Private Wealth Management

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• Answer 50 questions in 15 minutes.
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• Match each statement with the correct term.
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This is a study tool. The 3 wrong answers for each question are randomly chosen from answers to other questions. So, you might find at times the answers obvious, but you will see it re-enforces your understanding as you take the test each time.

1. What are the different stages of life?
Deterministic = use point estimates to generate a forecasted value such as an expected return or terminal value Monte Carlo = use probability distributions of inputs to generate expected returns with accompanying probability distributions
1) Taxes - outright sale produces large capital gains taxes 2) Psychological factors - client might have emotional attachment or not care about diversification
1) foundation phase 2) accumulation phase 3) maintenance phase 4) distribution phase
Can be used for clarification if questions areise about specific invesetment decisions - should outline a process for dispute resolution


2. Investor questionnaires help to determine what?
- extrepreneurs - for example - are usually familiar with taking business risk - they are willing to take risk b/c they feel they control their business and personal circumstances
Risk tolerance and decision-making style
- does not ordinarily exhibit the same attachments to the firm as an entrepreneur or top executive - does not have any degree of control either
Number of years to retirement/death - investable assets - annual liquidity requirement - specific amount (if any) needed at a future date


3. stages of life
- tax drag% > tax rate - as investment horizon increases - tax drag $ and tax drage % increase - as investment return increases - tax drag $ and tax drag % increase
Can be used for clarification if questions areise about specific invesetment decisions - should outline a process for dispute resolution
1. foundation 2. accumulation 3. maintenance 4. distribution
Immediate diersification - ability to borrow (monetize) - at end of partnership receive proportional share of pool


4. What is human capital?
HC = PV of future labor income
Aka - unbalanced collar - forward sale of shares with an agreed delivery date in exchange for cash today
Can be implemented quickly - can facilitate low cost borrowing (to monetize) - borrowing costs may be tax-deductible
Self confident - Gather information from a wide variety of sources to make their own decisions - Willing to take risk


5. characteristics of foundation stage
- extrepreneurs - for example - are usually familiar with taking business risk - they are willing to take risk b/c they feel they control their business and personal circumstances
The more equity-like - the less the demand for life insurance
- a subjective assessment of financial well-being based on perceived wealth
Young -Building a foundation for future wealth -above avg risk tolerance


6. Any amount above core capital is considered what?
Active wealth creators typically have an above-avg. willingness to take risk - passive recipients of wealth typically have an average or below-average willingness to take risk
- a subjective assessment of financial well-being based on perceived wealth
Simple and quick - removes all residual risk - allows reinvestment of proceeds to achieve desired diversification
Excess capital


7. Any amount above core capital is considered what?
Sources of wealth - measure of wealth - stage of life
Entrepreneurial activity (likely to have highly concentrated portfolio) -inheritance - one-time windfalls (may be more willing to diversify) -built up over long periods of safe employment (e.g. middle mgr - easier to divest than huge entrepreneurial
Excess capital
1) growing the portfolio (capital gains) 2) liquidity needs - total return approach


8. An investor's willingness to take risk is determined by what?

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9. What are the psychological issues of low basis stock held by an executive?
Portfolio size incr. = ability up - Liquidity needs up = ability down - Time horizon up = ability up - Spending importance down = ability up
A positive relationship
- the higher in the ranks - the more the executive acts like an entrepreneur - the more control = the more attached the executie is to the firm
Quick to make decisions in the heat of moment (don't want to miss opportunities) - High PTO - Focus on return w/out considering risk - Don't consider themselves experts - Don't trust professionals


10. What are the main characteristics of the maintenance phase of life?
Tax on the entire value of assets held - principal + earnings - not just earnings - has the same effect as an accrual tax - only taxes are paid at a (usually) reduced rate
Retired - focus on lifestyle maintenance and security - preservation of wealth - shortening time horizon and declining risk tolerance
When a decedent leaves no will or if the will is deemed invalid
- gifts to charitable organizations are not taxed - donor is allowed to take a tax deduction in the amount of the gift


11. What are the main characteristics of fixed annuities?

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12. What are the benefits of an IPS to the adviser?
Can be used for clarification if questions areise about specific invesetment decisions - should outline a process for dispute resolution
Anticipate individual investors' concerns and risk tolerance by specifying the investor's source of wealth - measure or adequacy of wealth in relation to needs - and stage of life -observables - reasonably objective
1) credit method 2) exemption method 3) deduction method
1) outright sale 2) exhcange funds (public or priate) 3) completion portfolios 4) hedging


