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Wealth Management - March 23, 2017

Make an impact on strategic initiatives in the area of robo-advising technologies

The Four-University Rotating FinTech Conference: Wealth Management Systems for Individual Investors will be held on 26 April, 2017 on the Princeton Campus. In this month's interview, we will discuss the partnership project between EDHEC-Risk Institute and the ORFE department at Princeton University, look at the partnership between the four academic institutions, unveil the list of featured speakers and topics covered, and present their hopes for this first edition of the conference. We will hear from Woo Chang Kim, Associate Professor, Industrial and Systems Engineering Department, and Head, KAIST Center for Wealth Management Technologies, Korea Advanced Institute of Science and Technology (KAIST); John Mulvey, Professor of Operations Research and Financial Engineering, ORFE Department, Princeton University; Lionel Martellini, Professor of Finance, EDHEC Business School, and Director, EDHEC-Risk Institute; and Andrew Yao, Professor and Dean of Institute for Interdisciplinary Information Sciences (IIIS), Tsinghua University.

Andrew Yao, Lionel Martellini, John Mulvey, Woo Chang Kim

In 2012, EDHEC-Risk Institute and the Operations Research and Financial Engineering department of Princeton University signed a partnership to set up a joint research programme in the area of asset-liability management for institutions and individuals. Can you remind us what the goals and expected focus of this partnership were, and what outreach activities have been developed in the context of this partnership?

Lionel Martellini: One of the key ambitions of our partnership is to develop innovative academic research in finance that could have a strong influence on the practice of investment management, at a time when the industry is facing a number of key paradigm changes leading to an increased focus on risk management. These developments also question a number of fundamental insights from modern portfolio theory, including for example the risk-return relationship in equity and bond markets from the cross-sectional and time-series perspectives, and the proposed joint research agenda is expected to address some questions that are not only practically relevant, but also at the forefront of outstanding problems in financial economics. In the end, the common ambition of EDHEC-Risk Institute and Princeton ORFE is to jointly develop and manage a research programme related to investment solutions for institutions and individuals, and more precisely with a focus on a comprehensive use of the three forms of risk management (diversification, hedging and insurance) regarded as the true source of added-value in investment management. These various research directions will heavily draw on tools borrowed from various academic fields where strong expertise is present in both institutions, including in particular financial engineering, financial econometrics, mathematical finance and stochastic optimisation. The Princeton ORFE and EDHEC-Risk Institute faculties include some of the leading experts in these fields and their combined expertise is expected to lead to influential developments which will re-enforce the visibility of the two partnering institutions in these domains, both in terms of academia and investment practice.

In terms of outreach activities, the broad ambition of EDHEC-Risk and Princeton ORFE is not only to develop cutting-edge research in investment solutions, but also to make sure that the investment industry will benefit from whatever useful academic insights will be generated through these research efforts. In this context, EDHEC-Risk and Princeton ORFE have set up a bi-annual event, the EDHEC-Princeton “Academia Meets Practice” conference. This event sees speakers from EDHEC-Risk Institute, Princeton ORFE and the Bendheim Center for Finance at Princeton University provide selected investment professionals with the latest academic insights related to new frontiers in institutional money management. The format of the conference is meant to facilitate the exchange of views between academics and practitioners; it includes presentations by a member of the faculty at Princeton University’s ORFE department and/or the Bendheim Center for Finance, or EDHEC-Risk Institute, followed by a discussion with the audience. After launching three successful events, the format will change this year since we take the opportunity of our extended partnership with KAIST and Tsinghua University to have the inaugural event for the Four-University Rotating FinTech Conference.

The Four-University Rotating FinTech Conference: Wealth Management Systems for Individual Investors represents the first time our institutions have joined forces to showcase the highest quality thinking and research in the area of financial technologies. Can you tell us the reasons behind your decision to join forces with EDHEC-Risk Institute and Princeton University in this way?

Andrew Yao: In recent years, tremendous progress has been made in key areas of information science, unleashing waves of new developments in many industries. Specifically and prominently, Financial Technology is poised to benefit from the exciting discoveries made in artificial intelligence, distributed systems (blockchains), and cryptography. These powerful tools can enable financial institutions to deliver services, old and new, at higher speed, lower cost, and with more security. At IIIS of Tsinghua we hope to leverage on our strengths in interdisciplinary information science and contribute to the coming new era in FinTech. To this end we are fortunate and extremely delighted to have the chance to collaborate with three top financial engineering institutes in EDHEC-RISK, Princeton and KAIST, not only on organising this forum but also on examining research issues of common interest.

