Client Recommendations and Investment Strategies Flashcards
Taxation of each type of client
Sole - flow through
GP - flow through
S corp - flow through
C corp - Entity files taxes (business & owner level if distribute dividend- so it could be twice)
LLC - flow through
Liability of owner for each type of client
Sole - full
GP - full
S corp - limited
C corp - limited
LLC - limited
Ease of formation
In order -
Sole -
LLC -
S corp -
GP -
C corp -
Easy of liquidation
C corp - easiest (own shares, sell shares)
Trust accounts
Living vs
Testamentary vs
Simple vs
Complex
- Living trust - must be formed while settlor is alive
- Testamentary trust - ONLY created once client dies, based upon instructions of client will, you would contact EXECUTOR/ADMINISTRATOR
- Simple trust - MUST distribute income annually, TAXED annually
- Complex trust - May accumulate income, taxed when distribution
Settlor/Grantor
Provides money to trust
They can also be beneficiary, grantor, trustee
Remainderman
Heirs of beneficiary
Per stripes
Heirs split original allocation
Per capita it is then split among others seperately
Per capita
When it splits the allocation depending on the beneficiary passing
Trust account w/ 2 named beneficiary’s, how do they manage it?
Based upon stated objective in trust agreement. All trust agreement have stated objective.
Tax form for trusts
1041
Balance sheets for clients (individual) & the difference between assets and liabilities
Asset - liabilities = net worth
Asset
- property of all types
- investments
- investment accounts
- retirement accounts
- cash
- jewelry
Liability (total amount of debt)
- mortgages
- consumer debt / revolving credit / credit cards
- car loans
Statement of cash flow for clients (individuals)
(monthly cash flow / money in money out)
Income: Salary, rental income, investment income
Out go: Taxes, Bills, Utilities, Mortgage Payments, CC payments
Most important information in making a suitable reccomendation?
Investment objective, it may include risk, age, salary, etc – these are sub to the INVESTMENT OBJECTIVE.
Always look for the (insert) when making recommendation, and ignore the NOISE
INVESTMENT OBJECTIVE
If the goal is to provide income
Corp bond, pref stock, REIT
If the goal is for growth
Common stocks
57 yr old husband, 58 wife, he wants to retire at 62, her at 65… They will ask you, what is their time horizon?
20 ish year, life expectancy, not just their retirement. You would WANT to include some stocks right? Hedge against inflation for example. Even at retirement you will still want to include stocks.
Capital Market Theory
What is it? What are pieces to the formula?
CAP M
Capital Asset Pricing model
The pieces of the CAPM formula are the risk-free rate (Rrf), investment beta (βa) and the market return (Rm – Rrf)
= Risk vs Return
Greater returns you have greater risk
Husband and wife looking for above average returns, according to CAP M, which is true..
- Must be comfortable with risk
- No risk tolerance
- Somewhat comfortable with risk
- (something else)
Must be comfortable.
Higher return than average.. Not somewhat.
(think about this conceptually)
Efficient Market Hypothesis
Markets are efficient in that information is already reflected in the investments price. No special analysis will allow you to achieve better than average returns.
Hypothesis works best with MORE information that is known. It is BASED ON HOW MUCH INFORMATION IS KNOWN. Least amount of information would be price & volume.
Stronger with more info, I.e. financials of the company (public info), STRONGEST and therefore analysis is LEAST Valuable when PUBLIC information AND PRIVATE information.
Private doesn’t have to be inside information, knowledge known to insiders is private info.
3 levels
- strong
- semi strong
- weak
Modern Portfolio Theory
Diversification through different asset classes & maximize returns.
Greatest amount of a return, portfolio mix of 100 equity stocks.
More risk - 70% equity and 30% income
Less risk - 20% equity and 80% income
THE CURVE on the graph of risk / reward is the EFFICIENT FRONTIER
Strategic vs Tactical
Strategic - long term
- 70/30 for example, however is not buy and hold, must rebalance.
