Assessing Net Worth and Making Informed Recommendations Using a Net Asset Statement
For candidates preparing for their CII R06 or AF5 exams, understanding a client’s net asset statement provides a comprehensive view of their financial position. By analysing assets, investments, and liabilities, the financial adviser can assess their net worth and make informed recommendations to align their financial goals for a secure future. Read on to find out more about how to interpret and utilise this valuable financial snapshot in the exam and real-world scenarios.
This article is correct as at 1 August 2023.
An individual’s net assets statement provides a snapshot of their financial position at a particular point in time, enabling the financial adviser to ascertain their capital position. It includes an overview of their assets, their liabilities and ultimately their net worth.
Assets can generally be divided into used assets and unused assets:
|The client’s home, for example, is a used asset, as is their car and household possessions. Typically, a client’s home should not be regarded as an investment and should be treated as a distinct asset from others (such as investments) that can be used to generate income.
Having said that, when it comes to planning for retirement, downsizing or equity release may be potential options to consider for obtaining additional capital and therefore it is worth noting the value of the property and whether there is any mortgage outstanding
|The rest of the client’s assets can usually be classed as unused assets. Typically, that will include their investments and pension funds, any of which can be used to generate a future income or capital return, rather than being needed right now.
Some assets, on the other hand, don’t fit neatly into either category. For example, an emergency fund is neither used (until it is accessed) or unused (because it needs to be accessible). Likewise, a holiday home may be used (while it is being rented out) or unused (during void periods).
To be of use to the client as well as to the adviser, the layout of their investments and pension funds should be clearly presented in a way that is easy to understand.
Initially, this could be as simple as stating the name of the investment, together with the amount originally invested (if available) and its current value.
|UK Managed Fund
This gives us the information we need to determine the fund’s performance over time.
Then, we can dig a little deeper and determine the fund’s asset allocation and whether it is held in a tax wrapper.
|UK Managed Fund
60% UK Equities
15% UK Bonds
15% UK Property
10% UK Deposits
We can then repeat this exercise for the rest of the client’s investments and pension funds.
The advantage of setting out the asset allocation of all funds is that the adviser can then cross-check the holdings with the client’s financial objectives and risk profile to determine whether the overall asset allocation of their investments and pension funds is in line with their objectives and profile, or whether rebalancing is required.
Setting out the tax wrappers will give an indication as to whether ISA and pension allowances are being used, although we would need further detail on annual contribution levels to be able to ascertain whether allowances are being used in full or not.Discover the key elements of net asset statements and their significance. Click To Tweet
Again, a straightforward presentation of the client’s existing debts will help both the client and the adviser understand the client’s current position and enable the adviser to recommend whether repayment of debt is a good use of the client’s available funds.
Secured or Unsecured
Secured on property
Generally speaking, higher-cost debt should be repaid first. If a client has older children it will be worth checking if they have any liabilities in relation to these children, for example, are they named on a guarantor mortgage?
A client’s net worth is simply their assets minus their liabilities. It can be used by their financial adviser as a means of assessing their financial health and benchmarking the client’s progress towards their financial objectives over time. It can be used to set goals and make recommendations for a secure financial future.
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