Wealth Management Flashcards
Paraplanner
Paraplanningrefers to the administrative duties of afinancialplanner carried out by junior members of afinancialplanning group.
The function of aparaplannerwas created to allowfinancialplanners to focus on working closely with clients and identify their investment needs.
Ring-fencing
guarantee that (funds allocated for a particular purpose) will not be spent on anything else
model portfolio management
discretionary investment management service that consists of a suite of risk-portfolios, each with aim to deliver strong risk-adjusted returns
Model Portfolio Theory (MPT)
Not enough to look at risk and return of single security. Make a portfolio, diversify.
Risk for investor: return on investment lower than expected…
According to MPT, risk = deviation from average return (each security with standard deviation (+/-))
How do you make an optimal portfolio?
Select right combination of assets.
correlation of assets…
Correlation between -1 and +1
+1: positive correlation, price of two assets move par for par
- 1: negative correlation prices move in opposite direction
Similar assets will move in similar fashion, i.e. assets from same economic sector.
Assets from different economic sectors show dissimilar price movements as they lack correlation.
Risk and return according to MPT
Assets risk and return should not be assessed by itself but by how it contributes to the risk and return of an overall portfolio
Rebalancing
Process of realigning the weightings of a portfolio of assets.
Involves periodically buying or selling assets in a portfolio to maintain an original or desired level of asset allocation or risk.
Aim of rebalancing
(1) safeguards the investor from being overly exposed to undesirable risks
(2) ensures portfolio exposures remain within the manager’s area of expertise
(3) gives investors opportunity to sell high and buy low, i.e. take gains from high-performing investments and reinvest them in areas of potential growth
Current Allocation
- describes the current allocation of stocks and bonds affected by market conditions
Constant Proportion Portfolio Insurance (CPPI)
- investor sets floor on dollar value of portfolio, structures asset allocation around that decision
- % allocation allocated between risky asset and conservative asset depends on cushion value
- cushion value = current portfolio value minus floor value
- multiplier used to determine amount of risk investor willing to undertake based on investor’s risk profile, and derived by asking what maximum one-day loss could be on risky investment
- investor makes beginning investment in risky asset equal to value of: (multiplier) x (cushion value), invest remainder in conservative asset
aim of CPPI
- aim: allows investor to maintain exposure to upside potential of risky asset while providing capital guarantee against downside risk
Auto-Rebalancing
- enter desired %s for each holding and frequency of desired rebalancing
- at desired interval platform will execute necessary buys and sells to maintain asset allocation
Risk Tolerance
Amount of risk investor willing to take or degree of uncertainty investors able to handle.
Investors take greater risk with investable assets when other more stable sources funds available.
Varies with age, income, financial goals, possession of other assets.
NB: risk-tolerance based rebalancing
Stocks
AKA shares or equity
Type of security that signifies proportionate ownership in the issuing corporation.
Entitles the stockholder to that proportion of the corporation’s assets and earnings.
Issued by companies to raise capital in order to grow the business or undertake new projects.
Bonds
AKA debt
Represents a loan made by an investor to a borrower.
Used by companies, municipalities, states, and sovereign governments to finance projects and operations.
Key Characteristics: face value, coupon rate, coupon dates, maturity date, issue price
Stocks VS Bonds
- stocks performance tends to vary more dramatically than bonds
- stocks inherently riskier investment than bonds: (stockholders last in line in the event of bankruptcy, whereas bondholders given legal priority over other stakeholders)
face value of bond
money amount bond worth at maturity
coupon rate of bond
Rate of interest bond issuer will pay on face value of bond.
Expressed as a percentage.
EXAMPLE: 5% coupon rate means bondholders receive 5% x $1000 face value = $50 every year
maturity date of bond
date on which bond will mature and bond issue will pay bondholder
Credit Quality and Bonds
Issuer with poor credit rating means risk of default is greater, these bonds pay more interest.
Credit ratings for company and its bonds generated by credit rating agencies (Standard and Poor’s, Moody’s, Fitch Ratings)
Bonds with very long maturity date pay higher as bondholder more exposed to interest rate and inflation risks for an extended period.
Segregation of Assets
Separation of assets from larger group or creating separate accounts for specific groups, assets, or individuals
Segregation used by portfolio manager
Segregate some accounts from larger pool when specific individuals have unique requirements related to risk and investment objectives.
Portfolio managers create portfolio models applied to majority of assets under management.
However discretionary accounts may be introduced for investors with different requirements.
Wrap Account
Means of consolidating and managing an investor’s investment portfolio and financial plans.
Wrap fee services cover all administrative and management costs.
NB: type of service also sometimes known as investment platform or financial platform service.
