Wealth Management & Private Banking
Wealth Management & Private Banking
This domain tests advice for high-net-worth clients: integrated tax, estate and investment planning, discretionary management, private credit and alternative investments. The focus is on suitability, control and the different roles of a registered representative, portfolio manager and trustee.
Client segments and service models
- Mass affluent, high-net-worth and ultra-high-net-worth clients differ in complexity, not just asset size.
- Advisory accounts require client approval for each trade; discretionary accounts give a portfolio manager authority within a written mandate. The portfolio manager has a fiduciary duty; a dealing representative's core obligation is suitability.
- Private banking adds secured lines of credit, bridge financing, custom mortgages, foreign exchange and custody, often using the investment portfolio as collateral.
- Alternative investments include hedge funds, private equity, real estate and exempt-market securities. They can reduce correlation but bring liquidity, valuation and concentration risk.
Trusts and estate planning
- A trust separates legal and beneficial ownership. Discretionary family trusts allow income splitting; alter ego, joint partner and spousal trusts are used for probate and incapacity planning.
- Most inter vivos trusts are subject to a 21-year deemed disposition, so assets are treated as sold at fair market value every 21 years unless the trust qualifies otherwise.
- Joint tenancy passes by survivorship; tenancy in common passes through the estate. Joint ownership can trigger attribution and should not be used only to avoid probate.
- Probate planning includes beneficiary designations, multiple wills for different asset classes and insurance.
Worked example
A parent lends $300,000 to an adult child at a 4% prescribed rate. The child invests at 7%, earning $21,000. The child pays $12,000 interest to the parent, deducts it, and reports $9,000 net. If the parent's marginal rate is 45% and the child's is 20%, the family tax without the loan would be $21,000 × 45% = $9,450. With the loan: parent $12,000 × 45% = $5,400; child $9,000 × 20% = $1,800; total $7,200. Saving = $2,250. The loan must be at the prescribed rate, interest must be paid by January 30 each year, and the rate can be locked in.
Traps
- Assuming joint tenancy always saves tax; attribution can apply.
- Forgetting the 21-year deemed disposition.
- Treating a discretionary account as suitable for every client.
- Using portfolio collateral for private credit without considering margin calls and concentration.
- Ignoring illiquidity and valuation uncertainty in alternative investments.