Private Wealth Management

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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 is the person called that transfers assets through a will?
Sources of wealth - measure of wealth - stage of life
- 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 testator
Excess capital


2. What are investment objectives and constraints?
Payments are based on the performance of a mixed-asset class portfolio selected by the investor (client) - investor receives a fixed number of 'units' each period - value of each unit increases (decreases) during periods of rising (falling) market re
Objectives = required return; risk tolerance - Constraints = time horizon - tax concerns; liquidity needs - legal/regulatory; unique circumstances
- gifts to charitable organizations are not taxed - donor is allowed to take a tax deduction in the amount of the gift
1. foundation 2. accumulation 3. maintenance 4. distribution


3. Define capital gains taxes.
Must partner with an outside - unrelated investor - lock up period - taxesdeferred but not avoided - potential regulatory (IRS) risk
Early career 8accumulating education - developing skills - above-average ability to take risk
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
Taxes paid on the gain (long or short position) when an asset is sold or purchased


4. What are the four broad categories of investor personality types (BB&K)?
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
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
- cautious - methodical - individualistic - spontaneous
Relies on hard facts -decisions tend to be conservative in nature -more risk averse -thinking/analysis


5. What is the person called that transfers assets through a will?
Simple and quick - removes all residual risk - allows reinvestment of proceeds to achieve desired diversification
Excess capital
The testator
1) outright sale 2) exhcange funds (public or priate) 3) completion portfolios 4) hedging


6. What are the disadvantages of an outright sale of low basis stock?
- a subjective assessment of financial well-being based on perceived wealth
1) growing the portfolio (capital gains) 2) liquidity needs - total return approach
Triggers tax on unrealized capital gains - requires liquidity - shares must be publicly traded or have low restrictions on sale
- gifts to charitable organizations are not taxed - donor is allowed to take a tax deduction in the amount of the gift


7. Calculating the required return component is driven by what 2 elements?
1) growing the portfolio (capital gains) 2) liquidity needs - total return approach
Extra investment value created by effective tax management
Number of years to retirement/death - investable assets - annual liquidity requirement - specific amount (if any) needed at a future date
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


8. Describe an individualistic investor personality type.
Demand for life insurance increases
Demand for life insurance decreases
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
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


9. What is the general relationship between tax drag% and tax rate when capital gains taxes are deferred and B=1; and as investment horizon increases and return increases?
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
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
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


10. What are the equity holding life risk attributes for an investor?
Excess 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
Income rising - assets growing - long time horizon - above-avg. ability to take risk
1) growing the portfolio (capital gains) 2) liquidity needs - total return approach


11. What are the advantages of hedging for low basis stock?
Number of years to retirement/death - investable assets - annual liquidity requirement - specific amount (if any) needed at a future date
- 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
Can be implemented quickly - can facilitate low cost borrowing (to monetize) - borrowing costs may be tax-deductible
Hedged with life insurance - think of the life insurance as a replacement for lost human capital


12. 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
- gifts to charitable organizations are not taxed - donor is allowed to take a tax deduction in the amount of the gift
Retired - focus on lifestyle maintenance and security - preservation of wealth - shortening time horizon and declining 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


13. characteristics of spontaneous investor

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14. Why do individuals often take steps to avoid probate?
Demand for life insurance increases
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
It is expenseive - time consuming - public
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


15. benefits of IPS to client
Decisions should be optimal -process is dynamic - thus factors in changing circumstances -focus on long-term objectives -new investment advisors should be able to use the IPS
Hedged with life insurance - think of the life insurance as a replacement for lost human capital
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
Implied assets


16. Investor questionnaires help to determine 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
Risk tolerance and decision-making style
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
Implied assets


17. What are wealth taxes.
INTEREST = heavy interest tax; light capital gain tax DVIDIDEND = heavy capital gain tax; light capital gain tax CAPITAL GAIN = heavy capital gain tax
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
Risk tolerance and decision-making style
Relies on hard facts -decisions tend to be conservative in nature -more risk averse -thinking/analysis


18. When should you use a tax-exempt versus a tax-deferred account?
Wealth transfer stage - focus on tax min. with trusts and foundations
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
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
Tax rate lower today = use tax-exempt - tax rate lower in future = use tax deferred - not expected to change = use either


19. What is the reinvestment caveat when considering tax loss harvesting?
- 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
The more equity-like - the less the demand for life insurance
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
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


20. What is the general relationship b/t a client's perception of wealth and risk willingness?
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
A positive relationship
Number of years to retirement/death - investable assets - annual liquidity requirement - specific amount (if any) needed at a future date
Should use accrual-equivalent returns and after-tax risk


21. What is the general relationship b/t a client's perception of wealth and risk willingness?
A positive relationship
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
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)
The reduction in return caused by the payment of taxes


22. What should an investor use in mean-variance optimization
Number of years to retirement/death - investable assets - annual liquidity requirement - specific amount (if any) needed at a future date
- does not ordinarily exhibit the same attachments to the firm as an entrepreneur or top executive - does not have any degree of control either
HC = PV of future labor income
Should use accrual-equivalent returns and after-tax risk


23. What is the general relationship between tax drag% and tax rate with accrual taxes; and as investment horizon increases and return increases?
The more equity-like - the less the demand for life insurance
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
The demand for life insurance increases - regardless of age
- tax drag% > tax rate - as investment horizon increases - tax drag $ and tax drage % increase - as investment return increases - tax drag $ and tax drag % increase


