Private Wealth Mgt (2)

Question 1

•••••••Private Wealth•••••••

Insurance

Risks that should be insured

Answer 1

Severe + Infrequent = Insured

Not Severe + Infrequent = Retained

Severe + Regular = Avoided

Not Severe + Regular = Reduced

Question 2

•••••••Private Wealth•••••••

Insurance

Net Payment Cost Index / Surrender Cost Index

Answer 2

Net Payment Cost Index / Surrender Cost Index:

1. (+) FV of Annuity Due - FV[PMT_{<strong>BEG</strong>} of Annuity Premium]
2. (-) FV of Dividends - FV[PMT_{<strong>END</strong>} of Dividends]
3. (-) Cash in x years [only for Surrender cost index. Net payment cost assumes death = no cash balance to surrender]
4. (=) FV COST OF INSURANCE
5. (=) PMT_{<strong>BEG</strong>} COST OF INSURANCE
6. (=) #5 PMT / (Face Value (i.e. Death Benefit) / 1,000)

Question 3

•••••••Private Wealth•••••••

Insurance

How life insurance premium is calculated?

Answer 3

Based on:

• mortality expectations,
• the discount (interest) rate, [i = ⬆, premium = ⬇]
• and loading

Question 4

•••••••Private Wealth•••••••

Insurance

Does insurance reduce risk?

Answer 4

NO, insurance is a form of risk transfer (not mitigation)

Question 5

•••••••Private Wealth•••••••

Concentrated Positions

Typical Objectives in managing concentrated positions

Answer 5

(1) reduce non-systematic risk (diversify)
(2) increase liquidity (especially for retirement)
(3) optimize taxes

Question 6

•••••••Private Wealth•••••••

Goal-based planning (Concentrated-Position)

Monetization is needed when…

Answer 6

Monetize is needed when concentration affects Primary Capital (personal risk bucket + market risk bucket). Investor needs to protect the Standard of Living (SLR).

Surplus capital = Aspirational risk bucket

Question 7

•••••••Private Wealth•••••••

Mitigating risk with a concentrated position

Answer 7

1. Outright sale (then reinvest, large tax liability)

2. Monetize strategies (perfectly hedge position that creates liquidity and does not generate a tax liability)

3. Hedging the value of the concentrated asset (using derivatives)

Question 8

•••••••Private Wealth•••••••

Monetization

(1) Concentrated Stock Position

Answer 8

(1) Concentrated Stock Position

1. Sell the asset:
2. Equity monetization:
   
   • Short sale against the box (borrow and short)
   • Total return equity swap
   • Forward sale
   • Forward conversion with options
3. Hedging Strategies
   
   1. Protective Puts: long stock + long put
   2. Cash-less collar: long stock + long OTM put + short OTM call
   3. Prepaid variable forward: “Sell” the asset forward, receiving cash at initiation.
4. Other Strategies
5. Covered Calls
6. Index tracking with active tax management
7. A completion portfolio
8. Gift the asset to charity
9. Exchange fund

Question 9

•••••••Private Wealth•••••••

Monetization Strategies for Private Business Owners

Answer 9

1. Sale to a strategic or financial buyer
2. Recapitalization: staged exit. 1 - Partial sell to PE, 2 - PE raises low-cost debt, 3 - grows company, 4 - Total exit @ higher price
3. Management buyout
4. Divestiture or sale of noncore business assets
5. Sale or gift to family members
6. Personal loan shares as collateral
7. IPO
8. Sale to an ESOP

Question 10

•••••••Private Wealth•••••••

Monetization Strategies for Real Estate

Answer 10

3) Real Estate

1. High loan-to-value mortgage financing
2. Sale and lease back
3. Donor-advised fund or charitable trust

Question 11

•••••••Private Wealth•••••••

Traditional vs Economic Balance Sheet

Answer 11

Traditional Balance Sheet = Assets + Liabilities that are generally easy to quantify

Economic Balance Sheet = Traditional BS + Human Capital and Pension Wealth (assets) + Consumption and Bequests Goals (liabilities)

Question 12

•••••••Private Wealth•••••••

How investment strategies can be modified to account for human capital risk?

Answer 12

selecting assets that correlate weakly with human capital.