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Private Wealth Management - November 25, 2010

EDHEC-Risk European Private Wealth Management Survey

The EDHEC-Risk European Private Wealth Management Survey has been completed as part of the second year of the "Private Asset/Liability Management" research chair, a chair endowed by Ortec Finance. The objective of this research chair is to assess the degree to which asset/liability management (ALM) practices common in institutional investment management are likewise effective in private wealth management. The theory behind private ALM is that, by representing a client’s spending objectives formally as a liability benchmark and by managing his assets relative to this benchmark, risk management can be customised, and that portfolio decisions that take into account the client’s specific objectives can then be made.

The research for the first year of the chair showed that taking an ALM approach to private wealth management has great implications for the design of optimal portfolios. ALM has a direct impact on the selection of asset classes, as it leads to a focus on the liability-hedging properties of asset classes. In a conventional asset-only perspective, after all, the risk-free asset for any investor is cash, whereas in ALM the risk-free asset is not unique. It is the asset that best hedges the future consumption needs of the investor. These insights have great implications for the ways private wealth managers should go about providing solutions to clients, and this year’s research looks into whether private wealth managers actually recognise these implications.

Our look at current practices shows that respondents see conventional concepts adding but little value to customised financial management. At the same time, new concepts such as private asset/liability management are largely unused. Yet, as our survey shows, private wealth managers are more interested in seeing improvements to customised risk management and to their ability to take into account investors’ objectives than to any other aspect of the tools that enable them to do business. Detailed interviews reveal that the concepts are considered hard to use but that there is realistic potential to derive benefits from tools with sound conceptual bases.

As part of this document, we provide a brief description of the development of the private wealth management industry and the challenges it currently faces; also included is a summary of the academic foundations of portfolio management for private clients (ALM, in particular). This background lays the groundwork for our exploration of current practices and serves as a prelude to the quantitative and qualitative analyses of survey results garnered from 159 private wealth managers across Europe.