A 58-year-old client lands with $12M, three goals (retire at 62, fund two grandchildren's educations, leave a meaningful legacy), and a concentrated stock position worth $3.5M. How you sequence that wealth across goal buckets, liquidity tiers, and tax wrappers determines whether the plan survives a recession or a tax law change.
Wealth planning sits one level above portfolio construction. A traditional mean-variance optimizer asks "what is the best risk-return tradeoff for this dollar?" A wealth plan asks a harder question: "this dollar belongs to which goal, over which horizon, with what tax wrapper, and with what required probability of success?" The CFA® Program tests your ability to answer the harder question for affluent and high-net-worth families.
A goals-based plan begins with a goal inventory. Each goal carries four attributes: target dollar amount, time horizon, required probability of success, and prioritization tier. Standard tiers run essential, important, aspirational, and legacy.
Essential goals cover non-negotiable spending: housing, healthcare, baseline retirement consumption. The required success probability runs high, typically 90% to 99%.
Common mistakes
- Treating goals-based planning as portfolio segmentation alone. The exam tests the link between required success probability and asset allocation. A bucket allocation without a probability rationale earns partial credit at best. Trap: describing buckets without explaining why the essential bucket holds bonds and the aspirational bucket holds equities.
- Optimizing financial capital in isolation. Human capital is part of total wealth. A young salaried client should hold equity-heavy financial capital because human capital is bond-like. Recommending a balanced 60/40 portfolio for a 30-year-old earner ignores the bond character of future wages. Trap: defaulting to age-based glide paths.
- Confusing asset allocation with asset location. Allocation is which assets you hold. Location is which wrapper holds them. A 60/40 portfolio held entirely in taxable suffers more tax drag than the same 60/40 with bonds in the 401(k) and equities in taxable. Trap: ignoring location when optimizing after-tax returns.
Bottom line
- Goals-based planning segments wealth into buckets (essential, important, aspirational, legacy), each with its own time horizon, required success probability, and asset allocation.
- Total wealth equals human capital plus financial capital. Bond-like human capital justifies equity-heavy financial capital; hedge longevity with annuities or extended fixed income.
- Insure human capital risks: life (mortality), disability (incapacity), umbrella (litigation), and LTC (care needs).
- Asset location (which wrapper) differs from asset allocation (which asset class). High-tax assets belong in tax-deferred accounts; tax-efficient equities live in taxable.
Exam shortcut
When a vignette presents an affluent client with a stated goal hierarchy, immediately map each goal to a tier (essential, important, aspirational, legacy) and assign each tier its allocation rule. Conservative for essential, balanced for important, aggressive for aspirational. The bucket structure is worth most of the points. When the question asks for liquidity sizing, separate required (non-negotiable cash flows) from desired (optional opportunities).
The full lesson (about 4,736 words, 32 min read) adds 2 worked examples, all 6 common mistakes, a self-check, free in the app.
Browse all free CFA L3 Private Wealth lessons or jump into free CFA L3 Private Wealth practice questions.