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Private Wealth Management

Subjects : personal-finance, business-skills

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1. What are the two sources of wealth?
To earn a total ______-tax __________ return of ______% covering: -expense 1 -expense 2 -expense n
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
1) active 2) passive
Taxes paid on the gain (long or short position) when an asset is sold or purchased

2. What are the disadvantages of hedging for low basis stock?
Upside potential of hedged position limited - regulatory risk (avoid constructive sale - some risk exposure required)
Simple and quick - removes all residual risk - allows reinvestment of proceeds to achieve desired diversification
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
Depends on the investor's goals and time horizon and the volatility the portfolio can bear b/f those goals are jeopardized

3. What are the diffferent types of tax jurisdictions?
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
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
Demand for life insurance decreases
The client's psychological profile

4. What are the disadvantages of completion portfolios for low basis stock?
Must have a very large portfolio or be willing to borrow - may take a long time to diversifiy completely
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
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
1) credit method 2) exemption method 3) deduction method

5. As desire to leave an estate increases...
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
1. foundation 2. accumulation 3. maintenance 4. distribution
Demand for life insurance increases
A will (also known as a testament)

6. What are the advantages of private exchange funds for low basis stock?
Risk tolerance = as risk tolerance increases - demand for life insurance decreases
INTEREST = heavy interest tax; light capital gain tax DVIDIDEND = heavy capital gain tax; light capital gain tax CAPITAL GAIN = heavy capital gain tax
Tax rate lower today = use tax-exempt - tax rate lower in future = use tax deferred - not expected to change = use either
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

7. What is mortality risk?
Should use accrual-equivalent returns and after-tax risk
The risk of a premature death with accompanying loss of future human capital
Must have a very large portfolio or be willing to borrow - may take a long time to diversifiy completely
Upside potential of hedged position limited - regulatory risk (avoid constructive sale - some risk exposure required)

8. Living expenses in retirment can be referred to as what?
Most risk averse/least risk tolerant - primary focus is financial security: preservation of wealth - hard to advise - can over-analyze - slow in making decisions and then changing investments - low portfolio turnover/volatility
It is expenseive - time consuming - public
Implied liabilities
Triggers tax on unrealized capital gains - requires liquidity - shares must be publicly traded or have low restrictions on sale

9. What are ways that individuals can avoid probate?
Joint ownership with rights of survivorship - living trusts - retirement plans - life insurance - other means that transfer assets without the need for a will
Can be implemented quickly - can facilitate low cost borrowing (to monetize) - borrowing costs may be tax-deductible
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
Demand for life insurance increases

10. All costs associated with probate are born by whom?

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11. What are the disadvantages of public exchange funds for low basis stock?
Self confident - Gather information from a wide variety of sources to make their own decisions - Willing to take risk
Lock up period (7-10 yrs) - must hold >20% illiquid assets - lack of control (no changes - manager determines asset mix) - original cost basis
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
Both increase with longer holding periods and higher returns

12. How is mortality risk typically hedged?
1) credit method 2) exemption method 3) deduction method
Hedged with life insurance - think of the life insurance as a replacement for lost human capital
INTEREST = heavy interest tax; light capital gain tax DVIDIDEND = heavy capital gain tax; light capital gain tax CAPITAL GAIN = heavy capital gain tax
- tax drag% > tax rate - as investment horizon increases - tax drag $ and tax drage % increase - as investment return increases - tax drag $ and tax drag % increase

13. What are the different global tax regimes and their respective ordinary income tax structure?
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)
Retired - focus on lifestyle maintenance and security - preservation of wealth - shortening time horizon and declining risk tolerance
Aka - unbalanced collar - forward sale of shares with an agreed delivery date in exchange for cash today
Excess capital

14. What is the most common estate planning tool?
1) outright sale 2) exhcange funds (public or priate) 3) completion portfolios 4) hedging
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
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
A will (also known as a testament)

