Private Wealth Management

Overview

Private Clients v.s. Institutional Clients

Personal Information (get to know) FIIICC

• Family situation: martial status, # of Children, ages of family member

• ID

• Investment Background: assets source

• Investment Preference: Return Preference, Liquidity Preference, ESG

• Career info

• Clients' Financial Objectives (goal and risk tolerance): wage earned, inheritance

Financial Information

Asset 不能 cover Liability 的方法

1. 增加A：少消费，多存钱。cash & deposit accounts surplus

2. 减少Lia：减少负债

3. 增长率：资产的增长率 超过高 lia的 $g_A>g_L$$g_A>g_L$

Tax Consideration

• Common Tax Categories

  1. Taxes on Income

  2. Wealth-based Taxes: Property, Real Estate, Taxes of Transfer of Wealth ( inheritance )

  3. Taxes on Consumption / Spending: Sales Taxes & Value-added Taxes

• Basic Tax Strategies

  1. Tax Avoidance 避税

  2. Tax Reduction 减税

  3. Tax Deferral ( interim earning e.g. coupon 不用 pay tax，所以不会因为tax减少compounding的数额)

• Other Information needed to Know

  • Estate Plan

  • Life Insurance, Excess Liability Coverage, and other insurance coverage

Client Goals

• Planned Goals

  Can be estimated or Quantified

  1. retirement

  2. Specific purchase: such as buy car at a certain year

  3. Education

  4. Wealth transfer (inheritance)

  5. Philanthropy 慈善捐赠 charitable donations

• Unplanned Goals

  1. Property Repairs 买房屋保险 insurance 面对 catastrophes （不一定有，有房子或者有买房意愿才有）

  2. Medical Expense 一定有

• Fund Manager should consider also (1) goal quantification (2) goal prioritisation (3) goal changes

Risk Tolerance

• Willingness 承担风险的意愿（Risk Tolerance）: investment style, psychological profile, self-statement

• Ability 承担风险的能力（risk capacity）：Time Horizon, Relative Portfolio Size (Spending Needs / Portfolio $\approx <8$$\approx < 8%$)

• 如果willingness & ability 都高，则 risk tolerance 高

• 如果有一个低或者都低，就跟低的走

Investment Planing

Evaluating Capital Sufficiency 判断投资是否能满足capital 需求

1. Deterministic Forecast Method

   Assume a straight-line manner

   The process is simple, but the assumption is unrealistic

2. Monte Carlo Simulation

   Assume probability distributions

   Get the percentage of trails by horizon in which client can achieve the object

Retirement Planning

• Analyse the Retirement Goals

  1. Mortality Table 概率和寿命 加权平均算出预期平均寿命。用年数把未来现金流折现

     • Drawbacks:

       1. Individual prob of living might exceed the general population 个人数据可能与大样本不一样

       2. Cannot model different scenarios

       

  2. Annuities 直接按 保险公司的 fixed payment 算

     • Drawbacks:

       1. fixed payment each year 与实际情况不相符

       2. Cannot model different scenarios

       

  3. Monte Carlo Simulation

     Aggregate the results of many trails

     Based on Assumption, so it's flexible

     • Drawbacks:

       1. cannot predict future, it's only the estimation

       2. Sensitive to changes in assumption

       3. Not necessary the shortfall magnitude ？wtf

       

• Behavioural Consideration in Retirement Planning

  1. Heightened Loss Aversion 相比于gain，更讨厌loss

  2. Consumption Gap 实际开销与预期不同

  3. Annuity Puzzle 不喜欢投资annuity 因为觉得保险公司都是sb，不如自己投资

  4. Preference for Investment Income over Capital Appreciation 相比于capital gain更喜欢 coupon 和 dividends更喜欢稳定的income 收入

IPS (Investment Policy Statement)

1. Background and Investment Objectives (R, for Return)

   1. Clarify the objectives

      know the background Information, (name, age, personal financial info, etc). Retirement, family member etc

   2. the investment objectives should be detailed and quantified Priorities the Objectives Conduct Capacity sufficiency Analysis

   3. capital sufficiency analysis, revise the objective

   4. IPS should include the market value of the portfolio and of the accounts that make uo the portfolio (Taxable, TDA)

   5. any other investment assets (timberland)

