The Asset Management Process Flashcards
What is an investment policy statement?
IPS serves as the basis for developing, administering, and reviewing and ongoing investment program
What are the 2 purposes of an IPS?
1) to provide a foundation of which the client’s portfolio is constructed
2) tp provide a basis for review of, and adaptation to, changing conditions and circumstances
What are the 3 attributes of a sound IPS?
IPS should have realistic expectations, long term approach, and clearly defined
What two things does time determine in a client’s IPS?
1) types of investments that make sense for the client
2) the feasibility that the investment professional will make recommendations that will meet the client’s expressed goals
List potential problems of a short-term perspective in an IPS?
Short term fluctuations cause investors to use low return asset classes that don’t benefit from positive stock market bias.
List the 5 elements that should always be contained in an IPS?
1) clear statement of the client’s investment goal
2) statement of investment vehicles deemed suitable and unsuitable for the client’s portfolio, and how they are managed
3) statement of acceptable risk level and how risk will be managed (diversification)
4) an asset allocation strategy and investment professional philosophy
5) provision for periodic reviews
Additional elements included in an IPS?
Liquidity, desired rate of return, cash flow requirements, taxes, loss limits, performance benchmarks, client responsibilities, & unique preferences
Describe how the client’s and investment professional’s degrees of responsibility increase and decrease over time?
Early phase as IPS is formulated the client plays the leading role and investment professional acts a sounding board. Later the investment professional takes the active lead and the client provides feedback
Who is responsible for general decision making in the IPS and asset class selection?
The decision making lies with the client and the advisor’s role is to point in the right direction. Investment selection lies with the advisor with the client agreeing or declining.
How can market changes cause clients to make incorrect investment decisions?
Price fluctuations can distract investors from their long term goals and extrapolate short term volatility.
What is “noise”?
Daily price fluctuations in the market as a result of media coverage of short term developments. Advisors need to client client to focus on real market change not random background noise.
What is one way that an investment professional can bring added value to a client during periods of market volatility?
An advisor should have both the ability to empathize with the personal situation of the client and act as a compass guiding client with their IPS roadmap.
List two negative results of client and investment professionals “feeding on each other’s fear & greed”?
1) an irrational investment decision
2) a loss of professionalism on the investment professional’s part, with a corresponding loss of respect for the investment professional by the client
List two qualities an investment professional must have to deal with financial markets during volatile times?
1) providing a sound perspective on the pitfalls of short term trading
2) ability to separate real market change from random background noise
Common mistakes relating to behavioral finance?
Rationalization bias, Representativeness bias, Money illusion bias, Hindsight bias
