LOS E requires us to:
describe the investment constraints of liquidity, time horizon, tax concerns, legal and regulatory factors, and unique circumstances and their implications for the choice of portfolio assets
Some of the constraints to the amount and type of investments are:
a. Liquidity: This basically deals with the redemption and withdrawal requirements. It depends upon the need to have the readily convertible investments to cash at a price close to fair value.
b. Time Horizon: The time horizon defines the ability to overcome losses and take risks. The shorter the time horizon, the more difficult it is to overcome the losses.
c. Tax Concerns. There are two types of investment accounts for the investors, i.e. registered accounts and non-registered accounts. The investors put their money in the non-registered accounts when their investible money exceeds the amounts that can be invested in the registered accounts.
For the amounts invested in registered accounts, the taxes are not much of a concern.
However, for the investments in the non-registered accounts, due consideration is required as to the nature of the investment, whether the income from the investment is in nature of interest, dividends, or capital gains. Within the capital gains also, whether they are short-term or long-term. Different types of incomes have different tax implications.
d. Legal and Regulatory Matters: There are legal and regulatory restrictions such as self-investment limits for the pension plans concerning the sponsor.
e. Unique Considerations: There are unique considerations, which may differ from client to client also. For example, there may be restrictions on investment in certain assets; there may be holding requirements, or concentration restrictions, etc.