IBBC CAPITAL ACADEMY / 2027
Private-client policy on an economic balance sheet
Independent IBBC Capital draft content for self-study. Not affiliated with or endorsed by CFA Institute. New lessons await subject-matter review. No CFA designation or official PSM credit is awarded.
Learning goals
- Relate human capital, financial wealth, taxes and life stage to an IPS.
- Distinguish individual goals from institutional commitments.
Draft · approximately 60 minutes, excluding further revision.
Decision case · fictional facts
A fictional household has financial assets 2 million, uncertain human-capital PV 3 million and liabilities PV 1 million. Annual net spending from investments is 60,000, with 100,000 tuition due next year. A partner’s job is strongly tied to local technology stocks. A simple one-year 8% nominal investment return faces assumed 25% tax on that return and 3% inflation.
Wealth includes uncertain earning capacity
Human capital is the economic value of future labor income, not a liquid asset or a guaranteed bond. Its stability, growth, currency and correlation with markets matter. As careers mature or retirement approaches, financial capital may replace human capital and spending horizons change. Concentrated employer exposure can justify less similar risk in the financial portfolio.
An individual IPS states return needs, risk capacity/willingness and constraints including liquidity, horizons, taxes, legal context and unique circumstances. Goals may include essential spending, education and legacy with different priorities. Family decision dynamics and behavioral biases make communication and documentation central.
Tax and inflation change spendable outcomes
Income, capital gains, wealth and transfer taxes can affect decisions differently; deferral and account location depend on current applicable law and client status. A teaching tax rate does not establish any real person’s liability. Match after-tax real spending needs with a consistent return convention and avoid mixing gross nominal performance with real consumption.
Institutions often have formal governance, specific liabilities and specialized regulation; individuals may have multiple family goals, changing human capital and idiosyncratic constraints. Neither group is homogeneous. Reserve known dated expenses and stress employment/market losses jointly before setting the risky allocation.
An IPS links life-cycle resources to taxes and goals
A private client’s risk capacity depends on liquid financial wealth, uncertain human capital, liabilities, income stability and goals. A young entrepreneur can have equity-like business/human capital despite a long horizon; adding concentrated listed equity can worsen economic risk. Risk willingness, family governance and knowledge require inquiry rather than inference from wealth alone.
Separate tax on ordinary income, realized gains, wealth and transfers using current applicable rules. Deferral can change compounding, asset location can change after-tax outcomes and inflation reduces spendable wealth. An8% return taxed25% annually nets6%; with3% inflation real return is2.9126%. A stated tax rate is an assumption, and unrealized gains need not share that timing.
Write an IPS with goals and priorities, required real/nominal return, risk capacity/willingness, liquidity calendar, horizon, taxes, legal restrictions, unique circumstances, permitted assets and review authority. Institutions often have formal mandates and defined liabilities; private families can have changing human capital and multiple goals. Neither category warrants one universal allocation.
Formula and assumptions
Economic net wealth=financial capital+human capital−liabilities; real after-tax return=(1+Raftertax)/(1+inflation)−1
Compare with the model response after drafting
- Estimated economic net wealth=2+3−1=4 million, but only 2 million is financial capital. Recurring draw=60,000/2,000,000=3% before setting aside tuition.
- After-tax nominal return=8%×0.75=6%; real return=1.06/1.03−1=2.9126%. Reassess funding and diversify away from employment-linked concentration.
Errors to catch
- Treating uncertain labor PV as spendable reserves.
- Comparing an 8% gross return directly with real spending.
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