   6. Any cash flows from external sources (trust / inheritance)

2. Investment Parameters (RTTLLU, r for risks)

   1. RIsk Tolerance (willingness and ability)

   2. Investment Time Horizon, (might be a range not a number)

   3. Asset Class Preferences

   4. Other Investment Preference (ESG, or Legacy, endowment bias)

   5. Liquidity Preference

   6. Constraints

3. Portfolio Asset Allocation (SAA, TAA)

   1. Strategic AA (long-term), define the target allocation and upper / lower bonds

   2. Tactic AA (short-term), class target ranges not specific percentage

4. Portfolio Management (Discretionary or Passive)

   1. Discretionary 可以自主决策的百分比

   2. Reblancing 将当期情况，向 target 调整

   3. Tactical Changes 什么时候能偏离 SAA

   4. Implementation: investment vehicles

5. Duties and Responsibilities

   1. wealth management responsibilities

   2. IPS review

6. IPS Appendix (Simulation)

Portfolio Construction and Monitoring

• Portfolio Construction

  1. Traditional Approach: MVO, etc

  2. Goals Based Approach: 详见AA

• Portfoio Reporting and Review <- periodically (monthly) review

  here below is what should be reported

  • Report

    1. Strategic Asset Allocation Target

    2. Performance Summary during the current period

    3. Detailed performance report (asset class and individual securities)

    4. Historical Performance Report

    5. Contribution and Withdrawl

    6. Purchase and Sales

    7. Currency Exposure

  • Review

    • Review 是否 满足 clients' objectives, risk tolerance, time horizon

    • AA 是否一致

• Evaluation of Success or Achievement

  1. Goal Achievement: 是否 meet the long-term objectives

  2. Process Consistency 真实流程与设计流程是否一致

     • third-party fund managers' performance relative to benchmark

     • reduce cost

     • taxation isses

     • etc

  3. Portfolio Performance (absolute & relative)

  4. definition of success 如果前3点都不达成，被判定为 success

Ethical and Compliance Consideration (不重要)

• Fiduciary Duty

• Know Your Customer (KYC)

• Confidentiality

• Conflicts of Interests

Private Client Segments 给个人投资者分类

Taxation

Tax Classes

• Income Tax = % of taxable income

• Gain Tax: based on price appreciation (capital gain)

• Wealth or Property Tax: tax on the Real Estate

• Stamp Duties: on the process of purchasing equity or properties

  • 相当于邮票，有这个流程，需要贴个stamp的税

  • 外国人的 比 本国人的贵

• Wealth Transfer Tax

  • estate or inheritance

Scenario

• Double Taxation (,income is taxed twice 收入被税两次)

• Qualified Dividends: In the U.S., if common stock is held for at least 60 days, then lower tax rate

• Cross-border investments: withholding taxes 预扣税

Capital Gain Taxes

• Tax Basis = price * # + all related other costs

• Step-up on Death: 拿 inheritance 时，tax basis 调整为 fair market value of the asset

Tax Jurisdiction

• Tax haven: no tax for foreign investors

• Territorial Tax System: only locally-sourced income is tax 只有本地的tax

• Worldwide Tax System: all income regardless the source 不管人在哪，只要有收入就征税 产生 double-taxation

  • Residence Rules 用于判定人是哪个国家的 taxable resident

  • 当一个人属于多个国家时，Tax Treaties (tie-breaker rules) 防止全额的 double-taxation，部分减少税

Measurement (Calculation)

• After-tax Holding Period Return

  No consider tax: $R=\frac{V_1-V_0+Income}{V_0}$$R = \frac{V_1-V_0 +Income}{V_0}$

  Consider Tax: $R^{\prime }=\frac{V_1-V_0+Income-T}{V_0}=R-\frac{T}{V_0}$$R' = \frac{V_1-V_0 +Income- T}{V_0} = R - \frac{T}{V_0}$

  $R^{\prime }=R-\frac{T}{V_0}$$R' = R - \frac{T}{V_0}$

• Cumulative After Tax Return, $R_G$$R_G$

  $(1+R_1^{\prime })\cdots (1+R_n^{\prime })=(1+R_G^{\prime }{)}^n$$(1+R'_1)\cdots(1+R'_n) = (1+R'_G)^n$

  $1+R_G^{\prime }=\sqrt[n]{(1+R_1^{\prime })\cdots (1+R_n^{\prime })}$$1+R'_G =\sqrt[n]{(1+R'_1)\cdots(1+R'_n) }$

  • However, 这么算的 $R^{\prime }$$R'$ 可能不准，if

    1. Realised capital losses can be fully deducted

    2. Not all investors will receive full credit for the tax losses realised

    3. Taxes are usually paid on annual or quarterly basis

    • in sum 只要记得 由于 capital losses 可能抵扣时出现问题即可

• After-tax Post-liquidation Return, $R_{PL}$$R_{PL}$

  $1+R_{PL}^{\prime }=\sqrt[n]{(1+R_1^{\prime })\cdots (1+R_n^{\prime })-\frac{LiquidationTax}{FinalValue}}$$1+R'_{PL} =\sqrt[n]{(1+R'_1)\cdots(1+R'_n) -\frac{Liquidation Tax}{Final Value}}$

  $LiquidationTax=(FinalValue-TaxBasis)\times t_{CapitalGain}$$LiquidationTax = (FinalValue-TaxBasis)\times t_{CapitalGain}$

  or says, $LiquidationTax=(V_t-V_0)\times T_{captialGain}$$LiquidationTax= (V_t-V_0)\times T_{captialGain}$ 对所有 captial gain 的部分收 capital gain tax，分母要是 $V_t=(1+R_1^{\prime })\cdots (1+R_n^{\prime })$$V_t = (1+R'_1)\cdots(1+R'_n)$

• After-Tax Excess Return (越大越好，所以 x' 在前)

  • $x=\text{Pre-tax excess return}=R-B$$x=\text{Pre-tax excess return}=R-B$

  • $x^{\prime }=\text{After-tax excess return}=R^{\prime }-B^{\prime }$$x'=\text{After-tax excess return}=R'-B'$

  • , where $R$$R$ is the portfolio return, $B$$B$ is the benchmark return. $R^{\prime }$$R'$ is after-tax return, and $B^{\prime }$$B'$ is the after-tax benchmark return

  • Tax Alpha = $x^{\prime }-x$$x'-x$

• Tax-Efficiency Ratio (TER) 因为是efficiency 越大越好，所以R'在分子才能越大越好

  $TER=\frac{R^{\prime }}{R}=\frac{\text{税}\text{后}return}{\text{税}\text{前}return}$$TER = \frac{R'}{R}=\frac{税后return}{税前return}$

