Private Wealth Management Flashcards
Probability of Success in meeting goals
- if low PoS, what can you do to increase PoS?
Increasing PoS
1) Increase contributions
2) Reducing goal amount
3) Delaying timing of goals (retire later)
4) Adopt investment strategy with higher expected returns (within risk tolerance and risk capacity
Monte Carlo Simulation
- Advantages?
Advantages
- quantify the probability that X will have sufficient assets to meet goals
- incorporates path dependency issues such as how inputs would affect portfolio value
- helps X focus on primary risk X instead of focusing on short-term volatility or return
Net Wealth?
Net Wealth = Assets + HC - Liabilities - PV lifetime consumption
Behavorial Considerations regarding retirees?
List 4
1) Increased loss aversion - affects return assumptions and AA decisions
2) Consumption gaps - spend < exp due to loss aversion & uncertainty
3) The Annuity Puzzle - don’t like them 1) high cost 2) want to control assets
4) Mental Accounting and Self-control - prefer to meet spending needs from investment income rather than capital appreciation as a result of lack of self control when it comes to spending.
Calculating PV of money needs
Can be applied to anything including insurance, future amounts needed
Idea is that an amount needs to be grown to a future date, and then discounted to find out the PV
1) Set calc to begin
2) Work out adj rate: (1+Discount rate) / (1+Growth rate)
3) N = 37 , i = 0.98% , pmt = 2490 , CPT - PV = ? = 77 700
2 Methods for life insurance needs
1) Human life method - PV earnings to be replaced
2) Needs analysis method (as above)
- Cash needs (funeral, taxes, emergency fund)
- Capital needs (PV Surv Spouse living costs less PV Surv Spouse income)
= Total financial needs
- Total capital available (investments, cash, PV vested retirement accounts)
= Additional life insurance needs
Key Investment Parameters
- as the second section in an IPS, list the sections that make up the Key Investment Parameters
Key Investment Parameters
1) Risk tolerance - willingness + ability + proximity of goals
2) Time horizon - range, can have multiple
3) Investment Prefererences - list acceptable (+unsuitable) asset classes + risk/retern charachteristics
4) Liquidity preferences - cash reservces, pending liquidity needs, preference for div income
5) Other preferences - ESG, legacy holdings, unique preferences
6) Constraints - restrictions on investments
PWM - Portfolio Performance & Review
Reporting
List 8 things that should be added to a report to improve client’s understanding of their portfolio performance
1) Asset allocation report - SAA weights + TAA target ranges
2) Performance summary - current period
3) Detailed performance - asset classes + indiv securities
4) Historical performance
5) Contributions/withdrawals
6) Purchases/sales
7) Currency exposure
8) Progress towards goals - if goals based investing used
Tax drag
List formulas for
1) Tax drag
2) Tax drag $
3) Tax drag %
1) Tax drag = gains lost to taxes
2) Tax drag $ = gains with no taxes - gains after taxes
3) Tax drag % = Tax drag $ / gains with no taxes
Accrual Taxes
Accrual Taxes
FVIF = {1 + r(1 - ti)}^n
Estate Planning
- What do the following terms mean:
1) Testator
2) Probate
Estate Planning
1) Testator - person transferring assets through a will
2) Probate: legal process at death, where court determines:
- validity of will
- resolves claims
- distributes
If no will (or invalid) - decedent dies “Intestate”
Wealth transfer
- List 2 means of transferring assets:
1) Gifts: lifetime gratuitous transfer (inter vivos - between living individuals)
- made during lifetime - inter vivos
- may or may not be taxed
2) Bequests: testamentary gratuitous transfers after death
subject to:
- Estate taxes: transferor
- Inheritance tax: recipient
Goals-based Planning
List the 3 buckets into which funds can be allocated
Goals-based Planning
1) Personal Risk bucket
- protection from bankruptcy
- below market return
- house, money market
- safety paramount
2) Market Risk bucket
- maintain standard of living
- earn expected market return
- stocks and bonds
3) Aspirational Risk Bucket
- substantially increase wealth
- above market returns: risky
Primary capital = determine PC to meet 1 + 2
Surplus capital = residual goes to 3
Risk exposures for individuals
- list 6 risk exposures and insurance to mitigate against each one
Risk exposures
1) Earnings risk - disability insurance
2) Premature death risk - life insurance
3) Longevity risk - annuities
4) Property risk - propery insurance
5) Liability risk - liability insurance
6) Health risk - health insurance
What types of life insurance are available?
Life insurance
1) Temporary (term): 5,10,15 years (cheaper)
2) Permanent
2.1) Whole life
- fixed annual premium payment
- can’t be cancelled as long as premiums paid
- better to buy when young
2.2) Universal life
- premiums can be increased or decreased
- more flexibility
- premiums can be discontinued with insurance continuing (non-forfeiture clause)
Riders can be added to both - provide additional benefits
- accidental death
- dismemberment
Shortfall Risk
Will be given a percentage they don’t want their portfolio or return to decline by
SR = E(R) - 2(StdDev)
eg doesn’t want portfolio declining by more than 11%
SR = 9.3% - 2(10.3%)
= 9.3% - 20.6%
= -11.3%
Therefore it may fall by 11.3% which is outside of the mandate
