Wealth Planning
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Introduction
The third reading in the Private Wealth Management pathway covers wealth planning, including the creation of comprehensive wealth management plans that take into account financial goals and considerations such as human capital, taxation, and liquidity. The reading first examines how wealth managers can assist clients in achieving their goals, followed by an exploration of wealth planning that considers other assets, liabilities, and risk exposures that wealthy clients may have. The reading then discusses taxation and its impact on wealth management planning from a broader perspective before concluding with a focus on liquidity and liquidity risk management. The reading concludes with a comprehensive case study addressing investment policy statements, goals-based financial planning, wealth structuring, taxes, and liquidity planning.
Learning Outcomes
The candidate should be able to:
- formulate goals-based financial plans and recommend appropriate strategies to achieve an individual’s goals-based financial plans;
- recommend and justify methods to manage a family’s financial exposures holistically across their lifetime and retirement;
- evaluate how the principles of taxation and taxes influence goals-based planning and holistic financial plans for individual investors;
- recommend appropriate liquidity strategies for goal-based planning and holistic financial plans.
Summary
- Goals-based planning aligns an individual’s financial resources with their unique goals and circumstances with the aim of achieving specific financial objectives. It prioritizes the attainment of financial goals over benchmark performance.
- The family extended balance sheet takes into account both explicit and implicit assets, liabilities, and surpluses that encompass all aspects of an individual’s financial situation. Human capital is a large implicit asset, and the present value of lifestyle related expenses are a large implicit liability.
- The value of implicit assets and liabilities can be hard to quantify: their actuarial present values can only be estimated based on certain assumptions.
- Goals-based planning reflects behavioral and cognitive influences on decision making and aims to tailor asset allocation to specific financial objectives. The four steps in goals-based financial planning are defin - ing goals, prioritizing and quantifying goals, structuring portfolios, and managing portfolios.
- The behavioral portfolio reflects non-discretionary lifestyle spending goals, discretionary lifestyle spending goals, philanthropic goals, and dynastic goals and matches these financial goals with distinct and appropriate subportfolios.
- Each subportfolio is tailored to meet a specific financial goal, time horizon, and the minimum probability of success measured by the likelihood of achieving the set financial goal.
- Financial goals change across life phases, reflecting shifts in time horizons, risk tolerance, and objectives. Providing family support and creating dynastic wealth transfer involves evaluating the impact it has on achieving financial goals and balancing incompressible spending needs with discretionary spending.
- Comprehensive wealth planning establishes appropriate and unequiv - ocal legal ownership and ownership protection to safeguard wealth; minimizes costs, including tax liabilities on income and wealth determined by the investor’s legal domicile; and proactively addresses potential conflicts within the family and between heirs and other stakeholders.
- Internally managed assets are assets for which the client generates value through their own activities and include the human capital from either traditional wage-based employment or a privately held business. Externally managed assets include assets managed by a hired external manager.
- For families with most of their wealth tied to human capital from a single business, it’s essential to evaluate the company’s sustainability. Selling a family-owned business monetizes the family’s human capital and transforms an illiquid and hard-to-value asset.
- Asset structuring structures investments, business interests, or other financial holdings to maximize wealth. Creating legal entities that own assets can provides tax benefits, legal protections, and clear ownership and helps avoid unintended legal and tax consequences. Engaging legal, tax, and accounting experts is often crucial for successfully structuring assets.
- In an arms-length transaction, both the buyer and the seller act inde - pendently and in their self-interest, which encourages fair pricing. Many inter-family transactions are not arms-length transactions and may trigger unexpected legal or tax consequences because of transfer of wealth.
2 PL Credit
If you are a CFA Institute member don’t forget to record Professional Learning (PL) credit from reading this article.