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TK 1003: Wealth Planning and Management

TK 1003: Wealth Planning and Management

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TK 1003: Wealth Planning and Management

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  1. TK 1003: Wealth Planning and Management Pre-examination Seminar By Dr Shaikh Hamzah

  2. What’s On Our Menu • 9:00 - 10:30 a.m. -- All About CIFP Part I Assessment Methods • 10:30 - 10:45 a.m. -- Break • 10:45 - 12:00 noon -- Review of TK 1001(Session I) • 12:00 -- 1:00 p.m. -- Break • 1:00 -- 3:30 p.m. -- Review of TK 1001 (Session II)

  3. Learning Outcomes • At the end of the PES, candidates should be able to: • comprehend the assessment methods for the CIFP Part I program • have a clear idea of the final examination format and procedures, NOT the questions  • understand the Do’s & Don’ts in the final exams 3

  4. Learning Outcomes • At the end of the PES, candidates should be able to: • have a better idea on how to maximize your scores/marks for each question in the exams • avoid common pitfalls and/or mistakes in the final exam • Reviews of the Module • Q & A

  5. Assessment Methods • The Assessment of the CIFP Part I Comprises of the followings: • One Project Paper - 20% (Due on 17th July 2009) • Final Examination - 80% (Aug 4th, 2009)

  6. Format of the Final Exam • Duration: 3 Hours (excluding 15 minutes reading time) • The Final Examination Consists of the Followings: • Twenty MCQs : 20 points • Five short essay questions : 20 points • Choose three out five long questions: 60 points

  7. Assessment Methods • Distribution of Grades: • 80 to 100 : A • 60 to 79 : B • < 60 : F

  8. Do’s and Don’ts • Do’s • Read and follow the instructions carefully • (write legibly, read all of the questions, begin your answers for each question on a fresh page, etc.) • Observe your time management • Lead a healthy lifesyle few days before the exam

  9. Do’s and Don’ts • Don’ts • Leave any questions unanswered -- this you will surely get ... • Leave the examination hall before the time is up, i.e. never give-up • Make any Pleas or Confessions

  10. Maximizing Your Marks • Analyze the framing of the question and response appropriately • e.g.: Critically analyze, critical assessment, discuss, soliciting for opinions, understand, compare and contrast, analysis of statements, current issues, etc. • Answer what you are asked for, NOT what you know • Plan your answer

  11. Maximizing Your Marks • Each question comes with the distribution of marks • Read and go through all questions and jot down your first thoughts on each question • Answer questions that will give you the most marks first • Write in full & complete sentences • Write legibly

  12. Waqf Wealth Creation Nature and Scope WP Zakat Topic 9 Taxation Topic 1 Asset Allocatiom Insurance and Takaful Topic 12 Issues Investment in Real Estate Estate & Will Planning Retirement Planning Investment in Securities TK 1003: Wealth Planning & Management Topic 11 Topic 2 Topic 3 Topic 4 Topic 10 Topic 5 Topic 6 Topic 7 Topic 8

  13. Common Pitfalls/Mistakes • To write what you know, NOT what is being asked • To leave questions unanswered • To write about the sad stories of your life • To write uneven answers according to marks distribution • To sit for the exam with insufficient stationaries required • To study until the last minutes, thus coming in late

  14. Topic One:Wealth Creation And Mobilisation From Conventional And Islamic Perspectives

  15. Review Questions & Answers • Differentiate the concepts of wealth between the Islamic and conventional perspectives. Are there any points of similarities? How do you reconcile the two concepts in reality? • In Islam • All wealth belongs to Allah. • Man is a trustee and needs to use it in accordance with Islamic teachings • Wealth is in abundance • Everyone has been allocated what is due to him. It is up to him to work on it. • From conventional perspective • Wealth is generated by individual and hence he is the rightful owner • Wealth is scarce • It is man who generates wealth and not apportioned to him. • He has complete freedom to use it • Efforts are needed to generate wealth under both perspectives • To reconcile: Man’s effort can only be successful with the permission of Allah

  16. Review Questions & Answers • Describe the nature of goods that Islam distinguishes for public consumption. Why do you think Islam distinguishes them from those that could rightfully be privately owned? • Two kinds of assets for public consumption: • First is public utilities such as large streams, bridges, land for common use and river banks. • Second, natural resources: water, herbage fire and salt • However, jurists are of the opinion that those goods with the same attributes should be included as well

  17. Review Questions & Answers • The rationale is that those goods whose production are too costly and burdensome to individuals yet are very much needed by the public at large should belong to public. Otherwise the good can be privately owned

  18. Review Questions & Answers • Explain why wealth is considered as a two-edged sword? How could one protect oneself from going beyond the bounds permitted by the Shariah and why? • It is useful when one uses it in accordance with Shariah. It helps man to perform his obligations and he should get the blessings of Allah • On the other hand he will suffer in the hereafter especially when asked to account how he has attained and spent it. • If he has used them for things forbidden it will be worst for him • Some examples?