  Not working is return is negative

Three Accounts

三个阶段：放入，capital gain，取出

• Taxable Account: 交两次税，放入要交税，capital gain交税，取出不交税

• Tax-Deferred Account (TDA): 交一次税，只有取出时交withdraw tax

• Tax-Exempt Account (TEA): 交一次税，放入时交

• Value, FV

  • Taxable Account , $FV=(1+R^{\prime }{)}^n$$FV = (1+R')^n$ , $R^{\prime }=R(1-t)$$R'=R(1-t)$

  • TDA, Tax Deferred Account, $FV=(1+R{)}^n(1-t)$$FV = (1+R)^n(1-t)$ 最后整体 (1-t)

  • TEA, Tax-exempt account, $FV=(1+R{)}^n$$FV=(1+R)^n$, no tax 最nb的没有tax

• P.S.

  • 对机构 pension fund, endowment fund, foundation are generally tax-exempt 最nb的

  • 对个人 The retirement accounts of individuals are usually tax-deferred 养老金给一定的优惠，在最后才tax

Tax Management Strategy

Tax avoidance strategy 整个就不交

• hold assets in a tax-exempt accout

• Invest in tax-exempt bond

• hold assets and divdidend-paying stock long enough to pay more favorable tax rate 持有越久 tax 越优惠，dividend 的 tax 更优惠

Tax-Deferral Strategy

• invest in TDA

• In a progressive tax system, defer tax if anticipate tax rate will be lower in retirement 在累积税率制情况下，在退休后拿收益，那时tax少

• Limit portfolio turnover and tax loss harvesting

• turnover might create tax benefits

Tax-Efficiency Strategy

• Equity is more tax efficient

  • Dividend receive preferential tax treatment 国家鼓励长期投资，所以分红的tax比captial gain的低

  • Capital Gain tax is lower 因为 capital gain 未实现的时候不交税

  • Flexible to sell

• Equity 比 Alternatives derivatives 省税，因为tax of alternatives is more complicated

• Low turnover is more tax-efficient than high turnover

• Low yield is more tax-efficient than high yield

• Style-box approach is not tax efficient 这是的fund manager有特定的style范围，如果出了box of style 要rebalance or reconstitute，这个过程税多

Tax-Aware Approaches to Planning

Asset Location

Rule of Thumb: 大原则，但是具体问题具体分析

• Tax-Efficient Assets -> Taxable Account

• Tax-Inefficient Assets -> TEA or TDA

I.E.

• Equity -> Taxable Account

  • 因为 equity本身就是 tax efficient，主要收益来自于 capital gain，capital gain本身就是realise时候交。

  • 但如果 high turnover 那么就变成 tax-inefficient了，那么放入TDA TEA

  • 如果本身资产就tax-efficient 如 股票，那么就放 taxable account

• Bond -> TDA

Tax-efficient Decumulation Strategies for a Retirement Account

先取taxable account的钱，不达到 累进税率 progressive tax 的额度。退休后，没有工资收入时，再取 retirement account 的钱

• Retirement Accounts are TEA or TDA, so their compounding rate would not be s.t. tax, so higher rate of compounding

Therefore, the rule of thumb, withdrawals from the taxable account first and allow the retirement account (TDA) to continue to compound.

• Under progressive tax regimes, a more tax-efficient strategy may be to withdraw from the retirement account until the lowest tax brackets have been fully utilised. 在累积税率时，工资收入高，所以税率高，所以先取 retirement account 的话税高。而退休之后取税低

Assets for Charitable Giving

Gifts: highly appreciated Equity 把有很多 capital gain 的捐出去，可以拿回捐赠发票，收到未来可以抵税的额度 tax deduction from the gift to remove future unrealised gain tax liability.

• Appreciated securities can be gifted to a qualified charity without triggering the capital gain. 把 tax basis 最低的捐了，因为 capital gain = price - tax basis 大。charity可以免税

  • Gifting low-cost- basis assets from taxable accounts is preferred.

Tax avoidance 为合法避税， tax evasion 偷税 is illegal不合法

Selection of Investment Vehicle

1. Partnership 合伙制企业，没有企业所得税，不用交企业税 (开办合伙制大企业，交个人税，不用交公司税。这样可以避免双重征税，先公司税后再个人税的问题)

   • tax liability is passed throught to partners

   • the fund is free of taxation

   • distribution is classified as capital gain

2. Mutual Funds

   • Co-investors are influenced 所有人共同承担税务，因为赎回时，卖share 换钱，capital gain的部分将被税，所以shareholder都会被税

   • When new shareholders buy into the fund, they are also buying a share of the unrealised capital gains accrued in prior periods. 因为 fund manager的tax basis为最开始的price，所以中途买入的话，不管买入价是多少，tax basis都是最开始的值。

     所以最好买此前captial gain 升值少的 stocks

     赎回的时候，要卖股票还钱，之前的 capital gain实现了要交税。其他人想赎回导致所有人都要承担 capital gain 的tax

   • Potential Capital Gain Exposure

     measure of tax liability embededd in a mutual fund

     Capital Gain Distribution 是减项

     $PCGE=\frac{NetG/L}{TotalNetAsset}=\frac{gains-distribtuion-losses}{startPrice+(G-Distribution)}$$PCGE = \frac{Net\ G/L}{Total NetAsset}=\frac{gains - distribtuion-losses}{startPrice+(G-Distribution)}$

