IPS - below average risk tolerance - ALM

[FrankCFA]

If the IPS shows the client’s risk tolerence is below average, can we said the client should use ALM approach? Or any other condition needs to consider? Thanks.

[sachin_patel]

is this institutional client or individual?

depends on that.

ALM is mostly for institutional with liabilities

[cpk123]

6 items that must be considered for an investor to take the ALM approach.

• ■ the investor has below-average risk tolerance;
• ■ the penalties for not meeting the liabilities or quasi-liabilities are very high;
• ■ the market value of liabilities or quasi-liabilities are interest rate sensitive;
• ■ risk taken in the investment portfolio limits the investor’s ability to profitably take risk in other activities;
• ■ legal and regulatory requirements and incentives favor holding fixed-income securities; and
• ■ tax incentives favor holding fixed-income securities.

(Institute 188)

[FrankCFA]

@cpk123

6 items that must be considered for an investor to take the ALM approach.

• ■ the investor has below-average risk tolerance;
• ■ the penalties for not meeting the liabilities or quasi-liabilities are very high;
• ■ the market value of liabilities or quasi-liabilities are interest rate sensitive;
• ■ risk taken in the investment portfolio limits the investor’s ability to profitably take risk in other activities;
• ■ legal and regulatory requirements and incentives favor holding fixed-income securities; and
• ■ tax incentives favor holding fixed-income securities.

(Institute 188)

Thanks. Why tax incentives favor holding fixed-income securities should use ALM approach?

[Audacious]

@FrankCFA

Thanks. Why tax incentives favor holding fixed-income securities should use ALM approach?

you deserve the Charter. You show a good attention to the merits of subjects

[cpk123]

tax, regulatory, legal - allow you to take on more Fixed income investments on your portfolio.

fixed income investments are interest rate sensitive.

and interest rate sensitive = ALM…

(maybe this is a convoluted explanation for this item).

[Viceroy]

@FrankCFA

If the IPS shows the client’s risk tolerence is below average, can we said the client should use ALM approach? Or any other condition needs to consider? Thanks.

Yeah if the client has no liabilities,he can be very risk averse but still not use an ALM framework, IMO.

[JSobes]

@Viceroy

@FrankCFA

If the IPS shows the client’s risk tolerence is below average, can we said the client should use ALM approach? Or any other condition needs to consider? Thanks.

Yeah if the client has no liabilities,he can be very risk averse but still not use an ALM framework, IMO.

This isn’t in anyone’s opinion - it’s totally a fact. If there’s not liabilities to match the entire structure of the approach falls apart!

[zulu007]

Thanks cpk123

[Audacious]

@JSobes

@Viceroy

Yeah if the client has no liabilities,he can be very risk averse but still not use an ALM framework, IMO.

This isn’t in anyone’s opinion - it’s totally a fact. If there’s not liabilities to match the entire structure of the approach falls apart!

Smart response

[FrankCFA]

@Viceroy

@FrankCFA

If the IPS shows the client’s risk tolerence is below average, can we said the client should use ALM approach? Or any other condition needs to consider? Thanks.

Yeah if the client has no liabilities,he can be very risk averse but still not use an ALM framework, IMO.

Future living expense or tax can be treated as liability as well.

[thefirstrule]

@FrankCFA

@Viceroy

@FrankCFA

If the IPS shows the client’s risk tolerence is below average, can we said the client should use ALM approach? Or any other condition needs to consider? Thanks.

Yeah if the client has no liabilities,he can be very risk averse but still not use an ALM framework, IMO.

Future living expense or tax can be treated as liability as well.

True… in essence, even when we do not take on ALM approach, we indirectly are considering it by noting future living expenses as liabilities to be matched… However, with the ALM approach, one of our main purposes is to match all future liabilities. And that is the main benchmark for us.

With a simple total return approach, we do not only aim to cover future expenses etc (liabilities) but we may aim for significant capital gains to cover other client requirements as well, e.g. bequests and gifts.

The difference, however, between the two approaches is subtle but quite clear in their aims.

[June06]

@sachin\_patel

is this institutional client or individual?

depends on that.

ALM is mostly for institutional with liabilities

2006 AM - individual guideline answer

ALM controls risk better than AO by providing an asset alloction that

1. meets reitrement spending needs

2. focuses on not outliving asset