CFA Level II ExamPortfolio Management and Wealth PlanningEasy
A financial advisor is preparing an Investment Policy Statement (IPS) for a young couple, both 30 years old, who are saving for retirement in 35 years. They have stable jobs, no immediate liquidity needs, and a high tolerance for risk. Which of the following investment constraints should be given the LEAST emphasis in their IPS?
- AUnique circumstances
- BLegal and regulatory factors
- CLiquidity needs
- DTime horizon
Show answer & explanationAnswer & explanation
Correct answer: C. Liquidity needs
Given the couple's long time horizon (35 years until retirement) and stable jobs with no immediate liquidity needs, liquidity is the constraint that requires the least emphasis. They can afford to invest in less liquid assets with potentially higher returns.
Why the other options are wrong
- A. Incorrect. While not explicitly detailed, unique circumstances could arise and must be considered, even if currently minimal.
- B. Incorrect. Legal and regulatory factors are always important for compliance, regardless of the client's profile.
- D. Incorrect. A long time horizon is a significant factor, allowing for greater risk-taking and long-term investments.
IPS Investment Constraints
Investment constraints are limitations or restrictions that influence the investment strategy within an Investment Policy Statement (IPS).
- Common constraints include liquidity, time horizon, legal/regulatory, tax situation, and unique circumstances.
- Constraints help tailor the investment strategy to the client's specific situation.
- The relative importance of each constraint varies by client.
Memory trick: LTTLU - Liquidity, Time, Tax, Legal, Unique - all in a row!