     这ratio越低越好，因为越低意味着gain少，所以PCGE越小，tax efficiency越好

3. ETFs 可以在二级市场交易，所以只有赎回的人被税，其他shareholder不受影响

   • very tax efficient

   • tax liabilities can be reduced or eliminated

4. Separately-managed account (SMA)

   • Flexible tax management

   • tax situation can be tailored

   • realised G/L can be aggregated across client's all account

Tax Harvesting

realise a loss that can be used to offset gains or other income 用loss 的 stock 抵税

• To avoid the wash sale rule (为了抵税，卖了，再在31天内买回来) in the United States, you must hold cash or some other security for 31 days. There are two issues:

  1. Cash Drag 由于现金收益低，被拉低return

  2. 如果这31天用cash 买ETF，为了挣 return 的话，由于short holding period 所以 high capital gain tax

  3. Tax Loss Harvesting is tax-deferral strategy

     • 相当于晚交税

     • 晚交的税 可以 compound

Tax Lot Accounting

track how much you paid when you bought it记录买入时的价格为 tax basis

The Tax Lot Method is for prioritising the realisation of G/L by

• FIFO 默认，但是由于一般first in 的tax basis 小，所以 tax inefficient

• LIFO

• HIFO (highest in first out) most tax efficient

• Specified-lot method 指定选择

Quantitative Method

Set objective function to be used to minimize taxdrag and investment risk.

• Mini tracking error / min trading cost

• Max realised loss / min realised gain

• Etc

• Different Types of quantitative methods

  • Transitions: avoid realising taxes during holding period

  • Tax-Optimised Loss Harvesting: continuously look for losses harvesting opportunities

  • Gain-Loss Matching Optimisation

Manage Concentrated Position 管理过集中的投资

Introduction

• Risks

  1. Company-specific risk

  2. Reduction in portfolio efficiency

  3. Liquidity risk inherent in a privately-held or outsized publicly-held security.

  4. Risk of incurring an outsized tax bill that diminishes return if one were to sell part of the concentrated position in an attempt to reduce the other risks.

• Factors to consider when selecting a diversify strategy

  1. Degree of concentration

  2. Volatility and downside risk of the position

  3. Tax basis

  4. Liquidity

  5. Tax rate of the investor

  6. Time horizon of the investor

  7. Restrictions on the investor

  8. Emotional attachment and other non-financial considerations

• Approaches to mitigate the risks of concentration

  1. Sell and Diversify 但是sell可能会产生 capital gain taxes

  2. Staged Diversification 分阶段卖，但是还是要交税

  3. Hedging and Monetisation Strategies 货币化，质押给银行换成贷款。

     $LoantoValueRatio=\frac{Loan}{\text{质}\text{押}\text{物}\text{价}\text{格}}$$Loan\ to\ Value\ Ratio = \frac{Loan}{质押物价格}$ 越高，套现的越多，对于借款人更好。抵押物风险越高，给的 loan贷款越少

     • Can provides owners with funds

     • Without triggering a taxable event

  4. Tax-free Exchange 以股换股。用低流动性的stock换高的

     • replacing an illiquid private company position with publicly traded stock,

     • without creating a taxable event

  5. Charitable Giving Strategies, 通过 charitable trust 把asset 转到 tax-exempt account in which it can be sold without incurring capital gains taxes.

管理上市公司的股票 Publicly Equities ( concentrated position in low basis stock)

1. Staged Diversification and Completion Portfolios

   • Sell and diversify

   • Staged diversification

   • Completion portfolio 卖一部分集中的，买 diversified equities

2. Tax-Optimised Equity Strategies

   • Equity monetisation

     strategies to receive cash without an outright sale 把资产 以非卖出的形式变成钱

     • Two-Step Process 做monetisation的方法

       1. hedge a large portion of risks

          hedge 价格下跌的风险， short sale, future, forward, option, etc

          因为直接把stock 抵押，stock由于风险大，100value的stock只能抵押 50 的钱。所以要先hedge 一下降低风险再抵押

       2. Borrow against the hedged position 把hedge 过的 risk 降低的 position 用来抵押 borrow money

     • Advantages 见下

       • avoid triggering the capital gains tax,

       • be subject to restrictions from the sale of the stock,

       • not want to cede control of the voting rights, 不会失去原有stock的控制权、投票权 (Cede = give up)

       • want to keep the position but create short-term liquidity.

   • Other Tax Consideration

     • Constructive Sale: trigger a taxable event if risks of stocks are completely eliminated. 当stock 所有的 风险都被对冲，则“视同销售”constructive sale，那么也会触发 taxable event

     • Long-term gain with a lower gax rate

   • Tools if hedge that can avoid the constructive sale: 因为保留的一部分风险，所以可以避免被判定为constructive sale

     • Zero-Cost Collar 不同于 monetisation，这两种方法用衍生品

     • S + P - C

       • Pros: protects against downside risk

     • Cons: has a limited upward potential

     • Covered Call

     • substitute for staged selling

       • it can psychologically prepare investor to dispose of those shares

     • Additional: Call Option and Tax

     • call option can affect the taxasiton of the stock divididends

       • premiums received on the short call can be classified as captial gain

       • call premium would be taxed at higher short-term gain rate

3. Tax-Free Exchanges

   • Exchange Funds 各公司创始人创建exchange fund，按比例在fund中换基金份额 pro rate（包含其他公司的股）达到diversified的目的.

