Case Analysis of Investment Losses Due to Financial Planners

financial advisor

1. Financial advisors are not allowed to manage client funds

As a financial planner, the scope of services provided is to develop financial plans and present them to clients as recommendations. The recommendations given can be in the form of financial reports, simulation of financial goals, suggestions for saving, advice on buying insurance, investment advice, and others. 

Financial planners should not manage client funds and have direct access to buying and selling shares in customer fund accounts. Meanwhile, those who can manage customer funds must have a license as an investment manager. 

Financial goals and conditions can change from time to time, therefore it is important to have control over our financial decisions. 

As financial planning clients, we should take this opportunity to learn with the guidance of financial planners but still make all financial decisions independently without coercion or control from any party.

2. In investing, investors should diversify

Apart from managing stock transactions, financial planners should understand well the concept of investment portfolio diversification. That is, we have to spread investment in several investment instruments or stocks to reduce the risk of loss due to certain stocks or companies. Therefore, investors usually spread their investment to 5 to 15 companies.

We never know how various external and internal factors can affect the performance and share price of a company. This is because changes in government policies, natural disasters, epidemics, pandemics, management decisions, and various other factors can increase or decrease the value of shares drastically.

3. Do not buy stocks at prices that are too expensive

A financial planner should be able to provide advice on buying stocks at the right price. There are various ways to determine a proper stock price.

Compare some ratios that can be used as a benchmark for investors before deciding to buy certain stocks, using the price earning ratio and the price-book value ratio in the company.

The first ratio that is usually used is the Price Earning Ratio (PER). Investors can see the company's net income when compared to the share price and the number of shares outstanding. 

The second ratio used is the Price Book Value Ratio (PBV). This ratio is obtained by dividing the price per share by the book value or equity of the issuer per share. Equity is the company's total assets, minus all the company's debt. This means that if in the worst case the company goes bankrupt and is liquidated, the shareholders will be distributed the book value of the company.

4. Investor capacity and risk tolerance should be taken into consideration

Everyone has a different level of risk capacity because investment funds may be needed for certain financial purposes.

Financial goals are divided into three types based on the timeframe. For short term financial goals will usually be achieved in 1-2 years. For the medium term, it is usually 2-5 years, and long term goals will usually be achieved in more than 5 years. 

The investment placement will of course be adjusted according to the period. For short-term financial purposes, it is usually placed in low-risk instruments such as deposits or government bonds, while for long-term purposes, it can be placed in instruments with large returns and large risks such as stocks.

In investing, investors also certainly have a limit of tolerance in facing losses. Investors should have the option to cut-loss, meaning stop losses at a certain limit. If it is considered that the tolerance/capacity limit is 20%, then the investor has the option to sell shares in a loss situation. This is of course by referring to other mature considerations.

5. Be vigilant when investing in small volume stocks

Another thing to consider next is liquidity or transaction volume. When investing, one aspect to pay attention to is the volume of share trading transactions that can be transacted within a certain period. 

A small volume of transactions can result in very large fluctuations in value. The value of shares can increase or decrease very drastically with a small number of transactions.

If other investors decide to sell, but not many are willing to buy, the price will continue to fall as is the law of economics. 

The wrong investment decision from the start can create a corner for investors. Therefore, we must be very familiar with the business model, growth prospects, financial health, and the exact price of the stocks we want to buy.

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