READING 28: Overview of Private Wealth Management

Practice Problems

CFA® Program Curriculum, Volume 5, page 224

Other Practice Problems

1. Which of the following statements is most accurate with respect to the difference between private
and institutional clients?
A. Private clients are more likely to have clearly defined investment objectives compared to
institutional clients.
B. Private clients are likely to have shorter investment horizons and smaller portfolio sizes
compared to institutional clients.
C. Private clients are likely to have a more formal governance structure and a lower degree
of investment sophistication compared to institutional clients.
2. Which of the following investments is most likely to be appropriate for a private client with a
short investment horizon and high liquidity needs?
A. Global bonds.
B. Hedge funds.
C. Private equity
3. A private wealth manager is educating her client on the importance of tax-efficient strategies. She
makes the following three statements:
Statement 1: I recommend that you change the asset location of your investment in high-
coupon corporate bonds from a taxable account to a retirement account that allows tax-free
earnings and withdrawals.
Statement 2: You should reduce your exposure to dividend-paying equities in favor of a
more tax-efficient asset class.
Statement 3: If required, you should use an account that allows tax-free earnings but requires
taxes to be paid on withdrawals.
Identify the tax strategy (tax avoidance, tax deferral, or tax reduction) associated with each
statement and give one reason for each answer.
4. Joan Cheong, CFA, just completed a portfolio review meeting with one of her private clients.
Which of the following statements describes a soft skill that Cheong utilized in managing her
client’s portfolio?
A. Cheong rebalanced her client’s portfolio in accordance with the guidelines in her client’s
IPS.
 B. Cheong updated capital market expectations for the asset classes that are suitable for her
client’s portfolio.
C. Cheong explained her client’s portfolio performance in easy-to-understand terms and in
her client’s regional dialect.
5. Vivian Collins is a client of ESP Financial Advisors. She presents her personal circumstances as
follows:
 Collins is 45 years old, divorced, and has a daughter, Daija, aged 15 years.
 Collins has worked at her current job with the government for the last 23 years and assumes
that she will remain there until retirement in 20 years when she will collect her pension.
 Currently, her employment income comfortably covers her living expenses.
 She wants to be able to send Daija to the college of her choice and states that this is her
highest priority goal as it will happen in the next 3–6 years. Collins expects her daughter to
eventually marry and have children, and she would love to be able to leave something to her
future grandchildren.
 Collins expects her pension to cover most of her retirement expenses and thinks she will
need $20,000 per year from her modest investment portfolio to fund her retirement lifestyle.
Identify the issues relating to Collins’s goal quantification and goal prioritization.
6. As a client of ESP Financial Advisors, Vivian Collins, age 45, expects to retire in 20 years. Her
financial advisor is evaluating her risk tolerance level associated with each of the following financial
goals:
 Retirement: Collins views retirement as a long-term goal and is prepared to accept a 10%–
15% drop in expected retirement spending. However, she is concerned that she might face
unexpected health-related expenses in retirement.
 College fees: Collins wants to be able to pay for her daughter’s college education in the next
3–6 years. Currently, this is her highest priority goal.
 Gifting: Collins would like to leave a gift to her grandchildren at her death.
Describe Collins’s risk tolerance level associated with each of her financial goals as either lower or
higher, and justify each answer.
7. When analyzing a client’s retirement goals, a private wealth manager considers the probability
that the client will live to a certain age and then predicts the client’s retirement spending
requirements using the probability that the client will still be living in a given year. When combined
with the client’s expected annual cash flows in retirement, this approach enables the wealth manager
to estimate the present value of the client’s retirement spending requirements. The approach that the
wealth manager is most likely using is:
A. the annuity method.
B. Monte Carlo simulation.
C. mortality tables.
8. The behavioral bias exhibited by retirees who prefer to meet their spending needs from
investment income rather than by liquidating securities in their investment portfolio is most likely
related to:
A. consumption gaps.
B. self-control bias.
C. heightened loss aversion
9. A private wealth manager has gathered the following information from a new client:
 Risk tolerance: Low
 Liquidity needs: $2 million for purchase of holiday apartment in 2 years
 Asset class preferences: No investment in commodities and hedge funds
10. What information is most likely to be included in the Investment Objectives section of the
client’s IPS?
A. Low risk tolerance.
B. $2 million purchase of holiday apartment in 2 years.
C. Investments in commodities and hedge funds have not been approved by client.
11. Which of the following investment considerations is most likely to be included as a constraint in
a client’s IPS?
A. ESG investing.
B. Time horizon.
C. Liquidity preferences.
12. Which of the following items is most likely to be included in the Portfolio Management section
of a client’s IPS?
A. Capital market expectations.
B. Modeled portfolio behavior.
C. Portfolio rebalancing methodology.
13. The requirement for a client’s investment portfolio to hold a cash reserve and/or constraint on
asset class selection because of the need to sell the portfolio relatively quickly is most likely to be
included in:
A. the Liquidity Preferences section of the client’s IPS.
B. the Other Investment Preferences section of the client’s IPS.
C. the Portfolio Asset Allocation section of the client’s IPS.
14. Vivian Collins is a client of ESP Financial Advisors. She is 45 years old and expects to retire in
20 years. Her financial advisor has determined that Collins has the following financial goals:
 Retirement: Collins views retirement as a long-term goal and is prepared to accept a 10%–
15% drop in expected retirement spending. However, she is concerned that she might face
unexpected health-related expenses in retirement.
  College fees: Collins wants to be able to pay for her daughter’s college education in the next
3–6 years. Currently, this is her highest priority goal.
 Gifting: Collins would like to leave a gift to her grandchildren at her death.
Which of the following descriptions of Collins’s investment time horizon is her financial advisor
most likely to include in her IPS?
A. Collins has a long horizon of 35 years, as she would expect to survive until 80 years old.
B. Collins has multiple time horizons: the college fees goal has a time horizon of 3 years, the
retirement goal has a time horizon of 20 years, and the gifting goal has a time horizon of 35 years.
C. Collins has multiple time horizons: the college fees goal has a time horizon exceeding 3 years,
the retirement goal has a time horizon exceeding 20 years, and the gifting goal has a time horizon
exceeding 35 years.
15. Rayyan Patel, CFA, has performed MVO to determine the optimal asset allocation for a client’s
portfolio, having determined that the maximum portfolio volatility that the client can tolerate is 9%.
The MVO portfolio allocation together with three alternative portfolio allocations that Patel is
considering are shown in the following table.

