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European private wealth managers fail to offer customised risk management

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Private wealth managers see the relationships with their clients as the principle source of value they add, but they fail to exploit this close relationship to customise the services they offer, according to a report by Edhec-Risk Institute as part of the “Private ALM” research chair in partnership with Ortec Finance.



When portfolios are designed for clients, market factors are taken into account more frequently than are the individual characteristics of the clients.

Wealth managers often assess their clients’ level of risk aversion, but other individual risk factors—longevity risk, individual income risk, and individual spending objectives—are accorded much less importance.

Private wealth managers also generally fail to provide state-of-the art means of horizon-dependent asset allocation. Current practice is inconsistent in the sense that horizon effects are recognised as important but the factors that generate horizon effects—stochastic outside income and time-varying equity risk premia—are not.

Private wealth managers rarely work with explicit models of mean reversion of the equity risk premium. Seventy seven of respondents do not model long-term equity returns at all.

Finally, private wealth managers see the potential of taking into account client-specific spending objectives, but only a small minority actually attempts to realise this potential.

According to the report, the methods private wealth managers are most familiar with are traditional investment analysis, which focuses on direct alpha generation (fundamental and macroeconomic analysis), or fund-selection concepts, which focus on accessing alpha indirectly (performance analysis and due diligence). These concepts, by aiming mainly at alpha, are unrelated to client-specific spending objectives, and private wealth managers acknowledge that they are of little value in achieving these objectives.

Together, private wealth managers who are unfamiliar with ALM and those who are familiar with it but do not use it make up a majority of our respondents. The lack of adoption of ALM has more to do with unfamiliarity with the concept and with the perceived difficulty of using it than with sceptical views of its usefulness, the report says.

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