CFA三级基础：私有财富管理-打印版

Private

Wealth

Management

CFAй㓗ษ䇝亩ⴞ

䇢ᐸ˖Irene



1-252

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TopicinCFALevelIII

Session

Content

StudySession1-2

StudySession3

StudySession4

StudySession5

StudySession6

StudySession7-8

ETHICS&PROFESSIONALSTANDARDS(1)&(2)

BEHAVIORALFINANCE

CAPITALMARKETEXPECTATIONS

ASSETALLOCATIONANDRELATEDDECISIONSINPORTFOLIOMANAGEMENT

DERIVATIVESANDCURRENCYMANAGEMENT

FIXED-INCOMEPORTFOLIOMANAGEMENT(1)&(2)

StudySession9-10EQUITYPORTFOLIOMANAGEMENT(1)&(2)

StudySession11

ALTERNATIVEINVESTMENTSFORPORTFOLIOMANAGEMENT

StudySession12-13PRIVATEWEALTHMANAGEMENT(1)&(2)

StudySession14

StudySession15

StudySession16

PORTFOLIOMANAGEMENTFORINSTITUTIONALINVESTORS

TRADING,PERFORMANCEEVALUATION,ANDMANAGERSELECTION

CASESINPORTFOLIOMANAGEMENTANDRISKMANAGEMENT

3-252

Framework

¾SS12:PrivateWealth

Management(1)

PrivateWealth

Management

•

•

R28OverviewofPrivateWealth

Management

R29TaxesandPrivateWealth

ManagementinaGlobal

Context

•

R30EstatePlanninginaGlobal

Context

¾SS13:PrivateWealth

management(2)

•

•

R31ConcentratedSingle-Asset

Positions

R32RiskManagementfor

Individuals

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Reading

28

OverviewofPrivateWealthManagement

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1.PrivateClientsversusInstitutionalClients

Framework

2.UnderstandingPrivateClients

3.InvestmentPlanning

4.InvestmentPolicyStatement

5.PortfolioConstructionandMonitoring

6.EthicalandComplianceConsiderationsin

PrivateWealthManagement

7.PrivateClientSegments

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1.PrivateClientsversusInstitutionalClients

¾Privateclientsandinstitutionalclientshavedifferentconcerns,

includingthefollowing:

1.InvestmentObjectives

2.Constraints

3.OtherDistinctions

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1.PrivateClientsversusInstitutionalClients

1.InvestmentObjectives

zPrivateClients

9financialsecurityduringtheclient’sretirementyears;

9theabilitytoprovidefinancialsupporttofamilymembers;

9thefundingofphilanthropicgoals;

9Privateclientinvestmentobjectivesoftencompetewithoneanother

andmaychangeovertime;

zInstitutionalClients

9Incontrasttoprivateclients,institutionalclientstendtohavemore

clearlydefinedobjectives,whicharetypicallyrelatedtoaspecific

liabilitystream.

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1.PrivateClientsversusInstitutionalClients

2.Constraints

zTimehorizon:Ingeneral,individualinvestorshaveashortertime

horizonthaninstitutionalinvestors,whosehorizonisoftentheoretically

infinite.

zScale:Ingeneral,individualinvestorportfoliostendtobesmallerinsize

(orscale)thanthoseofinstitutionalinvestors.

zTaxes:Taxesareasignificantandcomplexconsiderationformany

individualinvestors,andtheyvarybyjurisdiction.

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1.PrivateClientsversusInstitutionalClients

3.OtherDistinctions

zInvestmentGovernance

9Institutionalinvestorstypicallyoperateunderaformalgovernance

structure.

9Bycontrast,investmentgovernanceforindividualinvestorstendsto

belessformal.

zInvestmentSophistication

9Institutionalinvestorstendtohaveahigherdegreeofinvestment

sophisticationthanthetypicalprivateinvestoraswellasaccesstomore

investmentresources.

9Unlikeinstitutionalclients,privateclientsdonotnormallybenefitfrom

the“checksandbalances”ofaformalinvestmentgovernance

framework.Asaresult,privateclientscanbemorevulnerabletomaking

“emotional”investmentdecisions.