Woo Chang Kim: The banking and finance industry is rapidly changing thanks to technological advancements. Like many other countries, Korea is no exception. In order to cope with such changes in the FinTech space, and to provide technological support to the industry as the leading academic institution of the nation, KAIST founded a research center dedicated to wealth management technologies. Unfortunately, possibly due to the rapid growth of FinTech, there are not many (in fact, practically no) dedicated academic forums where leading scholars and practitioners meet each other and share their thoughts. By joining forces with EDHEC-Risk and Princeton, I expect that the four university rotational conference can provide an opportunity to exchange up-to-date ideas and share the cutting edge technologies among both academics and practitioners. Going forward, KAIST will share the most advanced ideas and technologies available in Korea at the conference. At the same time, KAIST would like learn much from our colleagues so that we, the four universities and other participants as a team, can contribute to the related area both academically and practically – especially from the perspective of enabling fully customised wealth management services for the not-so-rich.

The conference will bring together leading academic researchers and practitioners to take a critical look at the fourth revolution, the digital revolution, which is likely to have a dramatic impact on the investment industry. Could you provide us with more information about the featured speakers and the topics which will be covered?

John Mulvey: The keynote speakers have a wealth of experience in computer science and financial planning. John Bogle, founder of Vanguard, has made a convincing case that stocks and other assets will have much lower returns in the future than we have seen in the past. In this context, he will share his thoughts about the subsequent impact on the chance of a safe retirement for individuals in the United States and other developed countries. Dr. Andy Yao, Dean of the Interdisciplinary Institute for Information Systems at Tsinghua University, will discuss the role of computational science on the disruptive technologies in the emerging FinTech domain. John Mashey, a pioneer in computers, will provide historical context of the "big data" revolution. In addition, each of the four sponsoring universities and the afternoon panel will have a chance to weigh in on the opportunities and challenges of the trend towards robo-advising. What will it mean for the financial planning industry? All in all, the day will be packed with interesting talks and lively discussions.

Conference delegates registered for 26 April will also have the opportunity to stay on the Princeton Campus on Thursday, 27 April for a related event, dedicated to exclusive in-depth tutorial classes and demonstrations (on machine learning in finance, goal-based investing, digital wealth systems and more). Can you please give us further details on this unique day?

John Mulvey: The second day will allow participants to see a number of robo-advisors in action via demos in small group settings. The capabilities of these automated financial planning systems will be the main focus. In addition, there are several tutorials on related topics, including data driven optimisation and machine learning applications in finance. Anyone with deep interest in the exploding area of robo advising ought to attend. Participants on Thursday may wish to stay over until Friday when the Bendheim Center for Finance will have a top notch event on the economic, regulatory, and political aspects of FinTech – with Larry Summers as a luncheon speaker and J. Michael Evans, president of Alibaba, as the dinner speaker. This event will complement the discussions of the prior two days.

This rotational conference will then take place in Europe and in Asia. What are your hopes for this inaugural conference, which will be held at Princeton University?

Lionel Martellini: We have reasons to believe that the wealth management industry is about to experience a new industrial revolution. Indeed, we are currently at the confluence of historically powerful forces. On the one hand, liquid and transparent access to risk premia-harvesting portfolios is now feasible with smart factor indices, which are cost-efficient and scalable alternatives to active managers. On the other hand, distribution costs are expected to go down from their stratospheric levels as the trend towards disintermediation is accelerating through the development of robo-advisor initiatives, which are putting the old business model under strong pressure, and forcing wealth management firms to entirely rethink the value that they are bringing to their clients. In this context, and since cost-efficient meaningful building blocks have been made available at exactly the same time as digitalisation has started to offer a more relevant goal-based dialogue with investors, one might wonder whether the rise of robo-advisors is precisely the ultimate driving force required to bring about the long-awaited and much-needed access to cost efficient dedicated investment solutions for millions of individuals around the world.

EDHEC-Risk Institute will be very active in this space in the years ahead. Our hope in organising this event jointly with the Princeton ORFE department as the first step in a series of rotational conferences on financial technologies is that we can offer a meaningful forum to facilitate discussion between all interested parties (academics, practitioners, and regulators) around the world. Our ultimate desire would be to have an impact on strategic initiatives in the area of robo-advising technologies so that we can collectively help promote the emergence of welfare-improving and cost efficient investment solutions for individual investors.

Woo Chang Kim: One of the critical components for personalised wealth management service for individuals is the goals based investing (GBI). I will present our own version of GBI, which is flexible, computationally tractable, and easy for individual clients without much knowledge in finance to understand. By doing so, I hope to get feedback from the conference participants so that we can improve it further. In addition, I would like to learn their thoughts for the future events. As the main host of the future conferences that will be held in Asia, I will organise upcoming events based on that. Furthermore, I hope the inaugural event can be the place for practitioners and academics to find collaborators. For instance, it would be very cool if four universities meet and find collaborators from other parts of the world!

