Priv Wealth Flashcards
What are some charecteristics that seperate Private clients from insto investors
Smaller investment size
Better ability to divert from a specific investment philiposphy
Tax status
Less sophisticated
What are the 3 roles of a wealth manager
Goal prioritisation
Goal quantification
Goal changing
What are the 3 sorts of RISK that a wealth manager need identify/gauge with a client?
Risk tolerance
Risk Capacity
Risk perception
What are some HARD skills a wealth manager must have
Portfolio managemnt skills Capital market proficiency Lanugage skills Tech skills Financial planning competence (tax, legal)
What are some SOFT skills a wealth manager must have
Social skills
Sales skills
Education skills
What are the 2 types of capital sufficency analysis
Deterministic ForecastMortality Tables (probalistic approach to death and cash flows)
Monte Carlo
Human capital should be invested in when the client is
Young
For retirement planning, what are the 3 methods of forecasting/implementing a portfolio
Annuities (but care for annuity trap - desire for retirees just not to invest in annuiities because of hectic cash outflow initially)
Monte Carlo
Death/Mortality table
What are some behavioural biases to be concious of in retirees
loss aversion
Consumption gaps (thin they going to run out of cash)
Preferring income to capital appreciation
2 Adv of an IPS
Long term goaled
Keeps adviser/retiree on track
What are some parts of the IPS
Background and Investor Objectives
Parametres (Risk tolerance, asset class, ESG considerations etc.)
SAA - long term investments
Discretion of advisor to do what they think is good, and rebalancing preferences
Advisors responsbities
Appendix
Name 5 types of tax
Property Capital gains Income Inheritence Stamp duty
How to reduce taxable income on real estate
Spend money on maintence
Difference between taxable, tax deferred and tax exempt accounts
Tax deferred means you just pay tax when the assets are accessed (like super). Taxable is just a brokerage account, and tax exempt pays no tax
Are divs subject to preferential treatment in the tax world
Yes
Name the 3 types of tax environments/countries/locations and explain them with an example
Tax haven - pay no tax on cap gains or income (Cayman)
Tax Territory - pay tax on income earned WITHIN the territory (Hongkers)
Worldwide tax area - pay tax on your income from anywhere (Australia)
Withholding tax, explain
It is the tax payable on income and divs earned within a country that is leaving to another country.
e,g. i own UBS shares, before they leave Swiss land, they get clipped with 30% tax before being patriated to Aus
After tax period return formula
Value1 - Value0 +income-tax / value0
After tax post liquidation formula, what is it and why use it
Great for mutual funds and understanding returns after crystalising UNREALISED GAINS
(1+r)*(1+r)…….(Liquidation tax / total Value)
The liquidiation tax is the capital gains tax, the total value is like the unit price (because SOME VALUE IS ALREADY CRYSTALISED AS INCOME)
Tax alpha / excess return formula
post tax return - BM post tax return
Tax efficiency formula and what is it
After tax return / pre tax return (higher is better) shows how efficient you are with reducing tax
When constructing a portfolio, using the tax exempt, deferred and taxable accounts, how should i allocate bonds, stocks, private equity, market neutral and hedge funds
Stocks and bonds recieve tax exemptions already, put them in the normal account.
All the hectic stuff, put that in the tax deferred or exempt accounts because they will probably get taxed to buggery in the normal account
Can some bonds be tax exempt
Yes
Explain why we would want to harvest losses
Listen to you sell a stock thats does poorly, bam then you just buy it again, no harm no foul, but you get the x amount in tax credits that can offset other income. Your actual position hasnt changed except for the tax credit
Charible giving - explain usefulness (2 situations)
So, 2 things. 1 . if you are a beneficiary that can earn income from a charity (LEGALLY) , you can give a cocentrated position to a charity and boom, you get income tax free.
