Special Topics - Financial Management

**Chapter 5: KNOW YOUR CUSTOMER.** Definition and Importance: Introduce the concept of \"knowing your customer\" in wealth management Understanding client needs, preferences, and behaviors is crucial for providing personalized and effective financial advice. Knowing your customer helps financial...

**Chapter 5: KNOW YOUR CUSTOMER.** Definition and Importance: Introduce the concept of \"knowing your customer\" in wealth management Understanding client needs, preferences, and behaviors is crucial for providing personalized and effective financial advice. Knowing your customer helps financial advisors tailor their services to match individual client profiles, resulting in better outcomes and satisfaction. Objectives: The primary goals of knowing your customer are building trust, enhancing customer satisfaction, and improving financial outcomes. By knowing their clients well, advisors can create strategies that align closely with clients\' financial goals and risk tolerance. The Sense of 'Knowing Your Customer' Client Needs and Goals: It\'s essential to identify and understand clients\' financial goals, risk tolerance and investment preferences. This includes both short-term objectives, like saving for a vacation, and long-term goals, such as retirement planning. Advisors need to gather detailed information to provide advice that fits each client\'s unique situation. Building Relationships: Creating strong, personalized relationships with clients leads to better communication and a more tailored approach to wealth management. When clients feel understood and valued, they are more likely to trust their advisor and follow their recommendations. Communication: Regular and transparent communication is vital for maintaining a deep understanding of clients' evolving needs and preferences. Advisors should keep clients informed about their financial plan market changes, and any adjustments needed to meet their goals. A System Approach to Wealth Management Data Collection and Analysis: Use data collection and analysis to gain insights into client behaviors and preferences. This involves leveraging financial data, market trends, and client feedback. By analyzing the information, advisors can better understand clients and make more informed decisions. Technology Integration: Integrating technology, such as Customer Relationship Management (CRM) systems and financial planning software, can streamline the process of gathering and analyzing clients information. These tools help advisors manage client data efficiently and create detailed financial p Customized Financial Plans: Systematic methods help in creating customized financial plans that aligns with clients' unique goals and circumstances. Advisors can use the insights gained from data analysis to develop strategies tailored to each client's needs. Wealth Management According to Client Profile Segmentation: Segmenting clients based on criteria such as age, income, risk tolerance, and financial goals help provide more personalized services. For example, younger clients may have different financial priorities and risk profiles compared to older client Tailored Strategies: Developing tailored wealth management strategies for different client segments is crucial. Younger clients might focus on growth investments, while older clients might prioritize income generation and capital preservation. Each client segment requires a unique approach to meet their specific need Examples and Case Studies: Provide examples or case studies to illustrate how different client profile require different approaches. For instance, a young professional might need advice on aggressive investments and saving for a home, while a retiree might need help with estate planning and managing retirement income. **Chapter 6: ANTI MONEY LAUNDERING** How Anti-Money Laundering (AML) Works Anti-Money Laundering (AML) refers to a set of laws, regulations, and procedures designed to prevent criminals from disguising illegally obtained funds as legitimate income. Financial institutions play a crucial role in AML by monitoring transactions, reporting suspicious activities, and conducting due diligence on customers. Key components include: Know Your Customer (KYC): Verifying the identity of clients and assessing the legitimacy of their funds. Transaction Monitoring: Continuously tracking financial transactions to detect unusual pattern. Reporting: Submitting reports on suspicious activities to relevant authorities. Three Stages of Money Laundering Money laundering typically involves three stages: Placement: Introducing the illicit funds into the financial system. This can be done through deposit purchasing assets, or using businesses with high cash transactions. Layering: Concealing the source of the money through a series of complex transactions, often across multiple countries and financial institutions. This makes it difficult to trace the original