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How to tackle IPS questions ??

Lets face it.Solving IPS questions is as indispensable as it was taming FRA in level 1 & 2 !
Could someone pls throw some light on how to approach IPS questions?


  • Thanks for the link @AjFinance,but I am seeking some guidance particularly related to IPS questions
  • Hi @Lakshya25, perhaps it's better to explain what aspect of IPS you find challenging? It's quite a broad question :)
  • Give me 30 min on this, it's gonna be a LONG answer @Lakshya25... :)
  • Return - driven by annual liquidity & expenditure needs and tax
    • Before-tax return, R = r/(1-t), whereby r = annual liquidity needs / total portfolio value, t = taxes
    • If risk-return objectives are inconsistent (e.g. can't achieve return without violating risk objectives), note the inconsistency in the risk objective, recommend client education and portfolio objective reassessment

    Constraints (check out the tips)
    • Time horizon - usually at least 2 time horizons, pre-retirement and retirement. Time horizons are separated by a need to adjust the IPS
      • ** TIP ** In the exam, define number of stages and years (if identifiable). If client wants to maximise bequest to heirs, it's a multigenerational time horizon
    • Taxes - must always consider & identify individual tax circumstances. If unsure about tax treatment, include recommendation for legal counsel on either tax or regulatory
      • ** TIP ** In the exam, identify if the annual portfolio returns are subject to tax. E.g. dividends and interest income received outside retirement accounts are taxable. If not sure about tax treatment, include a recommendation for legal counsel either on tax or regulatory section
    • Liquidity - spending needs to be met by the portfolio
      • Immediate (current one offs)
      • Ongoing (living/medical expenses)
      • Other (e.g. house in future, expected receipt of large cash flow)
      • ** TIP ** In the exam, include all actual spending needs that needs to be covered by portfolio. 3 categories of spending needs: immediate, ongoing (living/medical expenses) and other (e.g. plan to pay cash to buy house in future or expectation of receiving large cash flow in future).
    • Legal & regulatory - can always recommend legal counsel. If no noticable legal concerns, Prudent Investor Rule applies. Individuals usually have minimal L&R concerns, unless trusts are involved, in which case issues are complex and legal counsel recommended:
      • Revocable trusts
      • Irrevocable trusts
      • ** TIP ** In the exam, if no noticable legal concerns, mention that Prudent Investor Rule applies. If question on trust/foundations, just say issues are complex and legal counsel is recommended
    • Unique circumstances - usually individual constraints present, such as avoid certain class of security or industry, or overweight a certain stock, moral objections etc
      • ** TIP ** In the exam, this section can be left as ‘none’ or a variety of items. If client portfolio includes a lot of investments in companies founded by client/relatives, this needs to be mentioned. If question instructs to NOT include client’s home in the value of investable portfolio, this is the place to state it.
  • Blimey! If I were @zee I would award you the 'Epic Post' badge!

    Will def go through this with a fine tooth comb! Thanks!
  • ZeeZee Charterholder London - UKPosts: 1,550 Sr Partner
    I've awarded it a 'promote', which is a super like! :D
  • Hope you guys find it useful, it's the last stretch to getting a charterholder!
  • Can't thank you enough @Sophie :) .. Actually I had not practiced any questions on IPS apart from the Schweser EOC questions.Was looking for a kinda framework which could give me the confidence to tackle IPS questions and your post precisely did that.Will get back with specific questions when I've practiced enough problems... Thanks a lot once again
  • edited April 2013
    @lakshya25 Which other sources are you using for practicing IPS questions other than Schweser?
  • @Sophie The first part that you answered reg. situational profiling,etc can be a standalone question, isn't it?

    Is it possible that they can combine the RRTTLLU part with situational profiling, behavioral finance, psychological profiling in one question? Or does the question/case details usually carry over to the next one?

    I did go through the Schweser video on IPS, where they walk you through one of the previous exam papers. Some of the questions asked you to respond on maybe 2-3 of the constraints within the template provided.
  • Yup @Ajfinance, that can be standalone. I was just categorising the typical IPS 'warmup' questions into 3 categories.