15. What are the advantages of public exchange funds for low basis stock?
Immediate diersification - ability to borrow (monetize) - at end of partnership receive proportional share of pool
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
Should use accrual-equivalent returns and after-tax risk
1. foundation 2. accumulation 3. maintenance 4. distribution

16. What are the different stages of life?
- gifts to charitable organizations are not taxed - donor is allowed to take a tax deduction in the amount of the gift
- 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
Implied liabilities
1) foundation phase 2) accumulation phase 3) maintenance phase 4) distribution phase

17. characteristics of foundation stage
Young -Building a foundation for future wealth -above avg risk tolerance
Simple and quick - removes all residual risk - allows reinvestment of proceeds to achieve desired diversification
Relies on hard facts -decisions tend to be conservative in nature -more risk averse -thinking/analysis
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

18. What are the advantages of completion portfolios for low basis stock?
1) source of wealth 2) measure of wealth 3) stage of life
Achieves diversification slowly over time - capital gains taxes avoided to extent of matching gains and harvesting losses
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
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. If human capital is equity-like/fixed-income like - how should you generally allocate financial assets?
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
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
Excess capital
Simple and quick - removes all residual risk - allows reinvestment of proceeds to achieve desired diversification

20. All costs associated with probate are born by whom?

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21. What are the advantages of private exchange funds for low basis stock?
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
Methodical - cautious - individualist - spontaneous
A will (also known as a testament)
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

22. How does the nature of human capital affect the demand for life insurance?
Depends on the investor's goals and time horizon and the volatility the portfolio can bear b/f those goals are jeopardized
- 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
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 more equity-like - the less the demand for life insurance

23. What are the general legal and regulatory considerations for individuals?
Client is a foundign family member - the firm still bears the family name - the shares were acquired by a loved one
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
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
Joint ownership with rights of survivorship - living trusts - retirement plans - life insurance - other means that transfer assets without the need for a will

24. What are the psychological issues of low basis stock held by an investor?
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
The risk of a premature death with accompanying loss of future human capital
1. foundation 2. accumulation 3. maintenance 4. distribution
- does not ordinarily exhibit the same attachments to the firm as an entrepreneur or top executive - does not have any degree of control either

25. What are the equity holding life risk attributes for an investor?
Total wealth = financial assets + human capital
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
Hedged with life insurance - think of the life insurance as a replacement for lost human capital
The government shares in both gains and losses

26. characteristics of accumulation phase
Simple and quick - removes all residual risk - allows reinvestment of proceeds to achieve desired diversification
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
Relies on hard facts -decisions tend to be conservative in nature -more risk averse -thinking/analysis
- a subjective assessment of financial well-being based on perceived wealth

27. Describe a cautious investor personality type.
Most risk averse/least risk tolerant - primary focus is financial security: preservation of wealth - hard to advise - can over-analyze - slow in making decisions and then changing investments - low portfolio turnover/volatility
- 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
- gifts to charitable organizations are not taxed - donor is allowed to take a tax deduction in the amount of the gift
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

28. What are the different retirment risks and how can they be hedged?
Demand for life insurance decreases
Implied assets
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)
Objectives = required return; risk tolerance - Constraints = time horizon - tax concerns; liquidity needs - legal/regulatory; unique circumstances

29. stages of life
The reduction in return caused by the payment of taxes
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
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
1. foundation 2. accumulation 3. maintenance 4. distribution

30. stages of life
INTEREST = heavy interest tax; light capital gain tax DVIDIDEND = heavy capital gain tax; light capital gain tax CAPITAL GAIN = heavy capital gain tax
Demand for life insurance decreases
1. foundation 2. accumulation 3. maintenance 4. distribution
- gifts to charitable organizations are not taxed - donor is allowed to take a tax deduction in the amount of the gift

31. How is demand for insurance affected by risk tolerance - financial wealth - probability of death - age - and bequest desire?
Risk tolerance = as risk tolerance increases - demand for life insurance decreases
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
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
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

