Behavioral Finance And Wealth Management Essay

Question:

Discuss about the Behavioral Finance and Wealth Management.

Answer:

Introduction

The company in focus is Pacific America coal Ltd which is a listed mining company in the ASX that is focused on developing coal assets in North America. The company’s main focus is increasing value of its shares to its shareholders (Berk and DeMarzo, 2007). A Chief Finance Officer of an organization is mainly a part of the managerial team of the same, and therefore as such is in charge of the maximization of shareholder funds invested. In nations with established stock exchanges , is the price of the share which determines the performance of management to investors of the organization (BRADSTREET, 2009).

Role of the CFO

Firstly , the CFO optimizes the returns of the organization . In spite of this , this should not always mean an optimum return to investors . The value placed on shareholders funds over time may lead them to choose one or even the other alternate . We cant disregard the risk component associated with the expectation of future return in fact the more the risk is the prerequisite for shareholder gain . The greater amount of profits can be accomplished even by authorizing more stock shares to accounting profits increase with diminishing liabilities , however this may imply that earnings per share is decreased (Curtis, 2012) . Similarly , you will find utilities which do not need automatic conversions in dividends , or even which are distributed to owners .The CFO is responsible for raising funds for the company to operate at the lowest possible and the best conditions of repayment cost and this has always been the traditional activity of a Chief finance officer. Without sufficient funding the company does not operate optimally (Drucker and Maciariello, 2008).The only way to know which is the level of debt and funds that should be available at all times, is through a budget appropriate cash, prepared by the CFO based on the information of the productive and service areas usually at the end of last year and with periodic reviews adjustment, depending on the circumstances.

Funds for the organization are not limitless , so they were , you can get an optimum above that is very expensive to possess surpluses (Hillier, 2010). Money is an asset that generates extra value so the standard must always' employ it to generate more than it costs , with the exception of one least amount cash permanently should be maintained basically idle to avoid instances illiquidity.

The role of the CFO would be to keep a proper equilibrium between liquidity and profitability . An illiquid organization , without enough funds , will not function effectively , and a organization with excessive liquidity is extremely costly . This is a problem that should be dealt with by a CFO . Fortunately , to attain liquidity you will find ways to retain cash on hand or even banking institutions , like the banks which enables one to have quick access , maintain quotas overdraft , possess readily liquidated assets , etc . The most difficult tasks of a CFO is having the ability to manage the surplus cash (Jordan and Michel, 2001).
Distribution of money among the several areas of the organization as well as priorities areas is yet another role of the CFO .In budgeting, preferences ought to be as per the needs of the organization which first allocates funds to the areas which are key .If there is a number of production lines , they need to establish their profit and loss , or even better , their cash flow , providing close focus on the gross profit margins are presented from month to month . It can be equally important to occasionally index stock turnover and also portfolio which helps detect fast irregular situations in the business (Nelken, 2006).

Another extremely important role of a CFO would be to make sure that the financial statements are timely and dependable , working also in its analysis . Likewise , the state demands periodic submission of various formats with operating and income tax information , the regular submission which ought to be monitored . Quality of accounting info relies on their timeliness as well as correct posting . The other role is to create management policies of the company with regards to finances . The CFO works mainly on current assets , explaining the management of cash and banks , accounts receivable and inventory (Nikbakht and Groppelli, n.d.) . The other function is to set debt structure for which the company can optimally operate in.

How responsibility of CFO can impact objective of the company

The CFO has to be well aware that financial decisions must consider non-financial aspects for example Market conditions , legal , labor , strategy e.t.c the following are objectives of a company

Maximize profits

Every companies must endeavor to raise their profitability , if they want to remain in business . Whether or not through the growth of new markets , seeking out for new products and solutions to offer to people , increase revenue margins as well as minimizing unnecessary expenses , organizations must find ways to improve profitability , both now and in the long term . The CFO should come up with ways to increase earnings by making sure the company makes the right investments and does business at very low cost (Pompian, 2012) .

Increased market share

One of the important corporate objectives is to increase your market share. For example the Pacific america coal Ltd should increase market share and the CFO is responsible by ensuring that he comes up with ways of increasing this market share either by formulating a blue print to increase the market share.

Develop current product lines

Providing the similar goods for a long time creates stagnation in the market . Whilst expanding wild is not advisable , try out new services and products to find out what the industry can support is an excellent strategy for growth as well as company objective . This not just promotes the product line , but additionally increases the market potential ( Ross , Westerfield and Jaffe , 2005 ) . The CFO together with product development manager should ensure that the company has new products to offer in the market .

Increase employee retention rates

Many corporate objectives target growth and profitability . However , its also wise to focus on the time of setting up the infrastructure of company objectives . If present rates of staff retention is little , it means that output is suffering and , as such , the organization goals can never be met . Increasing staff retention rates cuts down the amount and time invested in training new staff who , in return , helps profitability . An illustration of this this is a corporate target for an organization with a retention rate of 60 % currently to work to retain 80 % of its existing workforce until next year . If adjustments are necessary to satisfy this objective , as higher pay or even better benefits , these items must be included in the objective . The CFO ensures that the company provides good remuneration terms to its employees to keep them ( Ross , Westerfield and Jaffe , 2005 ) .