     因为是拿 股票换股票，所以 no trigger taxable events

   • Cons: 要求入股的stocks存续7年以上，提前取出费用高

4. Charitable Remainder Trust

   投资慈善信托，由于有慈善性质，可以减税

   • Revocable Donation: 所有权还属于 donor/grantor，没有破产保护

   • Irrevocable donation, receive a tax deduction for the gift. 所有权不属于grantor，与本人隔离了

     • 有破产保护 bankruptcy protection

     • prevent liability claim

   • Without incurring a capital gain tax.

   • But beneficiary would own income tax for the income

管理过集中的 Private Equities /Private Business

• Personal Line of Credit Secured by Company Shares

  • without put arrangement, so no cause an immediate taxable event

  • 以自己的名义把公司stock抵押贷款 arrange a personal loan secured by the private company's share

• Leveraged Recapitalisation 分步退出，让PE买

  • For owner who are not yet ready to exit entirely and still have desire to continue to grow the business 对于还想继续business 不完全退出的。

    先出一部分股权给 PE ，留一部分。留下的部分可以签合同，之后设置条件（对赌）更高价卖出。

  • Cons:

    1. 收到现金流

    2. diversified assets

    3. Incentive to the owner to still manage the firm 因为还有 minority ownership interest

• Employee Stock Ownership Plan (ESOP)

  • 把一部分公司股票卖给公司自己的 养老金计划。

  • Pros:

    1. Defer capital gain tax 可以通过 pension 把 gain 递延到 pension 提取到时候

    2. Retain control of the firm

    3. Maintain upside potential 一部分控股权没卖，所以剩下的部分还可以随公司增值

Managing Concentrated Positions in Real Estate

• Mortgage Financing 抵押借款（stock是质押，房子可以抵押 房地产抵押贷款不会视同销售，因为没有卖资产，所以没有触发 taxable event 但仍通过抵押获得了 liqudity）

  • Resource 有追索权，即若房价跌了，borrower要pay别的东西来补充抵押物的价值。so less risks for banks

  • Non-recourse 无追索权，房子价值跌了也不能找borrower 要别的东西赔偿，所以对银行来说违约风险高

    • 如果房价涨了，还债

    • 如果房价跌了，可以 non-resouse to protect the downside risks

• Donor Advised Fund (DAF)

  Real Estate Monetisation for the Charitably Inclined 把房地产捐给DAF。DAF免税，然后把钱gift给beneficiary

可以 maintain ownership 的话，的三种方法本质都是 抵押贷款 monetisation，其他方法 都有新的 owner 加入。

Estate Planning

Introduction

Estate 财产传承规划，death后传给下一代，可以 death 死的时候给，也可以 lifetime 或者时候给

Objectives of Wealth Transfer

1. Maintaining sufficient income and liquidity

2. Decide the control

3. asset protection, protect assets from creditor 债务保护

4. Transferring assets in a tax-aware manner

   • Estate Tax: levied on the total value, tax before the distribtuions of beneficiaries 是死后对总资产先交，分配给个人后还要再交

   • Inheritance Tax: paid by each beneficiary 个人获得分配后自己再交

   • Generation-skipping tax 直接交给孙子一次性的tax，比先交给儿子后儿子再交给孙子分阶段的多。保证整个过程给到孙子的时候都是tax一样的

5. Preservation of Family Wealth

6. Business Succession

7. Achieve Charitable Goals

Will and Probate

1. Will (or Testament) 遗嘱

2. Testator 立遗嘱的人 is the person who authored the will and whose property is disposed of accourding the will.

3. Probate: Inteste 无设置遗嘱，那么会进行 Probate (遗嘱认证) 流程，即为法院判定 legal process。流程长，费用高。

   • 避免 Probate 的方法

     1. Joint Ownership 在房产证上jointly 写父子的名字

     2. Living Trust，在生前作为 grantor 给 trust 钱做 probate

     3. retirement plan 在养老金计划中写其他受益人

     4. life insurance 理赔给 beneficiary。理赔部分不需要税，且不走 probate程序

     5. Lifetime gifts 在活着的时候 lifetime of donor

• Legal Systems

  • Common Law 允许 testators freedom of disposition by will 可以随便设遗嘱

  • Civil Law place restriction on testamentory disposition 强制遗产要给一些人

    • forced heirship laws 法定继承权。如：妻子1/3，孩子们1/3，剩下的才按 will 分配

Estate Tax 遗产税的计算

• Flat Rate, 为固定的税率，不累计

• tax after the deduction of a Statutory Allowance 超过 S.A.的部分才税

  $TaxAmount=(Total-S.A.)\times t$$TaxAmount=(Total - S.A.)\times t$

Lifetime Gift v.s. Bequest

活着给叫 lifetime gift 税低一点，但是不确定要给多少。死了给叫 bequest 税高

• Tax-Free Gift 算相对价值，哪个方式的Final Value高，那个方法合适

  1. If estate is taxed:

     $R{V}_{TaxFreeGift}=\frac{F{V}_{gift}}{F{V}_{Bequest}}=\frac{[1+r_g(1-t_g){]}^n}{[1+r_e(1-t_e){]}^n(1-T_e)}$$RV_{TaxFreeGift} = \frac{FV_{gift}}{FV_{Bequest}} = \frac{\big[1+r_g(1-t_g)\big]^n}{\big[ 1+r_e(1-t_e)\big]^n(1-T_e) }$ 如果 >1 ，则 gift 更 tax efficient

