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    Portfolio Construction For The Wealthy Investor

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    Ibra Grn
    1. When constructing an investment portfolio for a wealthy client, an adviser must understand the client's goals, resources, circumstances, and constraints. 2. The adviser needs to ensure the portfolio's risk level is suitable for the client based on their ability and willingness to take risk, time horizon, liquidity needs, tax status, legal factors, and unique circumstances. 3. The client's return objectives, which can be a target return amount or benchmark, must be realistic given their risk tolerance and current market conditions.

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    Portfolio Construction For The Wealthy Investor

    Uploaded by

    Ibra Grn
    30 views4 pages
    1. When constructing an investment portfolio for a wealthy client, an adviser must understand the client's goals, resources, circumstances, and constraints. 2. The adviser needs to ensure the portfolio's risk level is suitable for the client based on their ability and willingness to take risk, time horizon, liquidity needs, tax status, legal factors, and unique circumstances. 3. The client's return objectives, which can be a target return amount or benchmark, must be realistic given their risk tolerance and current market conditions.

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    Portfolio construction for the wealthy investor

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    1. When constructing an investment portfolio for a wealthy client, an adviser must understand the client's goals, resources, circumstances, and constraints. 2. The adviser needs to ensure the portfolio's risk level is suitable for the client based on their ability and willingness to take risk, time horizon, liquidity needs, tax status, legal factors, and unique circumstances. 3. The client's return objectives, which can be a target return amount or benchmark, must be realistic given their risk tolerance and current market conditions.

    Copyright:

    © All Rights Reserved
    Download as DOCX, PDF, TXT or read online from Scribd
    Download as docx, pdf, or txt
    30 views4 pages

    Portfolio Construction For The Wealthy Investor

    Uploaded by

    Ibra Grn
    1. When constructing an investment portfolio for a wealthy client, an adviser must understand the client's goals, resources, circumstances, and constraints. 2. The adviser needs to ensure the portfolio's risk level is suitable for the client based on their ability and willingness to take risk, time horizon, liquidity needs, tax status, legal factors, and unique circumstances. 3. The client's return objectives, which can be a target return amount or benchmark, must be realistic given their risk tolerance and current market conditions.

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    © All Rights Reserved
    Download as DOCX, PDF, TXT or read online from Scribd
    Download as docx, pdf, or txt
    of 4

    Portfolio construction for the wealthy investor

    To build a suitable portfolio for a client, an investment adviser should


    first seek to understand the client’s investment goals, resources,
    circumstances, and constraints.

    When constructing a portfolio for a client, it is important to ensure that


    the risk of the portfolio is suitable for the client

    Constraints

    1. Risk tolerance

    a) ability
    b) willingness

    An individual’s overall risk tolerance is a function of his ability to bear


    (accept) risk and his willingness to take risk.

    The ability to bear risk is measured mainly in terms of objective


    factors, such as time horizon, expected income, and the level of
    wealth relative to liabilities.

    Risk attitude, or willingness to take risk, is a more subjective factor


    based on the individual’s psychology and perhaps his/her current
    circumstances. Some psychological factors, such as personality type,
    self-esteem, and inclination to independent thinking, are correlated
    with risk attitude. A willingness to take risk may be gauged by
    discussing risk with the client, or by asking the client to complete a
    psychometric questionnaire.
    The adviser needs to examine whether a client’s ability to take risk is
    consistent with the client’s willingness to take risk.

    2. Time horizon
    It may be the period over which the portfolio is accumulating
    before any assets need to be withdrawn; it could also be the
    period until the client’s circumstances are likely to change.

    The time horizon of the investor will affect the nature of


    investments used in the portfolio:
    illiquid or risky investments may be unsuitable for an investor
    with a short time horizon, because the investor may not have
    enough time to recover from investment losses; such
    investments, however, may be suitable for an investor with a
    longer horizon.

    3. Liquidity needs
    The liquidity requirements (withdrawal of funds) need to be
    stated.
    Examples for an individual investor would be outlays for
    covering healthcare payments or tuition fees.
    When the client does have such a requirement, the adviser
    should allocate part of the portfolio to cover the liability :
    This part of the portfolio will be invested in assets that are liquid
    (that is, easily converted to cash) and low risk.

    4. Tax concerns
    Tax status varies among investors.
    The portfolio should reflect the tax status of the client :
    a taxable investor may wish to hold a portfolio that emphasizes
    capital gains and receives little income, if income is taxed more
    highly than gains.
    5. Legal and regulatory factors
    Some investors are subject to restrictions on the composition of
    the portfolio: for example, there may be a limit on the proportion
    of equities or other risky assets in the portfolio, or on the
    proportion of of the portfolio that may be invested overseas.

    6. Unique circumstances
    An investor may have personal objections to certain type of
    investments.

    Return objectives

    A client’s return objectives can be stated in a number of ways:

     The client may want to achieve a particular percentage rate of


    return, for example, x percent.
     The return objective can be stated on a relative basis, for
    example, relative to a benchmark return, such as a desire to
    outperform the benchmark index by one percentage point per
    year.
     The return objective could be a required return, that is, the
    amount the investor needs to earn to meet a particular future
    goal, such as a certain level of retirement income.

    The adviser must ensure that the return objective is realistic.

    When a client has unrealistic return expectations, the adviser will


    need to counsel the client about what is achievable in the current
    market environment and within the client's tolerance for risk.
    Portfolio construction

    Once the IPS (investment policy statement) has been compiled,


    the investment manager can construct a suitable portfolio.

    Strategic asset allocation

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