The modern investment professional can offer clients a menu of investment products that would make investment professionals of past generations envious, if not confused. Fifty years ago, the product universe for brokerage firms and their representatives was essentially limited to stocks and bonds. Even within these two important classes of financial instruments, choices were limited. Today, broker-dealers offer life insurance, real estate and oil and gas partnerships, brokered bank CDs, mortgage-backed securities in many forms, options, and an array of mutual funds and ETFs to suit every conceivable objective.

While these innovative vehicles provide new ways to serve clients, the proliferation of financial products has been a mixed blessing. For investment professionals, being knowledgeable about these many classes of assets- including their market behavior and performance, risks, and marketability-is one challenge; mixing them together into portfolios that serve the client’s investment objectives and need for diversification is yet another.

At the same time that the universe of financial products was expanding, knowledge about the investment performance of different classes of assets was being developed, as were the financial theories, which today form the foundation of securities analysis and portfolio management. Thus, two developments were under way: one being a methodology for evaluating individual securities and the other being the quantitative methods for managing classes of assets within portfolios. Total return data and information on the volatility of stocks, bonds, and T-bills have been compiled for various time periods, reaching back to the 1920s. Are you familiar with the relative returns and risks of these investment categories? Are you using this information to educate and assist your clients? The practice of asset allocation includes several approaches. Are you familiar with them and the methods for selecting securities as part of the asset allocation process?

This module describes the rationale and methods for allocating client funds across different classes of assets, with the final objective being superior riskadjusted returns. It also provides a review of the many different types of securities and investment vehicles found in those asset classes in terms of their investment characteristics, risks, and historic performance. Finally, it describes the methods used for selecting individual securities.

Author: Jennifer Coombs

Jennifer Coombs is an associate professor at the College for Financial Planning. Prior to joining the College, Jennifer spent a decade working in the financial services industry in New York City, with a special focus on equity research and analysis. She holds a Bachelor of Science degree in Finance and Political Science from Clarkson University. You can contact Jennifer at jennifer.coombs@cffp.edu.

Complexity Level: Advanced