Chapter 21-22 Private Wealth Management Flashcards
CFAI Private Wealth Management Flashcards
After-tax excess return
Calculated as the after-tax return of the portfolio minus the after-tax return of the associated benchmark portfolio.
Asset location
The type of account an asset is held within, e.g., taxable or tax deferred.
Bequest
The transferring, or bequeathing, of assets in some other way upon a person’s death. Also referred to as a testamentary bequest or testamentary gratuitous transfer.
Capital gain or loss
For tax purposes equals the selling price (net of commissions and other trading costs) of the asset less its tax basis.
Capital needs analysis
Capital sufficiency analysis.
Capital sufficiency analysis
The process by which a wealth manager determines whether a client has, or is likely to accumulate, sufficient financial resources to meet his or her objectives; also known as capital needs analysis.
Charitable gratuitous transfers
Asset transfers to not-for-profit or charitable organizations. In most jurisdictions charitable donations are not subject to a gift tax and most jurisdictions permit income tax deductions for charitable donations.
Charitable remainder trust
A trust setup to provide income for the life of named-beneficiaries. When the last named-beneficiary dies any remaining assets in this trust are distributed to the charity named in the trust, hence the term charitable remainder trust.
Completion portfolio
Is an index-based portfolio that when added to a given concentrated asset position creates an overall portfolio with exposures similar to the investor’s benchmark.
Controlled foreign corporation
(CFC) A company located outside a taxpayer’s home country in which the taxpayer has a controlling interest as defined under the home country law.
Deferred annuity
An annuity that enables an individual to purchase an income stream that will begin at a later date.
Discretionary portfolio management
An arrangement in which a wealth manager has a client’s pre-approval to execute investment decisions.
Discretionary trust
A trust that enables the trustee to determine whether and how much to distribute based on a beneficiary’s general welfare.
Double taxation
A term used to describe situations in which income is taxed twice. For example, when corporate earnings are taxed at the company level and then that portion of earnings paid as dividends is taxed again at the investor level.
Equity monetization
A group of strategies that allow investors to receive cash for their concentrated stock positions without an outright sale. These transactions are structured to avoid triggering the capital gains tax.
Estate
Consists of all of the property a person owns or controls, which may consist of financial assets (e.g., bank accounts, stocks, bonds, business interests), tangible personal assets (e.g. Artwork, collectibles, vehicles), immovable property (e.g., residential real estate, timber rights), and intellectual property (e.g., royalties).
Estate planning
The process of preparing for the disposition of one’s estate upon death and during one’s lifetime.
Estate tax
Levied on the total value of a deceased person’s assets and paid out of the estate before any distributions to beneficiaries.
Exchange fund
A partnership in which each of the partners have each contributed low cost-basis stock to the fund. Used in the United Sates as a mechanism to achieve a tax-free exchange of concentrated asset position.
Family constitution
Typically a non-binding document that sets forth an agreed-upon set of rights, values, and responsibilities of the family members and other stakeholders. Used by many wealth- and business-owning families as the starting point of conflict resolution procedures.
Family governance
The process for a family’s collective communication and decision making designed to serve current and future generations based on the common values of the family.
Financial capital
The tangible and intangible assets (excluding human capital) owned by an individual or household.
Fixed trust
Distributions to beneficiaries of a fixed trust are specified in the trust document to occur at certain times or in certain amounts.
Forced heirship
Is the requirement that a certain proportion of assets must pass to specified family members, such as a spouse and children.
Foundation
A legal entity available in certain jurisdictions. Foundations are typically set up to hold assets for a specific charitable purpose, such as to promote education or for philanthropy. When set up and funded by an individual or family and managed by its own directors, it is called a private foundation. The term family foundation usually refers to a private foundation where donors or members of the donors’ family are actively involved.
Generation-skipping tax
Taxes levied in some jurisdictions on asset transfers (gifts) that skip one generation such as when a grandparent transfers asset s to their grandchildren. (see related Gift Tax).
Gift tax
Depending on the tax laws of the country, assets gifted by one person to another during the giftor’s lifetime may be subject to a gift tax.
Human capital
An implied asset; the net present value of an investor’s future expected labor income weighted by the probability of surviving to each future age. Also called net employment capital.
Immediate annuity
An annuity that provides a guarantee of specified future monthly payments over a specified period of time.
Inheritance tax
Paid by each individual beneficiary of a deceased person’s estate on the value of the benefit the individual received from the estate.
Intestate
A person who dies without a valid will or with a will that does not dispose of their property are considered to have died intestate.
Investment policy statement
A written planning document that describes a client’s investment objectives and risk tolerance over a relevant time horizon, along with the constraints that apply to the client’s portfolio.
Irrevocable trust
The person whose assets are used to create the trust gives up the right to rescind the trust relationship and regain title to the trust assets. For tax purposes, the trustee is considered the owner of the assets.
