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Private Wealth Management

Subjects : personal-finance, business-skills

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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. Describe the equity holding life three stages from the perspective of the stock.
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
Demand for life insurance increases
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
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

2. 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)
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
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
Achieves diversification slowly over time - capital gains taxes avoided to extent of matching gains and harvesting losses

3. Human capital is sometimes referred to as what?
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
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) 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
Implied assets

4. Who is responsible for gains/losses in a taxable (accrual taxation) account?
Aka - unbalanced collar - forward sale of shares with an agreed delivery date in exchange for cash today
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) 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)
The government shares in both gains and losses

5. What are the main characteristics of fixed annuities?
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 client's psychological profile
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
Triggers tax on unrealized capital gains - requires liquidity - shares must be publicly traded or have low restrictions on sale

6. Define tax drag.
- cautious - methodical - individualistic - spontaneous
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 reduction in return caused by the payment of taxes
1. foundation 2. accumulation 3. maintenance 4. distribution

7. What are the steps involved in creating an IPS?
- gifts to charitable organizations are not taxed - donor is allowed to take a tax deduction in the amount of the gift
Upside potential of hedged position limited - regulatory risk (avoid constructive sale - some risk exposure required)
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
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

8. What are the equity holding life risk attributes for an investor?
Hedged with life insurance - think of the life insurance as a replacement for lost human capital
HC = PV of future labor income
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
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

9. What is the reinvestment caveat when considering tax loss harvesting?
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
Upside potential of hedged position limited - regulatory risk (avoid constructive sale - some risk exposure required)
- 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 decedent's estate

10. What are the advantages of completion portfolios for low basis stock?
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)
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
Achieves diversification slowly over time - capital gains taxes avoided to extent of matching gains and harvesting losses
A will (also known as a testament)

11. situational profiling
Both increase with longer holding periods and higher returns
Simple and quick - removes all residual risk - allows reinvestment of proceeds to achieve desired diversification
Demand for life insurance decreases
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

12. What is another name for a variable prepaid forward and What is its main purpose?
Aka - unbalanced collar - forward sale of shares with an agreed delivery date in exchange for cash today
- tax drag% > tax rate - as investment horizon increases - tax drag $ and tax drage % increase - as investment return increases - tax drag $ and tax drag % increase
The amount of assets (i.e.present value) necessary to meet all future liabilities
The client's psychological profile

13. What is the eifference in willingness to take risk between active and passive wealth creators?
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)
Wealth transfer stage - focus on tax min. with trusts and foundations
The decedent's estate
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

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

15. What is typically considered when imposing an exit tax?
Simple and quick - removes all residual risk - allows reinvestment of proceeds to achieve desired diversification
- 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
Implied assets
Risk tolerance = as risk tolerance increases - demand for life insurance decreases

16. What is core capital?
The amount of assets (i.e.present value) necessary to meet all future liabilities
Demand for insurance decreases; less human capital to replace
Hedged with life insurance - think of the life insurance as a replacement for lost human capital
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

17. What is loss aversion?
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
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
Joint ownership with rights of survivorship - living trusts - retirement plans - life insurance - other means that transfer assets without the need for a will
1) specific risk (unsystematic risk) 2) market risk (systematic risk) 3) residual risk (counterparty risk and regulatory risk)

18. As age increases..
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
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
Demand for insurance decreases; less human capital to replace
Joint ownership with rights of survivorship - living trusts - retirement plans - life insurance - other means that transfer assets without the need for a will

19. What are the steps involved in creating an IPS?
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
Sources of wealth - measure of wealth - stage 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
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

20. template for return objective
To earn a total ______-tax __________ return of ______% covering: -expense 1 -expense 2 -expense n
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
The government shares in both gains and losses
The testator

21. Describe a cautious investor personality type.
Can be used for clarification if questions areise about specific invesetment decisions - should outline a process for dispute resolution
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
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
Lock up period (7-10 yrs) - must hold >20% illiquid assets - lack of control (no changes - manager determines asset mix) - original cost basis

22. What are the disadvantages of hedging for low basis stock?
1) Taxes - outright sale produces large capital gains taxes 2) Psychological factors - client might have emotional attachment or not care about diversification
Upside potential of hedged position limited - regulatory risk (avoid constructive sale - some risk exposure required)
HC = PV of future labor income
- 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

23. What are the disadvantages of public exchange funds for low basis stock?
INTEREST = heavy interest tax; light capital gain tax DVIDIDEND = heavy capital gain tax; light capital gain tax CAPITAL GAIN = heavy capital gain tax
Lock up period (7-10 yrs) - must hold >20% illiquid assets - lack of control (no changes - manager determines asset mix) - original cost basis
The reduction in return caused by the payment of taxes
Achieves diversification slowly over time - capital gains taxes avoided to extent of matching gains and harvesting losses

24. What is HIFO accounting?
1) specific risk (unsystematic risk) 2) market risk (systematic risk) 3) residual risk (counterparty risk and regulatory risk)
Sources of wealth - measure of wealth - stage of life
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
Early career 8accumulating education - developing skills - above-average ability to take risk

25. What is human capital?
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
To earn a total ______-tax __________ return of ______% covering: -expense 1 -expense 2 -expense n
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
HC = PV of future labor income

26. What are the advantages of the monte carlo approach to portfolio construction?
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 drag% > tax rate - as investment horizon increases - tax drag $ and tax drage % increase - as investment return increases - tax drag $ and tax drag % increase
Joint ownership with rights of survivorship - living trusts - retirement plans - life insurance - other means that transfer assets without the need for a will
Lock up period (7-10 yrs) - must hold >20% illiquid assets - lack of control (no changes - manager determines asset mix) - original cost basis