If Patel wants to adjust the portfolio allocation to incorporate his client’s preference for non-U.S.
equities and alternative investments, which of the following portfolio allocations is he most likely to
recommend to his client?
A. Alternative 1.
B. Alternative 2.
C. Alternative 3
16. Christine Tan is preparing to meet Zach Bond, CFA, who has acted as her wealth manager for
the last 20 years. Over this period, her portfolio has earned a 6% compound annual return, matching
the annual return modeled by Bond in his capital sufficiency analysis of Tan’s portfolio 20 years
ago. The output of his most recent capital sufficiency analysis indicates that the current portfolio and
investment strategy are very likely to meet Tan’s future financial objectives. Tan’s portfolio return
has underperformed its benchmark by 0.3% over this period, while matching the benchmark’s
volatility. Tan notes that Bond has followed the guidelines laid out in her IPS in relation to ongoing
communications, rebalancing methodology, tax strategies, and implementation costs. Tan is most
likely to conclude that her investment program has:
A. failed because it has not met all three criteria of a successful investment program.
B. been a success because it has met two out of the three criteria of a successful investment
program.
C. been a success because it has met all three criteria of a successful investment program
17. Shane Long, CFA, works as a wealth manager for the London branch of a prestigious Swiss
private bank. Long is meeting a prospective client, Anna Bradescu, for the first time. In a telephone
conversation with Bradescu two days ago, she mentioned that she owns penthouse apartments in
Paris, New York, Hong Kong, and Tokyo. At the meeting, she provides Long with her personal
calling card that includes an address in one of the most exclusive residential areas of London. Long
politely asks Bradescu for her passport and bank account details and enquires about her family
circumstances and sources of wealth. The ethical consideration that Long is most likely concerned
about is:
A. KYC.
B. confidentiality.
C. conflicts of interest.
18. Shane Long, CFA, has just concluded his first meeting with a prospective client, Anna Bradescu.
Based on the information that Bradescu has provided, Long believes that Bradescu should be
classified as an ultra-high net worth (UHNW) client. Which of the following is most likely a
characteristic of the UHNW segment?
A. High client-to-manager ratio.
B. Complex tax and estate planning considerations.
C. Greater use of technology in providing wealth management services.
19. The growth of robo-advisors in the wealth management industry is most likely driven by:
A. cost considerations.
B. the superior ability of robo-advisors to develop sophisticated investment strategies.
C. the desire to have primarily human interaction for wealth advice coupled with automated
portfolio construction, rebalancing, and reporting services.