13. What are the 3 categories of investors when discussing concentrated positions?
Earnings start to accelerate -Expenses increase - but so do savings -Long time horizon over which to recover from short-term losses -above-average risk tolerance
Demand for insurance decreases; less human capital to replace
Simple and quick - removes all residual risk - allows reinvestment of proceeds to achieve desired diversification
1) Entrepreneur - large position in 1 private stock 2) Executive - large position in 1 public stock 3) Investor - large positions in 1 successful public stock


14. What are the advantages of public exchange funds for low basis stock?
Fixed income streat set at inception - usually no inflation adjustment - so real value falls over time - usually illiquid (can't withdraw funds) - lock in at the prevailing rate - which might be historically low
Immediate diersification - ability to borrow (monetize) - at end of partnership receive proportional share of pool
An investor focuses on gains and losses - prefer certain (riskless) gains and uncertain losses - are willing to face incerased risk to avoid losses - causes investors to exhibit risk-seeking behavior
Demand for insurance decreases; less human capital to replace


15. characteristics of accumulation phase
Lock up period (7-10 yrs) - must hold >20% illiquid assets - lack of control (no changes - manager determines asset mix) - original cost basis
Fixed income streat set at inception - usually no inflation adjustment - so real value falls over time - usually illiquid (can't withdraw funds) - lock in at the prevailing rate - which might be historically low
Earnings start to accelerate -Expenses increase - but so do savings -Long time horizon over which to recover from short-term losses -above-average risk tolerance
- a subjective assessment of financial well-being based on perceived wealth


16. When calculating a required return - you typically must identify what?
Total wealth = financial assets + human capital
Number of years to retirement/death - investable assets - annual liquidity requirement - specific amount (if any) needed at a future date
The reduction in return caused by the payment of taxes
1) common progressive (progressive) 2) heavy dividend tax (progressive) 3) heavy capital gain tax (progressive) 4) heavy interest tax (progressive) 5) light capital gain tax (progressive) 6) flat and light (flat) 7) flat and heavy (flat)


17. characteristics of methodical investor
Client description -purpose of IPS -identification of duties - responsibilities -formal statement of objectives and constraints -calendar schedule for portfolio performance and IPS review -performance measures and benchmarks -considerations for devel
1) foundation phase 2) accumulation phase 3) maintenance phase 4) distribution phase
More subjective than situational profiling -helps to understand how an investor perceives risk and return. -Bridges the differences between traditional finance and behavioral finance -Methodical - cautious - individualist - spontaneous
Relies on hard facts -decisions tend to be conservative in nature -more risk averse -thinking/analysis


18. template for return objective
Demand for insurance decreases; less human capital to replace
1) Traders (all gains short term) 2) Active investors (less churn - some gains taxed at reduced rates) 3) Passive investor (buy and hold - most gains are deferred) 4) Exempt investors (no investment taxes)
To earn a total ______-tax __________ return of ______% covering: -expense 1 -expense 2 -expense n
Fixed income streat set at inception - usually no inflation adjustment - so real value falls over time - usually illiquid (can't withdraw funds) - lock in at the prevailing rate - which might be historically low


19. What is the general relationship between tax drag% and tax rate with accrual taxes; and as investment horizon increases and return increases?
- tax drag% > tax rate - as investment horizon increases - tax drag $ and tax drage % increase - as investment return increases - tax drag $ and tax drag % increase
Single publicly traded mature company stock or vested options - greater appetite for specific risk due to higher degree of control - less residual risk - b/c the firm is more mature - less liquidity risk - but may have restrictions - desires tax effi
Single publicly traded mature company stock or vested options - greater appetite for specific risk due to higher degree of control - less residual risk - b/c the firm is more mature - less liquidity risk - but may have restrictions - desires tax effi
1) Traders (all gains short term) 2) Active investors (less churn - some gains taxed at reduced rates) 3) Passive investor (buy and hold - most gains are deferred) 4) Exempt investors (no investment taxes)