27. What are the different methods of relief from double taxation?
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
1) credit method 2) exemption method 3) deduction method
Excess capital
Young -Building a foundation for future wealth -above avg risk tolerance

28. Investor questionnaires help to determine what?
A will (also known as a testament)
Taxes paid on the gain (long or short position) when an asset is sold or purchased
Risk tolerance and decision-making style
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

29. What are the main characteristics of the accumulation phase of life?
- cautious - methodical - individualistic - spontaneous
- gifts to charitable organizations are not taxed - donor is allowed to take a tax deduction in the amount of the gift
Income rising - assets growing - long time horizon - above-avg. ability to take risk
Demand for insurance decreases; less human capital to replace

30. What is the difference b/t a required and desired return objective?
1) source of wealth 2) measure of wealth 3) stage of life
Tax rate lower today = use tax-exempt - tax rate lower in future = use tax deferred - not expected to change = use either
The demand for life insurance increases - regardless of age
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)

31. What are the two sources of wealth?
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
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
Young -Building a foundation for future wealth -above avg risk tolerance
1) active 2) passive

32. sources of wealth
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
Both increase with longer holding periods and higher returns
- tax drag% > tax rate - as investment horizon increases - tax drag $ and tax drage % increase - as investment return increases - tax drag $ and tax drag % increase
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

33. What are the disadvantages of public exchange funds for low basis stock?
Lock up period (7-10 yrs) - must hold >20% illiquid assets - lack of control (no changes - manager determines asset mix) - original cost basis
Achieves diversification slowly over time - capital gains taxes avoided to extent of matching gains and harvesting losses
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)
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

34. What is core capital?
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
Methodical - cautious - individualist - spontaneous
Should use accrual-equivalent returns and after-tax risk
The amount of assets (i.e.present value) necessary to meet all future liabilities

35. When dealing with low basis stock - emotional issues can arise from what?
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
Implied assets
Client is a foundign family member - the firm still bears the family name - the shares were acquired by a loved one
Immediate diersification - ability to borrow (monetize) - at end of partnership receive proportional share of pool

36. 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
- a subjective assessment of financial well-being based on perceived wealth
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
Implied liabilities

37. What is intestate?
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 risk of a premature death with accompanying loss of future human capital
When a decedent leaves no will or if the will is deemed invalid
1) growing the portfolio (capital gains) 2) liquidity needs - total return approach

38. characteristics of methodical investor
Risk tolerance and decision-making style
Relies on hard facts -decisions tend to be conservative in nature -more risk averse -thinking/analysis
Aka - unbalanced collar - forward sale of shares with an agreed delivery date in exchange for cash today
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

39. Investor questionnaires help to determine what?
1. foundation 2. accumulation 3. maintenance 4. distribution
The amount of assets (i.e.present value) necessary to meet all future liabilities
Implied liabilities
Risk tolerance and decision-making style

40. benefits of IPS to manager
Can be implemented quickly - can facilitate low cost borrowing (to monetize) - borrowing costs may be tax-deductible
- 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
The government shares in both gains and losses
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

41. What is measure of wealth?
The client's psychological profile
- 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
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 subjective assessment of financial well-being based on perceived wealth

42. How is mortality risk typically hedged?
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 more equity-like - the less the demand for life insurance
Hedged with life insurance - think of the life insurance as a replacement for lost human capital
1) outright sale 2) exhcange funds (public or priate) 3) completion portfolios 4) hedging

43. What are the advantages of hedging for low basis stock?
- 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
Demand for insurance decreases; less human capital to replace
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
Can be implemented quickly - can facilitate low cost borrowing (to monetize) - borrowing costs may be tax-deductible

44. How does the nature of human capital affect the demand for life insurance?
Must have a very large portfolio or be willing to borrow - may take a long time to diversifiy completely
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 more equity-like - the less the demand for life insurance
Demand for life insurance increases

45. What are the psychological issues of low basis stock held by an entrepreneur?
The client's psychological profile
Portfolio size incr. = ability up - Liquidity needs up = ability down - Time horizon up = ability up - Spending importance down = ability up
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
To earn a total ______-tax __________ return of ______% covering: -expense 1 -expense 2 -expense n

46. What risks must be considered when discussing each concentrated investor category?
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
1) specific risk (unsystematic risk) 2) market risk (systematic risk) 3) residual risk (counterparty risk and regulatory risk)
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

47. How is mortality risk typically hedged?
To earn a total ______-tax __________ return of ______% covering: -expense 1 -expense 2 -expense n
The risk of a premature death with accompanying loss of future human capital
Hedged with life insurance - think of the life insurance as a replacement for lost human capital
The reduction in return caused by the payment of taxes

48. When should you use a tax-exempt versus a tax-deferred account?
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)
1) active 2) passive
Demand for insurance decreases; less human capital to replace
Tax rate lower today = use tax-exempt - tax rate lower in future = use tax deferred - not expected to change = use either

49. What is the difference between a deterministic approach and a monte carlo approach to portfolio construction?
Methodical - cautious - individualist - spontaneous
Risk tolerance and decision-making style
Can be implemented quickly - can facilitate low cost borrowing (to monetize) - borrowing costs may be tax-deductible
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

50. What are the disadvantages of private exchange funds for low basis stock?
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
Must partner with an outside - unrelated investor - lock up period - taxesdeferred but not avoided - potential regulatory (IRS) risk
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
Should use accrual-equivalent returns and after-tax risk

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