Integrated Wealth Management The New Direction for Portfolio Managers 2nd edition Jean L.P. Brunei, CFA E U R M N E Y B K S
Acknowledgments The author Foreword xi xiii xiv The foundations of the new paradigm Introduction: changing the wealth management paradigm 3 The need for a new paradigm 4 Formulating the new paradigm 7 Illustrating the new paradigm 9 Introducing behavioural finance 11 Moving to the new paradigm 13 A road map for this book 14 l Chapter 1 The wealth management process 15 The process is iterative 16 The importance of investment education 17 The four distinct phases in the wealth management process 17 Understanding opportunities and issues 19 Planning a wealth management strategy 21 Case study: when there is more than one client 22 Case study: when there are insufficiently clear roles of each family member 24 Implementing the wealth management plan 26 Supervising and monitoring progress 30 Summary and implications 33 Chapter 2 Understanding investor psychology 35 Appreciating that we are dealing with individuals is not a new idea 35 A historical perspective on behavioural finance 37 Principles of behavioural finance 37 Living with the consequences of decisions 44 Summary and implications for wealth planning 45 VI
Chapter 3 Understanding tax efficiency 50 Defining our terms 50 The different forms of taxation 50 Taxes matter 52 The U.S. tax framework 55 The costs of being tax-efficient 59 The mechanics of tax efficiency and time horizon considerations 60 Static versus dynamic tax efficiency 63 Summary and implications 66 Chapter 4 Five principles of tax efficiency 68 Challenge conventional wisdom 68 Volatility may be valuable 72 Two types of transactions 74 Focus on the whole portfolio 76 Portfolio drift is not trivial 81 Summary and implications 82 Chapter 5 Multiple asset locations 85 Tax codes and multiple accounts 85 A feasible set of wealth structures 86 Wealth planning alternatives 88 Five criteria to evaluate wealth planning solutions 90 Seven wealth planning management alternatives 91 An illustrative case study 96 Dynamic asset location 100 Sumary and implications 102 Chapter 6 A tax-efficient portfolio construction model 106 Value added and portfolio activity 106 An alternative design: core and satellite 111 Summary and implications 116 Understanding the opportunities and the issues 117 Chapter 7 Defining the capital market opportunities 119 How the past speaks to us 120 Defining asset classes and strategies 121 Summary and implications: lessons on risk 124 Chapter 8 The need for capital market forecasting 133 Defining an achievable goal 134 Reacting to surprises or disappointments 135 vii
Education 136 The value added to a systematic process 137 Forecasting: purpose and inputs 138 Forecasting: three major principles 140 Summary and implications 148 Chapter 9 Redefining active management 150 The background: the active/passive debate 150 The actual performance of active managers 151 Active tax management 158 Summary and implications 164 Chapter 10 Low-basis stock ' 169 Defining the problem 169 Understanding stock risk 170 Applying the model to individual circumstances 173 Reducing a concentrated exposure 175 Summary and implications 186 Planning a wealth management strategy 189 Chapter 11 Strategic asset allocation: moving beyond the traditional approach 191 Flaws in the 'efficient frontier' framework 192 The cost of getting there 193 The cost of staying there 196 Summary and implications: adopting multiperiod analysis 199 Chapter 12 Goal-based asset allocation - incorporating behavioural finance in the strategic asset allocation process 203 Behavioural finance findings 204 Four fundamental goals 205 Interaction between income and capital preservation 207 Creating the building blocks 208 An alternative design 208 Case study 209 Periodic portfolio rebalancing 213 Unintended benefits 214 Summary and conclusions 215 viii Chapter 13 Integrated wealth planning: investment policy 219 Starting the process 219 Investment philosophy 225 Constraints 226 Family dynamics and governance 227
Modelling needs 230 Applying the iterative process 234 Discussing governance 238 Summary and implications 240 Statement and investment policy 241 Implementing the wealth management plan 245 Chapter 14 The market timing fallacy 247 Defining market timing 247 A traditional view of market timing 248 A different approach 250 Summary and implications 256 Chapter 15 Alternative assets - their roles in balanced portfolios 259 A highly heterogeneous universe 261 An important caveat: different return distributions 262 Non-traditional strategies in different market environments 266 A 'first cut' solution: simple approach to portfolio optimisation 271 Has time run out for so-called hedge fund managers? 274 Methodology 275 Absolute Return strategies 276 Semi-directional strategies 282 Trading strategies 284 Summary and implications 287 Chapter 16 Tax-efficient portfolio management 291 Physical and derivative decision sequences 291 A global equity management problem 293 The problem with the traditional investment process 295 Rethinking the problem 295 A possible solution: segregating security selection from asset allocation 297 Summary and implications 307 Chapter 17 Tax-efficient security selection 310 The fundamentals of an investment transaction 310 An analytical framework 311 The three-dimensional approach 314 Fixed-income issues 321 Summary and implications 325 Chapter 18 Style diversification: an impossible challenge? 327 The traditional pre-tax case 327 IX
Style timing 328 Specialist versus generalist analysis 335 An important caveat 338 Summary and implications 338 Chapter 19 Manager selection and managing multimanager stables 341 The institutional model 341 The taxable investor problem 342 Manager research 343 Building and administering a manager stable 356 Summary and implications 359 The supervising and monitoring process 363 Chapter 20 Computing and assessing after-tax returns 365 Knowing what to ask for 366 The CFA Institute performance presentation standards 367 Measuring after-tax performance 369 Assessing performance 373 After-tax performance benchmarking 377 Summary and implications 381 Chapter 21 From portfolio manager to wealth manager 382 The central role of the institutional portfolio or mutual fund manager 383 A new role: wealth manager 384 Summary 391 Bibliography 392