Longevity risk
The risk of outliving one’s financial resources.
Mortality table
A table that indicates individual life expectancies at specified ages.
Post-liquidation return
Calculates the return assuming that all portfolio holdings are sold as of the end date of the analysis and that the resulting capital gains tax that would be due is deducted from the ending portfolio value.
Potential capital gain exposure (PCGE)
Is an estimate of the percentage of a fund’s assets that represents gains and measures how much the fund’s assets have appreciated. It can be an indicator of possible future capital gain distributions.
Probate
The legal process to confirm the validity of the will so that executors, heirs, and other interested parties can rely on its authenticity.
Progressive tax rate schedule
A tax regime in which the tax rate increases as the amount of income or wealth being taxed increases.
Qualified dividends
Generally dividends from shares in domestic corporations and certain qualified foreign corporations which have been held for at least a specified minimum period of time.
Revocable trust
The person whose assets are used to create the trust retains the right to rescind the trust relationship and regain title to the trust assets.
Risk aversion
The degree of an investor’s unwillingness to take risk; the inverse of risk tolerance.
Risk capacity
The ability to accept financial risk.
Risk perception
The subjective assessment of the risk involved in the outcome of an investment decision.
Risk tolerance
The capacity to accept risk; the level of risk an investor (or organization) is willing and able to bear.
Staged diversification strategy
The simplest approach to managing the risk of a concentrated position involves selling the concentrated position over some period of time, paying associated tax, and reinvesting the proceeds in a diversified portfolio.
Tax alpha
Calculated by subtracting the pre-tax excess return from the after-tax excess return, the tax alpha isolates the benefit of tax management of the portfolio.
Tax avoidance
The legal activity of understanding the tax laws and finding approaches that avoid or minimize taxation.
Tax basis
In many cases, the tax basis is the amount that was paid to acquire an asset, or its’ cost basis, and serves as the foundation for calculating a capital gain or loss.
Tax-deferred account
An account where investments and contributions may be made on a pre-tax basis and investment returns accumulate on a tax-deferred basis until funds are withdrawn, at which time they are taxed at ordinary income tax rates.
Tax-efficiency ratio (TER)
Is calculated as the after-tax return divided by the pre-tax return. It is used to understand if a fund is appropriate for the taxable account of a client.
Tax-efficient decumulation strategy
Is the process of taking into account the tax considerations involved in deploying retirement assets to support spending needs over a client’s remaining lifetime during retirement.
Tax-efficient strategy
An investment strategy that is designed to give up very little of its return to taxes.
Tax evasion
The illegal concealment and non-payment of taxes that are otherwise due.
Tax-exempt account
An account on which no taxes are assessed during the investment, contribution, or withdrawal phase, nor are they assessed on investment returns.
Tax haven
A country or independent area with no or very low tax rates for foreign investors.
Tax loss harvesting
Selling securities at a loss to offset a realized capital gain or other income. The rules for what can be done vary by jurisdiction.
Tax lot accounting
Important in tax loss harvesting strategies to identify the cost of securities sold from a portfolio that has been built up over time with purchases and sales over time. Tax lot accounting keeps track of how much was paid for an investment and when it was purchased for the portfolio. Not allowed in all jurisdictions.
Taxable account
An account on which the normal tax rules of the jurisdiction apply to investments and contributions.
Territorial tax systems
Jurisdictions operate where only locally-sourced income is taxed.
Testamentary bequest
Bequest The transferring, or bequeathing, of assets in some other way upon a person’s death. Also referred to as a testamentary bequest or testamentary gratuitous transfer.
Testamentary gratuitous transfer
Bequest The transferring, or bequeathing, of assets in some other way upon a person’s death. Also referred to as a testamentary bequest or testamentary gratuitous transfer.
Testator
The person who authored the will and whose property is disposed of according to the will.
Trust
A legal is a vehicle through which an individual (called a settlor) entrusts certain assets to a trustee (or trustees) who manages the assets for the benefit of assigned beneficiaries. Trust may be either a testamentary trust, a trust created through the testator’s will, or a living or inter-vivos trust, a trust created during the settlor’s lifetime.
Will (or Testament)
A document that outlines the rights others will have over one’s property after death.
Withholding taxes
Taxes imposed on income in the country in which an investment is made without regard for offsetting investment expenses or losses that may be available from the taxpayer’s other investment activities.
Worldwide tax system
Jurisdictions that tax all income regardless of its source.
Franking Credit
A type of tax credit that allows the tax paid by the company to count towards tax payable by the individual.
Consumption Gap
Retireess tend to consume less in retirement than initially forecst, often attributed to loss aversion.
Criteria a Financial Advisor uses to evaluate success for a private client
Goal Achievement
Process Consistency
Portfolio Performance
