Investing Decisions for Wealth Management

Savings Account

After deciding how best to constitute yourself and getting satisfied that you have selected the best vehicle for wealth management (read more, visit our website at www.robenconsulting.co.ke), it is time to get deeper and select the products that will provide best returns. This will be highly driven by the expected return and the investor’s risk appetite.

Much as we all would like to leave the decision to a professional, it is prudent that we carry out research no matter how basic it turns out to be. There are many investment products, but the final decision is arrived at after considering the level of risk one is willing to take on.

It is also important to consider opportunity cost of investing in either or the other of the available investment products.

  1. Shares

    This includes shares in listed companies, startups established by other parties or starting own entity in which shares are allocated to various parties.

    • Due diligence is required, covering management of the company, from Board, senior staff, and other staff.

    • The product offered by the entity you are investing in should be marketable and appealing to you in person. Ensure you believe in the product or service that the company in whose shares you are investing is offering.

    • Compliance with various statutory obligations may be important to consider.

    • Profitability, current cashflow and projected cashflow for at least three of the years you intend to hold the investment.

  2. Real Estate

    Investment in rental property both residential and commercial. This is sometimes considered passive income but there may be various loopholes that need to be considered. The following are some of those considerations

    • Is the property’s income stream covering the financing obligations?

    • Is the property’s income stream covering repairs and maintenance bills?

    • Is the property’s income stream covering all the required taxes and other levies?

    • Is there a net cash inflow after all the anticipated outflows?

    There is a need to maintain proper records to help in deciding whether the property is really offering the desired return or to divest from the investment. Rental income is not as passive as many would wish.

  3. Annuities

    This product is offered by financial institutions and Insurance Companies. They offer a guaranteed income stream. When choosing an annuity, the devil is in the details, and it is therefore important to read the fine print very carefully to evaluate if the actual returns are within the expected threshold.

  4. Land

    Land is an investment that can be held for capital appreciation or for resale as a trading commodity. Whichever the decision is taken by the investor should be evaluated for optimal returns. Land has been very risky in Kenya of late due to existence of fraudulent titles and extra care needs to be taken. It is important to go back to the history of ownership of the land from as far back as possible. If the land at one point belonged to the Government or to a government institution, it is important to review the process that vested that land to private hands. Only invest in land if you are satisfied that all the transactions are above board.

  5. Bonds

    There are two types of bonds-Government bonds issued by the Central Bank and Corporate Bonds. Government Bonds are low risk but have lower returns. Corporate bonds are high risk but can have higher returns. It is important to evaluate the risks surrounding the company that is issuing the bond including the management practices, corporate governance, and overall compliance to statutory obligations. If there is an aspect of non-compliance, this is a very big red flag.

  6. Treasury Bills

    This is one of the safer options especially in stable countries since government default is lower. However, the returns are also modest.

  7. Cryptocurrencies

    My mantra in investing is that you only invest in a product that you fully understand and one whose risk you can establish. Money has been made in Cryptocurrencies and based on your risk appetite and proper understanding of the particular product, this is also an investing option.

  8.  Savings Account

This is the worst option that any investor can choose given that money in the bank is likely to lose value, whatever the interest rate is offered. Most of the financial institutions invest in any of the above listed products, pocket the bigger share of the returns and give savers a very basic return. This, coupled with the fact that the return offered in most instances does not cover inflation, the money invested in real terms offer negative returns.

The folly of operating as a Sole Proprietor or as a Partner for Wealth Management

Unless the business is a professional practice, one should avoid to the largest extent, operating as a sole proprietor or a partner in a partnership, especially where such partnership is not the limited liability model.”

The reasons are numerous and varied as to why I believe that such a model may erode personal and family wealth. Take for instances the following.

i. Where the personal expenses comingle with business expenses and hence not all expenses are properly accounted for. In this instance the expenses claimed may not represent the full cost of running the business and the individual ends up paying much more in taxes than their fair share.

ii. Where assets comingle and depreciation/wear and tear may not be properly claimed thereby increasing the tax bill.

iii. A will would be required for transition management, and this may cause wealth erosion for the succeeding generation as they battle it in court for division of assets especially if the owner passes on intestate.

iv. The liability arising from operations of the business is not limited. The owner may therefore have claims arising from the business attaching to the personal assets.

v. It is difficult to raise financing as a business.

vi. There are no tax benefits.

vii. It requires personal attention, which is detrimental if absence of the individual is inevitable.

viii. Lack of diversity in strategy and formulation of ideas.

These are just a sample of the reasons that you should not operate a business as a sole proprietor. It could end up being a very lonely journey and opportunities may be lost in the process.

Is a Limited Liability Partnership a Wealth Management tool for you?

A limited partnership shall not unless specifically provided in the partnership agreement be dissolved by the death or bankruptcy of a limited partner, and the lunacy of a limited partner shall not be a ground for dissolution of the partnership by the court unless the lunatic’s share cannot be otherwise ascertained and realized.” http://kenyalaw.org/kl/fileadmin/pdfdownloads/Acts/LimitedPartnershipsCap30.pdf

A limited liability partnership gives some flexibility at incorporation just like in basic partnerships but retains some aspects of a limited liability company characteristics.