     

  2. If the pre-tax return and effective tax rates are equal for both the recipient and donor (r_A = r_B 两个人的rate 一样大，则见下)

     $R{V}_{TaxFreeGift}=\frac{F{V}_{gift}}{F{V}_{Bequest}}=\frac{1}{1-T_e}$$RV_{TaxFreeGift} = \frac{FV_{gift}}{FV_{Bequest}} = \frac{1}{1-T_e }$

  3. If recipient also pay gift tax

     $R{V}_{TaxFreeGift}=\frac{F{V}_{gift}}{F{V}_{Bequest}}=\frac{[1+r_g(1-t_g){]}^n(1-T_g)}{[1+r_e(1-t_e){]}^n(1-T_e)}$$RV_{TaxFreeGift} = \frac{FV_{gift}}{FV_{Bequest}} = \frac{\big[1+r_g(1-t_g)\big]^n(1-T_g)}{\big[ 1+r_e(1-t_e)\big]^n(1-T_e) }$

  4. If the pre-tax return and effective tax rates are equal for both the recipient and donor

     $R{V}_{TaxFreeGift}=\frac{F{V}_{gift}}{F{V}_{Bequest}}=\frac{1-T_g}{1-T_e}$$RV_{TaxFreeGift} = \frac{FV_{gift}}{FV_{Bequest}} = \frac{1-T_g}{1-T_e }$

Estate Planning Tools

1. Trust

   Grantor 富B 把钱给 Trustee 管理者 把收益给 Beneficiary

   • Revocable Trust & Irrevocable (A B 之间隔离) 可以跟grantor隔离preotect assets from claim

   • Fixed Trust & Discretionary (B C 之间隔离) 有trustee自由决定给受益人多少钱不由beneficiary决定，跟beneficiary隔离

   

   • 信托的作用：

     1. Control. make resources available to beneficiaries without yielding complete control

     2. Asset Protection.

        • irrevocable trucst can protect assets from claims against the settlor

        • discretionary trust can protect assets from claims against the beneficiaries

        • ownership of family business does not get diluted

        • be used to avoid probate

     3. Tax-related Considerations.

2. Foundation 机构投资者章节会着重讲

   Private foundations may be required to make certain minimum annual distributions. 政府为了防止逃税，要求foundation每年必须distribute的额度

   Pros:

   • Income Tax Deduction

   • Favorable Tax Treatment of Investment Returns 在fundation里的钱也不investment return tax

   • Protection of Assets from Estate Tax 在fundation里的钱已经不是遗产了

3. Life Insurance 保寿险 按约定的 cover 付给 beneficiary

   • 一部分钱用于买保险，就不是estate了

   • 由于 death benefit 人都死了, so tax exempt

   • Life Insurance 可以和 Trust 结合 transfer assets to the beneficiaryes outside of the probate process 可以跳过 probate过程（税高），通过 trust 和寿险的方式把钱给 beneficiary

4. Companies (Controlled Foreign Corporation, CFC) 海外控股公司（开曼群岛）

   不能不交税，但是可以把 tax defer 把税递延

Across Multiple Generation 隔代转移 Family Governance

1. General Principles of Family Governance 家族治理 定规矩

2. Family Conflict Resolution 防止家族冲突，规定家族规定 family constitution，通过写入有法律约束力的家族文件中，违反就不给钱，而制定 legally binding

3. Family Dynamics in the Context of Business Exit

Individual Lifetime

Holistic Balance Sheet

Traditional v.s. Economic Balance Sheet

• Traditional BS includes accounting Asset & Lia, easy to quantify

• Economic Balance Sheets provides an overview of total wealth portfolio, including

  1. Asset: Human Capital

  2. Asset: Pension

  3. Liability: Consumption

  4. Liability: Bequest Goals

• Net Wealth = Net Worth + PV of Future Earning + Pension Plan

• $\rho (HC,FC)$$\rho(HC,FC)$ 越小，越 diversified。

  • For younger with greater human captial, is better to spend more to protect the value of Human Capital, and plan for retirement saving goals

• Vested Pension Plan 算作 financial capital, Unvested Pension Plan 算作 Human Capital

Human Capital & Financial Capital

让 Human Capital 和 Financial Capital uncorrelated 可以分散风险

$H{C}_0=\sum \frac{Pro{b}_t\times w_{t-1}\times (1+g_t)}{(1+r_f+y{)}^t}$$HC_0 = \sum \frac{Prob_t\times w_{t-1}\times (1+g_t)}{(1+r_f+y)^t}$

• $w_{t-1}(1+g_t)$$w_{t-1}(1+g_t)$, is previous wage times growth = current period wage

• y is risk adjustment (like the risk premium)

• 如果 r discount rate 降低，HC会增大

• Earning or Health 影响 both financial and human capital

• Property 基本上只影响 financial capitl

Financial Stages of Life for an Individual

Risk Management Strategy

• Procedure

  1. Specify the Objective

  2. Identify Risks

  3. Evaluate Risks and Select Appropriate methods to manage the risks

  4. Monitor outcomes and risk exposures

• Risk Management Techniques

  