- Strategic portfolio - what you’re looking for ASSET ALLOCATION & REBALANCE.
Tactical - shorter term
- Investment decisions based on current market conditions / market timing
- Market timing
Buy and Hold
- Consider this to be a completely diff style from Strategic & Tactical
- Very low expenses & very tax efficient
- Very similar to a ‘passive’ style
- LEAST appropriate for WRAP ACCOUNTS, why would you charge someone an annual fee when you’re not making changes???
What best shows buy and hold
Tactical
Strategic
Passive
(insert)
PASSIVE (not strategic)
Growth vs Value
Growth
- growth of company profits, which LEADS to the growth of stocks
- earnings momentum for the company as earnings get larger and larger
- stocks will have a high PRICE TO EARNINGS multiple
- Plowing their earnings back into growth of company and pay very little to no dividends.
Value
- Stable earnings, low PE, and higher dividend payout ratio’s
Most diversification?
1. domestic stock & int stock
2. blue chip and large cap
3. gov bonds and muni bonds
4. converable bonds vs corp bonds
Look for NEGATIVE COOROLATION
US stocks vs international stocks would be the right answer, they are not directly correlated
Blue chip and large cap are the same things
When asked about which portfolio represents most diversification, and giving you a bunch of alpha, beta, SD, and coorolation coefficient…
LOOK FOR THE COOROLATION COEFFICIENT.
Look for the one with the greatest negative if you’re looking for which has the most diversification
DCA
Dollar Cost Average - invest same amount on a regular basis.
What can you put into IRA
Life insurance
art collection
muni bond
gold coins US minted
Muni doesn’t make sense - tax benefit already
Life insurance and art collection you can’t
You CAN GOLD COINS US MINTED
Can you put RE in IRA
Primary residence,
vacation,
secondary home,
business property,
time share
Business property
Can’t be personal use
Roth IRA
Tax def not tax free
Not deductible
Penalty early withdrawl
No RMD, can contribute after 70.5 if working w/ earned income
Tax exempt company (organization)
What type of retirement plan should they set up?
401k
403b
457
HR10
Tax exempt - 403b
City fireman, what would you reccomend
457, government employee
Defined benefit vs defined contribution
Defined benefit
- older employers
- % of salary, usually average salary over last 3 years
- longer you’re there higher the salary higher the benefit
Defined contribution
- 401k for example, more modern
- based on how much you put into it
- deferred from own salary
- benefit younger employees
Money purchase plan
Profit sharing plan
If the company has one, it is MANDATORY for company to contribute
NOT mandatory for employee to contribute to it
QDRO
What happens when you get divorced and separate retirement plans, usually qualified plans. Alternative Payee, ex spouse, who is receiving assets it is still taxable upon withdrawal, but there is NO 10% early penalty
Distributions taxable, but no penalty for early withdrawl
Retirement plans in general
Upon distribution, TAXED as ordinary income, (401k, 403b, variable annuity, etc).
Apart of your AGI (adjusted gross income)
Alimony is included
Child support is NOT part of it, that is for child
inherited stock
if passed on before death, this would be a gift, cost basis would be what she paid for them.
if passed on after death, shares inherited you get step up in cost basis to market value at day of death.
Generally, you should not gift while still alive.
When do value estate for tax purposes
At date of death
OR
Choose to wait 6 months
We get to use, lower of the 2, whichever one is favorable.
STATE taxes MUST be paid within 9 months.
Gift tax
gifts > $15k
gifts greater than $15k
The one giving the gift pays the tax, not the reciever
ERISA guidelines (employee retirement)
- private sector (corporations) (not gov’t plans)
- Minimum of 3 investment selections
- eligibility 21 yr old and minimum 1k hours past 12 months
IPS (investment policy statement)
- Is it required? NO, it is not. Just good business if you do it.
- It INCLUDES summary plan document
- The fudiciary is to the planned participant if the corporation uses an IA alongside retirement plans for employees.
