Private Client Flashcards
goal of private wealth management
help investors seek the benefits as well as navigate the complexities of financial market
private client
inv. objective:
objective may not be clearly defined or quantified.
Constraints:
Time horizon: relatively short (lifelong)
Scale: smaller (more limitations)
taxes: significant and complex
investment governance less formal
distinction
Inv. sophistication:
emotional, subject to behavioral biases
regulation: separate regulation or shared regulatory structure
uniqueness and complexity:
similar objective may have different inv. strategies
institutional clients
inv. objective:
specified, clearly defined
Constraints:
Time horizon: theoretically infinite
Scale: larger
taxes: depends on institutions
investment governance: formal
distinction
Inv. sophistication:
a higher degree, professionals
regulation: separate regulation or shared regulatory structure
uniqueness and complexity:
similar objective may have different inv. strategies
information needed in advising private client
- personal info
- financial information
- tax considerations
basic tax strategies
tax avoidance
tax reduction
tax deferral
tax avoidance: TEA
tax exempt account TEA that investor are allowed to contribute a limit account
- various wealth transfer techniques
tax reduction
tax exempt bonds
tax efficient asset classes (stock paying a high dividend)
tax deferral
same investor in a progressive tax system seek to defer taxes because they anticipate lower futures tax rates
the wealth manager rols
goal quantification
goal prioritization
goal changes
private client risk tolerance
willingness to tolerate risk
risk aversion
unwillingness to tolerate risk
risk capacity
ability to accept financial risk, more obligate in nature
risk perception
subjective assessment of the risk involved in the outcome of an investment decision
- questionnaire for risk tolerance score
- risk tolerance conversion
capital sufficiency analysis/ capital needs analysis
process by wealth manager determines likely to accumulate, sufficient financial resources to meet his/her objectives
2 methods
- deterministic forecasting
- monte carlo simulation
- deterministic forecasting
portfolio growth occurs in a straight line
wealth manger must specify: portfolio return assumption current value of the portfolio anticipated future contribution CF the portfolio that represent client needs
disadvantage:
the use of single return assumption is not representative of the actual market volatility
2 monte carlo simulation
allows a wealth manager to model the uncertainty of several key variable and therefore the uncertainty or variability in the future outcome
- assume a simple average (arithmetic mean) return and a std of YoY returns for the portfolio
- forward looking assumption should be the foundation for the analysis
when the probability of success falls below the acceptable range, potential solution include:
- increase the amount of contribution
- reduce the goal amount
- adoption an investment strategy with higher expected return
deterministic planing
retirement stage of life
education: develop human capital
early career: save for retirement goal starts
career development:
35-50 career development: financial obligation and accumulate financial capital
51-60 peek accumulation : financial capital is greatest
early retirement: lnv. portfolio fund their lifestyle
retirement: accurate financial capital
late retirement: medical expense increase
(face longevity risk)
analyzing relevant goals
- mortality table
indicate individual life expectation at specific ages
potential drawback: individual clients pro. of living to a certain age may exceed that of the general population
- ammunities lump sum
provide a series of fixed pmt, entire for life or for a specific period in exchange for a lump sum payment.
It helps to mitigate the longevity risk. - monte carlo simulation
adv: applicability to the client, actual asset allocation
It can flexibly model different scenario and explore issues that are important to clients
disadvantage:
it cannot predict the future due to the limitation of use of historical data
- the output is highly sensitive to small changes in input assumption
- the output indicates the prob. of reaching a good but not accessary the “shortfall magnitude”
immediate annuity
pay an initial lump sum in return for a guarantee of specific future monthly payment, beginning immediately over a specific period of time
deferred annuity
the specific future monthly payment begin at a later date
longevity risk
use annuity
risk of outliving one’s financial resources
life annuities hep mitigate it.
behavioral consideration in retirement planning
- heightened loss aversion
- consumption gap between actual and potential consumption
- the annuity puzzle: not prefer to invest in annuity
- invest’s reluctance to give up hope of substantial life style
- the dislike of losing control of assets
- high cost of annuities - preference for investment income over capital appreciation
spending only the interest and not the principal is a self-control mechanism
spending dividend rather then selling stock
IPS
ADV:
- encourage investment discipline and reinforces client’s commitment to fall out the strategy
- focus on LT goals rather than ST performance
for individual:
1. return: variable objectives
may conflict internally and change over time
return maybe titled toward income
- risk: difficult to determine
subject to behavioral influences
smaller asset based increases sensitivity of risk - constraint
- liquidity
may be variable and subject to period shortfall - time horizon:
long >10 years
but short than pension plan - tax
fully taxable with some tax advantaged and tax-exempt accounts - legal/regulatory
ordinarily very few