Reading 18: Excerpts from Invest....ivate Investors－LOS b investment, benefits, investor, solution, return

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CFA Institute Area 3-5, 7, 12, 14-18: Portfolio Management
Session 4: Private Wealth Management
Reading 18: Multiple Asset Locations
LOS b: Evaluate the benefits of a multi-locational investment solution when given a basic set of tax constraints, investment alternatives, and investor goals for after-tax return, charitable giving, and cross-generational wealth transfer.

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With respect to the effectiveness of variable life insurance for individual investors, it is:

A) tax efficient, and accessibility of assets held inside the policy can be either good or poor, depending upon the terms of the policy.

B) tax inefficient, and accessibility of assets held inside the policy can be either good or poor, depending upon the terms of the policy.

C) tax efficient, and the degree of control over the management of the assets is unlimited.

D) tax inefficient, and the degree of control over the management of the assets is limited.

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Answer and Explanation

With respect to the effectiveness of variable life insurance for individual investors, it is tax efficient, accessibility of assets held inside the policy can be either good or poor depending upon the terms of the policy, and the degree of control over the management of the assets is limited.

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Deferred pension accounts are:

A) tax inefficient during the accumulation period, and are usually fully taxable when funds are removed to generate a retirement income.

B) tax efficient during the accumulation period, and are usually tax exempt when funds are removed to generate a retirement income.

C) tax efficient during the accumulation period, but are usually fully taxable when funds are removed to generate a retirement income.

D) tax inefficient during the accumulation period, but are usually tax exempt when funds are removed to generate a retirement income.

Answer and Explanation

Deferred pension accounts are tax efficient during the accumulation period, but are usually fully taxable when funds are removed to generate a retirement income. The main exception to this is the Roth IRA, which is less tax efficient at the time the contributions are made, but from which all payouts are tax exempt during retirement.

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Relative to other more tax efficient account options, the primary advantage that a personal account provides is that it:

A) provides an exact time horizon match.

B) affords greater control than the other account types.

C) allows for unlimited access to funds.

D) gives greater opportunity to take advantage of valuation discounts.

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Answer and Explanation

The primary advantage of an unsheltered personal account is that the investor retains unlimited access to the funds. Tax sheltered account options ordinarily limit the degree of access.