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CFA Level 3 > Overview of Private Wealth Management > Flashcards

Overview of Private Wealth Management Flashcards

1
Q

What are the basic investment objectives of private clients?

A
  1. Financial security during retirement
  2. Supporting family
  3. Philanthropy
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2
Q

What are the big differences in investment objectives between private wealth and institutional investors?

A
  1. Insitutional objectives do not change much

2. Objectives are very defined at the institutional level

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3
Q

What are the big differences in constraints between private clients and institutional investors?

A
  1. Time horizon - varies with private clients, typically single stage and very long for institutional
  2. Scale/Size
  3. Taxes
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4
Q

What are the big differences in governance, sophistication, and regulatoryenvironment between private clients and institutional investors?

A
  1. Governance - no formal governance for a person

2. Sophistication is higher on the institutional size

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5
Q

What information do you need to help private clients?

A
  1. Personal Info
    Family, employer, source of wealth, preferences, objectives, return goals
  2. Financial Info
  3. Other relevant information - service needs, complications (trust, wills, insurance, etc)
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6
Q

What are typical planned goals for private clients?

A
  1. Retirement
  2. Specific purchases
  3. Education
  4. Family events
  5. Wealth transfer
  6. Philanthropy
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7
Q

What is a wealth managers role in the client goal process?

A
  1. Quantify
  2. Prioritize
  3. Changes
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8
Q

What things affect risk tolerance?

A

Are you willing and able to bear risk

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9
Q

What things affect risk capacity?

A
  1. Time Horizon
  2. Income
  3. Wealth
  4. Liquidity needs
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10
Q

What things affect risk reception?

A

This is subjective

It is based on your psychology and life circumstances

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11
Q

What technical skills do you need to have to advise private clients?

A
  1. Capital market proficiency
  2. Portfolio construction
  3. Financial Planning
  4. Technology
  5. Language
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12
Q

What soft skills do you need to have to advise private clients?

A
  1. Communication
  2. Social
  3. Coaching
  4. Business Development
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13
Q

What are two types of capital sufficiency anlaysis?

A
  1. Deterministic - regular planning

2. Monte Carlo

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14
Q

What is the definition of tax avoidance?

A

Tax avoidance is simply avoiding paying taxes through using strategies such as tax free accounts, tax free gifting

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15
Q

What is the definition of tax reduction?

A

This is not the act of avoiding tasks entirely, this is the task of using specific tax treatment of assets to reduce overall tax liability. This typically involves adjusting asset location based on tax considerations.

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16
Q

What is the definition of an unplanned goal? What are some typical examples?

A

Unplanned goals are undetermined with regards to timing, amounts, or both. This includes medical expenses, unforeseen spending, property repairs.

17
Q

What is the difference between risk tolerance, risk perception, and risk capacity?

A

Risk tolerance is your ability and willingness to bear risk. This related to your attitude towards risk. Risk capacity is an objective measure of how much risk you can take relative to accomplishing your goals. Risk perception is a subjective measure of how you perceive the risk of an investment. This varies considerably among people.

18
Q

What risk measure does a risk questionnaire assess?

A

Risk tolerance

19
Q

What inputs do you need for capital sufficiency analysis?

A
  1. Portfolio Return Assumption
  2. Portfolio Values
  3. Contributions and withdrawals
20
Q

What are the pros and cons of mortality tables?

A

Pros:
1. Allow to assess retirement needs against likelihood of survival.
Cons:
1. Individual probabilities are not the same as group

21
Q

How can you use annuities to analyze retirement goals

A

You can determine the amount needed to purchase an annuity that funds lifestyle expenses during retirement. They will mitigate longevity risk.

22
Q

What are the pros and cons of Monte Carlo simulations?

A 
Pros:
1. Very flexible
2. Measure unforeseen events effect
3. Non-deterministic
Cons:
1. False sense of precision
2. Highly sensitive to assumptions
3. Does not really measure shortfall magnitude
23
Q

What are some of the common behavioural issues in retirement planning?

A
  1. Heightened loss aversion
  2. Consumption gaps - people spend less than predicted due to fear
  3. Annuity puzzle - reluctant to give up hopes of lifestyle improvement, control of assets
  4. Preference for income over CGs
24
Q

What is included in the Background and Investment Objectives section of the IPS?

A
  1. Relevant personal and financial info from discovery
  2. Ongoing objectives such retirement, support, bequesting over time, philanthropy.
  3. One time objectives such as asset purchases, one time gifts
  4. Withdrawal amounts or rates
  5. Relevant cash flows
  6. Primary vs secondary objectives
  7. Tax status
25
Q

What is included in the Investment Parameters section of the IPS?

A
  1. Time horizon
  2. Risk tolerance (ability and willingness)
  3. Asset Class Preferences
  4. Other Investment Preferences (desires)
  5. Liquidity preferences
  6. Constraints - what you cannot own, cannot sell, etc.
26
Q

What is included in the Portfolio Management section of the IPS?

A
  1. Discretionary authority
  2. Rebalancing
  3. Tactical Changes
  4. Implementation - products, manger, due diligence
27
Q

What is included in the Duties and Responsibilities section of the IPS?

A
  1. What does the Wealth Manager do?

2. How over is the IPS Reviewed

28
Q

What is included in the appendix section of the IPS?

A
  1. CME

2. Model Portfolio behaviour

29
Q

What are the different ways to evaluate the success of your investment program?

A
  1. Goal achievement - how much more likely to accomplish goals?
  2. Process consistency - manager evaluation, costs, updating goals
  3. Portfolio Performance

CFA Level 3 (28 decks)

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