Andrew Yao: The surging interest in FinTech has been well under way in the US and Europe, while in China it is only beginning to receive attention. As one of the first academic institutions in China to focus on research in FinTech, we hope to start a conversation not only with our three partner institutions, but indeed with participants of this inaugural conference event. We hope to get educated regarding the issues of most concern to the FinTech global community and the technical state-of-the-art in this community. We also look forward to bringing back lessons learned from this conference to our FinTech colleagues in China, to discuss the similarities and differences with our local FinTech environments. Our experiences at this first conference will be invaluable to the planning of future meetings in Asia.

About Woo Chang Kim, Lionel Martellini, John Mulvey and Andrew Yao

Woo Chang Kim is associate professor in the Industrial and Systems Engineering Department at the Korea Advanced Institute of Science and Technology (KAIST) and Head of KAIST Center for Wealth Management Technologies. He serves on the editorial boards for several journals, including Journal of Portfolio Management, Optimization and Engineering, and Quantitative Finance Letters. He is an expert on financial optimization and portfolio management, and has published many papers in leading academic and practitioner journals in the related fields as well as a textbook on robust portfolio management. He is a member of voting rights committee for Korea’s National Pension System and an advisor for Samsung Asset Management. He was a visiting professor in Department of Economics and Finance at LUISS Guido Carli in Rome in 2014, a visiting fellow in Department of Operations Research and Financial Engineering at Princeton University in 2013-2014, and a guest researcher for Hausdorff Research Institute for Mathematics at University of Bonn in 2013. He has earned doctoral degree from Princeton University’s Operations Research and Financial Engineering Department, and master’s and bachelor’s from Industrial Engineering at Seoul National University.

Lionel Martellini is a Professor of Finance at EDHEC Business School, the Director of EDHEC-Risk Institute and Senior Scientific Advisor for ERI Scientific Beta. Lionel holds Master’s Degrees in Business Administration, Economics, Statistics and Mathematics, as well as a PhD in Finance from the Haas School of Business, University of California at Berkeley. He is a former member of the faculty at the Marshall School of Business, University of Southern California, and has been a visiting fellow at the Operations Research and Financial Engineering department at Princeton University. Lionel is a member of the editorial board of The Journal of Portfolio Management, The Journal of Alternative Investments, and The Journal of Retirement. He conducts active research in a broad range of topics including long-term asset allocation decisions, equity and fixed-income portfolio construction, risk management and derivatives valuation. His work has been published in leading academic and practitioner journals and has been featured in major European and global dailies such as The Financial Times and The Wall Street Journal. He has co-authored reference textbooks on topics related to Alternative Investment Strategies and Fixed-Income Securities.

John M. Mulvey iis a Professor in the Operations Research and Financial Engineering Department and a founding member of the Bendheim Center for Finance at Princeton University. His specialty is financial optimization and advanced portfolio theory. For over thirty-five years, he has implemented asset-liability management systems for numerous organizations, including PIMCO, Towers Perrin/Tillinghast, AXA, Siemens, Munich Re-Insurance, and Renaissance Re-Insurance. His current research addresses regime identification and factor approaches for long-term investors, including family offices, and pension plans, with an emphasis on optimizing performance and protecting investor wealth (and surplus wealth). He has published over 150 articles and edited 5 books. He is currently editing a book “Machine Learning in Finance,” and is a senior consultant for the California Public Employees Retirement System.

Andrew Chi-Chih Yao is a Chinese-American computer scientist and computational theorist. He is currently a Professor and the Dean of Institute for Interdisciplinary Information Sciences (IIIS) at Tsinghua University. He completed his undergraduate education in physics at the National Taiwan University, before completing a Doctor of Philosophy in physics at Harvard University, and a second PhD in computer science from the University of Illinois. From 1982 to 1986, he was a full professor at Stanford University. From 1986 to 2004, he was the William and Edna Macaleer Professor of Engineering and Applied Science at Princeton University, where he continued to work on algorithms and complexity. In 2004, he became a Professor of the Center for Advanced Study, Tsinghua University (CASTU) and the Director of the Institute for Theoretical Computer Science (ITCS), Tsinghua University in Beijing. Since 2010, he has served as the Dean of Institute for Interdisciplinary Information Sciences (IIIS) in Tsinghua University. He is also the Distinguished Professor-at-Large in the Chinese University of Hong Kong. In 1996 he was awarded the Knuth Prize. He received the Turing Award, the most prestigious award in computer science, in 2000, “in recognition of his fundamental contributions to the theory of computation, including the complexitybased theory of pseudorandom number generation, cryptography, and communication complexity”.