20. What is core capital?
Transferring assets directly to a third generation avoids possible double taxation
Valuation discounts can reduce the value of wealth transfers - so high net worth indiiduals utilize them whenever possible to minimize transfer taxes
Active wealth creators typically have an above-avg. willingness to take risk - passive recipients of wealth typically have an average or below-average willingness to take risk
The amount of assets (i.e.present value) necessary to meet all future liabilities


21. What is the eifference in willingness to take risk between active and passive wealth creators?
Methodical - cautious - individualist - spontaneous
Diligently gather the best possible investment info - tend to be conservative and - since they base decision on facts - they rarely form emotional attachments to investments - continually seek better info to confirm past investment decisions
Risk tolerance = as risk tolerance increases - demand for life insurance decreases
Active wealth creators typically have an above-avg. willingness to take risk - passive recipients of wealth typically have an average or below-average willingness to take risk


22. What is another name for a variable prepaid forward and What is its main purpose?
Long stock position + long put + short call - long put protects downside (like purchasing insurance) - short call generates income to at least partially offset the cost of the put
The government shares in both gains and losses
Aka - unbalanced collar - forward sale of shares with an agreed delivery date in exchange for cash today
Self confident - Gather information from a wide variety of sources to make their own decisions - Willing to take risk


23. characteristics of maintenance phase
The reduction in return caused by the payment of taxes
HC = PV of future labor income
Joint ownership with rights of survivorship - living trusts - retirement plans - life insurance - other means that transfer assets without the need for a will
Investors begin to shift portfolios into less volatile assets -Reduced focus on accumulating additional wealth and more focus on preserving current wealth -Reduced ability to recover from market downturns -diminishing risk tolerance


24. What are the disadvantages of private exchange funds for low basis stock?
More risk toelrant than than methodical investors - do their own research; very confident in their ability to make investment decisions - confidence in their ability to achieve their long-term investment objectives - unlike methodical investors - th
Active wealth creators typically have an above-avg. willingness to take risk - passive recipients of wealth typically have an average or below-average willingness to take risk
Implied liabilities
Must partner with an outside - unrelated investor - lock up period - taxesdeferred but not avoided - potential regulatory (IRS) risk


25. When should you use a tax-exempt versus a tax-deferred account?
The amount of assets (i.e.present value) necessary to meet all future liabilities
1) foundation phase 2) accumulation phase 3) maintenance phase 4) distribution phase
Risk tolerance and decision-making style
Tax rate lower today = use tax-exempt - tax rate lower in future = use tax deferred - not expected to change = use either


26. What are the psychological issues of low basis stock held by an investor?
Hedged with life insurance - think of the life insurance as a replacement for lost human capital
Starts as a private stock held by an entrepreneur - Sold publicly in IPO (now held by exec - still major part of wealth - less specific risk b/c more mature) - Contributes less and less specific risk as other securities are added to portfolio - ends
- does not ordinarily exhibit the same attachments to the firm as an entrepreneur or top executive - does not have any degree of control either
Risk tolerance and decision-making style


27. Equation for total wealth.
Total wealth = financial assets + human capital
1) Traders (all gains short term) 2) Active investors (less churn - some gains taxed at reduced rates) 3) Passive investor (buy and hold - most gains are deferred) 4) Exempt investors (no investment taxes)
Risk tolerance and decision-making style
1) Traders (all gains short term) 2) Active investors (less churn - some gains taxed at reduced rates) 3) Passive investor (buy and hold - most gains are deferred) 4) Exempt investors (no investment taxes)


28. situational profiling

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29. What is the person called that transfers assets through a will?
Provides clarification in the event of questions regarding suitability -process for resolution of disputes with client -helps identify issues to be resolved to avoid problems
Diligently gather the best possible investment info - tend to be conservative and - since they base decision on facts - they rarely form emotional attachments to investments - continually seek better info to confirm past investment decisions
Must partner with an outside - unrelated investor - lock up period - taxesdeferred but not avoided - potential regulatory (IRS) risk
The testator


30. Describe the different types of double taxation conflicts.
Risk tolerance = as risk tolerance increases - demand for life insurance decreases
1. foundation 2. accumulation 3. maintenance 4. distribution
1) outright sale 2) exhcange funds (public or priate) 3) completion portfolios 4) hedging
1) Residence-residence = 2 individuals claim residence for the same individual 2) Source-Source = 2 countries claim authority over the same income (i.e. multinational company) 3) Residence-Source = individual is subject to residence jurisdiction and


