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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. situational profiling - considerations
- a subjective assessment of financial well-being based on perceived wealth
Sources of wealth - measure of wealth - stage of life
Early career 8accumulating education - developing skills - above-average ability to take risk
Demand for insurance decreases; less human capital to replace

2. What is the general relationship b/t a client's perception of wealth and risk willingness?
Relies on hard facts -decisions tend to be conservative in nature -more risk averse -thinking/analysis
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
A positive relationship
Transferring assets directly to a third generation avoids possible double taxation

3. When should you use a tax-exempt versus a tax-deferred account?
Demand for life insurance decreases
Portfolio size incr. = ability up - Liquidity needs up = ability down - Time horizon up = ability up - Spending importance down = ability up
Tax rate lower today = use tax-exempt - tax rate lower in future = use tax deferred - not expected to change = use either
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

4. What should an investor use in mean-variance optimization
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 rate lower today = use tax-exempt - tax rate lower in future = use tax deferred - not expected to change = use either
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
Should use accrual-equivalent returns and after-tax risk

5. What is another name for a variable prepaid forward and What is its main purpose?
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
Risk tolerance = as risk tolerance increases - demand for life insurance decreases
Aka - unbalanced collar - forward sale of shares with an agreed delivery date in exchange for cash today
HC = PV of future labor income

6. What are the main characteristics of fixed annuities?

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7. What are the equity holding life risk attributes for an executive?
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
Extra investment value created by effective tax management
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
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

8. How does the nature of human capital affect the demand for life insurance?
Both increase with longer holding periods and higher returns
The government shares in both gains and losses
The more equity-like - the less the demand for life insurance
When a decedent leaves no will or if the will is deemed invalid

9. How is demand for insurance affected by risk tolerance - financial wealth - probability of death - age - and bequest desire?
Client is a foundign family member - the firm still bears the family name - the shares were acquired by a loved one
1. foundation 2. accumulation 3. maintenance 4. distribution
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
Risk tolerance = as risk tolerance increases - demand for life insurance decreases

10. Living expenses in retirment can be referred to as what?
Implied liabilities
Methodical - cautious - individualist - spontaneous
To earn a total ______-tax __________ return of ______% covering: -expense 1 -expense 2 -expense n
It is expenseive - time consuming - public

11. 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
Valuation discounts can reduce the value of wealth transfers - so high net worth indiiduals utilize them whenever possible to minimize transfer taxes
Immediate diersification - ability to borrow (monetize) - at end of partnership receive proportional share of pool
It is expenseive - time consuming - public

12. What are the equity holding life risk attributes for an entrepreneur?
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
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
Self confident - Gather information from a wide variety of sources to make their own decisions - Willing to take risk
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

13. Define tax drag.
Must have a very large portfolio or be willing to borrow - may take a long time to diversifiy completely
The reduction in return caused by the payment of taxes
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
Implied assets

14. As desire to leave an estate increases...
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
Can be used for clarification if questions areise about specific invesetment decisions - should outline a process for dispute resolution
Demand for life insurance increases
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

15. When dealing with low basis stock - emotional issues can arise from what?
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
More subjective than situational profiling -helps to understand how an investor perceives risk and return. -Bridges the differences between traditional finance and behavioral finance -Methodical - cautious - individualist - spontaneous
Demand for life insurance decreases
Client is a foundign family member - the firm still bears the family name - the shares were acquired by a loved one

16. What are the diffferent types of tax jurisdictions?
The demand for life insurance increases - regardless of age
1) Source jurisdiction = country levies taxes on all income generated within its borders - whether by citizens or foreigners 2) Residence jurisdiction = a country taxes income of its residents whether generated inside or outside the country (most pre
1) source of wealth 2) measure of wealth 3) stage of life
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

17. Describe a spontaneous investor personality type.
Must partner with an outside - unrelated investor - lock up period - taxesdeferred but not avoided - potential regulatory (IRS) risk
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
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) active 2) passive

18. What are the main characteristics of the distribution phase of life?
1) outright sale 2) exhcange funds (public or priate) 3) completion portfolios 4) hedging
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
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
Wealth transfer stage - focus on tax min. with trusts and foundations

19. What is the difference between a deterministic approach and a monte carlo approach to portfolio construction?
More subjective than situational profiling -helps to understand how an investor perceives risk and return. -Bridges the differences between traditional finance and behavioral finance -Methodical - cautious - individualist - spontaneous
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
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
The reduction in return caused by the payment of taxes

20. What are the psychological issues of low basis stock held by an entrepreneur?
Can be implemented quickly - can facilitate low cost borrowing (to monetize) - borrowing costs may be tax-deductible
Total wealth = financial assets + human capital
Risk tolerance = as risk tolerance increases - demand for life insurance decreases
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

21. Define capital gains taxes.
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
Taxes paid on the gain (long or short position) when an asset is sold or purchased
Young -Building a foundation for future wealth -above avg risk tolerance
Risk tolerance = as risk tolerance increases - demand for life insurance decreases

22. situational profiling - considerations
- 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
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
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
Sources of wealth - measure of wealth - stage of life

23. 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
Demand for insurance decreases; less human capital to replace
Client is a foundign family member - the firm still bears the family name - the shares were acquired by a loved one
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

24. What are the four broad categories of investor personality types (BB&K)?
- cautious - methodical - individualistic - spontaneous
Demand for insurance decreases; less human capital to replace
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
When a decedent leaves no will or if the will is deemed invalid

