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Private Wealth Management

Subjects : personal-finance, business-skills

Instructions:

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. characteristics of cautious investor

2. What are the 3 categories of investors when discussing concentrated positions?
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
Excess capital
Self confident - Gather information from a wide variety of sources to make their own decisions - Willing to take risk
The amount of assets (i.e.present value) necessary to meet all future liabilities

3. situational profiling

4. Why do individuals often take steps to avoid probate?
It is expenseive - time consuming - public
Forced heirship rules (children have the right to parents' estate) - community property rights (each spouse has right to 1/2 the estate) - separate property rights (each spouse's estate considered separately)
Income rising - assets growing - long time horizon - above-avg. ability to take risk
Triggers tax on unrealized capital gains - requires liquidity - shares must be publicly traded or have low restrictions on sale

5. What are the advantages of completion portfolios for low basis stock?
The testator
The more equity-like - the less the demand for life insurance
Total wealth = financial assets + human capital
Achieves diversification slowly over time - capital gains taxes avoided to extent of matching gains and harvesting losses

6. Describe asset segregation in a behavioral finance context.
Immediate diersification - ability to borrow (monetize) - at end of partnership receive proportional share of pool
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
A positive relationship
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

7. Describe an individualistic investor personality type.
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
Typically very loyal to the firm - views the concentrated position as a positive - does not desire diversification - b/c feels in control of the future - as entrepreneurs delegate more and more control to others - they strive for more and more divers
1. foundation 2. accumulation 3. maintenance 4. distribution
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

8. What is core capital?
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
The amount of assets (i.e.present value) necessary to meet all future liabilities
1) exhibit loss aversion rather than risk aversion 2) exhibit biased expectations rather than rational expectations 3) tend to segregate investments rather than considering them in a portfolio perspective
- a subjective assessment of financial well-being based on perceived wealth

9. Define capital gains taxes.
Taxes paid on the gain (long or short position) when an asset is sold or purchased
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
Typically very loyal to the firm - views the concentrated position as a positive - does not desire diversification - b/c feels in control of the future - as entrepreneurs delegate more and more control to others - they strive for more and more divers
Simple and quick - removes all residual risk - allows reinvestment of proceeds to achieve desired diversification

10. What are the diversification techniques for low basis stock?
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)
The more equity-like - the less the demand for life insurance
1) outright sale 2) exhcange funds (public or priate) 3) completion portfolios 4) hedging
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

11. As wealth increases...
The reduction in return caused by the payment of taxes
Tax rate lower today = use tax-exempt - tax rate lower in future = use tax deferred - not expected to change = use either
Demand for life insurance decreases
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

12. What is the person called that transfers assets through a will?
The reduction in return caused by the payment of taxes
A will (also known as a testament)
The testator
The risk of a premature death with accompanying loss of future human capital

13. Describe a spontaneous investor personality type.
1. foundation 2. accumulation 3. maintenance 4. distribution
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
1) growing the portfolio (capital gains) 2) liquidity needs - total return approach
Tax drag % = tax rate - as the investment horizon increases - tax drag is unchanged - as the investment return increases - tax drag is unchanged - as the investment horizon increases - value of the tax deferral increases - as the inestment return inc

14. What are the main characteristics of fixed annuities?

15. What is human capital?
HC = PV of future labor income
The risk of a premature death with accompanying loss of future human capital
Immediate diersification - ability to borrow (monetize) - at end of partnership receive proportional share of pool
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

16. What are the 3 categories of investors when discussing concentrated positions?
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
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
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
- 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

17. Who is responsible for gains/losses in a taxable (accrual taxation) account?
Implied assets
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
The government shares in both gains and losses
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

18. What is measure of wealth?
Immediate diersification - ability to borrow (monetize) - at end of partnership receive proportional share of pool
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
- a subjective assessment of financial well-being based on perceived wealth
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

19. What are the main characteristics of the accumulation phase of life?
Income rising - assets growing - long time horizon - above-avg. ability to take risk
Should use accrual-equivalent returns and after-tax risk
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
Number of years to retirement/death - investable assets - annual liquidity requirement - specific amount (if any) needed at a future date

20. What are the different methods of relief from double taxation?
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
Aka - unbalanced collar - forward sale of shares with an agreed delivery date in exchange for cash today
1) credit method 2) exemption method 3) deduction method
Sources of wealth - measure of wealth - stage of life

21. An investor's ability to take risk depends on what?

22. Human capital is sometimes referred to as what?
Implied assets
The risk of a premature death with accompanying loss of future human capital
The decedent's estate
High need for financial security - High need to avoid losses - Don't like to make own investment decisions - Don't trust others to make investment decisions - either - Tend to select least volatile assets - Low asset turnover - Frequently miss invest

23. What are the psychological issues of low basis stock held by an executive?
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
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
- 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
1) exhibit loss aversion rather than risk aversion 2) exhibit biased expectations rather than rational expectations 3) tend to segregate investments rather than considering them in a portfolio perspective

24. When dealing with low basis stock - emotional issues can arise from what?
Must have a very large portfolio or be willing to borrow - may take a long time to diversifiy completely
Can be used for clarification if questions areise about specific invesetment decisions - should outline a process for dispute resolution
Client is a foundign family member - the firm still bears the family name - the shares were acquired by a loved one
1) source of wealth 2) measure of wealth 3) stage of life

25. What are the main characteristics of chritable gifts?
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
- gifts to charitable organizations are not taxed - donor is allowed to take a tax deduction in the amount of the gift
When a decedent leaves no will or if the will is deemed invalid
The testator

26. What are the different stages of life?
Demand for insurance decreases; less human capital to replace
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
The more equity-like - the less the demand for life insurance
1) foundation phase 2) accumulation phase 3) maintenance phase 4) distribution phase

