Rudy Wong Case Analysis

Week 1 Assignment: Rudy Wong Case

Rodrigo Silva Pigatto

Florida National University

Applied Managerial Finance

Dr. Bullen

03/02/2017

Rudy Wong Case Study

        The case presented in this week’s class shows us the story of an investment advisor, Rudy Wong, who is faced with four clients worried about their financial investments because of the global crisis that affected markets worldwide between 2006-2009. Four clients, in particular,  seemed to be more concerned about their position as they requested meetings with Wong to discuss their current investments and possible changes in their portfolios. In order to better help their clients, Wong needs to reexamine the strategy developed for each one of them. He needs to take into consideration that all of them are different and have varied needs, expectations, and goals when it comes to their investments.

An investment advisor basically provides comprehensive financial planning and sell securities to retail investors. They also help optimize the allocation of their clients’ financial assets to meet their financial needs. Advisors need to take into account the client’s financial resources and constraints, as well as their short term and long-term objectives. In order to recommend an investment strategy, advisors analyze critical factors such as the client’s liquidity needs, disposable income requirements, tax planning situation, investment time horizon and provisions for unusual circumstances. In addition, advisors serve as financial counselors, guiding planners in how to save money on mortgage payments, retirement plans, saving money for college funds, how to improve their credit, etc.

In order to add value advisors provide customers with an objective point of view, backed up with logic and historic background that would help them overcome fears and insecurities based on their subjectivity and emotions. Advisors served as mediators between the client’s emotions and their logical reasoning in committing to a financial strategy. Wong, in particular, credited his success to his disciplined approach to long-term strategies notwithstanding short-term fluctuations, placing particular emphasis on recognizing client limitations and recommending from the best available strategies and customized investment approach to help clients reach their financial goals.

Investment advisors add value to a client’s portfolio by appropriate allocation of stocks, bonds and cash. Over the long run, investment in equities has been the best way to grow capital, but implies higher volatility. Bonds help to smooth portfolio returns, providing a consistent source of income and controlling volatility. Cash has no growth potential after taxes and minimum real returns, but provides liquidity and provisions for emergencies and tempers downside risk during times of uncertainty to wait for better investment opportunities. Once the correct mix of assets is designed security selection and market timing come into play. Based on the internal and external analysis of the firm, advisors recommend a diversified basket stocks, usually taking a more active approach with stock selection as opposite to bonds. Diversification could serve as a method to achieve higher returns while combining assets in a way that fluctuations cancel each other out. Tactical asset allocation involves a strategy whereby investors try to sell securities at the top of the market and buy at the bottom of the market.

Questionnaire profiling, as Wong’s company uses for each client, serves the purpose of identifying the clients’ expectations, financial goals, priorities, and how they react to different market conditions. The questionnaire also helps Wong to find out about some behavioral aspects of his clients such as fears, prejudice, and trust of his clients towards Wong’s firm and the market. The questionnaire also reduces the complexity and clarifies the risk taking capacity of each client. The questionnaire, however, is not able to cover all the client’s investment priorities and goals. Other needs were critical to the analysis such as the client’s age, gender, expected retirement age, percent of current income desired at retirement, life expectancy, and expected future rates of inflation and taxation. A need’s analysis would also evaluate a client’s investment horizon, short-term needs and long term planning.

In the stock market, emotions can play a big role in a client’s decision to buy or sell a stock and these emotions can negatively affect this decision. When emotions come into play, clients might think that, instead of trusting his financial advisor, they can make their own trades believing to better alter the outcome of their portfolio returns. Emotions on the stock market are usually influenced by biases, social media, negative news, and misplaced rules-of-thumb. Excessive optimism, overconfidence, confirmation bias (ignoring information counter to one’s current viewpoint) and stereotypical thinking can also lead to poor judgment and to too conservative actions of the investors.

After analyzing each client’s questionnaire and profile, Wong knows that each one of them will respond differently to different approaches, they most likely will respond differently to the same approach offered by Wong. Logic would be the best approach to some, whereas counseling and behavioral modification would be the best for others. Each client’s portfolio would also influence Wong’s tactical and strategic decisions. Even though Wong is faithful to his long-term investment strategies, he was considering if he should stay in this course given the magnitude of the global financial crisis, which made him unsure if the market was going to rebound like it had done in the past.

In the case presented, Wong has four clients that are requiring meetings to discuss their financial investments: Bob Miller, Mary Swanson, The Kleins, and The Nichols.

Bob Miller is a single, 42 years old man with no dependents. He allocated 70% of his portfolio in equities and 30% on bonds. Insisted in allocating a sizable portion of his portfolio in Canadian oil and gas stocks, and expressed in his decision tree questionnaire that he wouldn’t change strategies due to short term losses. He does suffer from “Illusion of control and thinks he can make his own decisions to better the outcome of his portfolio.

Given the emotional vulnerability of Miller, Wong should persuade him using emotional counseling and to not make decisions based on his fears, to follow his recommendations. Miller’s needs and priorities are long-term capital, willing to take some downsize risk. But still willing to hold 30% of his assets in bonds to reduce volatility. Because of the cyclical nature of investments on oil and gas, Miller should be patient and keep investing notwithstanding the current downturn of the economy, since this are sectors that are always going to recover. Wong could also advise Miller to diversify his portfolio more to mitigate risk and maybe obtain returns from other sectors that are less volatile.