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1.PrivateClientsversusInstitutionalClients

3.OtherDistinctions

zRegulation

9Inmostcountries,theregulatoryenvironmentisdifferentforindividual

andinstitutionalinvestors.

9Insomecases,separateregulatorsfocusonthesetwoinvestor

segments.Inothercases,theindividualandinstitutionalinvestorgroups

shareacommonregulatorbutaresubjecttodifferentregulations.

zUniquenessandComplexity

9Privateclientswithsimilarsetsoffinancialconsiderationsand

objectivesmayneverthelesspursuedifferentinvestmentstrategies.

‹Multiplefactorsmayinfluenceeachindividual’spreferences,needs,

andconcerns—notably,familybackgroundandupbringing,work

history,sourcesofwealth,investmentexperience,groupsoffriends,

andgeographiclocation.

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1.PrivateClientsversusInstitutionalClients

Summary

Privateclients

Institutionalclients

diverseinvestment

objectives(maynotbe

clearlydefinedorquantified)

specific,clearlydefined

investmentobjectives

Investment

objectives

Timehorizon

Scale

ashortertimehorizon

theoreticallyinfinite

larger

smaller(morelimitations)

Constraints

taxableincomemaybemore

favoredbyatax-exempt

institution

Taxes

significantandcomplex

Investment

Governance

lessformalgovernance

structure

formalgovernancestructure

Investment

ahigherdegree(more

investmentresources)

emotional

Other

Distinctions

Sophistication

Regulation

separateregulatorsorsharedregulatorystructure

Uniqueness

and

Complexity

Similarfinancialand

objective,different

investmentstrategies

Similarobjective,similar

strategies

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2.UnderstandingPrivateClients

¾InformationNeededinAdvisingPrivateClients

zPersonalInformation

zFinancialInformation

zPrivateClientTaxConsiderations

¾ClientGoals

¾PrivateClientRiskTolerance

¾TechnicalandSoftSkillsforWealthManagers

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2.1InformationNeededinAdvisingPrivateClients

¾1.PersonalInformation

ztheclient’sfamilysituation,includingmaritalstatus,thenumberof

childrenandgrandchildren,andtheagesoffamilymembers;

zproofofclientidentification;

zemploymentandcareerinformation;

zthesourcesofaclient’swealth;

zinvestmentbackground;

9returnobjective;liquiditypreferencesoradesiretoconsider

environmental,social,andgovernance(ESG)issues;

zfinancialobjectivesandrisktolerance.

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2.1InformationNeededinAdvisingPrivateClients

¾2.FinancialInformation

Assets

Liabilities

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•

•

Cashanddepositaccounts

Brokerageaccounts

Retirementaccounts

Otheremployeebenefits,suchas

restrictedstockorstockoptions

Ownershipinterests(stock)inprivate

businesses

•

Consumerdebt,suchascreditcard

balancesandloansoutstanding

Automobileloans

•

•

•

Studentloans

Property-relatedloans,suchas

mortgagesandhomeequityloans

(orlinesofcredit)

•

•

•

Cash-valuelifeinsurance

Realproperty,includingresidences,

rentalproperty,andland

Otherpersonalassets(e.g.,

automobiles,art,orjewelry)

•

Margindebtinbrokerageaccounts

•

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2.1InformationNeededinAdvisingPrivateClients

¾3.PrivateClientTaxConsiderations

zCommonTaxCategories

9Taxesonincome.Theseincludetaxesonsalaries,interest,

dividends,capitalgains,andrentalincome.

9Wealth-basedtaxes.Theseincludetaxesontheholdingofcertain

typesofproperty(e.g.,realestate)andtaxesonthetransferof

wealth(e.g.,taxesoninheritance).

9Taxesonconsumption/spending.Theseincludesalestaxesand

value-addedtaxes.

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2.1InformationNeededinAdvisingPrivateClients

¾3.PrivateClientTaxConsiderations--BasicTaxStrategies

zTaxavoidance.(conformtoboththespiritandtheletterofthetax

codesofjurisdictionswithtaxingauthority.)vs.Taxevasion

(circumventingtaxobligationsbyillegalmeans).

9Tax-exemptaccounts:permittax-freeearningsandfuture

withdrawals;wealthtransfertechniques.

zTaxreduction.

9tax-exemptbonds;tax-efficientassetclasses

zTaxdeferral.