24. What are the disadvantages of public exchange funds for low basis stock?
The amount of assets (i.e.present value) necessary to meet all future liabilities
Lock up period (7-10 yrs) - must hold >20% illiquid assets - lack of control (no changes - manager determines asset mix) - original cost basis
Methodical - cautious - individualist - spontaneous
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


25. Why would someone want to use a valuation discount?
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
- 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
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


26. Define capital gains taxes.
1) growing the portfolio (capital gains) 2) liquidity needs - total return approach
1) active 2) passive
Taxes paid on the gain (long or short position) when an asset is sold or purchased
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


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

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28. What is loss aversion?
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
Methodical - cautious - individualist - spontaneous
Achieves diversification slowly over time - capital gains taxes avoided to extent of matching gains and harvesting losses
Client is a foundign family member - the firm still bears the family name - the shares were acquired by a loved one


29. If human capital is equity-like/fixed-income like - how should you generally allocate financial assets?
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
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
The testator
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


30. What is mortality risk?
Self confident - Gather information from a wide variety of sources to make their own decisions - Willing to take risk
Income rising - assets growing - long time horizon - above-avg. ability to take risk
Demand for life insurance increases
The risk of a premature death with accompanying loss of future human capital


31. Why would an individual try to use generation skipping in estate planning?
1) specific risk (unsystematic risk) 2) market risk (systematic risk) 3) residual risk (counterparty risk and regulatory risk)
Transferring assets directly to a third generation avoids possible double taxation
Demand for life insurance increases
Implied assets


32. Any amount above core capital is considered what?
Excess capital
Demand for insurance decreases; less human capital to replace
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
- gifts to charitable organizations are not taxed - donor is allowed to take a tax deduction in the amount of the gift


33. Living expenses in retirment can be referred to as what?
Depends on the investor's goals and time horizon and the volatility the portfolio can bear b/f those goals are jeopardized
Tax rate lower today = use tax-exempt - tax rate lower in future = use tax deferred - not expected to change = use either
Implied liabilities
HC = PV of future labor income


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
Immediate diersification - ability to borrow (monetize) - at end of partnership receive proportional share of pool
Tax rate lower today = use tax-exempt - tax rate lower in future = use tax deferred - not expected to change = use 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


35. What are the psychological issues of low basis stock held by an entrepreneur?
Extra investment value created by effective tax management
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
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
- does not ordinarily exhibit the same attachments to the firm as an entrepreneur or top executive - does not have any degree of control either


36. situational profiling

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37. What happens to both tax drag $ and tax drag % with holding period changes and return changes?
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)
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
Taxes paid on the gain (long or short position) when an asset is sold or purchased
Both increase with longer holding periods and higher returns


38. template for return objective
1) active 2) passive
To earn a total ______-tax __________ return of ______% covering: -expense 1 -expense 2 -expense n
Achieves diversification slowly over time - capital gains taxes avoided to extent of matching gains and harvesting losses
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


39. situational profiling - considerations
- gifts to charitable organizations are not taxed - donor is allowed to take a tax deduction in the amount of the gift
Sources of wealth - measure of wealth - stage of life
1. foundation 2. accumulation 3. maintenance 4. distribution
The demand for life insurance increases - regardless of age


40. Define tax drag.
Can be used for clarification if questions areise about specific invesetment decisions - should outline a process for dispute resolution
A will (also known as a testament)
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


41. Describe the equity holding life three stages from the perspective of the stock.
Immediate diersification - ability to borrow (monetize) - at end of partnership receive proportional share of pool
1) active 2) passive
- tax drag% > tax rate - as investment horizon increases - tax drag $ and tax drage % increase - as investment return increases - tax drag $ and tax drag % increase
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


42. What is the general relationship between tax drag% and tax rate when capital gains taxes are deferred and B=1; and as investment horizon increases and return increases?
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
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
Achieves diversification slowly over time - capital gains taxes avoided to extent of matching gains and harvesting losses
Relies on hard facts -decisions tend to be conservative in nature -more risk averse -thinking/analysis


43. When dealing with low basis stock - emotional issues can arise from what?
Achieves diversification slowly over time - capital gains taxes avoided to extent of matching gains and harvesting losses
Tax rate lower today = use tax-exempt - tax rate lower in future = use tax deferred - not expected to change = use either
Triggers tax on unrealized capital gains - requires liquidity - shares must be publicly traded or have low restrictions on sale
Client is a foundign family member - the firm still bears the family name - the shares were acquired by a loved one


44. What is loss aversion?
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
The reduction in return caused by the payment of taxes
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
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


45. What is another name for a variable prepaid forward and What is its main purpose?
Demand for life insurance increases
Aka - unbalanced collar - forward sale of shares with an agreed delivery date in exchange for cash today
Extra investment value created by effective tax management
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)


46. Describe a cautious investor personality type.
Implied assets
Client is a foundign family member - the firm still bears the family name - the shares were acquired by a loved one
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
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


47. What are the two sources of wealth?
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)
Upside potential of hedged position limited - regulatory risk (avoid constructive sale - some risk exposure required)
The client's psychological profile
1) active 2) passive


48. What are the equity holding life risk attributes for an investor?
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
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
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
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


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

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50. What are the main characteristics of variable annuities?

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