Course : F1404-Wealth Management

Year
: 2015

The Wealth Management Process

Session 1

Chapter 1
The Wealth Management Process
The Four General Categories:
1.The Client Relationship
2.The Client Profile
3.Wealth Management Investment Policy
4.Portfolio, Management, Monitoring, and
Market Review

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The Client Relationship

Looking at the bottom left corner of exhibit 1.1 you

may have already noticed from the schematic that
the overall wealth management investment process
is recursive and ongoing.

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The Client Relationship

There are few points about client relationship:
Everything is client driven
Developing strong relationship with client is critical
Developing a client relationship is iterative
Education is important
Education process is tailored to the individual

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The Client Profile

Look at the parallelograms across the top of Exhibit.1.1

It lists some of the primary elements of a client profile

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The Client Profile

List some of the primary elements of a client profile:
Client goals
Risk tolerance
Behavioral biases
Client constraints life balance sheets
Tax profile
Market expectations

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Client Goals
The wealth managers job is to help client quantify
their goals.
These goals include:
Planning for wealth transfers
Managing risks
Managing family dynamics
And preparing for charitable donation

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Client Goals
But in qualitative form they often wish to:
Maintain their current standard of living
Pay childs college education
Leaving legacy after their passing

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Risk Tolerance
Many methods to determine a clients risk
tolerance, from the subjective to the objective
If risk tolerance level is exceed clients lever of risk
tolerance resolution is needed because if not, a
nervous client is likely to bail out of the market. As
a result the, the decision should generally resolved
in favor of the more conservative risk tolerance
This discrepancy is illustrated in exhibit 1.2
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EXHIBIT 1.2
Risk Tolerance Versus Risk Capacity
Risk Capacity
Risk Tolerance

Below Average

Below Average

Below-average risk tolerance Resolution needed

Above Average

Resolution needed

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Above Average
Above-average risk
tolerance

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Behavioral Biases
Behavioral biases also affect the way investor
decisions and experience outcomes.

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Client Constraints
Constraints establish the parameters within which the
wealth manager must work. They can be categorized
into:
Time horizon
Priority
Liquidity requirements
Legal considerations
Taxes
Unique circumstances

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Life Balance Sheet

No CEO can effectively run a business without
understanding its financial position. Similarly , wealth
managers need Life Balance sheet, its one such
framework that provides a comprehensive accounting
of a clients assets, liabilities and net worth.
Exhibit 1.3 presents a simple life balance sheet with a
few explicit and implied assets as well as implied
liabilities

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Life Balance Sheet

Typically financial capital and human capital follow the
opposite pattern over ones lifetime with replacing
human capital overtime as shown in exhibit 1.4.
The value of human capital relies heavily on its nature,
depending not only investors current wages but also
volatility of the earnings stream.
Example: a tenured university professor faces far less
human capital risk than investment banker does.

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Tax Profile
The intersection of taxes investments is one of the
most daunting of challenge for the wealth manager.

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Market Expectations
Establishing expectations of the capital markets is
an important input to establishing investment policy

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Wealth Management Investment

Policy

Exhibit 1.5 presets an outline for a typical

investment policy statement.

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EXHIBIT 1.5
Investment Policy Statement
a. Brief client description
b. Client goal
c. Investment objectives
i.
ii.

Return objective
Risk objective

d. Investment constraints
i.
ii.
iii.
iv.
v.

Time horizon
Tax consideration
Liquidity needs
Legal and regulatory concerns
Unique circumstances

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e. Strategic asset allocation

i.
ii.
iii.
iv.

Asset class constraints

Investment constraints
Investment strategies
Investment styles

f. Implementation, monitoring, and review

i.
ii.
iii.
iv.

Responsibilities of client, managers, custodian, and other parties

involved
Performance measures, evaluation, and benchmarks
Review schedule
Rebalancing guidelines

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Plus Exhibit 1.6

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Risk Management and Insurance

a. Longevity risk
b. Mortality risk
c. Medical, disability, and long-term care
i.
ii.

Living wills
Health care proxies

d. Business risk
e. Political risk
f. Legal risk

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Wealth Transfer Goals

a. Estate planning
b. Philanthropy
c. Business succession

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Portfolio Management,
Monitoring, and Market Review
In the right most part of Exhibit 1.1 it required that
the parties involved have an understanding of each
other responsibilities as well as their own.
One way of implementing investment policy is to
construct portfolios by selecting individual assets.

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THANK
YOU

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