9Bydeferringtherecognitionofcertaintaxesuntilalaterdate,clients

canbenefitfromcompoundingportfolioreturnsthatarenot

diminishedbyperiodictaxpayments.

9Someinvestorsinaprogressivetaxsystemmayalsoseektodefer

taxesbecausetheyanticipatelowerfuturetaxrates.

9limitportfolioturnover.

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Example

¾RoseannaRodriguezmeetswithherwealthmanager,RajGupta,CFA,to

discussherinvestmentstrategyandfinancialplan.Guptamentionsthe

importanceoftaxstrategiesinRodriguez’sfinancialplanandmakesthree

recommendations:

zInvestintwodifferentaccounttypes:

„Anaccountthatpermitsbothearningsandfuturewithdrawalsto

betax-freeand

„Anaccountthatpermitsearningstoaccumulatetax-freebut

requiresthattaxesbepaidwhenassetsarewithdrawnfromthe

account.

zReduceexposuretoanassetclasswithundesirabletaxcharacteristics

infavorofanassetclassthatismoretax-efficient.

zDelaythesaleofsharesofastockpositionuntiltheyearfollowing

retirement.

¾Identifythebasictaxstrategy(orstrategies)—taxavoidance,taxreduction,

ortaxdeferral—representedineachofthethreerecommendations.

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Example

¾Solution:

zThefirstrecommendationrepresentsbothtaxavoidanceandtax

deferral.Withtheaccountthatpermitstax-freeaccumulationand

distributions,Rodriguezwouldbeavoidingtaxes.Withtheaccount

thatpermitstax-freeaccumulationbutresultsinincometaxes

upondistribution,Rodriguezwouldbedeferringtaxes.

zThesecondrecommendationisanexampleoftaxreduction

becausetherecommendedassetclasswouldincurlowertaxes.

zThethirdrecommendationisanexampleoftaxdeferralandmay

alsobeanexampleoftaxreductionifRodriguez’staxratedeclines

afterretirement.

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2.1InformationNeededinAdvisingPrivateClients

¾4.OtherRelevantInformation

zEstateplan(inapplicablejurisdictions),copiesofrelevantlegaland

governingdocuments,suchaswillsandtrustdocuments;

zLifeinsurance,disabilityinsurance,excessliabilitycoverage,andany

otherrelevantinsurancecoverage;

zWealthmanagersandclientsnormallyagreeonwhocanapprove

and/orchangeinvestmentpolicies,whocanauthorizetradingactivity,

andwhocanauthorizemoneytransfers.

zWealthmanagersseekinformationregardingclients’serviceneedsand

expectations.

zThewealthmanagerandtheclientshouldhaveaclearunderstandingof

whatinformationshouldandshouldnotbesharedwithotherservice

professionals.

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2.2ClientGoals

¾Financialgoalsarenotalwaysapparent,defined,ormeasurable:theymay

beexpressedbyclientsaswishes,desires,oraspirations.

zPlannedGoals:Plannedgoalsarethosethatcanbereasonably

estimatedorquantifiedwithinanexpectedtimehorizon.

9Retirement.Maintainingacomfortablelifestylebeyondtheir

workingyearsisagoalformostclients.

9Specificpurchases.Tendtobeafunctionofthelevelofwealth

and/orstageoflife.

9Education.Clientsoftenwishtofundtheirchildren’seducation.

9Familyevents.(e.g.weddings)

9Wealthtransfer.Whenclientshaveadefiniteamountof

inheritancethattheywishtotransfer,thisgoalmayneedtobe

prioritizedoverothergoals.

9Philanthropy.Clientsoftenwishtomakecharitabledonations

duringoraftertheirlifetime.

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2.2ClientGoals

zUnplannedGoals:Unplannedgoalsarethoserelatedtounforeseen

financialneeds.(difficulttoestimatethetimingandtheamountof

fundingneeded)

9Propertyrepairs.Althoughhouseholdsmaybeinsuredagainst

lossesorcatastrophes,clientsmayfaceadditionalspendingneedsif

insurancedoesnotfullycoversuchevents.

