Information Needed in Advising Private Clients

Personal Information

Several factors contribute to the success of a wealth management relationship. To provide comprehensive advice, managers require all pertinent details about the prospective client, avoiding fragmented advice based on a partial analysis of the client's wealth.

Relevant personal information includes:

• Budget Details: Understanding the client's monthly income and expenses. Are they living within their means, or are they saving?
• Occupational Status: Is the client currently employed, and is there an expectation of continued employment?
• Marital Status: Important for tax planning and understanding other financial dynamics.
• Family Information: Including children, parents, and dependents.
• Goals and Aspirations: What is the client's wealth-building objectives?
• Current Net Worth: Does the client have existing savings, and how are they invested?
• Source of Wealth: Was wealth accumulated through consistent contributions or a windfall? This helps assess the client's attitude toward money and risk.
• Return Expectations: Does the client have realistic expectations for the program's outcomes? Are these expectations aligned with the existing constraints, or does the client require further education?

Financial Information

Financial information is an extension of the “Current Net Worth” subsection mentioned earlier. Understanding a client's net worth is crucial for establishing an appropriate financial plan. Below is an example of a “personal balance sheet,” similar to the balance sheet used for publicly traded companies but focusing on personal assets and liabilities:

Example Family, 4/16/20XX

$$ \small{\begin{array}{l|r|l|r}
\textbf{Assets} & & \textbf{Liabilities} & \\
\text{Cash} & \$20,000 & \text{Consumer Debt} & 2,500 \\ \\
\textbf{Brokerage Accounts} & & \textbf{Property Related Debt} & \\
\text{Taxable Account} & 100,000 & {\text{Mortgage for Personal} \\ \text{Residence}} & 35,000 \\
\text{Retirement Account} & 5,000 & {\text{Mortgage for Rental} \\ \text{Property}} & 45,000 \\ \
\textbf{Real Property} & & & \\
\text{Personal Residence} & 150,000 & & \\
\text{Rental Property} & 75,000 & & \\
\text{Other Personal Property} & \underline{1,000} & & \underline{\hspace{2cm} } \\ \\
\text{Total Assets} & \bf{351,000} & \textbf{Total Liabilities} & \underline{ \bf{82,500 }} \\
& & \textbf{Total Net Worth} & \bf{ \underline{ \$268,500}}
\end{array}} $$

Using a structure like this, the manager can start understanding the client and their current financial situation. It's important to remember that wealth is relative. A net worth of $268,500 doesn't inherently indicate good or bad financial health. It merely shows that the client saves more than they spend. To assess their financial well-being, we must consider these details alongside others.

For instance, if a family with this net worth spends $150,000 annually with no other income sources, it's a different situation than a single person just beginning their career and spending $20,000 annually.

Question

Considering a client's source of wealth is essential for:

1. Determining return expectations.
2. Completing Mean-variance Optimization.
3. Assessing client risk disposition.

Solution

The correct answer is C.

Considering a client's source of wealth is essential primarily for assessing their risk disposition or risk tolerance. The source of wealth can influence how comfortable a client is with taking risks in their investment portfolio. For example, if a client's wealth comes from a stable, low-risk source like a government pension, they may have a lower tolerance for investment risk compared to someone whose wealth comes from a high-risk business venture.

A is incorrect. Determining return expectations is not directly tied to the source of wealth but more related to the client's financial goals, time horizon, and risk tolerance. While the source of wealth can indirectly impact return expectations, it is not the primary factor.

B is incorrect. Completing Mean-variance Optimization is a quantitative technique used to construct a portfolio based on expected returns and risk. While the source of wealth can inform the inputs for optimization, it is not the primary purpose of considering the source of wealth.

Portfolio Construction: Learning Module 4: Overview of Private Wealth Management; Los 4(b) Discuss information needed in advising private clients