Intro & Chapter 1 Flashcards
IPS
Investment Policy Statement
IPS can be thought of as a ‘road map’ that outlines a clients starting point, destination, the available resources, and how the client is going to get to that destination.
5 Step Asset Management Process
- Gather Data
- Establish Goals
- Analyze Information
- Make recommendations and Implement
- Monitor Performance
All of the following would be included on a client’s statement of financial position except the client’s
a. home value
b. salary
c. credit card balances
d. checking account balance
B. Salary
The statement of financial position shows the client’s assets, liabilities, and net worth. The client’s salary is a cash inflow and would be included on the statement of cash flows, not the statement of financial position.
Which one of the following items is not an invested asset?
a. primary residence
b. individual brokerage account
c. 401(k) account
d. real estate investment trust
a. Primary residence
One’s home is typically not held for investment purposes.
Which one of the following is considered a ‘foundation’ goal?
a. college funding
b. emergency fund
c. mortgage payoff
d. travel
b. emergency fund
An emergency fund is a foundation goal because it is essential to daily living - the other three are lifestyle goals.
All of the following provide a clearer picture of the clients needs except
a. succession planning in place, if any, for a client involved in ownership of a business.
b. bad experiences with particular investments
c. anticipated retirement lifestyle.
d. the current rate of inflation
d. the current rate of inflation does not provide insight into a client’s needs (although the rate of future inflation will impact the client’s future needs.)
A financial plan should include
l. recommendations based on the client’s needs, objectives, and goals
ll. specific information regarding the responsibilities of the planner, the client, and any other advisers.
lll. alternate approaches to accomplishing the client’s goals, if applicable
lV. the advantages and disadvantages of each recommended approach
a. l and lll
b. ll and lV
c. l, ll, lll, and lV
d. ll, lll, and lV
C.
All of these should be included in a financial plan.
Cash/Cash equivalents
Checking accounts
mm
tbills
CDs
savings accounts
Invested assets
stocks
bonds
mutual funds
IRAs
Pension funds (vested portion
rental property
Personal use assets
cars and other vehicles
main residence
personal property
boats
clothing
Short term liabilities
liabilities payable in less than one year, such as credit card balances
Long term liabilities
liabilities due in one year or more, such as mortgages, car loans, student loans, and home equity loans
Net worth
the residual difference between assets and liabilities
A - L = NW
Time is of critical importance in an investment policy statement because
a. it determines the feasibility of the investment professional making recommendations that meet the client’s goals.
An investor’s life expectancy determines the horizon for a portfolio
the current market and economic climates set client expectations for portfolio performance
market timing is essential to investment performance
A.
In periods of market volatility, how can the investment professional add value to client relationships?
a. explaining the psychology of financial markets to the clients
b. advising the client to move out of the market in its early stages of decline
c. creating a new investment policy statement for the client
d. increasing market timing to take advantage of market volatility
A.
The role of an investment policy statement during times of economic and financial change is to
a. adapt to incremental changes in the clients situation.
b. predict change and adapt accordingly.
c. provide a rigid framework preventing the client from making any changes to the portfolio.
d. Provide consistency and steadiness in management of the portfolio
D.
The role of an investment policy statement during times of economic and financial change is to provide consistency and steadiness in management of the portfolio.
Sara White bought a stock that has subsequently droped 50%. She plans to hold on to the stock in the hopes of getting back to even.
What investor mistake is Sara most likely making?
a. overconfidence
b. loss aversion
c. fear of regret
d. retionalization
B.
Loss aversion is the reluctance to take losses and is associated with a ‘get-even’ mentality
Purpose of an investment policy?
Charles Ellis: to establish useful guidelines for investment managers that are genuinely appropriate to the realities of both the client’s objectives and the realities of the investments and the markets.
Two purposes of an investment policy statement?
- to provide a foundation on which the client’s portfolio is constructed
- to provide a basis for review and adaptation to changing conditions.
What is an investment policy statement?
Written statement of the goals for the portfolio and the guidelines to be followed by money managers to achieve those goals. This document establishes a tart rate of return, guidelines for the amount of risk managers may accept in pursuit of the target, and any other restrictions by which managers must abide.
Three attributes of a sound investment policy statement:
- must be realistic
- should have a long term perspective
- must be clearly defined.
What two things does time determine in a client’s investment policy statement
- types of investments that make sense for the client.
- feasibility of the investment professional making recommendations that will fulfill the client’s expressed goals.
Problems of a short-term perspective in an investment policy statement:
Trading losses
high transaction costs
the client is on the sidelines during the early stages of a rising market.
5 elements that should be contained in an IPS (investment policy statement)
- clear statement of the client’s investment GOALS.
- statement of the VEHICLES DEEMED SUITABLE and (unsuitable) for the client’s portfolio and how they should be managed
- statement of the RISK level acceptable to the client
- ASSETT ALLOCATION statement, describing how the client’s assets will be diversified among both asset classes and the suitable investment vehicles. This should address diversification.
- provision for PERIODIC REVIEW