9Medicalexpenses.Privateclienthouseholdsnormallyhavemedical

insuranceforillnessorhospitalization,buthealthinsurancemaynot

coverallmedicalexpenses.Arelatedissueinsomelocationsisthe

potentialcostofeldercareforoneselforone’sfamilymembers.

9Otherunforeseenspending.

¾Whenestablishingclientgoals,privatewealthmanagersconsidergoal

quantification,goalprioritization,andgoalchanges.

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Example-ClientGoals

¾Mr.C.Y.LeeisamanagingdirectorfortheinvestmentfirmAcme&

Bass,whichislocatedintheAsia-Pacificregion.Leeis43yearsold,is

married,andhastwochildren,ages12and10.Heandhisfamilyreside

inahomethattheyowninSingapore.Inaconversationwithhiswealth

manager,Leestatesthathewishestofundtheundergraduatetuition

forhischildrentostudyabroad.Leeexpectsthetuitioncosttobe

approximately£40,000peryear.Leealsowishestofundhischildren’s

weddingsatsomepointinthefuture.Becausetheeducationcostswill

occurinthenext5–10years,Mr.Leestatesthattheyarehistop

priority.

¾Leeanticipatesworkinguntilage65anddoesnotknowhowmuchhe

andhiswifewillneedtofundtheirretirementlifestyle.Hementionshis

desiretopurchaseaflatinLondonandlet(rent)itaspartoftheir

retirementplan.Theflatwouldcostapproximately£1.5million.Leeis

alsoconcernedaboutthefuturehealthcareexpensesofhiswife’s

parentsandtowhatdegreeheandhiswifemayneedtosupportthem

financially.

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Example-ClientGoals

1.IdentifyLee’splannedgoals.

Lee’splannedgoalsare(a)fundinghischildren’seducation;(b)

fundinghischildren’sweddings;(c)fundinghisandhiswife’s

retirement;and(d)purchasingandsubsequentlyletting(renting)aflat

inLondon.

2.IdentifyLee’sunplannedgoals.

Lee’sunplannedgoalsrelatetothefuturehealthcareexpensesofhis

wife’sparents,aswellaspossibleuninsuredpropertyrepairsforthe

Lee’sSingaporeresidenceand,ifpurchased,theirLondonflat.

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Example-ClientGoals

3.DiscusstheissueofgoalquantificationforLee.

Leehasquantifiedtheeducationfundinggoalandtheflatpurchase.

Heandhiswealthmanagershouldworktoestimatethecostofthe

weddingsforLee’schildrenandtheanticipatedretirementlifestyle

needsforLeeandhiswife.

4.DiscusstheissueofgoalprioritizationforLee.

Leestatesthathisfirstpriorityiseducationfundingforhischildren.

However,thetimingofaneedshouldnotbethesoledeterminantof

goalpriority.Iffundingtheirchildren’seducationcostswillleaveLee

andhiswifeunpreparedforretirement,forexample,theymaywishto

reevaluatetheirpriorities.

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2.3PrivateClientRiskTolerance

¾Keytermsforasetofrisk-relatedconcepts:

zRisktolerancereferstothelevelofriskanindividualiswillingandable

tobear.Risktoleranceistheinverseofriskaversion.

zRiskcapacityistheabilitytoacceptfinancialrisk.Thekeydifference

betweenriskcapacityandrisktoleranceisthatriskcapacityismore

objectiveinnature,whilerisktolerancerelatestoanattitude.

zRiskperceptionisanindividual’ssubjectiveassessmentoftherisk

involvedinaninvestmentdecision’soutcome.

9Howaclientperceivestheriskinessofaninvestmentdecisionorthe

investmentclimate—dependsonthecircumstancesinvolved.

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2.3PrivateClientRiskTolerance

¾Risktolerance:

zWillingness(Risktolerance)

9Investmentstyle

9Psychologicalprofile

9Self-statement

zAbility(Riskcapacity).

9Timehorizon

9Relativeportfoliosize(spendingneeds/portfoliosize)

Situation

Risktolerance

Willingness>Ability

Ability(Education)

ReturnObjective=WillingnessWillingness(Reevaluation)

Willingness<

Ability

ReturnObjective=Ability

Ability(Education)

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2.3PrivateClientRiskTolerance

¾Wealthmanagersoftenutilizequestionnairestoassessclients’risk

tolerance.

zTheresultofarisktolerancequestionnaire,typicallyanumericalscore,is

oftenusedasaninputintheinvestmentplanningprocess.

