Private Wealth Management
- Human and Financial Capital
- Technical and Soft Skills for Wealth Managers
- Economic Net Worth
- Retirement Planning
- Life Insurance
- Health Insurance Plan
- Annuities
- Tax issues
- Estate Planning
- Concentrated Positions
- Client Segment
Human and Financial Capital
Human capitalis commonly defined as the mortality-weighted net present value of an individual’s future expected labor income.Financial capitalincludes the tangible and intangible assets (outside of human capital) owned by an individual or household.
Human Capital
The value of human capital is a function:
- survival probabilities (usually proxied by mortality tables)
- current employment income
- expected annual wage growth
- the risk-free rate
- a risk adjustment based on occupational income volatility the expected number of working years
Risks
Earnings risk(insure with disability insurance) refers to loss in HC. Job loss and other career disruptions can reduce HC and may even lead to the need to consume FC prematurely.Premature death risk(insure with life insurance) can be a substantial HC loss. In addition, it may cause unexpected expenses that consume limited FC of the survivors.Longevity risk(insure with annuities) is where individuals who live too long are at risk of outliving their FC.Property risk(insure with property insurance) refers to sudden loss in value of physical property (FC). The loss of business property could reduce FC and also HC of the owner if the property is necessary to generate business income.Liability risk(insure with liability insurance) refers to being legally responsible for damages and a reduction in FC.Health risk(insure with health insurance) can lead to direct loss of FC to pay illness or injury related expenses. It can reduce HC through diminished or inability to work.
Technical and Soft Skills for Wealth Managers
- Technical Skills
- Capital Markets proficiency
- Portfolio construction ability
- Financial planning knowledge
- Quantitative skills
- Technology skills
- Language fluency
- Soft Skills
- Communication Skills
- Social Skills
- Education and coaching skills
- Business development and sales skills
Economic Net Worth
Economic Net Worth = Traditional Net Worth + PV (future earnings + unvested pension benefits) - PV (consumption goals + bequests)
Retirement Planning
- Mortality Table: A mortality table allows for estimating the present value of retirement spending needs by associating each outflow with a probability based on life expectancy.
- Annuity Method: The calculated price of an annuity equals the present value of a series of future fixed outflows during retirement.
- Monte Carlo Simulation: Monte Carlo simulation yields an overall probability of meeting retirement needs by aggregating the results of many trials of probability-based estimates of key variables, and it is a flexible approach for exploring different retirement scenarios.
Life Insurance
- Temporary Insurance (Term Insurance)
- Permanent Insurance
- Whole Life Insurance: fixed premium payments
- Universal Life Insurance: more payment and investment flexibility
Net Payment Cost Index
- Calculate the insurance cost = FV (Premiums) - FV (Dividend)
- Set the insurance cost to FV and calculate the PMT
- Net payment cost index = PMT / Face value in thousands
Surrender Cost Index Calculation
- Calculate the insurance cost = FV (Premiums) - FV (Dividend)
- Substract the final cash value from the insurance cost calculated in the previous step
- Set the result of step 2 to FV and calculate the PMT
- Surrender cost index = PMT / Face value in thousands
Health Insurance Plan
Indemnity plan, which allows the insured to go to essentially any medical service provider, but the insured must pay a specified percentage of the “reasonable and customary” fees.Peferred provider organization (PPO), which is a large network of physicians and other medical service providers that charge lower prices to individuals within the plan than to individuals who obtain care on their ownHealth maintenance organization (HMO), which allows office visits at no, or very little, cost
Loss Control
- Risk avoidance: remove the possibility that an event involving loss will occur.
- Risk prevention: taking actions to reduce the probability that a loss event will occur
- Risk reduction: seeking to reduce the size of a loss if a loss event occurs.
- Risk transfer: generally involves insurance or annuities; Incorporation of an individual’s business provides a non-insurance risk transfer in many countries
| Loss characteristics | High frequency | Low frequency |
|---|---|---|
| High severity | Risk avoidance | Risk transfer |
| Low severity | Risk reduction | Risk retention |
Annuities
- Deferred versus Immediate
- Deferred annuities provide income that begins at a future date after the initial purchase of the annuity.
- Immediate payout annuities—or single-premium immediate annuities (SPIAs): the individual permanently exchanges a lump sum for a contract that promises to pay the annuitant an income for life.
- Fixed versus Variable.
- Fixed annuities: For each dollar invested, the insurance company will tell the investor how much income he or she will receive
- Variable annuities: the amount of the payments varies over time based on the performance of the portfolios that the assets are invested in
Incorporating Growth Rate
As long as discount rate > growth rate, the adjusted discount rate can be calculated as (1 + Discount rate)/(1 + Growth rate) − 1
Advanced life deferred annuity’s (ALDA’s)
Provide the greatest supplemental level income relative to the cost because the payments are made far in the future
Tax issues
Potential Capital Gain Exposure (PCGE)
- Used to assess the tax efficiency of mutual funds
- PCGE = net gain (loss) / total net assets = (gains - capital distribution - loss) / (starting asset + gain - distribution - loss)
After-tax post-liquidation return
- Calculate the final after tax portfolio return
- Subtract liability from unrealized capital gain = embed gain * capital tax rate
Estate Planning
RV_gift = FV_gift/FV_bequest = (1 + r(1-t))^n(1-T) / (1 + r(1-t))^n(1-T)
Concentrated Positions
Risks
- The company-specific risk inherent in the concentrated position
- The reduction in portfolio efficiency resulting from the lack of diversification
- The liquidity risk inherent in a privately-held or outsized publicly-held security
- The risk of incurring an outsized tax bill that diminishes return if one were to sell part of the concentrated position in an attempt to reduce the other risks
Solutions
Outright Sales
- Tax immediately due
- Loss of voting power
Completion portfolio
- Needs sufficient assets to complement
- Takes time to complete
Exchange Fund
- Only available to accredited investors
- Need to hold at least seven years
Charitable Remainder Trust
- An irrevocable donation to a trust and receive a tax deduction for the gift.
- Provide income for the life of the named beneficiaries. When the last-named beneficiary dies, any assets remaining in the trust would be distributed to the charity named in the trust.
- Loss of voting rights
Client Segment
Robo-Adviser (part of the mass affluent client segment)
- Robo-advisers support advanced asset allocation techniques, implement typically with exchange-traded funds or mutual funds, and are lower-cost alternatives for relatively small portfolios.
- Robo-advisers enable their clients to use advanced techniques, such as mean–variance optimization, for determining asset allocations
Mass Affluent Segment
- The mass affluent segment covers asset levels between $250,000 and 1 million and serves clients who are focused on building their portfolios and want help with financial planning needs.
High-Net-Worth Segment
- Covers asset levels between $1 million and 10 million and can provide a team of specialized advisers that supports more customized strategies for more sophisticated investments with longer time horizons, greater risk, and less liquidity.
Ultra-High-Net-Worth Segment
- Covers asset levels over $50 million for clients with multi-generational time horizons and provides a wider range of services for complex tax situations, estate planning, bill payment, concierge services, travel planning, and advice on acquiring high-end assets.