Wealth Management Issues

One of the greatest challenges facing them that have amerced wealth with huge capital accumulation is the management of their wealth. While one factor leads to another, accumulating wealth is one of the greatest ordeals of the present and the ancient world, so is the management of the same. Therefore, in the analysis of wealth accumulation, it is proper to examine the various aspects of wealth management issues within the spectrum of the behavioral finance. While pursuing this course, the purpose of this study involves taking an objective examination into the issues of wealth management, the demonstration of an understanding of the wealth management issues from a client perspective. More than that, the study draws its observations from upon behavioral biases, asset allocation, tax and lifetime advice concepts, and personal research into technical and communication issues in relation to providing advice.

Wealth Management Issues

Wealth management issues are a social, economic, and financial issue that does not affect only from the personal perspective but also from a societal perspective. In the study of a disciplined approach to ensure an individual financial well-being, Bukovansky (2018) argues that research has come up with about 13 different wealth management issues that are very critical for a proper financial well-being of a family or society or an individual. These issues require certain vital approach to address these wealth management concerns from a disciplined perspective. The criticality of such disciplined approach in dealing with such issues involves ensuring creation and growth of wealth itself, protection and preservation of wealth that has been created as well as transferring that wealth that has been created, the excess of it, during a life (Chang,  & Tsai, 2016). Finally, they are vital in helping in passing the wealth on through an individual estate at death.

Among the issues addressed include investment management, the flow of cash and management of debts, family risk management, the retirement planning, education planning, legacy planning, business planning, and special situations planning. These issues also involve investments, stock compensation, insurance, distribution of wealth, asset protection among others. Based on the client interviewing result, this study effectively covers most of the issues so that the client may be in a position to prioritize and address the concerns of the remaining wealth management issues. In the event the client is in a position to address these issues individually, it would be easier to work with the financial planners effectively (Zaremba & Umutlu, 2018). More than that, it would be possible to instill some of the disciplined approaches to handle the wealth management need of the client, since these approaches are derived from proven strategies for planning for the future financially.

Investment Management

Investment management: Each client, an individual in this case, has financial priorities in life. Therefore, a unique investment strategy must be established or developed for an individual based on these priorities, horizon of time, goals, and tolerance of risk. In this case, there is a prudent requirement for an investment plan that is diversified enough and maintained through the process of balancing as well as reallocation in a formulation process.  Based on the study done by Koeberle-Schmid, Kenyon-Rouvinez & Poza (2014), these approaches in dealing with investment management, a client may be in a position to assess his or her overall portfolio before building a long-term investment strategy and diversify assets. This is where there is involvements of tax implications.

Cash flow and debt management: The relationship between the flow of cash and the management of debts is one of the challenging factors in wealth management. Creating a balance between these two issues have challenged many people because it involves reviews and evaluations of the debts and tax implications in the process. Therefore, the incoming and the outgoing cash flows should be assessed in order to develop a picture that is transparent and accountable. Through this, Lusardi & Mitchell, (2014) argues that it would be easier to trace finances and the availability of the finances to meet the current and future financial needs. In addition, concerning debt management, one should realize that the debts in general require proper evaluation and opportunities to expand the cash flows. This is the reason why debt management strategies become vital at this point as well as the review and evaluation being done on the implications of taxes.

According to the study done by Lusardi, Michaud & Mitchell (2017), there is every possibility some clients spend more than they earn, placing them in huge debts in the end. However, working cash flow and debt management firms, the various clients are able to identify the direction of the flow through evaluation process, thus helping the clients to assess the viable chances of improving their cash flow through the proper debt management plans proposed by firms. Through this strategy, the clients may be in a position to determine ways that are fruitful in financial management such as refinancing, debt consolidation as well as change of taxes withholding. More than that, the client is able to pursue other future wealth management goals in the process.  

Risk management: There are various forms of risk management. There are certain issues that are really taking place in a family. Some of them include death, sicknesses, and disability, among others. One of them is the family risk management. In financial matters, family risk management involves issues such as insurance policies that protect life like health insurance, property, disabilities, long term cares, as well as plans that insure the family of the client from losing income, retirement and savings (Rohner, Bolliger, & Michaels, 2017). The importance of this study is that it helps in the evaluation processes of the client’s current plans of risks in order to determine their adequate fulfillments of needs at every stage of life the client is in. This means that risk management becomes one of the keys in succeeding in any plan that is financial. Risk management of this manner helps the client in reviewing and evaluating the existing plans of death, disability of a family member, and long term care plans so that when such risks occurs, they can be catered for in an adequately, efficiently, effectively, and in a cost-efficient level.