¾RiskToleranceConversationenablethewealthmanagertoeducatea

clientaboutinvestmentrisk.

¾Clientsoftenhavemultiplegoalsorobjectives,theirrisktolerancemay

varyfordifferentgoals.

zalowrisktolerancewithrespecttonear-termgoalsbutahigherrisk

tolerancewhenitcomestolonger-termgoals.

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2.4TechnicalandSoftSkillsforWealthManagers

¾TechnicalSkills

zTechnicalskillsrepresentthespecializedknowledgeandexpertise

necessarytoprovideinvestmentadvicetoprivateclients.

9Capitalmarketsproficiency.

9Portfolioconstructionability.

9Financialplanningknowledge.

9Quantitativeskills.

9Technologyskills.

9Languagefluency.

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2.4TechnicalandSoftSkillsforWealthManagers

¾SoftSkills(non-technical)

zSoftskillstypicallyinvolveinterpersonalrelationships—thatis,the

abilitytoeffectivelyinteractwithothers.

9Communicationskills.

9Socialskills.

9Educationandcoachingskills.

9Businessdevelopmentandsalesskills.

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Example

¾JohnMüller,CFA,aprivatewealthmanager,recentlyreceivedfeedback

fromclientsandcolleaguesaspartofhisperformancereview.Clients

commentedfavorablyonhowMüllercoordinateswithexternaltaxand

legalprofessionalsandonhowwellhelistenstoandunderstandshis

clients’needs.ColleaguesremarkedonMüller’sbroadknowledgeof

traditionalandalternativeassetclassesandhisabilitytoobtainnew

clientengagements.

¾DescribewhichtechnicalandsoftskillsMüllerdemonstrated

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Example

¾Solutions:

zInhisperformancereview,Müllerdemonstratedthetechnicalskills

ofcapitalmarketsproficiencyandfinancialplanningknowledge.

9Müller’scapitalmarketsproficiencywasshownthroughhis

broadknowledgeoftraditionalandalternativeassetclasses,

9whilehisfinancialplanningknowledgewasshownbyhis

successfulcoordinationwithtaxandlegalprofessionals.

zMüllerdemonstratedthesoftskillsofcommunicationandbusiness

developmentandsales.

9Communicationskillswereshownbyhisabilitytolistenwell

andunderstandclientneeds,

9whilebusinessdevelopmentandsalesskillswereshownbyhis

recordofobtainingnewclientengagements.

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3.Investmentplanning

¾Afterdevelopinganunderstandingoftheirclients,wealthmanagersbegin

theprocessofhelpingclientsmeettheirobjectives.

zCapitalSufficiencyAnalysis(Capitalneedsanalysis)

9Theprocessbywhichawealthmanagerdetermineswhetheraclient

has,orislikelytoaccumulate,sufficientfinancialresourcestomeet

hisorherobjectives.

zRetirementPlanning

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3.1CapitalSufficiencyAnalysis

¾MethodsforEvaluatingCapitalSufficiency

zDeterministicForecastingMethod

9Portfoliogrowthoccursinastraight-linemanner.

9Inputs

‹aportfolioreturnassumption(r);

‹thecurrentvalueoftheportfolio(PV);

‹anticipatedfuturecontributionstotheportfolio(+CF);

‹cashflowsfromtheportfoliothatrepresentclientneeds(-CF).

9Simpletounderstand;

9Unrealisticwithrespecttothevariabilityinpotentialfuture

outcomes.

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3.1CapitalSufficiencyAnalysis

¾MonteCarlosimulation

9Generatesrandomoutcomesaccordingtoassumedprobability

distributionsforseparatekeyvariables.(notwholeportfolio).

9Allowsawealthmanagertomodeltheuncertaintyorvariabilityin

thefutureoutcome.

zThetableshowsthepercentageoftrialsatagivenhorizoninwhichthe

clientsuccessfullyachievedherobjective.

