PM R21 Flashcards
Investment concerns: private clients vs institutional
Private clients:
1. May not be precisely defined
2. Can change over time
3. May be difficult to reconcile
4. Shorter/different time horizons depending on goals
5. Smaller portfolios (less suitable for alternatives)
6. Tax planning is vert important for private clients
Institutions are more formal, precisely defined and sophisticated
Information needed in advising private clients
Family circumstances
Employment
Retirement Plans
Sources of Wealth
Investment Objectives
Risk Tolerance
Investment Preferences
Wills/Trusts
Insurance
Reporting
Personal Balance Sheet
Income/Expenses
Sources of Cash
Tax considerations for private clients
Income Tax
Wealth Bases Tax
Consumption Tax
Tax Avoidance
Tax Reduction
Tax Deferral
Identifying and formulating client goals based on information
Planned goals: specific time frame
Unplanned goals: unexpected financial expenditures
PWM help in quantifying, prioritizing and reevaluating goals
Evaluate private client risk tolerance
Willingness and ability to take risk
Risk capacity is ability to take on risk (more objective than tolerance)
Risk perception is subjective and change with question framing
Describe technical and soft skills needed in advising private clients
Technical:
Financial planning
Capital Markets/Asset Classes
Portfolio Construction and Monitoring
Technology
Languages
Soft:
Communication and Social
Education
Business development and Sales
Evaluate capital sufficiency for clients goals
Determine likelihood of reaching goals
Deterministic forecasting: assuming a single compounded annual growth rate over investment horizon
Monte Carlo: allows for real world uncertainty and determines probability of success
Discuss principles of retirement planning
Starts at early career stage and goes until preretirement. Clients depend on pension cashflows to fund retirement. Distribution rate of pensions key factor.
Retirement goals can be analyzed with mortality tables, annuities, and Monte Carlo. Life annuity can be used to reduce longevity risk, but not popular (annuity puzzle)
Behavioral biases by retirees: increase loss aversion, consumption gaps, lack of self-control
IPS construction for private clients
Client background and Objectives - planned, unplanned, one-time, ongoing and primary and secondary priority
Key Investment Parameters - low risk tolerance for high-priority or near term goals, time horizon range, asset class preference, liquidity, unique
Asset Allocation - Strategic AA: Long-term target allocation, Tactical AA: Active management strategy, specifying range for each asset class
Portfolio Management and Implementation - discretionary authority, rebalancing, TAA, investment vehicles
PWM Responsibilities - formulating and reviewing IPS, construction, monitoring, performance
IPS Appendix - modeled portfolio and CME
Recommending/Justifying portfolio allocations for private clients
Traditional approach: identify appropriate asset classes, develop CME, determine weighting, assess constraints, implement portfolio, choose location of assets
Goals-based: follows similar process, but creates separate portfolios for each goal
Evaluate investment program success for private clients
Evaluated in terms of goal achievement, process consistency, portfolio performance
needs to achieve all 3
Effective practice for portfolio reporting and review
Reporting: performance summary of current period, market commentary, asset allocation, detailed performance of asset classes and securities, benchmark, historical performance, transactions, purchase and sales, currency
Review should look at goals, investment parameters, rebalances, changes to manager duties
Ethical and compliance considerations for private clients
Fiduciary Duty and Suitability
Know your customer
Confidentiality
Conflict of Interest
Compliance depends on jurisdiction
Levels of service and range of solutions for private clients
PWM - non-customizable and high client-to-manager ratio
HNW - smaller client-to-manager ratio, tailored solutions, sophisticated portfolios
UHNW - multi-generational planning, tax and estate planning, comprehensive service
Robo-advisors - automated and lower cost, scalable