Cash Flow and Debt Management

Retirement planning:  One of the challenges that people meet when they retire is the adjustment period from work to retirement. During these periods, there is every possibility of a shock or panic spending or saving that may hurt an individual. For this reason, there is a need for striking a balance between entering the workforce and leaving the workforce. Through financial management, one is able to establish a clear and sound retirement plan that begins by establishing assets management that would be needed to pursue the vision (Yeh, 2015). This vision becomes the beginning point of the sound retirement plan.  There are certain attachment to this plan such as the needs for income and the tax implications and the building road blocks that are potential in the plan. They are therefore evaluated, assessed, and clearly examined to steadily help the vision of retirement plans. This process also involves assessing and considering some of the longer life expectancy and potential future cost of healthcare issues into the plan.

Education, business, legacy, and special situation planning: There are certain issues in life that may look secondary but are very critical. For instance, education, legacy, business and special situation planning are very vital in life but require financial planning and management. Special situations in this case include situations like weddings, fundraising, graduations, and ceremonies, among others. Legacy involves establishing a financial position that is firmly established for generations to come and the security for the finances thereof (Sciascia, Mazzola & Kellermanns, 2014). Business planning involves evaluating and assessing issues that may affect the business in the event the owner, in this case the client, becomes ill, dead, or called away from the business. These and other potentially devastating issues can be preempted by having a business continuation and a business succession plan in place. This study helps the client to examine the systems and finances to construct effective continuation plans.

Asset Allocation

In the discussion of asset allocation plans, it is important to note that there are three types of assets. They include equities or stocks, fixed incomes, and cash. The allocation process of these types of assets is not the same. This is based on the nature and dynamic differences of these assets. For instance, while stocks involves shares of ownership in an entity, fixed incomes involves assets that make interest payments using the interest rate while cash physical cash or interest bearing paths like savings or money market accounts. Allocation of these assets is different.

Risk Management

Based on the study done by Seim (2017), asset allocation involves strategies adopted to divide an individual investment portfolio using the various asset classes discussed above. In this way, asset allocation is an organized and effective manner of diversification.

According to Jacobs Müller, & Weber, 2014), one of the ways of asset allocation involves minimizing risk and maximizing return on investments. The main goal of allocating the assets for the client is to minimize risks involved in the business while at the same time meeting the expected level of return. More than that, in dealing with risks and returns on investment, the client should be in a position to make decision on what is best and right for them. This is done through an assessment of risk tolerance, investment objectives, time, and the capital that is available.

The other way of allocating assets is through conservative portfolios, a process through which large portions of the total portfolios can be allocated to lower risk securities like money market securities. This method is able to protect the base value of the portfolio (Güttler, 2016).

The asset allocation process should be tailored to suit the needs of the client. There are various models of portfolios through which there is every possibility of error. Therefore, the client should associate his or her strategies based on the needs presently and the future (Zakamulin, 2014).  The asset allocation strategies must match the goals of the client in asset management. Each of the strategy adopted should coincide with the client time frame, goal and the tolerance of risk since the strategy should be focused, tactical, and weigh on constant issues in a systematic asset allocation process.

Based on the analysis by Lusardi, Michaud & Mitchell (2017), the taxable amounts or funds have varied issues. However, in asset allocation process, it is important to note that the returns on investments are normally taxed in the same way before the end of the investment period. The nature of the taxation process depends on the asset type as well as the portfolio turnover. These two issues; asset type and portfolio turnover dictate the recognition level of capital gains as well as the form of capital gain realized.

During the period of liquidation of such assets, there is every chance that this may trigger another taxable event in the form of capital gain. Therefore, as argued by Zakamulin (2014), these taxes may make the assets to be held in the taxable accounts in generating lesser after-tax cash.

Retirement Planning

The concepts describing the future after-tax accumulation of the taxable assets are available.

When returns on investment are taxed as ordinary income with a rate of t_oi, then the future after tax accumulation in a taxable income becomes:

FV _{After Tax, Taxable} = [1+ r (1+t_oi)] ⁿ, where r is the pretax rate of return, and n is the investment horizon. The value above is optimized to determine the after tax portfolio.

In the event the client had the following return on investment at the state of the economy shown below:

Economic State	Return A (RA)	Return B (RB)
Boom	38%	6%
Recession	–4%	12%

In the calculation of the expected return on a portfolio with equal proportions in the risky assets, and 30% in a risk-free asset considering all the taxable accounts would be:

The Portfolio weights: W_A=0.125 and W_B=0.875:

VAR (R_b) = 0.125² × 0.20576² + 0.8752 × 0.02939² + 2×0.125×0.875×–0.006048 = 0

SD(R_b) = 0% (Risk Free Portfolio)

In other words, the

E(R_b|Boom) = 0.125 × 0.38 + 0.875 × 0.06 = 0.10 (10%)

E(R_b|Recession) = 0.125 × -0.04 + 0.875 × 0.12 = 0.10 (10%)

For the client, it is much easier to see that this is a risk-free investment.