Individual Risk Exposures

• Earnings risk (insure with disability insurance 工作能力丧失了赔钱的保险)

  • Disability Income Insurance 残疾保，对 disability 对定义

    1. According to one' regular occupation 如钢琴家保手，丧失本职工作能力就保

    2. According to any occupation is suited by education and experience 丧失同等教育水平工作的能力保

    3. According to duties of any occupation 只要能看大门就不保

• Premature death risk (insure with life insurance 防止提前挂了家庭没有收入了的保险)

• Longevity risk (insure with annuities 防止活太长了钱不够花弥补pension)

• Property risk (insure with property insurance 财产险如车险)

• Liability risk (insure with liability insurance 责任险，如把赔钱的责任转移给保险公司)

• Health risk (insure with health insurance 医保)

Life Insurance 寿险 死了才给

Life Insurance 算作 Human Capital，用于防止 Human Capital 的 risks

1. hedge risks of premature deathe 防止死太早

2. estate-planning tool 用于estate 遗产的planning

• Life Insurance 寿险，可以重复投保

  • 死亡险 Temporary Life Insurance 定期死亡险，在一定时间內死才保 Permanent Life Insurance 保永久。所以贵

  • Annuity 年金

    • Immediate v.s. Deferral 立刻拿payment 或 将来拿

    • Fixed v.s. variables 拿固定的钱 或 跟指数变动

  • Universal 全险 = 保障 + 投资

    • 如年轻的时候更多在投资账户 growth大，老了把钱放保障账户。flexible

• Non-life Insurance 不能重复投保

  • cata 灾难险

  • Property insurance 有 deductible 部分 用于规避 moral hazard比如买了保险之后乱撞车，反正保险给赔

  • Medical insurance

Basic Elements

• Terms 保险的周期

• Coverage 保额

• Premium 保费

• Policy Owner 投保的人 负责付premium。投保人和受益人要有 insurable interest 可保利益，要是亲戚才给买寿险。

• Insured people 被保险的，被设定了condition的

• Beneficiary 受益人，收coverage的

• 条款

  • Elimination / Waiting Period 等待期，给保险公司调查真相 有没有骗保

  • Non-forfeiture Clause 不丧失现金价值。退保的时候可以退还 cash value

  • guaranteed insurability 其他杂毛条款，如续保

Type of Life Insurance

• Temproary Life Insurance 如 在40-50岁 (term) 之间挂了才赔

• Permanent Life Insurance 对于整个年龄段

  • Whole Life Insurance 保费固定

  • Universial Life Insurance 在cash value上增加一些灵活度，一般有需要赔付灵活分配的，选这个

付钱

• Net Premium 一般为先付

  • the discounted value of the future death benefit.

  • 假设发生了理赔，（负）投资者每年付的premium折现 + 保险公司理赔coverage折现

• Gross Premium

  • 平滑了之后，实际交的保费。

    1. 平滑。因为一般人越老，prob of death越高，保费越高。年轻时候交的少，年老了交的多。Gross Premium 是平滑了实际交的之后，每年应付premium

    2. 实际交的。 + Expense 保险公司运营的费用（销售费用、提成etc） + Profits 给保险公司赚的钱

       

       因为提成第一年多，越到未来越少。所以前几年的 费用将被抵扣掉（cash value 剩下的少），以后越交累积的越多 These cash values build up very slowly in the early years, during which the company is making up for its expenses.

    • Cash Value 可以做抵押贷款，抵押出去换成钱再来投资。相当于加杠杆，套现，用更少的钱获得保险保障

算钱

Net Premium = Gross Premium - 总收益

• Use real discount rate = (1 + growht) / (1+ discount rate) 去计算折现

• Total Discount Rate = Nominal Rf + Income Volatility

• Net Premium Cost Index 不考虑第三步的cash value，因为我们假设在25th year 发生了理赔

• Surrender Cost Index（退保），即没发生保险触发条件，在最后要把cash value还给投保人

Surrender Cost Index, see eco-system

Other Insurance

• Disability Income Insurance 残疾保，对 disability 对定义

  1. According to one' regular occupation 如钢琴家保手，丧失本职工作能力就保

  2. According to any occupation is suited by education and experience 丧失同等教育水平工作的能力保

  3. According to duties of any occupation 只要能看大门就不保

• Health / Medical Insurance 医保

  1. Indemnity Plan 可以去 any medical service provider with reasonable fee 可以去任何医院，自己付款后，拿小票回来报销

  2. Preferred Provider Organisation 可以找network of physician or provider with lower price 可以找固定的医院，用低价格

  3. Health Maintenance Organisation 有私人医生office, allow office visits at no, or very little, cost to encourage individuals to seek help for small medical problems before they become more serious 像英国 NHS 小病找诊所 不要钱

  4. Co

  5. mprehensive Major Medical Insurance 大多数病 vast majority of health care expense全覆盖

Annuity 活着才给

年轻时候买，用来老了退休了收到 annuity payment

2 * 2 + 1 Deferred/Immediate * Fixed/Variable + ALDA

Deferred & Immediate * Fixed & Variable 两两组合，一共四种结果

variable 指的是 diversified menu of potential investment options，可以调整 payment

Defer 指的是 退休时候才返钱，immediate指的是立刻返钱

Fixed 指的是 fixed annuity locks the annuitant into a portfolio of bond-like assets at whatever rate of return exists at the time of purchase