31. What are the benefits of an IPS to the adviser?
The government shares in both gains and losses
Early career 8accumulating education - developing skills - above-average ability to take risk
Can be used for clarification if questions areise about specific invesetment decisions - should outline a process for dispute resolution
Should use accrual-equivalent returns and after-tax risk


32. What is core capital?
Taxes paid on the gain (long or short position) when an asset is sold or purchased
The amount of assets (i.e.present value) necessary to meet all future liabilities
Valuation discounts can reduce the value of wealth transfers - so high net worth indiiduals utilize them whenever possible to minimize transfer taxes
Investors have too much confidence in their ability to forecast - they tend to discount or even ignore info that does not support their choices - they interpret info based on their current frame of mind and the medium through which it is received


33. Living expenses in retirment can be referred to as what?
Transferring assets directly to a third generation avoids possible double taxation
Implied assets
Implied liabilities
1) active 2) passive


34. If human capital is equity-like/fixed-income like - how should you generally allocate financial assets?
- gifts to charitable organizations are not taxed - donor is allowed to take a tax deduction in the amount of the gift
1) outright sale 2) exhcange funds (public or priate) 3) completion portfolios 4) hedging
Upside potential of hedged position limited - regulatory risk (avoid constructive sale - some risk exposure required)
If human capital is equity-like - allocate financial assets more to fixed income - if the human capital is fixed-income like - allocate financial assets more to equities


35. What are the two sources of wealth?
1) active 2) passive
1) foundation phase 2) accumulation phase 3) maintenance phase 4) distribution phase
Most risk tolerant - fear that failing to respond to changing market conditions will negatively impact their portfolio - constantly adjust their portfolios in response to changing market conditions - tend to doubt investment advice. - high turnover a
Valuation discounts can reduce the value of wealth transfers - so high net worth indiiduals utilize them whenever possible to minimize transfer taxes


36. As age increases..
Provides clarification in the event of questions regarding suitability -process for resolution of disputes with client -helps identify issues to be resolved to avoid problems
1) Taxes - outright sale produces large capital gains taxes 2) Psychological factors - client might have emotional attachment or not care about diversification
Demand for insurance decreases; less human capital to replace
Acts as an operational guideline that represents the long-term - best interests of the investor - the process is dynamic and can incorporate changed circumstances (review at least annually) - the IPS allows continuity over time and portability to new


37. What are the main types of investors?
Demand for life insurance decreases
Determine: the client's contraints - as well as risk/return objectives - the best strategy - given capital market expectations for achieving the client's objectives - the appropriate strategic (long term) asset allocation which meets those goals
Can borrow and/or use derivatives to diversify - ability to borrow (monetize) increased - owners retain upside potential of the original investment - not required to hodl illiquid assets - partners can change fund composition
1) Traders (all gains short term) 2) Active investors (less churn - some gains taxed at reduced rates) 3) Passive investor (buy and hold - most gains are deferred) 4) Exempt investors (no investment taxes)


38. What are the main characteristics of the maintenance phase of life?
1. foundation 2. accumulation 3. maintenance 4. distribution
Retired - focus on lifestyle maintenance and security - preservation of wealth - shortening time horizon and declining risk tolerance
The reduction in return caused by the payment of taxes
Single privately-held stock - high degree of control - immature firm - very high unsystematic risk - face significant residual risk - limited or restricted liquidity - zero cost basis in the original investment - desires tax efficient transfer to hei


39. As age increases..
Distribution of outcomes provides a better indication of the risk/return tradeoff - show the tradeoff b/t short-term risk and ability meet long-term goals - incorporates the impact of taxes and the compounding effect of reinvestment - can build in f
1) Traders (all gains short term) 2) Active investors (less churn - some gains taxed at reduced rates) 3) Passive investor (buy and hold - most gains are deferred) 4) Exempt investors (no investment taxes)
Client is a foundign family member - the firm still bears the family name - the shares were acquired by a loved one
Demand for insurance decreases; less human capital to replace


40. As probability of death increases...
Upside potential of hedged position limited - regulatory risk (avoid constructive sale - some risk exposure required)
The demand for life insurance increases - regardless of age
1) Source jurisdiction = country levies taxes on all income generated within its borders - whether by citizens or foreigners 2) Residence jurisdiction = a country taxes income of its residents whether generated inside or outside the country (most pre
Extra investment value created by effective tax management