Therefore, the Portfolio weights: W_A=0.35 and W_B=0.35 and W_F=0.3:

E(R_b) =  0.35 × 0.128 + 0.35 × 0.096 + 0.3 × 0.10 = 0.1084 (10.84%)

The Investment Policy Statement (IPS) for the client

The investment priority Investment policy Statement for (client)

The Executive Summary

Client’s name, the sole investor,

Age: 51

Portfolio: Individual portfolio, taxable

State:

Tax ID:

The current Asset: $100,000

Return on investment goal: 5%

Loss limit: 1 year in the worst case scenario at 10-15%

Objectives:

The investment is for growth in the long term as well as to preserve capital. Thus, this is a conservative risk profile for a time horizon of 5 years.

There is no need for liquidity that is short term, but the rate of return in the long run is expected to perform at 6% considering the surrounding rates.

Responsibilities and the duties of the Advisory

Links with the client to create the asset allocations

To be in control as well as reporting the costs of investments

Providing the diversifications of the risks and returns

Monitoring and valuing investment options and portfolios

Portfolio Selection Guidelines:

Considering the conservativeness of the client profile portfolio, the asset allocation will be 70% of the stock assets and 30% fixed.

Formal Agreement

Dear Mr/Madam……………..

The purpose of this financial agreement letter is to show the commitment to the working terms and conditions for the services being offered by my firm on your behalf. Upon agreement to this terms and conditions, you are expected to sign at the bottom and return the form. Please consider the latter keenly.

Terms of Agreement:

My firm will be charging 15% commission to any financial services offered on behalf of your company.

Within this commission include the initial transaction and any profit from the same transaction.

The payment be made at the start of the transaction, the completion and at the close of the said transaction and a monthly statement received for all of them

Sign the financial agreement for your commitment to the terms.

…………………………… …………………………..

(Signature)         (Name)

Best regards,

…………………………………..

References

Bukovansky, M. (2018). The Despot’s Guide to Wealth Management: On the International Campaign against Grand Corruption. By JC Sharman. Ithaca: Cornell University Press, 2017. 274p. $29.95 cloth. Perspectives on Politics, 16(3), 902-904.

Chang, S. C., & Tsai, P. H. (2016). A hybrid financial performance evaluation model for wealth management banks following the global financial crisis. Technological and Economic Development of Economy, 22(1), 21-46.

Güttler, B. (2016). Asset allocation strategies in the current low interest rate environment: An analysis and practical approach from an institutional investors’ perspective. GRIN Verlag.

Jacobs, H., Müller, S., & Weber, M. (2014). How should individual investors diversify? An empirical evaluation of alternative asset allocation policies. Journal of Financial Markets, 19, 62-85.

Koeberle-Schmid, A., Kenyon-Rouvinez, D., & Poza, E. J. (2014). The Family Office, Wealth, and Wealth Management. In Governance in Family Enterprises (pp. 179-194). Palgrave Macmillan, London.

Lusardi, A., & Mitchell, O. S. (2014). The economic importance of financial literacy: Theory and evidence. Journal of economic literature, 52(1), 5-44.

Lusardi, A., Michaud, P. C., & Mitchell, O. S. (2017). Optimal financial knowledge and wealth inequality. Journal of Political Economy, 125(2), 431-477.

Rohner, T. F., Bolliger, A. B., & Michaels, M. (2017). Recent developments affecting the Swiss wealth management sector. The International Family Office Journal, 2(1), 5-9.

Sciascia, S., Mazzola, P., & Kellermanns, F. W. (2014). Family management and profitability in private family-owned firms: Introducing generational stage and the socioemotional wealth perspective. Journal of Family Business Strategy, 5(2), 131-137.

Seim, D. (2017). Behavioral responses to wealth taxes: Evidence from Sweden. American Economic Journal: Economic Policy, 9(4), 395-421.

Yeh, Y. P. (2015). Corporate social responsibility and service innovation on customer loyalty: An empirical investigation in wealth management services. International Journal of Bank Marketing, 33(6), 823-839.

Zakamulin, V. (2014). Dynamic Asset Allocation Strategies Basedon Unexpected Volatility. The Journal of Alternative Investments, 16(4), 37-50.

Zaremba, A., & Umutlu, M. (2018). Strategies can be expensive too! The value spread and asset allocation in global equity markets. Applied Economics, 1-18.