or just give a gift to them (ussually a highly appreciated asset) and get a tax credit (bboom)
Name 4 basic ways to avoid tax
Tax exempt accounts
Tax exempt instruments
Frankking credits
Loss harvesting
How does deferring taxes work
So here i am, a 25 year old fella earning some good money in a high tax bracket - WHY SELL NOW AND GET REKT AT THE HIGHEST TAX BRACKET - wait til im old and earning no cash, then sell then boom, taxed less
Which 2 vechiles are most tax beneifical / flexible
ETF and SMA
What is tax lot accounting
FIFO, LIFO (HIFO Highest) - it is selling a stock or bond based on when you bought it (or what the price was when you bought it. If you want to get tax credits, sell the high tax base ones, if cap gains, low tax base
Why is selling a concentrated portfolio hard for a client
Emotional attachment
Liquidity
Tax bill
Time horizon of investor
What are the best ways to sell/dispose a concentrated portfolio - 4 ways
Sell it and cop the bill
Tranched selling
Gift to charity
Let owner die and inherit to children at higher tax base
Do you want higher or lower tax bases for assets
Entirely dependent on situation. If you want a heap of tax credits, then a high tax base, higher than the current price, would be best
What is a completion strategy for avoiding tax (concentrated position)
COMPLETING AN INDEX / riskreturn charecteristics around the concentrated asset, then selling down the concentrated portfolio until it is just a normal index.
Sell down by incurring losses and not paying tax
Equity monetization - what is it (you love this)
So you got an asset, lets say 5m in APX.
Short it. Then borrow money using your 5m apx as collateral. THEN invest in the index. THE BETA OF YOUR PORTFOLIO IS NOW JUST 1. AWESOME
How are premiums on options treated in tax world
As capital gains
What is a tax free exchange structure
Pretty much where a heap of people with concentrated portfolios pool thier assets for 7 years , then at the end of the 7 years, they recieve a diversified portfolio of the combination of concerntrated assets
How to sell a family business / exit concerntrated position there
IPO, trade sale, recapitalization or loan against the business
What is recapitalisation of a business when exiting a concentrated position?
It is selling portion of your business to a PE firm and recieving equity ina new entity, while also reciving cash
When you take out a line of credit against a proprty or binsess, what are you trying to do?
Exit a concentrated position - you can then invest the line of credit/loan in a diversified portfolio and even harvest losses to offset a full sale of your house/business
If i a mortgage refinancing on my house/apartment building, what is the play?
Taking out another loan on my house, so much so that the RENTAL income on the property matches that of the interest expense, then investing the loan proceeds in the stocks market
If i donate my house to charity what happens
Tax benefit
Forced heirship meaning
Laws of the land that mean you must give x amount to your wife or brother or kids etc.
Progessive inheritenve tax regimee is
Where you get taxed x% on first million, y% on next million etc
Are gratuities tax free
Dependent on jurisdiciton, great way to avoid tax in estate planning
Explain trusts (fixed/discretionary, revokable/non-revokable)
Trust is pretty much another legal entity, you can transfer your assets to it (tax free) which can then sell/give income to beneficiaries.
Splitting your assets in half generally means you are taxed at a lower effective rate
Revokable means that the person who grants the assets to the trust still has legal ownership (and can rup thier assets from the trust) non-revokable means they cant
Fixed trust means a fixed amount is paid to beneficiaries each period - discresionary means the trustees decide
Foundation is a …….
Charity created for a person, similar to a trust
How to determine the premium for an life insurance package (3 things)
Mortality %
Discount rate
Loading (Margin for insurance firm)
Joint annuity plans - what are they
So the annuity continues for as long as 2 people are alive
What is an advanced life annuity
An annuity for in 40 years or so that has the best income
Can you withdraw variable annuities?
Yes
Features of fixed annuities
No vol, higher costs
In an inflationary envuronment, would you want fixed or variable annuities
Variable
If i work in a cyclical industry, making 1m a year (a lot), do i want a high or low risk approach to my retirement planning
Low risk, cyclical industry means you could get rekt if the busienss cycle goes sour
What is a target/life cycle fund?