25. Describe a spontaneous investor personality type.
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) foundation phase 2) accumulation phase 3) maintenance phase 4) distribution phase
Must have a very large portfolio or be willing to borrow - may take a long time to diversifiy completely
The amount of assets (i.e.present value) necessary to meet all future liabilities

26. What are the advantages of public exchange funds for low basis stock?
Aka - unbalanced collar - forward sale of shares with an agreed delivery date in exchange for cash today
1. foundation 2. accumulation 3. maintenance 4. distribution
- cautious - methodical - individualistic - spontaneous
Immediate diersification - ability to borrow (monetize) - at end of partnership receive proportional share of pool

27. What are the benefits of an IPS to the client?
The more equity-like - the less the demand for life insurance
- tax drag% > tax rate - as investment horizon increases - tax drag $ and tax drage % increase - as investment return increases - tax drag $ and tax drag % increase
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
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

28. characteristics of maintenance phase
Early career 8accumulating education - developing skills - above-average ability to take risk
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
Valuation discounts can reduce the value of wealth transfers - so high net worth indiiduals utilize them whenever possible to minimize transfer taxes
1) Taxes - outright sale produces large capital gains taxes 2) Psychological factors - client might have emotional attachment or not care about diversification

29. As probability of death 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) Taxes - outright sale produces large capital gains taxes 2) Psychological factors - client might have emotional attachment or not care about diversification
The demand for life insurance increases - regardless of age
- does not ordinarily exhibit the same attachments to the firm as an entrepreneur or top executive - does not have any degree of control either

30. Why would someone want to use a valuation discount?
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
Must have a very large portfolio or be willing to borrow - may take a long time to diversifiy completely
Valuation discounts can reduce the value of wealth transfers - so high net worth indiiduals utilize them whenever possible to minimize transfer taxes
Early career 8accumulating education - developing skills - above-average ability to take risk

31. 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?
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
Must have a very large portfolio or be willing to borrow - may take a long time to diversifiy completely
- 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
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

32. Any amount above core capital is considered what?
A will (also known as a testament)
When a decedent leaves no will or if the will is deemed invalid
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
Excess capital

33. What are the general legal and regulatory considerations for individuals?
A will (also known as a testament)
Must partner with an outside - unrelated investor - lock up period - taxesdeferred but not avoided - potential regulatory (IRS) risk
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

34. Who is responsible for gains/losses in a taxable (accrual taxation) account?
Client is a foundign family member - the firm still bears the family name - the shares were acquired by a loved one
The government shares in both gains and losses
1) outright sale 2) exhcange funds (public or priate) 3) completion portfolios 4) hedging
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

35. What is tax alpha?
Extra investment value created by effective tax management
Immediate diersification - ability to borrow (monetize) - at end of partnership receive proportional share of pool
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
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

36. What is the eifference in willingness to take risk between active and passive wealth creators?
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
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
The government shares in both gains and losses
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

37. As wealth increases...
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 decreases
Sources of wealth - measure of wealth - stage of life
Simple and quick - removes all residual risk - allows reinvestment of proceeds to achieve desired diversification

38. four types of investors
Achieves diversification slowly over time - capital gains taxes avoided to extent of matching gains and harvesting losses
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
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
Methodical - cautious - individualist - spontaneous

39. 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)
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
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
- a subjective assessment of financial well-being based on perceived wealth

40. What are the different types of trusts?
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)
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
Can be implemented quickly - can facilitate low cost borrowing (to monetize) - borrowing costs may be tax-deductible
Tax rate lower today = use tax-exempt - tax rate lower in future = use tax deferred - not expected to change = use either

41. Human capital is sometimes referred to as what?
Tax rate lower today = use tax-exempt - tax rate lower in future = use tax deferred - not expected to change = use either
Sources of wealth - measure of wealth - stage of life
Implied assets
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

42. Describe an individualistic investor personality type.
- a subjective assessment of financial well-being based on perceived wealth
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
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
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

43. What are the different methods of relief from double taxation?
1) credit method 2) exemption method 3) deduction method
HC = PV of future labor income
More subjective than situational profiling -helps to understand how an investor perceives risk and return. -Bridges the differences between traditional finance and behavioral finance -Methodical - cautious - individualist - spontaneous
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

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

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45. What is measure of wealth?
Extra investment value created by effective tax management
Aka - unbalanced collar - forward sale of shares with an agreed delivery date in exchange for cash today
- a subjective assessment of financial well-being based on perceived wealth
Demand for life insurance decreases

46. What progressive tax regimes do not have favorable treatment for interest income/dividend income/capital gains?
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
Taxes paid on the gain (long or short position) when an asset is sold or purchased
INTEREST = heavy interest tax; light capital gain tax DVIDIDEND = heavy capital gain tax; light capital gain tax CAPITAL GAIN = heavy capital gain tax
The reduction in return caused by the payment of taxes

47. What is another name for a variable prepaid forward and What is its main purpose?
- 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
Aka - unbalanced collar - forward sale of shares with an agreed delivery date in exchange for cash today
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) 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

48. What are the main characteristics of the accumulation phase of life?
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
The reduction in return caused by the payment of taxes
It is expenseive - time consuming - public
Income rising - assets growing - long time horizon - above-avg. ability to take risk

49. When calculating a required return - you typically must identify what?
Wealth transfer stage - focus on tax min. with trusts and foundations
Number of years to retirement/death - investable assets - annual liquidity requirement - specific amount (if any) needed at a future date
Transferring assets directly to a third generation avoids possible double taxation
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

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

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