MonteCarloSimulationResults

Year10

Year15

Year20

Percentile

5th

25th

50th

75th

PortfolioValuePortfolioValuePortfolioValue

$3,519,828

$1,981,861

$1,239,837

$765,821

$197,179

98%

$3,651,264

$1,698,449

$843,820

$305,126

($264,048)

88%

$3,647,328

$1,530,372

$569,974

($249,205)

($1,402,608)

69%

95th

SuccessfulTrials

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Example

¾BasedonExhibits1and2,theprobabilitythatNjauwillbeableto

meethercharitablegoalisclosestto:

A.25%.

B.50%.

C.75%.

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Example

¾CorrectAnswer:B.

zTheMonteCarlosimulationshowsthatNjauhasa50%probability

ofhavinganamountexceeding$553,803inYear15.SinceNjau’s

charitablepledgegoaltoUdhaminiis$500,000,shehasaslightly

greaterthan50%probabilityofmeetingorexceedingher

charitablepledgegoalinYear15.

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3.1CapitalSufficiencyAnalysis

¾InterpretingMonteCarloSimulationResults

zWealthmanagerstendtoguideclientstowarda75%–90%probability

ofsuccess,althoughnoindustrystandardrangeexists.

zWhentheprobabilityofsuccessfallsbelowanacceptablerange,

potentialsolutionsincludethefollowing:

9Increasingtheamountofcontributionstowardagoal

9Reducingthegoalamount

9Delayingthetimingofagoal(e.g.,retiringafewyearslaterthan

originallyplanned)

9Adoptinganinvestmentstrategywithhigherexpectedreturns,

albeitwithintheclient’sacceptablerisktoleranceandriskcapacity

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3.2RetirementPlanning

¾AnalyzingRetirementGoals

zWealthmanagersmayuseseveraldifferentmethodstoanalyzeaclient’s

retirementgoals.

zThreecommonmethods

9Mortalitytables

9Annuities

9MonteCarlosimulation

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3.2RetirementPlanning:MortalityTables

¾Amortalitytableindicatesindividuallifeexpectanciesatspecifiedages.

PlanYear

ClientAge

LifeExpectancy

SurvivalProbability

0

1

2

3

4

5

72

73

74

75

76

77

12.0

11.4

10.8

10.2

9.7

100%

97%

93%

90%

86%

82%

9.1

zInpractice,awealthmanagercanuseamortalitytabletoestimatethe

presentvalueofaclient’sretirementspendingneedsbyassigning

associatedprobabilitiesbasedonlifeexpectancytoannualexpected

cashoutflows.

zDrawbacks:

9anindividualclient’sprobabilityoflivingtoacertainagemayexceed

thatofthegeneralpopulation.

9Cannotmodeldifferencescenarios.

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3.2RetirementPlanning:Annuities

¾Annuitiesprovideaseriesoffixedpayments,eitherforlifeorfora

specifiedperiod,inexchangeforalumpsumpayment.

zTwobasicforms.

9Withanimmediateannuity,anindividual(calledthe“annuitant”)

paysaninitiallumpsum,inreturnforaguaranteeofspecified

futuremonthlypayments—beginningimmediately—overa

specifiedperiodoftime.

9Withadeferredannuity,thespecifiedfuturemonthlypayments

beginatalaterdate.

¾Arelativelysimplewayofcalculatingthepresentvalueofaclient’sdesired

retirementspendingisbypricinganannuity.

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3.2RetirementPlanning:MonteCarloSimulation

¾AdvantagesofMonteCarloSimulation

zitsapplicabilitytotheclient’sactualassetallocation.

zaggregatingtheresultsofmanytrialsofprobability-based

estimatesofkeyvariables,theoverallprobabilityofmeeting

retirementneedsisgenerated,

zcanflexiblymodeldifferentscenariosandexploreissuesthatare

importanttoclients.

¾LimitationsofMonteCarloSimulation

zItisonlyamethodofestimation;itcannotpredictthefuture.

ztheoutputfromMonteCarlosimulationcanbehighlysensitiveto

smallchangesininputassumptions.

zMonteCarlooutputincludestheprobabilityofreachingagoal(or

goals)butnotnecessarilythe“shortfallmagnitude.”

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Example

¾Silinextusesthreeapproachestoanalyzehisretirementgoals:

zApproach1Siliconsiderstheprobabilitythathewilllivetoacertain

ageandthenpredictshisinflation-adjustedretirementspending

accordingtotheprobabilitythathewillstillbelivinginagivenyear.

