Wealth Management Flashcards
Paraplanner
Paraplanningrefers to the administrative duties of afinancialplanner carried out by junior members of afinancialplanning group.
The function of aparaplannerwas created to allowfinancialplanners to focus on working closely with clients and identify their investment needs.
Ring-fencing
guarantee that (funds allocated for a particular purpose) will not be spent on anything else
model portfolio management
discretionary investment management service that consists of a suite of risk-portfolios, each with aim to deliver strong risk-adjusted returns
Model Portfolio Theory (MPT)
Not enough to look at risk and return of single security. Make a portfolio, diversify.
Risk for investor: return on investment lower than expected…
According to MPT, risk = deviation from average return (each security with standard deviation (+/-))
How do you make an optimal portfolio?
Select right combination of assets.
correlation of assets…
Correlation between -1 and +1
+1: positive correlation, price of two assets move par for par
- 1: negative correlation prices move in opposite direction
Similar assets will move in similar fashion, i.e. assets from same economic sector.
Assets from different economic sectors show dissimilar price movements as they lack correlation.
Risk and return according to MPT
Assets risk and return should not be assessed by itself but by how it contributes to the risk and return of an overall portfolio
Rebalancing
Process of realigning the weightings of a portfolio of assets.
Involves periodically buying or selling assets in a portfolio to maintain an original or desired level of asset allocation or risk.
Aim of rebalancing
(1) safeguards the investor from being overly exposed to undesirable risks
(2) ensures portfolio exposures remain within the manager’s area of expertise
(3) gives investors opportunity to sell high and buy low, i.e. take gains from high-performing investments and reinvest them in areas of potential growth
Current Allocation
- describes the current allocation of stocks and bonds affected by market conditions
Constant Proportion Portfolio Insurance (CPPI)
- investor sets floor on dollar value of portfolio, structures asset allocation around that decision
- % allocation allocated between risky asset and conservative asset depends on cushion value
- cushion value = current portfolio value minus floor value
- multiplier used to determine amount of risk investor willing to undertake based on investor’s risk profile, and derived by asking what maximum one-day loss could be on risky investment
- investor makes beginning investment in risky asset equal to value of: (multiplier) x (cushion value), invest remainder in conservative asset
aim of CPPI
- aim: allows investor to maintain exposure to upside potential of risky asset while providing capital guarantee against downside risk
Auto-Rebalancing
- enter desired %s for each holding and frequency of desired rebalancing
- at desired interval platform will execute necessary buys and sells to maintain asset allocation
Risk Tolerance
Amount of risk investor willing to take or degree of uncertainty investors able to handle.
Investors take greater risk with investable assets when other more stable sources funds available.
Varies with age, income, financial goals, possession of other assets.
NB: risk-tolerance based rebalancing
Stocks
AKA shares or equity
Type of security that signifies proportionate ownership in the issuing corporation.
Entitles the stockholder to that proportion of the corporation’s assets and earnings.
Issued by companies to raise capital in order to grow the business or undertake new projects.
Bonds
AKA debt
Represents a loan made by an investor to a borrower.
Used by companies, municipalities, states, and sovereign governments to finance projects and operations.
Key Characteristics: face value, coupon rate, coupon dates, maturity date, issue price
Stocks VS Bonds
- stocks performance tends to vary more dramatically than bonds
- stocks inherently riskier investment than bonds: (stockholders last in line in the event of bankruptcy, whereas bondholders given legal priority over other stakeholders)
face value of bond
money amount bond worth at maturity
coupon rate of bond
Rate of interest bond issuer will pay on face value of bond.
Expressed as a percentage.
EXAMPLE: 5% coupon rate means bondholders receive 5% x $1000 face value = $50 every year
maturity date of bond
date on which bond will mature and bond issue will pay bondholder
Credit Quality and Bonds
Issuer with poor credit rating means risk of default is greater, these bonds pay more interest.
Credit ratings for company and its bonds generated by credit rating agencies (Standard and Poor’s, Moody’s, Fitch Ratings)
Bonds with very long maturity date pay higher as bondholder more exposed to interest rate and inflation risks for an extended period.
Segregation of Assets
Separation of assets from larger group or creating separate accounts for specific groups, assets, or individuals
Segregation used by portfolio manager
Segregate some accounts from larger pool when specific individuals have unique requirements related to risk and investment objectives.
Portfolio managers create portfolio models applied to majority of assets under management.
However discretionary accounts may be introduced for investors with different requirements.
Wrap Account
Means of consolidating and managing an investor’s investment portfolio and financial plans.
Wrap fee services cover all administrative and management costs.
NB: type of service also sometimes known as investment platform or financial platform service.
Tax Wrapper
Tax breaks that investor can “wrap” around their investment, sheltered from paying some or all tax on it.
Method of structuring investment portfolios in most tax efficient way.
Most common examples are ISAs and pensions.
Benefits of wrap account
(1) only one counter-party to deal with; saves time dealing with diverse range of fund managers, financial institutions, and other product providers
(2) investors view entire portfolio all in one place; able to keep track of current financial position on daily basis
(3) investors receive single consolidated annual tax statement, comprehensive six-monthly statements, documentation of all purchases, sales, deposits, and withdrawals
DIF
Discretionary Investment Fund
Investment professional known as a Discretionary Fund Manager (DFM) builds and manages a portfolio of investments on client’s behalf.
DFM take into account how much client has to invest, the level of risk client prepared to take, client’s financial goals, and tax position.
“Don’t allow the tax tail to wag the investment dog.”
Letting the amount of capital gains tax owed on the sale of your asset (stock, bond, real estate, or business) dominate your decision process.
Investors not willing to pay taxman if they sell.
Investment Platform
Online service which allows you to buy, sell, and hold funds.
Underlying Assets
The financial assets upon which a derivative’s price is based.
Used to identify the item within the agreement that provides value to the contract.
Derivative
A financial investment with a price that is based on a different asset.
Options
Financial derivatives that give buyers the right to buy or sell an underlying asset at an agreed-upon price and date.
Shadow Account
A secondary account used to connect to the remote computer on behalf of the primary record account to perform the designated tasks.
[user] without full permissions on remote host. Shadow Account [admin] with permissions to execute scripts on the remote host.
White Labelling
Provider of service purchases a fully supported product from another source, then applies its own brand and identity to it, and sells it as its own product.
A white-label product is a product or service produced by one company that other companies rebrand to make it appear as if they had made it.
CTF Transfer
Transfer a Child Trust Fund to a Junior ISA.
PEP
Personal Equity Plan
Discontinued in 1999 and replaced by Individual Savings Accounts (ISAs)
Back Office Integration
The coordination between e-commerce systems and back office processes.
Information from both systems is accessible from one location or database.
Improved coordination creates better customer service and reduced duplication of effort by staff.
Back Office Operations
Processes used by employees that help keep the business running.
E.g. accounting, finance, inventory, order fulfilment, distribution.
Front Office Operations
Focused on customers.
E.g. sales, marketing, customer service.
IFA
Independent Financial Adviser
