Private Wealth Management

Question 1

What are the primary differences between private client and institutional objectives?

Answer 1

1. Client objectives are much more broadly defined
2. Constraints - private clients generally have shorter time horizons, less capital, and more tax considerations
3. Clients are generally less sophisticated, and are subject to more behavioural biases

Question 2

What are the 3 ways to analyze retirement goals?

Answer 2

1. Mortality based - estimate expenses and probability of being alive
2. Annuity based - PV of spending
3. Monte Carlo

Question 3

What is a short sale against the box?

Answer 3

This is when you short sale one of your large concentrated holdings in order to monetize it

Question 4

What is the difference between financial and human capital?

Answer 4

Human capital is the PV of future earnings weighted by probability of being alive, it typically makes up the majority of net worth when you are younger. Economic net worth includes both

Question 5

What are the seven life stages?

Answer 5

1. Education - little financial assets, investing in human capital
2. Early Career - little financial assets, insurance could protect human capital
3. Career Development - increasing saving
4. Peak Accumulation - reduction of investment risk
5. Pre-retirement
6. Early retirement
7. Late retirement

Question 6

What are the three most relevant factor in insurance pricing?

Answer 6

1 Mortality

2. Load
3. Discount rates

Question 7

How do you calculate the net payment cost index?

Answer 7

1. Find FV of annuity due with premium
2. Find FV of ordinary annuity with dividends payable if any
3. Find net value of 1-2
4. Find payments of annuity due that equals value 3

Question 8

How do you calculate the surrender cost index?

Answer 8

1. Find FV of annuity due with premium
2. Find FV of ordinary annuity with dividend
3. Subtract B and expected cash value from A
4. Calculate payment for FV annuity of the above value