felt confident. Not just confident in the solution but, equally important, he was confident that he had asked the right questions, examined each scenario and was solving for the real issue. He was now free to pursue the growth of his business and worry less about his lifestyle if something went wrong with the business.