  19. Review Questions & Answers • Is wealth planning permissible in Islam? How much different will it be donefrom the conventional approach? • Define wealth planning • What are the components of wealth planning in Islam and in conventional practice • Why is it permissible in Islam? Wealth planning is permissible in Islam in order to ensure that man is able to live comfortably in his old age. Islam does not want Muslims to suffer in this world • It will be very different because • a Muslim needs to cleanse (pay zakat, voluntary sadaqah and spending on others) his property. • He must not indulge in unIslamic activities while generating, accumulating, preserving, protecting and spending his wealth.

  20. Review Questions & Answers • The three prohibitive elements that would make a commercial transaction non-shariah compliant are riba (usury), maisir (gambling) and gharar (uncertainty; ambiguity). Why are they considered prohibitive to Shariah? • They obstruct justice and equity • The players are not in the same playing fields • Information is incomplete (gharar)

  21. Review Questions & Answers • “They ask you what they should spend (in charity). Say: Whatever you spend that is good, is for parents and relatives and orphans and those in want and for wayfarers. And whatever ye do that is good, -(Allah) knows it well” [Quran: Chapter 2 (Al-Baqarah): Verse 215] Spending one’s wealth on others is strongly encouraged by Islam as is mentioned in the above verse of the Holy Quran. Briefly explain the importance of spending in the context of wealth purification in Islamic wealth planning.

  22. Review Questions & Answers • Purification is of two kinds, the physical and the spiritual • Wealth purification is manifested by sharing with others what we have and better still what we love most (physical, purifying from non-Shariah compliant income that may be earned unknowingly or within tolerable limits) • It is in the spirit of searching for the blessings of Allah that we give away what we have (spiritual)

  23. Review Questions & Answers • The main distinction between the conventional and Islamic wealth planning is the Shariah requirement of wealth purification. Briefly explain each of the different Islamic wealth purification processes. • Spending (infaq) • Voluntary charity (sadaqah) • Compulsory wealth tax (Zakat) • Endowment (Waqf)

  24. Topic Two:Nature and scope of wealth planning

  25. Review Questions & Answers • Describe the differences and similarities between wealth planning and financial planning • Similarities: • Both aim at enhancing the value of wealth or resources • Both use similar methods to enhance or preserve value • Both have specific objectives when formulating plans • Differences: • FP is for specific projects or periods. WP is for the end of the period • FP is for relatively shorter term but WP is for long term • FP is meant to have enough for all periods but WP is for future

  26. Review Questions & Answers • Explain the differences and similarities between the objectives of conventional and Islamic wealth planning • Similarities: • Both contain functions of generation, accumulation, protection or preservation, enhancement and distribution • Both aim to have a good life during retirement • Differences: • Islamic: need to do cleansing (zakat, etc) • Islamic: cannot contravene Shariah

  27. Review Questions & Answers • Describe the significance of the different stages in wealth planning process • Inventory taking • Analysis & Evaluation • Plan Designing • Implementation • Monitoring and Reviewing

  28. Review Questions & Answers • Explain the trade-off concept and its relevance in the preparation of a comprehensive wealth management plan. • Trade-off between risk and return • May not get the rate of return expected • Client may have different risk appetite • Risk-free concept means return is very low • Consistency of performance • Asset allocation can improve or worsen return • Trade-off between service and return • Trade-off between this world and the next

  29. Review Questions & Answers • How different is the conventional trade-off concept from the Islamic concept? • Trade-off between this world and the next • A Muslim believes in fate and destiny (qadha’ and qadar) • There is effort (ikhtiar) and leaving it to Allah (Tawakkul)

  30. Review Questions & Answers • Explain the similarities and differences between the conventional and Islamic “Trade-off Concept” in relation to wealth planning. • Similar answer to the previous question

  31. Review Questions & Answers • “To Allah belongs all that is in the heavens and on earth: To Him do all questions go back (for decision)” [Quran: Chapter 3 (Ali ‘Imran): Verse 109] Based on the above verse from the Holy Quran: • can you explain the concept of wealth ownership in Islam; • what implications do you think the second part of the verse has on the generation and utilization of wealth in Islam? • what should the objectives of wealth planning in Islam be and relate its importance especially in the modern world.

  32. Review Questions & Answers • To Allah belongs all creations and hence all resources and wealth and man is just the trustee who has the right to use in accordance with His Will • We are accountable for all our actions • To generate and accumulate wealth in order to be closer to Him in whatever way. E.g. spend in His way, sharing with others, etc.

  33. Topic Three:Wealth (asset) allocation process

  34. Review Questions & Answers • One of the most important aspects of successful wealth planning is the process of wealth allocation. Describe the main components of wealth allocation process and explain the significance of each to the success of wealth planning. • Establishment of objectives • Identifying potential opportunities • Determining risks and constraints • Potential investment channels

  35. Review Questions & Answers • One of the important processes in wealth planning is the wealth allocation. In order to ensure that the wealth allocation process is carried out properly, one needs to formulate the investment policy statement. List four important elements that should be included in the investment policy statement for wealth allocation process and briefly explain what each entails.