source. Integration: Reintroducing the laundered money into the economy in a way that makes it appear legitimate. This could involve investing in real estate, businesses, or other assets. Five Ways to Combat Money Laundering Improve Searches with Technology: Using advanced technologies like AI to enhance the detection of suspicious activities and reduce false positives. Regular Cross-Communication: Facilitating regular meetings between financial institutions and law enforcement to share intelligence and stay updated on new laundering techniques. Use Data Analytics: Employing data analytics to identify patterns and trends that may indicate money laundering activities. Standardize Systems: Ensuring that financial institutions have standardized and updated systems streamline compliance and reporting processes. Structured Training: Providing ongoing training for employees to recognize and respond to money laundering activities effectively. **Chapter 7: BANKRUPTCY** Definition of Bankruptcy Bankruptcy is a legal process for individuals or businesses unable to repay their debts, allowing for debt relief or reorganization under court supervision. Types of Bankruptcy ❖ Bankruptcy chapter 7: Liquidation - means termination of the firm as a going concern; it involves selling the assets of the firm for salvage value. ❖ Bankruptcy chapter 11: Reorganization - is the option of keeping the firm a going concern; it sometimes involves issuing new securities to replace old securities. ❖ Financial Rehabilitation and Insolvency Act of 2010 (FRIA), or Republic Act No. 10142 - This law provides a comprehensive framework for dealing with financially distressed individuals and businesses, offering options for both Reorganization and liquidation. Businesses who filed bankruptcy in the Philippines 1\. Hanjin Heavy Industries and Construction Philippines -- This shipbuilding company filed for bankruptcy in 2019 due to its \$412 million debt owed to local banks and \$900 million owed to other creditors. It marked one of the largest corporate defaults in Philippine banking history. 2\. Philippine Airlines (PAL) -- PAL filed for Chapter 11 bankruptcy in the United States in 2021 due to severe financial challenges, especially exacerbated by the COVID-19 pandemic\'s impact on global travel. The filing allowed PAL to restructure its debt while continuing operations under a rehabilitation plan. Consequences of Bankruptcy POSITIVE Debt Relief Automatic Stay Fresh Start Consequences of Bankruptcy NEGATIVE Loss of assets Negative Impact on others Credit damage Legal Costs Emotional and Psychological Impact Trouble getting loan Difficulties in finding housing and jobs You may not get tax refund Some debt may remain How the Bankruptcy Process Works Step 1: Find a Good Attorney Step 2: Conduct a Bankruptcy Counseling Session Step 3: Filing for Bankruptcy With the Court Step 4: Liquidation or Repayment Step 5: Complete a Debtor Education Course Step 6: Debt Discharge **Chapter 8: CORPORATE MERGERS AND CONSOLIDATION** Definition of Merger A merger happens when two companies combine to form a new entity. Both original companies cease to exist independently and merge their resources, operations, and management into the new company. Mergers are usually done to achieve synergies, expand market reach, enhance product offerings, or reduce competition. Is an event in which a corporation absorbs the other and remains in existence while the others are dissolved. (Sec. 75) Example: RCBC and RCBC Savings Bank Land Bank of the Philippines and United Coconut Planters Bank Definition of Consolidation Consolidation is when multiple companies merge into a single, new entity. Unlike a merger, which typically involves two companies, consolidation can involve several companies coming together. The goal is often to streamline operations, reduce costs, and strengthen market position by pooling resources and capabilities. A new corporation is created, and consolidating corporations are extinguished. (Sec. 75) Example: First Consolidated Bank - Established in 1982 as a result of the consolidation of 14 independent banks in the Province of Bohol. Merger or consolidation does not become effective by mere agreement of the constituent corporations. The approval of the SEC is required (Sec. 79) EFFECTS OF MERGER & CONSOLIDATION Surviving/consolidated corporation: - Possess all the rights, privileges, immunities, and franchises of each constituent corporation - Become transferee of the properties previously pertaining to the merger/consolidated corporation - All liabilities of the constituents shall pertain to the surviving or consolidated corporation - Employees of an absorbed corporation are not deemed absorsed; the Revised Corporation Code does not mandate absorption of employees; HOWEVER, the constituents may provide for absorption procedures in its Plan of Merger (or Consolidation) (BPI v. BPI Employees Union, G.R. No. 164301, 10 August 2010 TYPES OF