    I'm not sure what you meant by combining? It's usually various parts of an IPS question, no rules per se on what order they come in. So I suppose it's possible to combine.

    Yup 2-3 constraints is not abnormal, they will ask on various aspects of the RRTTLLU.
  • You're welcome @Lakshya25! Let us know how things are going. You have a few cool peers around taking Level 3 too like @Ajfinance and @MattJuniper to discuss :)
  • @zee, as Master Badge Collector @mattjuniper said - I need an Epic Post Badge :P
  • Maybe I should start lobbying for a talkative badge. @Sophie what is the most efficient way to bribe @Zee?
  • Diya said:

    Maybe I should start lobbying for a talkative badge. @Sophie what is the most efficient way to bribe @Zee?

    Hmm... dude food like burgers may work . Other than that in goes into nerdier stuff like tech gadgets or keeping is forum fun, nice and tidy. I suspect the latter is efficient virtually!

  • ZeeZee Charterholder London - UKPosts: 1,550 Sr Partner
    There is a # Comments badge achievements series @diya!
  • @Zee this badge would be about how fast you acquire the #comments badge :D

    This will be based on the # of posts per day xD

    I think bribing will work better in this case
  • ZeeZee Charterholder London - UKPosts: 1,550 Sr Partner
    At this rate I'll need to manage badges as a full time role. [-(
  • Diya said:

    @Zee this badge would be about how fast you acquire the #comments badge :D

    This will be based on the # of posts per day xD

    I think bribing will work better in this case

    Not sure though, commenting for commenting's sake is not the goal here. Epic, helpful, funny or useful posts are what we wanna encourage :)
  • I officially step down from being a lobbyist. This short stint illustrates that I'm not good at it. Till next time!
  • Holy mother of god. I'm bookmarking this now as it'll be useful when I'm taking Level 3! Cheers @Sophie
  • ZeeZee Charterholder London - UKPosts: 1,550 Sr Partner
  • @Sophie, I just noticed these posts...absolutely outstanding. Just came on here to ask some IPS questions, and your post answered most of them. Seriously, so helpful, to the point, and accurate. Thank you.

    With that said, I still do have a question. I seem to be struggling on "time horizon." My initial understanding was that the stage of the time horizon changes any time there is a significant change in circumstances. For instance, in question 1 in the CFA 2008 AM exam, I put something to the effect of:

    "They have a long, multi-stage horizon. The first stage spans from now until their children enter college (in about 14 years), the next stage is while their kids are in college, the third stage is when their kids are out of college and no longer dependent on them, and the final stage is retirement."

    However, the answer given by CFA was simply:

    "The Carvalhos have a long-term multi-stage time horizon. In the short term,
    they must pay living expenses and provide a home for their family. They
    may also have to pay tuition for their children. Their second stage is
    retirement, thirty years from now."

    How do I know what is significant enough to constitute a stage of the time horizon, other than retirement?
  • Additional question related to what I posted above: Does retirement consist of one stage or two? Because in one of the readings it discusses the lifecycle stages (can't remember the first stage, but the others are accumulation, maintenance, and distribution), in which the latter two both take place in retirement. Maintenance is the majority of retirement (I think) and distribution is when you actually start distributing your net worth. Wouldn't this be two stages? Or am I reading too much into it?
  • SophieSophie Posts: 2,041 Sr Partner
    @padniaki - you're welcome. I put these on precisely because essay questions were hard and I messed it up in mine. And no one else talks about it! So glad they are useful :)

    I think your answer above is perfect, more detailed than CFA's. You recognised the key stages that the income requirement may change due to changes in circumstances. So that's fine. As long as the key points are noted down, you shouldn't be penalised for being more thorough than them (but that doesn't mean you waste extra time writing everything down to the last detail!).

    On your second question: It depends on the question really, maintenance and distribution could be considered 2 stages. The point of the question is not really how many stages they are but description of those stages. So if you segment them more but covers the same points I dont think you'd be penalised.
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