• Deferred variable annuities

• Deferred fixed annuities

• Immediate variable annuities

• Immediate fixed annuities

• Advanced life deferred annuities (ALDA) 最后一种是 高龄年金，给老人买，付的钱不多，但是能收到钱的年份也少了，因为活得时间短了

• Mortality Credits 由于有的人死得早有的人死得晚，比预期。所以取打样板可以中和正负的diff

• Payout Method

  • Joint Life 夫妻双方活一个就要付 annuity

    • Joint Life Annuity: The joint life feature will provide payments until both of them are no longer living. 俩人都挂了才终止，一个挂了不终止payment

  • life annuity 活着就付

  • Period Certain Annuity 只付20年

  • Life Annuity with Period Certain 至少payment 10年，如买了立刻挂了，按理说 annuity支付给活的，将终止。但是 life annuity with period certain 可以保证挂得早 继续赔

  • Life Annuity with refund 提前挂了可以退款

• The income yield for a given amount invested in a life-only immediate annuity is higher for an older person than for a younger person.

  年金买的越晚，income yield 越高

  PV 固定，I/Y 固定（保险公司去投资的收益率，与这个人多久挂没关系，所以固定），FV=0。如果 N 大， PMT就小

  • Ceteris paribus, 男的 income yield 要比 女的高，因为女性平均寿命长

  • The inclusion of a period certain (or a return-of-premium feature) will reduce the payout but to varying degrees 加了period certain，一般会减少income yield，如在90岁买10year period certain，那么income yield一定会小。但是如果30岁买 10year period certain则对income yield 影响不大

Implementation of Risk Managament

A risk with the loss characteristics of high frequency of occurrence and low severity of loss, such as dental cavities, is best managed through risk reduction—for example, through proper dental hygiene.

A risk with the loss characteristics of low frequency of occurrence and high severity of loss, such as an earthquake that destroys your home, is best managed through risk transfer. 买保险 transfer 给保险公司

A risk with the loss characteristics of low frequency of occurrence and low severity of loss is best managed through risk retention, such as not purchasing an extended warranty on an infrequently used and relatively inexpensive item.

所以保险，包括 life insurance，都是 risk transfer

Human Capital

• Overall Volatility of one's economic balance sheet can be reduced by selecting assets that correlate weakly (or even negative) with human capital 通过与Human Capital 负相关降低风险

• Equity-like human capital: 如个人工资中与stock挂钩的部分多，则 Financial Capital can be less aggressive portfolio

• Bond-like human capital: 如医生律师人力资本收入稳定，则 Financial Capital 金融资本可以more aggresive portfolio

• 投资的 financial asset 要与 Human Capital 即工作领域&工作领域的option/stock

  不相关。去 diversify risks

Others Sample Text

About Private Wealth Manager

• In order to construct client portfolios, a private wealth manager requires a thorough understanding of asset class risks and returns, correlation among asset classes, and knowledge of investment vehicles, managers, products, and implementation strategies.

• In most cases, wealth managers must have a broad understanding of capital markets and asset classes, but it is unlikely that they will be investment specialists.

• Wealth managers are typically not experts in specialized financial planning fields, such as insurance, taxation, and estate planning. However, wealth managers who have a working knowledge in these fields can add value for clients and more effectively interact with other professionals who serve the clients.

About Retirement Income Goal

• The Benettons stress the importance of achieving their lifetime income goal of maintaining their inflation-adjusted current standard of living throughout retirement. Analyzing this goal by pricing a joint life annuity is the best method to insure that this goal will be achieved. A joint life annuity provides a guaranteed series of fixed payments for as long as either of them is alive in exchange for a lump sum payment.

• A mortality table illustrates an individual’s life expectancy at any given age. A potential problem with using mortality tables as the sole method to analyze the Benetton’s retirement goal is the probability that either one or both of them live to an age that exceeds the life expectancy of the general population. Thus, they run the risk of outliving their assets and may need to reduce their annual income (spending) goal at some point.

• The Monte Carlo simulation analyzes the likelihood of the client’s actual portfolio meeting anticipated retirement needs. Although the Monte Carlo output would include the probability of achieving the Benetton’s goal, it would not guarantee that their goal is achieved, nor would it necessarily measure the “shortfall magnitude” to achieving their goal. Thus, they run the risk of outliving their assets and may need to reduce their annual income (spending) goal at some point.

  MCS does not deal with the "shortfall"

IPS

Parts of IPS

1. Background and Investment Objectives

   PV -> CF, Tax -> FV

2. Investment Parameters 区分 什么能投什么不能投

   Risk, Time, Liquidity, Unique, Constraints

3. SAA TAA

4. Portfolio Management 在构建和管理 portfolio 时的过程

   1. D 判断是否是 discretionary

   2. R 判断 rebalanced 的方法

   3. Tactical Changes 判断 the degree that FM is permitted to go outside the range of SAA 即 TAA 超出 SAA 的部分

   4. I 如何实施，买ETFs 还是 mutual fund，要不要雇人，investment vehicle 等

5. Duities and Responsibilities 说明 FM 的职责，IPS 的频次等 此部分为固定内容

6. Appendix

Evaluatng the Success of an Investment Program 如何评价投资的好坏

1. 是否实现 goals

2. 投资过程是否 consistent，（是否可持续）见下details

3. Portfolio Performance : absolute or relative metrics