32. Describe biased expectations in a behavioral finance context.
Can be used for clarification if questions areise about specific invesetment decisions - should outline a process for dispute resolution
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
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
1) active 2) passive

33. What are the 3 categories of investors when discussing concentrated positions?
Must have a very large portfolio or be willing to borrow - may take a long time to diversifiy completely
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
Taxes paid on the gain (long or short position) when an asset is sold or purchased
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

34. Describe the different types of double taxation conflicts.
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
Income rising - assets growing - long time horizon - above-avg. ability to take risk
Young -Building a foundation for future wealth -above avg risk tolerance
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

35. What is another name for a variable prepaid forward and What is its main purpose?
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
Aka - unbalanced collar - forward sale of shares with an agreed delivery date in exchange for cash today
Joint ownership with rights of survivorship - living trusts - retirement plans - life insurance - other means that transfer assets without the need for a will
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

36. In contrast to standard finance (MPT) - behavioral finance assumes individuals do what?
Can be used for clarification if questions areise about specific invesetment decisions - should outline a process for dispute resolution
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
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
Implied assets

37. What is an equity collar? What is the purpose of the underlying positions
Early career 8accumulating education - developing skills - above-average ability to take risk
A will (also known as a testament)
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
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

38. typical IPS elements
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
Triggers tax on unrealized capital gains - requires liquidity - shares must be publicly traded or have low restrictions on sale
Retired - focus on lifestyle maintenance and security - preservation of wealth - shortening time horizon and declining risk tolerance
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

39. When dealing with low basis stock - emotional issues can arise from what?
Wealth transfer stage - focus on tax min. with trusts and foundations
Client is a foundign family member - the firm still bears the family name - the shares were acquired by a loved one
Joint ownership with rights of survivorship - living trusts - retirement plans - life insurance - other means that transfer assets without the need for a will
When a decedent leaves no will or if the will is deemed invalid

40. 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
Portfolio size incr. = ability up - Liquidity needs up = ability down - Time horizon up = ability up - Spending importance down = ability up
1) credit method 2) exemption method 3) deduction method
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

41. What is the eifference in willingness to take risk between active and passive wealth creators?
Upside potential of hedged position limited - regulatory risk (avoid constructive sale - some risk exposure required)
Can be used for clarification if questions areise about specific invesetment decisions - should outline a process for dispute resolution
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)
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

42. As probability of death 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
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
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 demand for life insurance increases - regardless of age

43. How is demand for insurance affected by risk tolerance - financial wealth - probability of death - age - and bequest desire?
Wealth attained through inheritance - windfalls - long steady employment - etc. - might have less experience and less understanding of risk/return - might require investment education
Risk tolerance = as risk tolerance increases - demand for life insurance decreases
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
- 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

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

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45. situational profiling

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46. As wealth increases...
Demand for life insurance decreases
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
Hedged with life insurance - think of the life insurance as a replacement for lost human capital
Triggers tax on unrealized capital gains - requires liquidity - shares must be publicly traded or have low restrictions on sale

47. What should an investor use in mean-variance optimization
A will (also known as a testament)
Should use accrual-equivalent returns and after-tax risk
Simple and quick - removes all residual risk - allows reinvestment of proceeds to achieve desired diversification
HC = PV of future labor income

48. What are the different types of trusts?
- Deemed disposition = amount is usually based on the gains on assets leaving - as if the individuals sold the assets and realized the gains - Shadow period = could include a tax on income earned for a period after leaving
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
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
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

49. What is the reinvestment caveat when considering tax loss harvesting?
1) outright sale 2) exhcange funds (public or priate) 3) completion portfolios 4) hedging
1) foundation phase 2) accumulation phase 3) maintenance phase 4) distribution phase
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
- 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

50. Any amount above core capital is considered what?
Must have a very large portfolio or be willing to borrow - may take a long time to diversifiy completely
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
Valuation discounts can reduce the value of wealth transfers - so high net worth indiiduals utilize them whenever possible to minimize transfer taxes
Excess capital

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