AAFM Wealth Management Strategies 2 — Questions and Answers
Question 1: Which document formally captures a client's investment objectives, risk tolerance, constraints, and return expectations?
- Statement of Cash Flows
- Investment Policy Statement (Correct answer)
- Financial plan summary
- Prospectus
Correct answer: Investment Policy Statement
An Investment Policy Statement (IPS) is a formal agreement that codifies a client's goals, constraints, benchmarks, and guidelines to govern portfolio management decisions.
Question 2: Human capital is best described as the present value of which future financial stream?
- Dividend income
- Earned income from labor (Correct answer)
- Rental income
- Pension benefits
Correct answer: Earned income from labor
Human capital represents the present value of all future labor income a person expects to earn over their working life, forming a major component of total wealth early in a career.
Question 3: Which tax-advantaged account allows high-deductible health plan participants to invest pre-tax dollars for medical expenses?
- Flexible Spending Account
- Health Savings Account (Correct answer)
- 529 Plan
- Coverdell ESA
Correct answer: Health Savings Account
A Health Savings Account (HSA) offers a triple tax advantage: tax-deductible contributions, tax-free growth, and tax-free withdrawals for qualified medical expenses.
Question 4: A family office differs from a private bank primarily in that it provides services exclusively to which client group?
- Institutional endowments
- A single ultra-high-net-worth family or small group of families (Correct answer)
- Corporate treasury departments
- Sovereign wealth funds
Correct answer: A single ultra-high-net-worth family or small group of families
A family office is a private wealth management firm established to serve the comprehensive financial and personal needs of one family (single-family office) or a few families (multi-family office).
Question 5: In behavioral finance, which bias causes investors to hold losing positions too long because selling would confirm the loss?
- Overconfidence bias
- Disposition effect (Correct answer)
- Anchoring bias
- Recency bias
Correct answer: Disposition effect
The disposition effect describes investors' tendency to sell winning investments too quickly while holding losing investments too long to avoid realizing a loss.
Question 6: Which charitable giving vehicle allows a donor to receive an immediate tax deduction, invest the gift, and recommend grants over time?
- Private foundation
- Charitable remainder trust
- Donor-advised fund (Correct answer)
- Qualified charitable distribution
Correct answer: Donor-advised fund
A donor-advised fund lets donors make an irrevocable contribution, receive an immediate charitable deduction, and then recommend grants to charities at any future time.
AAFM Wealth Management Strategies 2
Which document formally captures a client's investment objectives, risk tolerance, constraints, and return expectations?