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    Reading 28 Pratice

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    Reading 28 Pratice

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    Nghiem Nguyen Vinh
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    Reading 28 Pratice

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    76 views8 pages

    Reading 28 Pratice

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    Nghiem Nguyen Vinh
    Reading 28 Pratice

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    of 8
    Reading 28 = Overview of Private Wealth Management PRACTICE PROBLEMS The following information relates to Questions 1-3 Henlopen McZhao is private wealth manager. After a successful introductory meet- ing with Nescopeck Cree, she is meeting again with this new client to plan a wealth management strategy. McZhao seeks additional personal information from Cree. MZhao learns that Gree is 45 years old and is currently employed as an attorney. Cree has a number of specific financial goals that he wishes to achieve in the future but has no particular return objective for his portfolio, Because he has been invest- ing for 20 years, Cree is comfortable with moderate levels of market volatility. His employment provides for his current expenses, so Cree’s liquidity requirements are minimal, Cree prefers to have his environmental and social concerns reflected in his investment choices. 1. Discuss additional personal information that Mc in order to properly advise this new client. Zhao should gather from Cree ‘MeZhao then focuses on Cree's financial goals: © Cree wants to fund university expenses for his three children, with the first payment starting in 10 years. Cree does not know what to expect in terms of college costs. © Cree plans to retire at age 62 and expects to need $80,000 per year to fund his retirement lifestyle. He is concerned that an increasing level of medical expenses for himself and his wife may reduce his financial assets. Cree expects to purchase an apartment building in three years and plans to use the rental income from this investment property to help fund his retirement needs. ‘© Crees wife enjoys donating to philanthropic causes. She currently donates $10,000 per yeat, but by the time Cree retires, she hopes to increase this amount to $30,000 per yeat: © Cree collects antique furniture and budgets $15,000 per year for additions to his collection. He mentions that this year’s antique purchase will be his next large expense and currently has the highest priority ofall his goals. 2. Discuss the issues relating to Cree’s 1. goal quantification. fi. goal prioritization. McZhao continues the discussion with Cree in order to evaluate his degree of risk tolerance associated with each of the following individual goals: (©2019 CFA Institute, Al Practice Problems Retirement: Investment property: Philanthropy: Antique furniture: 2s Cree considers retirement a long-term goal and is willing to endure a 10% drop in expected retirement spending. However, he is very concerned with having suficent funds to cover medical expenses Cree sees the investment property asa source of sta- ble income, so itis very important to him to purchase the building, He realizes that maintenance and repair ‘expenses will be necessary, and he also considers those very important. CCree’s wife strongly influences him to Fund her philan thropic causes, and he wants to maintain some level of annual contribution, Cree believes that his wife would be willing to maintain her $10,000 per year contributions and not increase that amount Cree is willing to reduce or eliminate his spending on antique furniture, 3 Determine Cree’s degree of risk tolerance associated with each of the following ndividual goals. Justify each response. Determine Cree's degree of risk tolerance associated with each of the following individual goals. Justify each responsé Degree of Risk Goal Tolerance Justification Retirement Lower Higher Investment Lower Property Higher Philanthropy Lower Higher Antique Lower Furniture Higher The following information relates to Questions 4-6 Sharfepto Zik, a private wealth manager, is meeting with a client, Garbanzo Patel, in ‘order to create an investment policy statement (IPS) for Patel’s upcoming r iment. Patel estimates that he will require €200,000 per year, with annual increases for inflation, during retirement. Patel’s primary spending goals during retirement are to provide for his family’s needs and maintain his retirement lifestyle. His secondary goals are to fund his philanthropic activities and leave a significant inheritance to his children. During his retirement, Patel will receive union pension payments of €50,000 per ‘year with annual increases for inflation. In his spate time, Patel runs a small business that provides him with an annual income of €120,000 and is valued at €1 million. He will continue running his business during retirement. Reading 28 = Overview of Private Wealth Management Patel holds a portfolio of securities valued at approximately €4 million. The port- folio primarily contains dividend-paying stocks and interest-bearing bonds. Patel has reinvested all these distributions back into his portfolio but anticipates that after retirement he may need to use some of the distributions to fund his expenses. Patel plans to buy a vacation home in three years. His budget forthe