Thisapproachallowshimtoestimatethepresentvalueofhis

retirementspendingneedsbyassigningassociatedprobabilitiesto

annualexpectedcashoutflows.

zApproach2Silideterminesthathecanspecifyhislevelofannual

spendingduringretirementandthathecanmodelthatspendingasa

seriesoffixedpayments.Hecalculatesthepresentvalueofthatseries

ofpaymentsasofthedayofhisretirement,resultingintheamountof

moneythathewillneedtofundhisretirementgoals.

zApproach3Silimodelstheuncertaintyofeachkeyvariableindividually

byassigningeachoneitsownprobabilitydistributionandthen

generatesalargenumberofrandomoutcomesforeachvariable.He

aggregatestheoutcomestodetermineanoverallprobabilityof

reachinghisobjectives.Siliseesthisasaflexibleapproachthatallows

himtoexplorevariousscenarios,includingunforeseenexpenses.

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Example:CorrectAnswers

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Example:CorrectAnswers

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3.3BehavioralConsiderationsinRetirementPlanning

¾Heightenedlossaversion.Somestudiessuggestthatretireesaremuchmore

loss-aversethanyoungerinvestors.

¾Consumptiongaps.Duetolossaversionanduncertaintyaboutfuturefinancial

needs,manyretireesspendlessthaneconomistswouldpredict,resultingina

gapbetweenactualandpotentialconsumption.

¾The“annuitypuzzle”.Individualstendnottoprefertoinvestinannuities.

zExplanationsforthepuzzleincludeinvestors’reluctancetogiveuphopeof

substantiallifestyleimprovement,theirdislikeoflosingcontroloverthe

assets,and,inmanycases,thehighcostofannuities.

¾Preferenceforinvestmentincomeovercapitalappreciation.Evidencefor

thisbehaviorincludesthetendencyofinvestorstospenddividendincome

ratherthansellingsharesofsecuritiesandspendingtheproceeds.

zOnepossibleexplanationisthatinvestorslackself-controlwithrespectto

spending.Thistheorysuggeststhatspendingonlytheincomeandnotthe

principalisaself-controlmechanism.

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4.InvestmentPolicyStatement

¾Theinvestmentpolicystatement(IPS)isawrittenplanningdocumentthat

describesaclient’sinvestmentobjectivesandrisktoleranceoverarelevant

timehorizon,alongwiththeconstraintsthatapplytotheclient’sportfolio.

¾TheIPSisalsoanoperatingmanual,listingkeyongoingmanagement

responsibilities.

¾Advantages

zOneadvantageisthattheIPSencouragesinvestmentdisciplineand

reinforcestheclient’scommitmenttofollowthestrategy.

zAsecondadvantageisthattheIPSfocusesonlong-termgoalsrather

thanshort-termperformance.

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4.InvestmentPolicyStatement

¾Aninvestmentpolicystatement(IPS)foranindividualincludesthefollowing

parts:

zBackgroundandInvestmentObjectives

zInvestmentParameters

zPortfolioAssetAllocation

zPortfolioManagement

zDutiesandResponsibilities

zIPSAppendix

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4.1BackgroundandInvestmentObjectives

¾Theclient’sbackgroundandinvestmentobjectivesarecriticalpartsofthe

IPS.

zBackgrounditemscommonlyincludetheclient’snameandage,aswell

asrelevantpersonalandfinancialinformation.

zCommonobjectivesincludefundinglifestyleneedsduringretirement,

supportingfamilymembers,fundingphilanthropicactivities,and

meetingbequestgoals.

¾Investmentobjectivesshouldbedetailedandquantifiedwhenever

possible.

¾Inasituationinvolvingmultipleobjectives,thewealthmanagershouldnote

whichoftheobjectivesisprimary.

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4.1BackgroundandInvestmentObjectives

¾Theinvestmentobjective,whenlinkedtotheclient’sassetallocationandthe

wealthmanager’scapitalmarketassumptions,shouldprovidethebasic

inputstoacapitalsufficiencyanalysis.

zWheneverthecapitalsufficiencyanalysisdoesnotsupportthe

investmentobjective,thewealthm