- Individuals Securities selection criteria is NOT find in IPS (TESTABLE QUESTION
JTWRDS (special account)
vs
JTIC
JTWRDS
- For spouses
- Avoids probate
JTIC (joint tenant in common)
- for non spouse (brother and sister, each of whom are married that want to open an account, but if one of them die, they want their portion of asset to go to their estate for family)
- You do have to specify percentage of ownership because of this, how much of the asset gets transferred
Grandpa wants to leave asset to grandson, but wants access to assets while alive, what to do? UTMA or UGMA or Trotten Trust?
Trotten Trust / POD (payment on death)
- Old bank term
- Only when dies, assets are transferred
529 plans vs Coverdell
College savings
Donor retains control of assets, not irrevocable
Grow tax free & can be used tax FREE if used for education
No age limit to use for education either, use for themselves for grandkids, kids, etc
if not used for school, pay taxes on it
Primary or secondary education
Coverdell
- max is 2k a year
- max amount is 5x gift tax in any 5 year period
- Primary or secondary education
UTMA and UGMA
irrevocable
Jane doe is custodian for benefit of Suzie UGMA in Washington
What age may they register account soley in Suzie age?
Social security number used is for the minor child
Can only be used 1 donor 1 beneficiary
Limit under UGMA is there is NO LIMIT
Irrevocable
Donor pays gift tax > $15k
Age of majority (legal age, whatever that is in which state), can’t put a number to that.
When Suzie becomes legal age and takes the assets, donor CANNOT take the money back. That is why these have fallen out of favor.
UGMA vs UTMA
UTMA - designate legal age UP TO 25
UGMA - Age of majority
Every security has a 2 sided quote - listed security on exchange with a specialist (DMM)
(customers buy at what? and sell at what?)
Customers buy @ at the ‘ask’ (offer) & sell to bid.
Customer buy the ask & sell at the bid.
Customer buy the ask & sell at the bid.
Customer buy the ask & sell at the bid.
Unlisted security, how do you trade
OTC - Over the counter
Specialists are to
Market maker are to
Specialists (DMM) are to listed exchange
Market maker are to unlisted. Market makers continuously upload information NASDAQ, hardwire into NASDAQ, find them and then do the trade for over the counter.
Which of the following best describes market maker
1. BD buy or sell listed securities on exchange
2. Underwriter
3. BD buys or sells unlisted securities OTC
4. NASDAQ subscriber
- BD buy or sells unlisted securities
1 - would be a specialist
Market order
Filled immediately at current market price
Limit orders
specify a price
Stop orders
Explain options above market value or below existing market value
If the market does something, THEN I want to buy/sell
If/then scenario
1. Does the customer currently own the stock, or do they want to? This tells you what they would want to do with it. If they have it, it would be to sell
2. Customer market attitude, bearish or bullish
3. SL BS (above line - above market value) & BL SS (below line - bearish below market value)
(SLOBS and BLISS)
Sell Limits and Buy Stops & Buy Limits and Sell Stops
Customer has a large gain in XYZ stock and fears a correction. What stop order?
1, Buy limit
2. Buy stop
3. Sell limit
4. Sell stop
- Owns stock
- Bearish
- Sell stop
Current Yield
Annual interest income / market price
Total return
Income (Interest or Dividends) +/-Gain or Loss / Cost Basis
Tax Equivalent Return (net return)
Tax Free Return
(Municipal Bond) / (100% -Tax Bracket %)
Corp. Bond Yld. X (100% - tax bracket %)
Inflation Adjusted Return (Real Return)
Total return
Sharpe Ratio (risk adjusted basis)
Annual return – Risk Free Rate / Standard Deviation
NAV per share
Assets - fund expenses / # of outstanding shares
Rule of 72
determine how long an investment will take to double
72 / annual rate = # of years of doubling
or
72 / # years of doubling = annual rate
Gross Margin %
Gross Profit (Income Statement)
Margin % = Revenue – COGS / Revenue
Gross profit = Sales – COGS
