Investment Policy Statement (IPS) - AAMS Module 1: Exercises and Questions, Exams of Manufacturing Systems Design

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AAMS Module 1

Investment Policy Statement (IPS) Answer: A written planning document/statement that describes a client's investment objectives and risk tolerance over a relevant time horizon, along with restrictions that apply to the client's portfolio. Purpose of an investment policy statement Answer: Foundation of financial plan, provides guidance. A basis for review and adaptation to changing conditions Attributes of a sound investment policy statement Answer: Realistic, long term perspective, clearly defined What a clients IPS determines - (2 things) Answer: 1) Types of suitable investments

2. Feasibility of recommendation to fulfill clients goal/s. Potential problems of short term perspective (in IPS) Answer: risk factors high transaction costs trading loss...client might be on the sidelines during early stages of rising market These are... 5 elements that should ALWAYS be contained in an IPS Answer: Clear statement of investment goals Statement of suitable Investment vehicles (and unsuitable)

2024/ Risk level that's acceptable & how managed asset allocation statement - how assets will be diversified- and a statement of philosophy according to how they should be managed A provision for review Additional elements in an IPS Answer: Degree of portfolio liquidity desired after tax rate cash flow requirements investment strategy or strategies to be followed specific performance measurement standards & benchmarks loss limits for a given year and 5 year period regulatory or legal considerations tax considerations time horizons of investment goals criteria for investment management selection clients responsibilities regarding oversight of the portfolio unique preferences and circumstances Client - Professional degree of responsibility Answer: In the beginning, client is CEO - drives the IPS with assistance and recommendations from adviser. Over time, the adviser takes over as captain and leads the ship. Who makes decisions? Answer: Client (adviser recommends based on IPS) representativeness Answer: making judgments based on stereotypes

2024/ Rationalization Answer: searching for information that supports a decision or view/illusion of validity - confirmation bias anchoring Answer: holding on to certain beliefs that one is anchored Recency Answer: availability bias, putting too much weight on current events/data - bull market and bear market shorter more recent time frame than representativeness mental accounting Answer: the habit of mentally assigning dollars to different accounts so that some dollars are worth more than others -think of the principal vs what is gained money illusion Answer: when people mistake changes in nominal prices for changes in real prices self-attribution bias Answer: investors tend to take credit for successes and blame factors out of their control for failures The status quo bias is best described as: Answer: stay the same, change very little endowment effect Answer: the tendency of people to be unwilling to sell a good they already own even if they are offered a price that is greater than the price they would be willing to pay to buy the good if they didn't already own it

2024/ when clients play on their emotions - they buy securities when they should be selling, and sell when they should be buying - miss opportunities in the market Answer: how market changes cause clients to make incorrect investment decisions definition of noise (market terms) Answer: the daily fluctuations in the market; the RESULT is being out of the market during the early stages of rallies— when many of the greatest gains are made—and being in the market during the early stages of declines—when some of the largest losses are incurred negative result of adviser/client feeding on each others fear and greed Answer:

1. irrational investment decisions can be made, incur a cost or loss in investment;
2. loss of professionalism 2 qualities that an investment professional must have to deal with financial markets during volatile times Answer: 1) patience & ability to empathize;
3. ability to not be thrown off course - reference the investment policy statement/compass examples of common investor mistakes relating to behavioral finance Answer:
4. loss aversion
5. fear of regret
6. overconfidence
7. representativeness
8. framing the problem
9. rationalization/illusion of validity
10. hindsight bias

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8. anchoring
9. recency
10. mental accounting
11. money illusion
12. status quo bias
13. endowment bias incremental change Answer: small and natural extension of an existing pattern; normal changes that happens over time discontinuous change Answer: a radical departure from a current trend or pattern (such as a client winning the state lottery) -an abrupt change that is unexpected from norm - causes disruption that must be addressed role of IPS during economic and financial change Answer: provides consistency and steadiness in the management of a client's portfolio - acts as compass and provides guidance. needs to be monitored and can be adjusted if needed at times of discontinuous change. events that represent a dramatic change in a client's financial situation Answer: loss of job, loss of pension, death, birth, sudden move or disaster, health, marriage or divorce, starting a new business, business failure, forced early retirement, receiving an inheritance how an investment professional can bring added value to a client during periods of market volatility Answer: sift through all the noise and bring real answers/data to table

2024/ What are cash and cash equivalents? Answer: Checking accounts, MMKT MFDs, T bills, CDs, MMKT deposit accounts and savings accounts What are invested assets? Answer: Stocks, bonds, MFDs, IRAs, pension funds (vested portion) and rental property What are person use assets? Answer: Autos and other vehicles, main residence, personal property, boats and clothing What are short term liabilities? Answer: Liabilities payable in less than one year are... What are long-term liabilities? Answer: debts whose payments are due after the next accounting period. example: mortgage payment,loans extended beyond 1 year,and leased equipment. What is net worth? Answer: Assets - Liabilities = Cash flow (gross income) is: Answer: Gross salaries and wages, dividends and interest income and miscellaneous inflows like tax refunds. Cash flow (expenses) Answer: Mortgages, insurance payments, loans, clothing, food, taxes, vacations, liabilities, utilities, etc. Several aspects of a clients's financial situation that are important in determining the client's financial picture: Answer: Income, debt, benefits at job, tax situation, investment holdings, their investment outlook/RTQ, retirement planning, business ownership, time horizons...

2024/ Why are investment holdings, experience and outlook important - and how can they affect the asset management process? Answer: What do these items address? Gives investment professional foundation to know client Allows investment professional to understand current holdings, which helps the professional create a suitable portfolio. Understanding their outlook gives insight to developing a portfolio that will likely satisfy the client today and in future. What are client goals usually lacking? Answer: They are unspecific, no time frame and they haven't prioritized MULTIPLE goals. What are "foundation goals"? Answer: Food and shelter Emergency fund Maintain insurance coverage What are lifestyle goals? Answer: College funding Retirement funding Home down payment Business ownership Mortgage payoff Travel What are some issues that might want to be resolved before beginning an investment program? Answer: Sufficiency of liquid assets

2024/ Sufficiency of insurance Validity of goals based on other information Mismatches between time horizon and stated goals Mismatches between time horizon and current investments Mismatches between client's personality, current investments/resources and stated goals Tax problems that may be resolved through investment planning Investment vehicles that may/may not meet client's need/s Degree to which the client is relying on a pension to provide financial resources during retirement The amount of risk being taken What is the purpose of analyzing client information? Answer: Completing a picture that was partially revealed through the process of building a relationship & identifying problems that warrant further discussion. Area between client & investment professional that require clarification: Answer: Understanding client goals Agreement on essential assumptions Agreement on asset allocation Agreement on risk parameters Agreement on time horizons Who makes the final decision/s? Answer: Client makes -

2024/ Purpose of investment policy? Answer: Ellis says: purpose is to establish useful guidelines for investment managers that are genuinely appropriate to the realities of both the client's objectives and the realities of the investments and markets. What tools are available to the investment professional to monitor a client's performance and progress toward goals? Answer: Statement of financial position Statement of cash flows Year end brokerage statements Year end MFD statements Tax returns What information should be exchanged at periodic meetings between clients and investment professionals? Answer: