To calculate the return objective for a client you divide Net Additions/Withdrawals by Net Investable Assets. However, what happens if you Net Investable Assets are are less than your Net Additions? This seems fairly conceivable if you deduct your home equity from you Investable Asset base.
How do you then calculate the client’s return objective? Is it simply not necessary and you instead set a thumbsuck return objective of inflation + x%?
Thanks
Return objective is always return objective in %. If client has no sufficient asset base, he will likely fail to accomplish his return objectives and this happens. For. ex. in year 1, client seems he will meet all his objectives but in year 4 seems he may go to bankruptcy in case IPS must be updated and all risk and return objectives must be recalculated.
You must distinguish primarily return objectives from fantasies and wishes which may be considered only upon meeting primarily and secondary ones. However, return objective is in % and cannot be negative but liquidity constraint may be negative what means client has no sufficient money for funding current liabilities.
Thank you.
As I understand it, I need to think about the return objective as having two components, (i) a return requirement, and (ii) a return desire. As I understand it, if the client has Net Additions then there’s no need to have a return requirement and the client can create a new cash outflow line item in their cash flow statement which the return desire will need to cover, i.e. prepaying a mortgage, or saving for a holiday.
Well. You just have to distinguish between realistic return objectives (mortgage repayment, card debt settlement,etc) and unrealistic wishes (client would like to purchase a ticket to the flight around the moon and so on). Only the primarily and secondary objectives should be considered if client’s budget is limited.
A return requirement is always part of client’s IPS. If client is a net saver and has a surplus and has sufficient large asset base, thus client has low return requirement and has a higher risk tolerance. Thus additional goals ( like wishes) may be considered in IPS.
Where are you finding this information from? I’m almost done with individuals IPS except for Concentrated Positions from the CFAI curricilum and have yet to find a blue box problem or a EOC that has a negative return incident.