Overview of Private Wealth Management - CFA Institute

Private wealth management refers to investment management and financial planning for individual investors. The private wealth sector has grown considerably ... We’reusingcookies,butyoucanturnthemoffinPrivacySettings.Otherwise,youareagreeingtoouruseofcookies.LearnmoreinourPrivacyPolicy. PrivacySettings SkiptoContent CFAInstitute Membership CommittoProfessionalLearning RefresherReadings OverviewofPrivateWealthManagement RefresherReading OverviewofPrivateWealthManagement PrivacySettings Functionalcookies,whicharenecessaryforbasicsitefunctionalitylikekeepingyouloggedin,arealwaysenabled. Allowanalyticstracking.Analyticshelpusunderstandhowthesiteisused,andwhichpagesarethemostpopular.ReadthePrivacyPolicytolearnhowthisinformationisused. SaveSettings CloseModal 2022 Curriculum CFAProgram LevelIII PortfolioManagementandWealthPlanning OverviewofPrivateWealthManagement Downloadthefullreading(PDF) Availabletomembers Introduction Privatewealthmanagementreferstoinvestmentmanagementandfinancialplanningfor individualinvestors.Theprivatewealthsectorhasgrownconsiderablyasglobalwealth hasincreasedandasindividualshavetakenonmoreoftheresponsibilityformanaging theirownfinancialresources.Privatewealthmanagerscanhelpindividualinvestors seekthebenefitsaswellasnavigatethecomplexitiesoffinancialmarkets. Thisreadingintroducescandidatestotheprocessofdesigningandexecutinganinvestment planorstrategyfortheindividualinvestor.Wediscussthetoolsandtechniques usedbyprivatewealthmanagersandhowthewealthmanagerinteractswiththeclient toservetheclient’sneeds.Section2examinesthekeydifferencesbetweenprivate clientsandinstitutionalclients.InSection3,wediscusshowthewealthmanager gainsanunderstandingoftheclientandidentifieskeyattributesoftheclient’s financialsituationthatarerelevanttothewealthmanagementprocess.Section4 coversinvestmentplanning,includingcapitalsufficiencyandretirementplanning. Section5discussestheinvestmentpolicystatement,includingitsvariousunderlying parts.Section6analyzesportfolioconstruction,portfolioreporting,andportfolio review.Finally,inSection7,wediscussthepracticeofprivatewealthmanagement, includingethicalconsiderationsforprivatewealthmanagers,complianceconsiderations, andthevariousclientsegmentsthatprivatewealthmanagersencounter. Reflectingthevariationinindustryterms,weusetheterms“privatewealthmanagers,” “wealthmanagers,”and“advisors”interchangeably. Wealsoreferto“individualinvestors”as“privateclients”or,simply,“clients.” Inpractice,privatewealthmanagerstypicallyoperateeitherindependentlyoras representativesoforganizations,suchaswealthmanagementfirms,banks,andbroker/dealers. LearningOutcomes Themembershouldbeableto: contrastprivateclientandinstitutionalclientinvestmentconcerns; discussinformationneededinadvisingprivateclients; identifytaxconsiderationsaffectingaprivateclient’sinvestments; identifyandformulateclientgoalsbasedonclientinformation; evaluateaprivateclient’srisktolerance; describetechnicalandsoftskillsneededinadvisingprivateclients; evaluatecapitalsufficiencyinrelationtoclientgoals; discusstheprinciplesofretirementplanning; discussthepartsofaninvestmentpolicystatement(IPS)foraprivateclient; preparetheinvestmentobjectivessectionofanIPSforaprivateclient; evaluateandrecommendimprovementstoanIPSforaprivateclient; recommendandjustifyportfolioallocationsandinvestmentsforaprivateclient; describeeffectivepracticesinportfolioreportingandreview; evaluatethesuccessofaninvestmentprogramforaprivateclient; discussethicalandcomplianceconsiderationsinadvisingprivateclients; discusshowlevelsofserviceandrangeofsolutionsarerelatedtodifferentprivate clients. Summary Privateclientsandinstitutionalclientshavedifferentconcerns,primarilyrelating toinvestmentobjectivesandconstraints,investmentgovernance,investmentsophistication, regulation,andtheuniquenessofindividuals. Informationneededinadvisingprivateclientsincludespersonalinformation,financial