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Private Wealth Management - November 25, 2010

The number of advisors using ALM techniques is growing very fast - an interview with Ton van Welie

In this month's interview, Ton van Welie, Chief Executive Officer of Ortec Finance, discusses the survey of European private wealth management practices which has just been released as part of the "Private ALM" research chair at EDHEC-Risk Institute, and his views on what the future holds for the risk management and investment processes of pension funds, insurance companies, asset managers and real estate managers after the financial crisis.

Ton van Welie

When we spoke a year ago, we discussed the first-year research paper from the EDHEC / Ortec Finance "Private ALM" research chair, entitled "Asset-Liability Management in Private Wealth Management." The second-year publication from the chair is a survey of European private wealth management practices. How would you react to some of the shortcomings identified in this new survey?

Ton van Welie: What strikes me as something that is hard to understand is that despite a strong focus on the client relationship by the Private Wealth managers, the current practices and methods fall short of the definition of client-centric investment advice. The study results indicate that the importance of the investors' investment time horizons is recognised, but nevertheless sub-optimal solutions are used in accounting for it. What seems to be new is the increasing willingness of private wealth managers to adopt an ALM approach. The hesitation though seems to center on how to implement it. From our perspective these hurdles can be overcome with the right selection of tools. The advisory process clearly differs between the different segments and ambitions set for the advisory process, and therefore so should the tools. In addition to this, many Private Wealth Managers believe in their ability to differentiate their advisory process, and clearly the tools should be flexible enough to reflect this ambition.

At this moment the focus of Private Wealth Managers seems to be on three issues: delivering added value to the client , MiFID and local legislation, and efficiency of the processes i.e. costs. On the client side, trust needs to be regained. In our view this can be greatly influenced by better managing clients’ expectations.

One interesting finding was that more than half of the respondents were somewhat familiar with the concept of asset-liability management but only 29% actually use ALM concepts in their asset allocation. Do you think that this is a number that will increase in years to come?

Ton van Welie: The number of advisors using ALM techniques is growing very fast at the moment. We think this is due to several reasons. The most important reason is the focus of the Private Wealth firms on re-designing their advisory processes from filling in a questionnaire and selecting securities, to a client-centric advisory process. From this objective we have a very natural link to ALM once it is understood that ALM is nothing more than re-designing the process into one that truly starts with the client’s objectives. For this reason I sometimes wish we would have selected other terminology such as an objective-driven investment process, or life cycle investing. These well-informed firms also recognise the need to manage the expectations of their clients. Naturally advisors therefore need tools to give insight into the possible future development of the assets, giving insight into risk and return given the objectives of the client, in order to pro-actively discuss when the probability of their clients reaching their personal goals is decreasing.

Advisors think that integrating ALM techniques in their advisory process is complex which is why we have changed our approach a bit. We now provide firms the option of moving stepwise to ALM. We have created so-called Views for the advisors to work with. The advisor can choose between a more traditional way of assessing the needs of the client, and more advanced tail risk or capital preservation and growth, as well as ALM Views. This we believe will help the transition plus it will allow for deeper insight into the difference in recommended portfolios depending on how the objectives are formulated.

EDHEC-Risk and Ortec Finance recently organised a series of seminars in Zurich, Luxembourg and London to discuss the results of this survey. What was some of the feedback that you received from the industry on the occasion of these seminars?

Ton van Welie: The feedback from people who attended the seminar was very positive with much of the discussion centering on the combination of the research findings with the practical solutions which were presented. Clearly the results of the research came as a surprise to some. In general, the attendees seemed to appreciate the combination of academic research combined with examples from the current practices.

Ortec Finance provides solutions for holistic risk/return management for pension funds, insurance companies, asset managers and real estate managers. How do you see each of your client segments emerging after the financial crisis and developing in the future?

Ton van Welie: The common theme across these different segments is one of risk management with the help of clearly defined risk budget and a transparent investment decision process. It is actually quite striking how common this need is between the markets although there are of course great differences in the implementation. Scenario analysis is at the heart of this development, as it captures the dynamics of both the quantitative finance theory and the principles of behavioral finance. What matters are the real world characteristics of risk and return in a multi-horizon context.

Another similarity is in our view the convergence between the countries in terms of priorities. From Finland, to Australia and Israel etc. we see the emergence of local and global leaders representing the best in class in governance, risk management and managing towards specific objectives.

Clearly pension funds have additional challenges as they move from accumulation to decumulation. Managing a pension fund or any fund with negative cash flows is significantly more challenging than managing one with positive cash flow, especially when the return expectations remain very low. The asset- and private wealth managers are on the other hand in the process of redefining both risk management and advisory processes, whereas the insurance sector is truly challenged in balancing between the regulatory (Solvency II) requirements and the economic realities.

All in all we see a lot of change, and specific focus on an integrated management of strategic objectives, ex-ante or the short term risk they represent, and the improvement of the ex-post process for greater transparency and continued learning from the structured investment decision process.

About Ton van Welie

As CEO of Ortec Finance since 2006, Ton van Welie oversees the daily operations of the global provider of technology and advisory services for risk and return management for pension funds, insurance companies, asset managers and real estate managers.

Ton has been with Ortec for over fifteen years, fulfilling several different functions throughout the organisation. After working on several asset management projects, he developed the housing corporations business for Ortec Finance. Following his appointment as the Head of the Housing Corporation division he moved to manage the operations of Ortec Finance on a larger scale including the comprehensive organisational restructuring with the target of improved client focus as well as expansion strategy outside Holland.

Mr. van Welie graduated from the Erasmus University of Rotterdam with an MSc. in Econometrics. He has maintained strong links with academia, teaching as a guest lecturer, and has published in various professional journals.