  36. Review Questions & Answers • Brief client description • Purpose of establishing policies and guidelines regarding objectives, goals, restrictions and responsibilities • Identification of duties • Statement of investment goals, objectives and constraints • Schedule of review of investment performance, Shariah compliance, etc. • Asset allocation considerations • Rebalancing guidelines for portfolio adjustments based on feedback

  37. Review Questions & Answers • If you are appointed to be a consultant for a high net worth Muslim individual to draft and execute a plan for his wealth, what would be the four important steps that you would take to ensure that his financial goals are fulfilled? • Planning • Identifying investor’s objectives and constraints • Creating investment policy statement • Forming capital market expectations • Creating strategic asset allocation • Execution • Feedback • Performance evaluation • Monitoring and rebalancing

  38. Review Questions & Answers Suppose your client has USD200,000 and he wants to get a return of 10% per annum from the investments that you propose. (a) What would his total asset be at the end of three years? {Hint: Use the formula A = P(1 + r)n where A = total asset at the end of n years, P = Principal amount invested, r = annual rate of return and n = number of years invested) (b) If you allocate 50% of the investment in fixed income instruments which give a return of 5% per annum and the rest in equities with an expected rate return of 11% per annum, would such allocation meet with the expected rate of return of your client in three years’ time?

  39. Review Questions & Answers (a) P = total amount invested = $200,000 r = rate of return per annum = 10% n = number of years of investment = 3 A = total asset at end of n = 3 years Using formula A = P(1 + r)n We have A = 200,000 (1 + 0.10)3 A = $266,200

  40. Review Questions & Answers (b) If 50% of principal amount is invested in fixed income instruments that give 5% return and 50% in equities that give 11% return, then A = 100,000(1+.05)3 + 100,000(1+0.11)3 = $115,762.50 + $136,763.10 = $252,525.60 (c) This investment does not meet with the objective of the investor.

  41. Topic 4: Investment In Real Estates

  42. Review Questions & Answers • Real estate is one investment that seems to appreciate in value more than depreciate. Explain. • Real estate refers to land and anything affixed to it • It has special features: • Durable/ Perpetual • Over time the property will be surrounded by development • More facilities become available • Scarcity and immobility

  43. Review Questions & Answers • What are the common factors that determine the value of real estate? Give reasons why. • High demand • Short supply • Development surrounding it • Shape and size • Accessibility • No encumbrances • Scenic view • Location

  44. Review Questions & Answers • Why does locality of a real estate play such an important role in determining the value of a real estate? • It is immovable and hence depends on where it is located, near the town, country side, • Accessibility • Access to facilities (market, shops, school, hospital) • Landscape

  45. Review Questions & Answers • Describe and explain the various methods of valuation of real estate • Comparison method • Compare like for like and adjust the differences • Investment method • Comparing the returns to investment on the property • Cost method • Normally applied to public properties such as schools, hospitals, etc. Comparison is made between the cost of building and the replacement cost giving allowance to depreciation • Profit Method • It is based on the kind of profit that could be earned from the property • The Residual method • It is used to evaluate the development sites and properties suitable for redevelopment. It compares value of proceeds (after development) with development cost

  46. Review Questions & Answers • Explain the economics of real estate cycles • Increase in demand due to population growth, industrial development, public works and government services • Time is required to supply and construct properties which gives rise to rents and land value • Peak – high volume of real estate transfers. By that time, S>D. Rentals fail to readjust. This causes the break of building boom

  47. Review Questions & Answers • Mr. Ali bought a house for investment. He paid a total of RM200,000 for it which includes the legal and agency fees and all other miscellaneous expenses. He took a 90% financing based on Bay’ Bithaman Ajil (BBA) for 20 years at 4.0% per annum. He managed to get a tenant who pays a rental of RM1,500.00 per month. (a) How much will Mr. Ali pay for the house in 20 years? (b) What is the rate of return on his investment? (c) Is this a good investment? Why?

  48. Review Questions & Answers (a) 90% financing at 4% per annum for 20 years will yield a total financing cost of (90/100) x 200,000 x (4/100) x 20 = $144,000 Therefore the total amount paid by Ali in 20 years is $200,000 + $144,000 = $344,000 (b) The rate of return on his investment is $1,500 x 12 ÷ $200,000 x 100% = 9% p.a. (c) Since the rental is $1,500 per month and the monthly instalment is $344,000 ÷ 240 = $1433 per month, it is not a bad investment at all.

  49. Topic 5: Investment InSecurities

  50. Review Questions & Answers • Briefly explain the following terminologies as used in the securities market: • Authorised Capital • Market Value of Firm • Bonus Issue • Earnings per Share or EPS