Investment portfolios are planned at two levels -- asset allocation and stock selection.Asset allocation is a necessary part of the role of every financial planner and involves determining the proportions in which each client's financial assets should be allocated between three main asset classes -- namely cash, fixed interest securities and shares -- having regard to clients' financial objectives, their attitude to risk and the prospects for investment markets.It is the process of stock selection -- the selection of individual securities within each asset class -- which involves a greater degree of risk and calls for a higher level of skill.

Persons authorised under the Law Society's Module B(i) to conduct investment business involving packaged products, delegate the task of stock selection to the professional managers employed by the providers of those products.

Whereas -- insofar as concerns UK securities at least -- persons authorised under Module B(ii) undertake the stock selection process in-house.It is possible to access basically the same underlying securities through different packaged products.

For example, life policies, pension policies and unit and investment trusts all provide the means of investing in shares.

The main, though by no means only, factor influencing the choice between these products is their tax treatment.

Clearly, if one is able to obtain tax relief on premiums, or to gain access to the tax-free roll-up of investment returns, or to withdraw the sale proceeds free of tax, the net return will be greatly enhanced.The most tax-efficient investment medium is a pension plan, but it is also relatively inflexible.

However, it can be used as collateral for a loan (though not assigned) and with the advent of the 'income withdrawal' facility (which will be discussed in a future article in this series) it is possible to take tax-free cash at 50 and to draw a minimal pension income -- which can itself be recycled back into another plan if the policy holder is still earning -- until retirement proper.After pensions, Venture Capital Trusts offer the next most attractive set of tax breaks.

However, these are conditional upon VCTs investing in unquoted companies, which makes them appropriate only for the less risk averse client.The product which provides the best combination of tax-efficiency and flexibility is the Personal Equity Plan.

However, PEPs are in danger of becoming a victim of their own success.

The PEP rules have been progressively relaxed over the years and the revenue leakage has become so severe that there is an increasing likelihood that the tax advantages will have to be curtailed.PEPs have an important role in complementing pension plans.

Whereas pensions offer tax relief on contributions, a tax-free build up, but a taxed income, PEPs provide no tax relief or contributions but a tax-free fund and a tax-free income.

Most PEPs now are unit trust-based and permit investment in a wide range of international securities.When PEP entitlements have been exhausted, the next most tax-efficient vehicle is the unit and investment trust and the new European amalgam of the two, the OEIC (open ended investment company] .

Unit and investment trusts enjoy similar tax treatment, that is to say, freedom from CGT for fund investments and Advanced Corporations Tax on distributions, which can be reclaimed by non-taxpayers.

Investment trusts invest only in shares whereas unit trusts offer the opportunity to invest in bonds, cash, property and financial derivatives such as futures and options.Both unit and investment trusts have their adherents.

Investment trusts have lower charges, but can be more volatile because being closed-end funds, their market price is determined by supply and demand rather than by the value of the underlying assets.

Also the managers are permitted to raise loan capital to fund their investments.

Unit trust managers claim that the flow of new funds which they receive enables them to take advantage of market opportunities, while investment trust managers point to the advantage which they offer in emerging and other volatile markets, where in times of turbulence they will not be obliged by investors' redemption demands to sell investments against their own better judgment.Less tax-efficient than unit and investment trusts, because capital gains made by the fund are subject to corporation tax, are investment bonds.

These are single premium investments in life companies with profits or managed funds, with a nominal amount of life cover.Investment bonds have had particularly useful characteristics, namely, that being life policies they can be written in trust, and that withdrawals can be made of up to 5% per annum of the sum invested.

These are regarded as capital for tax purposes.Some factors have made investment bonds popular with trustees of Accumulation & Maintenence and discretionary trusts with higher rate taxpayers wishing to roll-up investment growth until retirement, and with elderly people whose income marginally exceeds the age allowance limit.

Offshore investment bonds offer a tax-free roll-up, but no relief for withholding tax, and a higher tax rate is payable on the proceeds by UK residents.

Consequently, they have been used mainly by people who expect to be able to realise the proceeds at a time when they would be non-UK tax resident.The life policy taxation rules are about to change however, so that every withdrawal would be split into two, one element representing capital and the other any accrued investment return; and UK residents would be subject to higher rate tax on the latter element.

This would fundamentally alter the profile of the client for whom these investments may be suitable, and disconcertingly, the changes may be retrospective.By taking advantage of the different tax opportunities which are available from time to time; by diversifying between asset classes and managers, and by adding into the mix other tax-efficient products such as TESSAs and National Savings, financial advisers are able to design balanced portfolios which, with periodic review, can be adapted to meet their clients' changing financial needs.