vacation home is approximately €1.4 million, Patel has not decided yet how he will fund this purchase 4 Prepare the Investment Objectives section of Patel’s IPS. Patel has been working with Zik for 10 years. At the beginning of the 10-year period, Zik forecasted that the equities in Patel’ portfolio would outperform their benchmark and that the bonds would match their benchmark. Now, atthe end of the 10-year period, equities have outperformed the benchmark, but with higher volatility than the benchmark. In addition, the bonds in the portfolio matched their benchmark performance, but with lower volatility than the benchmark. However, returns and volatility are within IPS specifications for both equities and bonds. Patel stated his goals to Zik at the beginning of the 10-year period and has not changed them. Patel’ plan isto retire this year, and he wants to be able to support a specified annual spending level. Zik’s original capital suficiency analysis modeled a 6% rate of return, and Patel’ portfolio has earned slightly more than that over the 10-year period. Zik’s most recent capital sufficiency analysis shows that the portfolio and strategy are very likely to meet Patel’s needs as he transitions into retirement. Zik has followed the guidelines stated in the original IPS in terms of rebalancing the portfolio, maintaining an ongoing dialog with Patel, and coordinating the strat- egy with Patel’ retirement and philanthropic goals. Although fees have remained unchanged at 1%, Zik has been able to reduce expenses for equities by 20 bps and for bonds by 12 bps. 5 Evaluate the success of Zik’s investment program for Patel in terms of: 1. goal achievement. process consistency. fi, portfolio performance. After every regular monthly rebalancing, Zik sends an email to Patel with a port- folio report. Zik’s portfolio report contains the following: © An asset allocation report that reflects strategic asset allocation targets, © A detailed performance report that includes individual asset class and security performance = A year-to-date performance summary report and a historical performance report starting from the inception of Patel’s investment strategy 6 Recommend additional information that Zik could provide to enhance his portfolio reports for Patel. Practice Problems 27 The following information relates to Questions 7 and8 Val Sli, age 22, has just graduated from college and begins making ambitious future financial plans. The four stages of his plan are summarized below. Sili would like to have outside financial advice at each of these stages. Stage 1—Age 22-26: _Sili plans to work asa software developer in a startup com- pany, where he will earn both a salary and stock options. He will save as much as he ean to invest, but his portfolio will be relatively small, and he will be willing to pay only ow management fees, Sill would like to use a sophisticated ‘mean-variance optimization technique for asset allocation, although he will limit his investments to exchange-traded fands and routual funds Stage 2—Age 26-30: ili will have reached a more senior position in the com- pany. He plans to have accumulated assets of $350,000, and his investment focus wil be on building his portfolio Si will want help with his increasing financial planning needs and will be able to afford the fees of a professional wealth ‘manager, Stage 3—Age 30-36: Sill plans to exercise his stock options to buy a large quan- tity of the company’s stock ata price significantly below is ‘market value. The proceeds should increase his portfolio value to $8 million. Silt will quit his job to start his own software company. Sil wll be interested in more sophisti- cated investments with longer time horizons, greater risk, and less liquidity. He will also want specialized advisers for taxes, legal issues, and investment strategies. Stage 4—After Age 36: _Sili will sell his software company for $200 million and retire, He will spend his retirement traveling on his private jet and collecting artwork for his collection; therefore, he will need advice on acquiring high-end assets. The substan- tial increase inthe value of his investment portfolio will allow him to have a multi-generational time horizon, He will require a wider range of investment advisory services, including complex tax planning, estate planning, nd bill, payment services 7 Determine the client segment or adviser type that is most appropriate for each stage of Sili’s plan. Justify each response. Determine the client segment or adviser type that is most appropriate for each stage of Sil’ plan. Justify each response. Stage 1— Age 22-26 Stage 2— Client Segment/Adviser Type: Age 26-30 justification: Stage 3— Client Segment/Adviser Ty Age 30-36 Justification: Stage 4— Client Segmenti Adviser Type: After Age justification: 36 Reading 28 = Overview of Private Wealth Management Sili next uses three approaches to analyze his retirement goals: Approach 1 Sili considers the probability that he will live toa certain age and then predicts his inflation-adjusted retirement spending accord- ing to the probability that he will still be living in a given year. ‘This approach allows him to estimate the present value of his retirement spending needs by assigning associated probabilities to annual expected cash outflows. Approach 2 Sili determines that he can specify his level of annual spending

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