MERGER - Horizontal Merger - This is a merger between two companies in the same industry, often direct competitors. The aim is usually to increase market share, reduce competition, or achieve economies of scale. - Vertical Merger - This involves companies operating at different stages within the same industry's supply chain (e.g., a manufacturer merging with a supplier). Vertical mergers can help secure supply chains, reduce production costs, and improve efficiencies. - Conglomerate Merger - Two companies in unrelated industries come together. This type of merger can help diversify business risk, enter new markets, and create a larger financial base. - Market-Extension Merger - This occurs when companies in different geographic markets but within the same industry combine. The primary goal is to expand the market reach and customer base. - Product-Extension Merger - This is a merger between companies that offer different but related products. The goal is often to expand the product line and increase offerings to customers. TYPES OF CONSOLIDATION Statutory Consolidation - this is when two or more companies combine to form a new entity. In statutory consolidation, the merging companies cease to exist, and a new company is created to house the assets and liabilities of the previous companies. **Chapter 8: Corporate Mergers and Acquisition** **MERGER AND CONSOLIDATION GUIDELINES** In the Philippines, mergers and consolidations of corporations are governed by the Revised Corporation Code of the Philippines (Republic Act No. 11232), as well as the Philippine Competition Act (Republic Act No. 10667). 1. Definition and Distinction Merger: involves the combination of two or more corporations, where one corporation absorbs the others, with only one surviving entity. Consolidation: combines two or more corporations into a new entity, with all the original corporations ceasing to exist. 2. Approval Process Board Approval: The board of directors of each participating corporation must approve the merger or consolidation plan through a resolution. Shareholder Approval: Approval by at least two-thirds (2/3) of the outstanding capital stock (or in some cases, by shareholders representing a majority) is required at a stockholders' or members' meeting. A notice of the meeting and the plan must be provided in advance. 3. Submission of Merger or Consolidation Plan Names and descriptions of the constituent corporations. Terms and conditions of the merger or consolidation. Manner of converting shares of the constituent corporations. Details about the surviving or consolidated corporation, including articles of incorporation and bylaws. 4. Filing with the Securities and Exchange Commission (SEC) Once approved by the board and shareholders, the plan must be submitted to the SEC for evaluation. Documentation: The submission includes articles of merger or consolidation, the merger/consolidation plan, and other necessary documents, along with the filing fee. 5. Approval by the SEC The SEC evaluates the plan, ensuring it adheres to the law and SEC rules, and considers whether the merger is just and fair to all parties, including shareholders, creditors, and other stakeholders. Issuance of Certificate: If approved, the SEC issues a certificate of merger or consolidation. At this point, the merger or consolidation takes legal effect. 6. Effect of Merger or Consolidation Transfer of Assets and Liabilities: All assets and liabilities of the constituent corporations are transferred to the surviving or new consolidated entity. Share Conversion: Shares of the constituent corporations are either converted to shares in the new or surviving corporation or otherwise disposed of as agreed in the merger/consolidation plan. 7. Final Dissolution Process (for Consolidations) In cases of consolidation, all original entities undergo formal dissolution following the SEC approval of the consolidation. The new entity then holds all the assets, rights, and obligations as stipulated in the plan. PROS AND CONS OF MERGERS AND CONSOLIDATION PROS AND CONS OF MERGERS P R O S Cost Savings Bigger Market Share More Products Lower Cost New Ideas C O N S Difficult to Combine Job Losses Legal Issues Increased Debt Distractions PROS AND CONS OF CONSOLIDATION P R O S Efficiency Strong Market Position Cost Savings Improved Services Better Investment Opportunities C O N S Complex Integration Employee Uncertainty Reduced Competition Regulatory Approval Debt and Costs Process of Merger and Consolidation under the Revised Corporation Code of the Philippines SEC. 75. Plan of Merger or Consolidation - The board of directors of each constituent corporation must approve a plan of merger or consolidation. This plan should include details like the terms and conditions of the merger or consolidation, the rights of the stockholders or members of each corporation, and the proposed articles of merger or consolidation. SEC. 76. Stockholders' or Members' Approval - The