41. What are the main characteristics of variable annuities?

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42. What is the general relationship b/t a client's perception of wealth and risk willingness?
A positive relationship
INTEREST = heavy interest tax; light capital gain tax DVIDIDEND = heavy capital gain tax; light capital gain tax CAPITAL GAIN = heavy capital gain tax
- cautious - methodical - individualistic - spontaneous
Diligently gather the best possible investment info - tend to be conservative and - since they base decision on facts - they rarely form emotional attachments to investments - continually seek better info to confirm past investment decisions


43. characteristics of maintenance phase
Long stock position + long put + short call - long put protects downside (like purchasing insurance) - short call generates income to at least partially offset the cost of the put
1) Financial market risk (reduced with efficient diversification) 2) Longevity risk (hedged w/ annuities) 3) Savings risk (hedged by employing a savings program and consuming less)
Investors begin to shift portfolios into less volatile assets -Reduced focus on accumulating additional wealth and more focus on preserving current wealth -Reduced ability to recover from market downturns -diminishing risk tolerance
1) Traders (all gains short term) 2) Active investors (less churn - some gains taxed at reduced rates) 3) Passive investor (buy and hold - most gains are deferred) 4) Exempt investors (no investment taxes)


44. What are the diffferent types of estate ownership rights?

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45. What are the different types of trusts?
1) revocable trust = the settlor can rescind the trust and resume ownership of the assets 2) irrevocable trust = the settlor relinquishes ownership and control 3) fixed trust = pattern of distributions to the beneficiaris is predetermined by the sett
- if you sell a security to harvest its loss and then reinvest the proceeds in a very similar security - the selling price fo the old security becomes the tax basis for the new security - in that case - the loss harvest only delays the payment of t
1) source of wealth 2) measure of wealth 3) stage of life
A will (also known as a testament)


46. What are the diversification techniques for low basis stock?
1) specific risk (unsystematic risk) 2) market risk (systematic risk) 3) residual risk (counterparty risk and regulatory risk)
Total wealth = financial assets + human capital
1) outright sale 2) exhcange funds (public or priate) 3) completion portfolios 4) hedging
Methodical - cautious - individualist - spontaneous


47. What are the disadvantages of private exchange funds for low basis stock?
Must partner with an outside - unrelated investor - lock up period - taxesdeferred but not avoided - potential regulatory (IRS) risk
Relies on hard facts -decisions tend to be conservative in nature -more risk averse -thinking/analysis
Number of years to retirement/death - investable assets - annual liquidity requirement - specific amount (if any) needed at a future date
If human capital is equity-like - allocate financial assets more to fixed income - if the human capital is fixed-income like - allocate financial assets more to equities


48. What is human capital?
Quick to make decisions in the heat of moment (don't want to miss opportunities) - High PTO - Focus on return w/out considering risk - Don't consider themselves experts - Don't trust professionals
HC = PV of future labor income
- if you sell a security to harvest its loss and then reinvest the proceeds in a very similar security - the selling price fo the old security becomes the tax basis for the new security - in that case - the loss harvest only delays the payment of t
Client description -purpose of IPS -identification of duties - responsibilities -formal statement of objectives and constraints -calendar schedule for portfolio performance and IPS review -performance measures and benchmarks -considerations for devel


49. What are the general legal and regulatory considerations for individuals?
If board of director member = inside - prudent investor rules usually applies - recommend legal counsel for setting up personal trust or family foundation - if a trust - balance the needs of income beneficiaries and remainderment
The risk of a premature death with accompanying loss of future human capital
The testator
Anticipate individual investors' concerns and risk tolerance by specifying the investor's source of wealth - measure or adequacy of wealth in relation to needs - and stage of life -observables - reasonably objective


50. What are the equity holding life risk attributes for an investor?
Required = critical financial objectives (e.g. living expenses - kids' college expenses) Desired = objectives the client would like to meet (e.g. - large bequests to family or charity - early retirement)
- does not ordinarily exhibit the same attachments to the firm as an entrepreneur or top executive - does not have any degree of control either
Multiple-security holding with one superstar - the result is a concentrated equity position - high specific risk - diversifies from concentrated - active and core concentrations into passive index positions
Iinvestors analyze ind. investments on a stand-alone basis - do not consider how the asset will affect portfolio risk and return - manifests itself as mental accounting/pyramiding - lack of diversification