Case Study in Risk Management: Private Wealth
2020 Curriculum CFA Program Level III Portfolio Management and Wealth Planning
Case Study in Risk Management: Private WealthDownload the full reading (PDF)
Available to members
Giving advice on risk management to individuals and families raises a number of challenges. These challenges include the extent to which identified and evaluated risks can be reduced and/or addressed using insurance policies or self-insurance. Families’ financial circumstances and risks evolve over time, and financial advisers should review and update the solutions addressing these risks accordingly. Risk management solutions recommended by advisers should consider the family’s overall health, wealth, and long-term goals.
This case study explores some of the risk management issues for a married couple living in a hypothetical country in the Eurozone. The case spans several decades and follows the couple through different stages of life from their early career phase, when they are in their late twenties, all the way to retirement. We will show how risk management methods need to change as the family’s circumstances evolve. Particularly important prior readings related to this case are the Level III readings “Risk Management for Individuals” and “Overview of Private Wealth Management.”
The assumptions used are drawn from what is typical for many countries in Europe. The circumstances and risks that this married couple face are influenced by the environment in which they find themselves. Despite the differences between Europe and other parts of the world, however, their goals, the risks they face, and the assessment of their circumstances, as well as the suggested methods, are by no means unique to the region. The risk analysis methodology and its application would therefore be valid in a much broader context.
For simplicity, we assume that economic conditions and tax rates remain unchanged throughout the four decades that this case study spans. The terms “adviser” and “wealth manager” are used interchangeably throughout this case study. The amounts that appear in exhibits throughout the case study are rounded.
The case is divided into six major sections. Section 2 provides background information about the hypothetical country in which the Schmitt family resides. Section 3 provides initial case facts relating to the family’s early career stage and risk management analysis, as well as solutions relevant to that stage. In Section 4, we revisit the couple in their career development stage when they are 45 years old. In Sections 5 and 6, we examine their lives at age 55, in peak accumulation phase, and age 64, when they are preparing to retire. The final section provides a summary of the case.
The member should be able to:
- identify and analyze a family’s risk exposures during the early career stage;
recommend and justify methods to manage a family’s risk exposures during the early career stage;
identify and analyze a family’s risk exposures during the career development stage;
recommend and justify methods to manage a family’s risk exposures during the career development stage;
identify and analyze a family’s risk exposures during the peak accumulation stage;
recommend and justify methods to manage a family’s risk exposures during the peak accumulation stage;
identify and analyze a family’s risk exposures during the early retirement stage;
- recommend and justify a plan to manage risks to an individual’s retirement lifestyle goals.
This case study follows a family from the early career to the retirement stage. It touches on a small and simplified selection of a wide range of issues and considerations that a family may face. A great range of skills and competencies is required to provide financial advice, ranging from the ability to conduct in-depth risk analysis, all the way to making recommendations on risk mitigation strategies, including the choice of insurance products, to perform asset allocation, tax optimization, retirement planning, and estate planning. All of this must be done with a clear understanding of the applicable legal environment and of the level of access and the cost of accessing financial products. In practice, it is very unlikely that a single financial professional can master all the foregoing competencies. The key to success is to understand at what point the generalist needs to bring in, or refer the client to, a subject matter expert.
In this case study:
We identify and analyze the Schmitts’ risk exposures. We observed that the types of risk exposure change substantially from the early career stage to the early retirement stage. We conducted the analysis holistically, starting from the economic balance sheet, including human capital.
We recommend and justify methods to manage the Schmitt family’s risk exposures at different stages of their professional life. We use insurance, self-insurance, and adjustments to their investment portfolio.
We prepare summaries of the Schmitts’ risk exposures and the selected methods of managing those risk exposures.
We recommend and justify modifications to the Schmitts’ life and disability insurance at different stages of the income earners’ lives.
Finally, we recommend a justified a plan to manage risk to the Schmitts’ retirement lifestyle goals.