information,andtaxconsiderations. Basictaxstrategiesforprivateclientsincludetaxavoidance,taxreduction,and taxdeferral. Aclient’splannedgoalsarethosethatcanbereasonablyestimatedorquantified withinanexpectedtimehorizon,suchasretirement,specificpurchases,education, familyevents,wealthtransfer,andphilanthropy. Unplannedgoalsarethoserelatedtounforeseenfinancialneeds,suchasproperty repairsandmedicalexpenses. Whenestablishingclientgoals,privatewealthmanagersconsidergoalquantification, goalprioritization,andgoalchanges. Risktolerancereferstothelevelofriskanindividualiswillingandabletobear. Risktoleranceistheinverseofriskaversion.Riskcapacityistheabilitytoaccept financialrisk.Riskperceptionisanindividual’ssubjectiveassessmentoftherisk involvedinaninvestmentdecision’soutcome. Wealthmanagersoftenutilizequestionnairestoassessclients’risktolerance.The resultofarisktolerancequestionnaire,typicallyanumericalscore,isoftenused asaninputintheinvestmentplanningprocess. Wealthmanagersneedbothtechnicalskillsandnon-technical(“soft”)skillsintheir advisoryroles.Technicalskillsincludecapitalmarketsproficiency,portfolioconstruction ability,financialplanningknowledge,quantitativeskills,technologyskills,and insomesituations,foreignlanguagefluency.Softskillsincludecommunicationskills, socialskills,education/coachingskills,andbusinessdevelopmentandsalesskills. Capitalsufficiencyanalysis,alsoknownascapitalneedsanalysis,istheprocess bywhichawealthmanagerdetermineswhetheraclienthas,orislikelytoaccumulate, sufficientfinancialresourcestomeethisorherobjectives. TwomethodsforevaluatingcapitalsufficiencyaredeterministicforecastingandMonte Carlosimulation. Wealthmanagersuseseveraldifferentmethodstoanalyzeaclient’sretirementgoals, includingmortalitytables,annuities,andMonteCarlosimulation. Aninvestmentpolicystatement(IPS)foranindividualincludesthefollowingparts: backgroundandinvestmentobjective(s);investmentparameters(risktoleranceand investmenttimehorizon);assetclasspreferences;otherinvestmentpreferences(liquidity andconstraints);portfolioassetallocation;portfoliomanagement(discretionary authority,rebalancing,tacticalchanges,implementation);dutiesandresponsibilities; andanappendixforadditionaldetails. Twoprimaryapproachestoconstructingaclientportfolioareatraditionalapproach andagoals-basedinvestingapproach. Portfolioreportinginvolvesperiodicallyprovidingclientswithinformationabout theirinvestmentportfolioandperformance.Portfolioreviewreferstomeetingsor phoneconversationsbetweenawealthmanagerandaclienttodiscusstheclient’s investmentstrategy.Thekeydifferencebetweenportfolioreportingandportfolio reviewisthatthewealthmanagerismoreactivelyengagedinareview. Thesuccessofaninvestmentprograminvolvesachievingclientgoals,followinga consistentprocess,andrealizingfavorableportfolioperformance. Ethicalconsiderationsforprivatewealthmanagersinclude“knowyourcustomer”(KYC), fiduciarydutyandsuitability,confidentiality,andconflictsofinterest. Severalglobalregulationshaverelevanceforprivatewealthmanagers. Keyprivatewealthsegmentsincludemassaffluent,highnetworth,andultrahigh networth. Robo-advisorshaveemergedinthemassaffluentclientsegment.Theseadvisorshave aprimarilydigitalclientinterface.Robo-advisorserviceprovidersgenerallycharge lowerfeesthantraditionalwealthmanagementfirms.Scalabilityoftechnologyhas enabledrobo-advisorstoserviceinvestorswithrelativelysmallportfolios. Related DownloadtheGuide(PDF) 2 PL RecordPLcredit ManageyourProfessionalLearningcredits CategoriesRiskAnalysis&Management InvestmentManagementStrategies PrivateWealthManagement InvestmentProducts&AssetClasses PortfolioOptimization&Rebalancing FinancialMarkets FixedIncomeInvestments ReturnAnalysis&PerformanceMeasurement Economics InternationalInvesting ActiveManagement FinancialReporting&Accounting RealEstate EquityInvestments FinancialRegulation FundamentalAnalysis EconomicConditions Bonds