Institutional Clients

Lesson

Institutional clients are organizations that invest on behalf of their members or beneficiaries. They have unique investment needs and objectives compared to individual clients.

Practice Question #1

Which of the following is NOT a characteristic of institutional clients?

A) Invest on behalf of members or beneficiaries

B) Seek investment advice for personal financial goals

C) Have unique investment needs and objectives

D) May include pension funds and endowments

Select an option above to see an explanation here.

A) Institutional clients invest on behalf of their members or beneficiaries. B) Individual clients, not institutional clients, seek investment advice for personal financial goals. C) Institutional clients have unique investment needs and objectives compared to individual clients. D) Institutional clients may include pension funds, endowments, and insurance companies.

Terms

Institutional clients:: Organizations that invest on behalf of their members or beneficiaries, such as pension funds, endowments, and insurance companies.

Practice Question #2

What is the primary purpose of an investment policy statement (IPS)?

A) To outline the investment adviser's fees and services

B) To provide a standard against which the portfolio's performance can be measured

C) To outline the investment objectives, risk tolerance, and constraints of an institutional client

D) To document the investment adviser's fiduciary duty to the client

Select an option above to see an explanation here.

A) A separate agreement typically outlines An investment adviser's fees and services. B) A performance benchmark, not an IPS, provides a standard against which the portfolio's performance can be measured. C) An IPS outlines an institutional client's investment objectives, risk tolerance, and constraints. D) Fiduciary duty is a legal obligation, not a document.

Do Not Confuse With

Individual clients:: Non-institutional investors seeking investment advice for their financial goals and objectives.
Retail investors:: Individual investors who buy and sell securities for their personal accounts.

Practice Question #3

Which of the following factors is most important when determining the asset allocation for an institutional client's portfolio?

A) The investment adviser's personal investment preferences

B) The performance of the client's previous investments

C) The client's financial goals, risk tolerance, and time horizon

D) The current market conditions and economic outlook

Select an option above to see an explanation here.

A) The investment adviser's personal preferences should not influence the asset allocation for a client's portfolio. B) While the performance of previous investments may be considered, other important factors exist. C) The client's financial goals, risk tolerance, and time horizon are the most important factors when determining the asset allocation for their portfolio. D) Current market conditions and economic outlook may influence asset allocation but are not the most important factors.

Historical Example

In the late 1990s, many institutional investors, such as pension funds and endowments, began to allocate a significant portion of their portfolios to alternative investments, such as hedge funds and private equity. This shift was driven by the desire to diversify their portfolios and achieve higher returns. However, the financial crisis of 2008 exposed the risks associated with these investments, leading to significant losses for some institutional clients.