Toward a New Framework for Private Wealth

To improve performance, better investment processes and structures are needed.

By Pranay Gupta. CFA ,  CFA Institute Magazine Jan/Feb 2015

 

Investment processes followed by private wealth need to improve to deliver better performance and risk management but must do in a manner that does not compromise customization and service quality. Institutional mostly fit into a common framework in wich assets are invested in multiple commingled fund structures. Private wealth is distinguish by the fact that every single client specifies constraints and preferences to be incorporated into portfolio, resulting in limits on investments, liquidity, leverage, single stock holdings, home bias, intergenerational requirements, and cash flows. Given the large numbers of accounts in private wealth , the customization requirement is a problem for large scale implementation.

Two Key Concepts for Wealth Management and Beyond

William Reichenstein, CFA, Stephen M. Horan, CFA, CIPM, and William W. Jennings, CFA

Financial Analysts Journal Volume 71 · Number 1 ©2015 CFA Institute

 

Asset allocation is profoundly influenced by at least two underappreciated concepts. First, tax-deferred accounts—for example, 401(k)s—are like partnerships in which the investor owns (1 – tn) of the partnership principal and the government owns the remainder, where tn is the marginal tax rate when the funds are withdrawn. Second, the government shares in both the return and the risk of assets held in taxable accounts. The authors discuss these concepts’ implications for wealth management.

What Would Yale Do If It Were Taxable?

Patrick Geddes, Lisa R. Goldberg, and Stephen W. Bianchi, CFA

Financial Analysts Journal Volume 71 · Number 4 ©2015 CFA Institute

 

The distinctive financial goals and constraints of ultra-high-net-worth individuals together with their aggregate growth in assets have led to the emergence of “New Institutional” investing, which includes the best practices from institutional investors but also incorporates the critical element of tax management. The authors design New Institutional asset allocations that incorporate traditional investment metrics in a tax-aware setting. Specifically, they show how risk and after-tax returns need to be combined from inception when seeking an optimal after-tax asset allocation. Diversification is especially important for taxable investors because low asset class correlations can facilitate the inclusion of attractive but tax-inefficient asset classes in a tax-aware allocation.