AN OVERVIEW OF PRIVATE WEALTH MANAGEMENT

Question 1

Explain the concept of human capital and the key inputs to estimating an individual’s human capital.

Answer 1

Human capital : Present value of future expected employment income.

Key inputs :

• Future income from employment : Taking the current income level and applying an assumed growth rate. Also need assumer number of years left.
• Survival rate : Probability that you survive each year
• Nominal risk free rate
• A risk premium to reflect uncertainty of income. Investment banker’s risk premium will be much higher than someone who works at the government.

Question 2

Compare the different inflation utilities between the following asset classes : Equities, commodities, inflation linked bonds and real estate

Answer 2

Equities : In the long-term, equities tend to outpace inflation. However, tend to be quite volatile in the short term.

Commodities : Can see their price outperform during inflationary periods. Hence, can be a good hedge of inflation in the short term.

Inflation linked bonds : Can offer a good hedge for inflation as their price keep pace with inflation, but often offer low real returns.

Real Estate : Provide a good hedge against inflation because property and income tend to increase with inflation.

Question 3

Identify the key aspect that an IPS cover for a private client

Answer 3

• Client background and investment objectives
• Key investment parameters
• Portfolio asset allocation
• Portfolio management and implementation
• Duties and responsibilities of the private wealth manager

Question 4

Describe how an asset manager can help their clients in formulating their financial goals

Answer 4

Quantify the goals

Put the goals in different priority

Changing goals

Question 5

Identify the key investment parameters that should be specify in a private wealth client IPS

Answer 5

Time horizon, risk tolerance, cash flow (liquidity), Asset class preference, other investment preference (concentrated position in a stock, ESG preference).

Question 6

Identify what should be specify in the portfolio management and implementation section in the IPS of a private wealth client

Answer 6

• If the manager has full discretion on the portfolio
• How should the portfolio get rebalance
• If the portfolio allows the manager to make tactical asset allocation changes.
• Implementation of the portfolio : Different investment vehicles to implement the strategy.