27. characteristics of maintenance phase
High need for financial security - High need to avoid losses - Don't like to make own investment decisions - Don't trust others to make investment decisions - either - Tend to select least volatile assets - Low asset turnover - Frequently miss invest
- 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
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
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

28. characteristics of accumulation phase
To earn a total ______-tax __________ return of ______% covering: -expense 1 -expense 2 -expense n
1) specific risk (unsystematic risk) 2) market risk (systematic risk) 3) residual risk (counterparty risk and regulatory risk)
The amount of assets (i.e.present value) necessary to meet all future liabilities
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

29. characteristics of distribution phase
Valuation discounts can reduce the value of wealth transfers - so high net worth indiiduals utilize them whenever possible to minimize transfer taxes
- a subjective assessment of financial well-being based on perceived wealth
Retirement -Wealth has been accumulated -Liabilities paid off -Investor looking to live off of portfolio and/or considering distributions to others -need + ability to bear risk really starts to decline
Depends on the investor's goals and time horizon and the volatility the portfolio can bear b/f those goals are jeopardized

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

31. characteristics of individualist investor
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
Self confident - Gather information from a wide variety of sources to make their own decisions - Willing to take risk
Implied liabilities
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

32. What is the eifference in willingness to take risk between active and passive wealth creators?
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
Risk tolerance = as risk tolerance increases - demand for life insurance decreases
Risk tolerance and decision-making style
Self confident - Gather information from a wide variety of sources to make their own decisions - Willing to take risk

33. What is another name for a variable prepaid forward and What is its main purpose?
Must partner with an outside - unrelated investor - lock up period - taxesdeferred but not avoided - potential regulatory (IRS) risk
Aka - unbalanced collar - forward sale of shares with an agreed delivery date in exchange for cash today
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
Lock up period (7-10 yrs) - must hold >20% illiquid assets - lack of control (no changes - manager determines asset mix) - original cost basis

34. What are the advantages of private exchange funds for low basis stock?
Retirement -Wealth has been accumulated -Liabilities paid off -Investor looking to live off of portfolio and/or considering distributions to others -need + ability to bear risk really starts to decline
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
Relies on hard facts -decisions tend to be conservative in nature -more risk averse -thinking/analysis
The reduction in return caused by the payment of taxes

35. What are the main characteristics of variable annuities?

36. template for return objective
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
- 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
To earn a total ______-tax __________ return of ______% covering: -expense 1 -expense 2 -expense n
Implied liabilities

37. In contrast to standard finance (MPT) - behavioral finance assumes individuals do what?
Young -Building a foundation for future wealth -above avg risk tolerance
1) exhibit loss aversion rather than risk aversion 2) exhibit biased expectations rather than rational expectations 3) tend to segregate investments rather than considering them in a portfolio perspective
Using HIFO accounting - an investor assumes the lot with the highest tax basis was sold to either maximize the loss for harvesting or minimize the taxable gain
Number of years to retirement/death - investable assets - annual liquidity requirement - specific amount (if any) needed at a future date

38. As probability of death increases...
Excess capital
- does not ordinarily exhibit the same attachments to the firm as an entrepreneur or top executive - does not have any degree of control either
The demand for life insurance increases - regardless of age
- 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

39. What are typical characteristics of active wealth creators?
The more equity-like - the less the demand for life insurance
Taxes paid on the gain (long or short position) when an asset is sold or purchased
It is expenseive - time consuming - public
- 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

40. As desire to leave an estate increases...
Demand for life insurance increases
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 testator
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

41. What are the main characteristics of the foundation phase of life?
Methodical - cautious - individualist - spontaneous
Typically very loyal to the firm - views the concentrated position as a positive - does not desire diversification - b/c feels in control of the future - as entrepreneurs delegate more and more control to others - they strive for more and more divers
Forced heirship rules (children have the right to parents' estate) - community property rights (each spouse has right to 1/2 the estate) - separate property rights (each spouse's estate considered separately)
Early career 8accumulating education - developing skills - above-average ability to take risk

42. What should an investor use in mean-variance optimization
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
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 will (also known as a testament)
Should use accrual-equivalent returns and after-tax risk

43. Living expenses in retirment can be referred to as what?
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
Implied liabilities
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)
Immediate diersification - ability to borrow (monetize) - at end of partnership receive proportional share of pool

44. As wealth increases...
Tax drag % = tax rate - as the investment horizon increases - tax drag is unchanged - as the investment return increases - tax drag is unchanged - as the investment horizon increases - value of the tax deferral increases - as the inestment return inc
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
Income rising - assets growing - long time horizon - above-avg. ability to take risk
Demand for life insurance decreases

45. What are the benefits of an IPS to the client?
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
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)
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
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

46. What are the different types of trusts?
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)
The demand for life insurance increases - regardless of age
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
Early career 8accumulating education - developing skills - above-average ability to take risk

47. What is mortality risk?
The risk of a premature death with accompanying loss of future human capital
A positive relationship
Using HIFO accounting - an investor assumes the lot with the highest tax basis was sold to either maximize the loss for harvesting or minimize the taxable gain
Typically very loyal to the firm - views the concentrated position as a positive - does not desire diversification - b/c feels in control of the future - as entrepreneurs delegate more and more control to others - they strive for more and more divers

48. When should you use a tax-exempt versus a tax-deferred account?
Can be used for clarification if questions areise about specific invesetment decisions - should outline a process for dispute resolution
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
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
Tax rate lower today = use tax-exempt - tax rate lower in future = use tax deferred - not expected to change = use either

49. What are the main characteristics of the distribution phase of life?
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
Wealth transfer stage - focus on tax min. with trusts and foundations
The client's psychological profile
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

50. What is the difference b/t a required and desired return objective?