plan must be submitted to the stockholders or members of each constituent corporation for approval. Stock Corporations: The plan must be approved by the affirmative vote of stockholders representing at least two-thirds of the outstanding capital stock of each constituent corporation. Non-Stock Corporations: The plan must be approved by the affirmative vote of at least two-thirds of the members of each constituent corporation. SEC. 77. Articles of Merger or Consolidation - After obtaining stockholder or member approval, the constituent corporations must execute the articles of merger or consolidation. These articles should include: The plan of merger or consolidation The number of shares or members voting for and against the plan The number of shares outstanding (for stock corporations) or the number of members (for non-stock corporations) SEC. 78. Effectivity of Merger or Consolidation - The articles of merger or consolidation must be filed with the Securities and Exchange Commission (SEC). The SEC will review the documents to ensure compliance with the RCCP. SEC. 79. Effects of Merger or Consolidation - Upon approval by the SEC, the merger or consolidation becomes effective. **Chapter 9-CORPORATE FINANCIAL DISTRESS** Definition of Financial Distress Financial distress is a condition in which a company or individual cannot generate sufficient revenues or income, making it unable to meet or pay its financial obligations. This is generally due to high fixed costs, a large degree of illiquid assets, or revenues sensitive to economic downturns. For individuals, financial distress can arise from poor budgeting, overspending, too high of a debt load, lawsuit, or loss of employment. Signs of Financial Distress Cash Flow Problems - The first sign things are going wrong is a constant lack of cash. All businesses suffer periodic dips where cash is tight. Defaulting on bills - Everyone misses a payment or forgets a bill, but if the frequency with which it occurs increases, it suggests a business can't pay its way. Extended Terms - Being slow to pay is not as bad as not paying, but it can be an indication your business is in financial distress. High Interest Payments - Your lender is likely evaluating your creditworthiness on a regular basis. Falling Margins - Long-term survival for a business is more closely tied to profits rather than sales volume. Sales are Decreasing - If you don't have money coming in through product sales, then it is time to figure out the problem. The failure to do so could lead to financial distress. High Turnover and Decreased Morale - Many businesses to adjust labor and employment budgets. Causes of Financial Distress Declining or Low Profits - Profits are steadily declining or are very often too low with regard to the amount of effort put into the business. Reduced Margins - Margins are reduced due to price-cutting or increased costs of materials, products or services, etc. Increase in Fixed Costs - Fixed costs are steadily increasing, or aren't under control. Increases in Variable Costs - Variable costs of the business are increasing disproportionately in relation to sales. Prices aren't being adjusted to compensate for the increase. Lack of Adequate Cash Flow - The business owner is continuously short of cash, with the business unable to pay its bills on time. Overstocking - Business uses incorrect purchasing methods. Doesn't know which lines are fast or slow moving, which lines are obsolete. Poor Credit Control - Giving credit to businesses without doing a proper credit check, selling to people who cannot pay. How to Manage Financial Distress 1\. Diagnosing the Problem Financial Analysis ○ Conduct cash flow, income statement, and balance sheet reviews. ○ Use financial ratios (e.g., liquidity, solvency, profitability). Root Cause Analysis ○ Identify whether issues are operational, strategic, or external. 2\. Immediate Actions Cost Cutting ○ Reduce non-essential expenses. ○ Layoffs, outsourcing, or renegotiating contracts if necessary. Debt Restructuring ○ Negotiate with creditors for lower interest rates or extended repayment terms. ○ Consider debt-for-equity swaps. Asset Liquidation ○ Sell non-core or underperforming assets to generate immediate cash. 3\. Long-Term Solutions Turnaround Strategies ○ Revise business models or pivot to new markets. ○ Focus on core competencies and divest non-core operations. Operational Efficiency ○ Implement lean management principles to reduce waste. ○ Use technology to optimize processes. Revenue Enhancement ○ Introduce new products/services or explore untapped markets. ○ Strengthen marketing and customer retention strategies. 4\. Financial Tools Refinancing ○ Secure new loans with better terms to replace high-interest debts. Seeking External Investment ○ Attract private equity, venture capital, or strategic partners. Bankruptcy and Restructuring ○ Utilize Chapter 11 or equivalent for court-supervised restructuring (if applicable).