Assume a client has a job and has USD5,000 as his savings. But his annual salary does not cover the annual living expenditure by USD15,000. His total investable asset base is USD1,000,000 (including the above savings).
One time planned expenditure: (a) He needs to pay his income tax of USD6,000 in 1 month. (b) He intends to denote USD3,000 to a charitable institution in 2 month.
Recurring expenditure: His family living expenditure for USD80,000 a year.
Others: He want to make a contingency reserve of USD20,000 a year.
How to answer the part of liquidity requirement in a private wealth management? Which amounts should be included.
Any amount that you will need within a year is immediate liquidity requirement and should be considered as non-investable. In this case: +5000-15000-6000-3000-(80000HKD)-20000 There could be future liquidity requirement. Ex. Expected college tuition fee of a child after 5 years
Since Client is dependent on Portfolio’s income for his living expenditure…Liquidity req are high…it says its annual salary does not cover libing expenditure by 15,000..so his annual income is USD 65,000 (since total family expenditure are 80,000 year) + immediate expenses Tax & donation…so Liquidity constraint = Above average… ??
Two areas have to be considered carefully. 1) Since all the one-time expenditures within 1 year have to be deducted for the purpose to calculating Return Objective, the total investable asset has been be deducted before treating it as the client’s investment portfolio. 2) The contingency reserve will be kept stable normally not be used up, no return from the investment portfolio is expected to provide for each of coming year. To detemine the Liquidity Constraint should we have both categories of expenditures neglected? Thank you.
I attempted to discern liquidty constraint earlier on 8th Dec. Now when I am again reading through the question, I can’t resist to admit how badly I answered it the other day. I realize now why L-3 candidates stress on articulating answers in a proper way while attemepting IPS questions. My changed answer would be as follows: Typically, Liquidty constraints can be divided into three categories:- 1) Immediate: Which is the payment of Income tax & Charity in this case. These expenses are taken off from the portfolio base immediately as if it were paid off already. 2) Ongoing: Since Client is in working age but unable to meet living expenses, her portfolio should focus on Current income needs. This reflects that an Average size portfolio has to meet living expenses, Client has below average ability to tolerate risk. 3) Others. Can include many other types of liquidity needs. Liquidity constraint: The portfolio must pay for his income-expense shortfall over the investment period & also keep Contingency reserve (means allocation to cash while setting Strategic asset allocation) Please suggest if this answer looks appropriate while addressing liquidity needs of the underlying client…