Another objective of the company is to minimize cost, the CFO is responsible for creating operations that reduce wastes and increase efficiency in the company thus he is very important for Pacific American Coal Ltd and ensures that the company incurs very minimal costs. If the company want to make a profit this year to be taken into account actions such as deferring maintenance, keep the lower limits inventories and take measures to reduce costs One of the main activities of the Chief finance officer is financial planning, in which are concentrated the three main tasks of the Chief finance officer which are;

Investment decisions are all companies with limited resources and these should be allocated in different activities or projects competing. You must decide where to invest and when to invest, always looking for that these investments are designed to meet the objective function Funding decisions are when the company must make investments that contribute to the generation of value, including Chief finance officers must worry about where to get the funds or resources for such investments. Overall the company has two form to obtain resources through shareholders or creditors (Ross, Westerfield and Jordan, 2007) .

Dividend decisions is when the company must decide how much profit is generated must be reinvested in the same and that both must be returned to shareholders. These decisions must be made with special care because if the company returns to shareholders a high percentage of income, growth potential will be lower and the company could be worth less in the long run. This effect will be even greater in companies that miss investment opportunities.

For Pacific America coal ltd , the CFO, should know the trend of the exchange rate and should study new situations, such as the case of a change in the pattern of development of a country.The Chief finance officer, given his interaction with all areas and how this affects the global market.

Each of them will take us to meet the objective of Chief finance officer function. Exemplifying the above found that if the administration does what is necessary for the company to survive, we might think that it is making a profit, thus it approaches meet the objective function; if the financial difficulties are avoided and that the company falls into bankruptcy might also be able to maximize the wealth of shareholders (Smart, Megginson and Gitman, 2004).

Efficient market hypothesis

Beating the market by making use of just about any information that the market currently knows is not possible according to this hypothesis. The information refers to any kind of news that may determine the equities price is random walk which is impossible to discover in advance.

The efficient markets hypothesis was formulated by Professor Eugene Fama .Efficient market hypothesis states that monetary market segments are effective with regards to the info they deal with , this implies asset costs currently have internalized information of the market Once economists of behavioral financial emerged, they pushed this theory.

Based on the concept of efficient markets equities usually they are bought and sold at reasonable value , which makes it difficult for forex investors to buy undervalued equities oroffer securities at prices that are higher, therefore could be difficult to beat the industry by means of a selection approach actions like technical analysis , and the sole way by which the investor will be able to earn greater returns is simply by purchasing actions bearing an increased level of risk.Beyond increasing utility , effective markets concept requires that market participants have logical expectations so when new info becomes investors correctly update their expectations (Bahbah, 2009).

Role of a fund manager

The role of a fund manager is Carrying fund accounting and discretionary management of investment portfolios, including the pension fund. Another role of a fund manager is to manage the fund where the owners should be able to get profits and also investors who put their capital in this structure seeking to optimize their investments involved (Strachman, 2012). Other functions include obligations of the fund Investment Consulting, rights and, as well as the risk policy, quantification of positions, and also informing the investor on a regular basis. The other role of a fund manager is Carrying fund accounting and discretionary management of investment portfolios, including the pension fund.The fund manager also carries out the investments of the assets of the fund and reports periodical changes in investment policy and the fees charged to participants. Other functions include Investment Consulting, quantification of positions, rights and obligations of the fund, as well as the risk policy, and also informing the investor on a regular basis (Berk and DeMarzo, 2007).

The fund manager also Provides Information about policies transfers between funds and Information about account adjustments result from financial transactions in securities .Other functions include Investment Consulting, quantification of positions, rights and obligations of the fund, as well as the risk policy, and also informing the investor on a regular basis. In conclusion the fund manager should not select portfolio with a pin since it needs since the pension manager should select the right mix of investments to get profits (Bahbah, 2009).

References

Bahbah, B. (2009). Wealth management in any market. Hoboken, N.J.: John Wiley & Sons.

Berk, J. and DeMarzo, P. (2007). Corporate finance. Boston: Pearson Addison Wesley.

BRADSTREET, D. (2009). WEALTH MANAGEMENT. Tata McGraw-Hill.

Curtis, G. (2012). The stewardship of wealth. Hoboken, New Jersey: John Wiley & Sons.

Drucker, P. and Maciariello, J. (2008). Management. New York, NY: Collins.

Hillier, D. (2010). Corporate finance. London: McGraw-Hill Higher Education.

Jordan, J. and Michel, F. (2001). The lean company. Dearborn, MI: Society of Manufacturing Engineers.

Nelken, I. (2006). Hedge fund investment management. Amsterdam: Elsevier/Butterworth-Heinemann.

Nikbakht, E. and Groppelli, A. (n.d.). Finance.

Pompian, M. (2012). Behavioral finance and wealth management. Hoboken, N.J.: Wiley.

Ross, S., Westerfield, R. and Jaffe, J. (2005). Corporate finance. Boston: McGraw-Hill/Irwin.

Ross, S., Westerfield, R. and Jordan, B. (2000). Fundamentals of corporate finance. Boston: Irwin/McGraw-Hill.

Ross, S., Westerfield, R. and Jordan, B. (2007). Essentials of corporate finance. Boston: McGraw-Hill/Irwin.

Smart, S., Megginson, W. and Gitman, L. (2004). Corporate finance. Mason, Ohio: Thomson/South-Western.

Strachman, D. (2012). The fundamentals of hedge fund management. Hoboken, N.J.: John Wiley & Sons, Inc.

Tracy, B. (2014). Management. New York: AMACOM.

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