A fund that changes through the lifecycle of a person to match thier circumstances as they change with age (Lifestage)
What is an asset only approach to asset allocation
This only takes the asssets themselves into consideration, not the individual in question
What is a liability driven approach to asset allocation
It takes assets into consideration
Which ratio is trying to be maximised in MVO and asset based approaches to asset allocation
Sharpe Ratio
The risk of a Liability driven approach to asset allocation is …..
The inability to pay the laibility itself and the risk or SD associated with the surplus of assets over the PV of the liability
What is the main goal of SAA?
To get a predetermined exposure to systematic risk through pairing of assets
What are the 4 criteria for asset classes
Assets can only be in one asset class Assets should have similar attributes All assets in the world should have an asset class There should not be a 1 correlation between 2 asset classes
SAA = Capital market expectations + IPS (True False?
True
9 steps in SAA
Determine objextive Determine risk Determine horizon Determine constraints Which approach to asset allocation will you use Specifiy and test portfolio Reevaluate
What do you need in your portfolio (charecteristic) for short term goals
Liquidity
Active approach to asset allocation means what happens to your portfolio’s charecteristics
Higher active share
Higher tracking error
Higher fees
What is mean variance optimisation
It is getting a computer to run simulations to determine the set of assets that has the highest sharpe ratio for your investor
What is the formula used for MVO (Certainty Equivilent Return)
Expected Return on Asset + (.0005 * Investor risk coefficient * Variance of asset)
Asset can be a portfolio of assets that comes out of the MVO
The higher the better
What are 2 prerequistes to the output of MVO
The portfolio MUST sum to 100%%
NO Negative positions
Issues with MVO (IMPORTANT)
It makes concentrated portfolios (investing in just one asset class or subsets)
Garbage in garbage out in the MVO formula
Does not take FUTURE into consideration - cash flows, changes in market etc.
Assumes returns on stocks are normally distributed
Ignores investors liabilities or goals
Explain the Black Litterman model for asset allocation
So, what you do is reverse optimise the portfolio. What that means is that you get a market portfolio, and get the expected returns on each asset class within it - THEN you utilize your capital market expectations and increase or decrease the expected returns - you then push that expected return data through a MVO, and it spits out the ideal portfolio
Advantages of the black litterman to the MVO (importants)
Less likely to get concentrated portfolios
Takes the investor and future expectations into consideration
What other contraints (apart from Budget 100 and non negativity) can you add to MVO to make it better
Add sector limits or minimums, relaitve minimums etc.
Resampled MVO - what is it and what are the advantages
It is using regular MVO, but then incorporating the average of multiple periods of monte carlo simulation and averaging out the asset allocaition to create a portfolio
This takes future into consideration, like rebalancing and withdrawrals. and also creating a portfolio more diverse than a regular MVO
Monte Caro simulation in asset allocation advantages
Incorporates reblaancing and withdrarwals in future periods and taxes.
Good for future periods
What are the 3 types of liability driven approaches to asset allocation
Surplus
Hedged portfolio
ALM
What is the surplus approach to Asset liability management in asset allocation
Surplus is jsut managing the SURPLUS of assets over your future liabilities and managing the risk of that surplus. Risk stats are used on the asset and the liabikity
What is the hedged/2asset approach to Asset liability management in asset allocation
Is it creating 2 portfolios, one to hedge the liability (WHICH CAN NEVER BE DONE PERFECTLY) and another for growth
Breifly explain process of goals based asset allocation
Pretty much determineing a set of goals for an individual, then assigning probabilities of success to each of those goals in x years - this will dictate how much money you initially have to put in.
Then the money is put to work in a variety of subportfolios.
What are some heuristic approaches (rule of thumb) to asset allocation
120 minus age = allocation to equitiyies
60-40
Yale/endowment
High correlation = what to corridors of rebalancing
Wide corridor
High vol means low corridor for rebalancing
Yep
