Although wealth advisers are aware of the limitations of traditional asset allocation models and investment concepts, they seldom use the new risk-controlled dynamic asset allocation models or sophisticated theories because of the complexities involved with them. Most wealth managers focus on only portfolio-related risk and ignore client-specific risks.
The author suggests that many wealth managers do not apply novel insights proposed by financial economists when advising their clients. Novel insights, in this case, include dynamic asset allocations with consideration of labor income, human life cycle, risk, and estimated future expenditure. Most practitioners, when determining asset allocation, focus on managing only the market risk exposure—such as the interest rate risk of their clients’ portfolios—and ignore the dynamic factors.
How Is This Research Useful to Practitioners?
When advising private clients, wealth managers should incorporate clients’ human capital, spending objectives, and investment time horizon, which are dynamic over the course of investment. Such factors will significantly affect the traditional asset allocation process and investment returns over the long term.
The author finds that most advisers are aware of such asset allocation strategies as mean–variance, asset/liability management, and goal-based allocation but have not used them to their full extent. Advisers seem to focus more on common portfolio-related factors than on such client-specific needs as time horizon or inflation and income risks. Their reluctance to use these more modern concepts stems largely from the concepts’ inherent complexity, despite available tools and means of implementation.
In addition, there seems to be a lack of quality investment advice available to retail investors.
How Did the Author Conduct This Research?
The data the author uses come from an online voluntary survey of 159 European private wealth managers; the survey seeks to discover their approaches to asset management for wealthy private investors or families and their awareness of the limitations of traditional concepts. Survey participants are European wealth advisers, most of whom work in private banks or family offices or are asset management specialists for wealthy clients. The target is considered to be representative because of these managers’ ability to understand and to implement modern portfolio practices and asset allocation strategies.
The author focuses on average client segmentation based on assets and evaluates the use of asset allocation strategies and managers’ satisfaction with them. He also tries to judge the importance of investment risks and investment parameters, and he seeks to confirm their use in the current allocation models, including quantitative market models. He segments the data by client and by employer financial institutions and analyzes responses in terms of familiarity with and use of concepts, current practices in asset allocation, and evaluation of the importance of strategies.
Although the sample is not random and might suffer from self-selection bias, the author indicates with cross-sectional analysis that these results are largely independent of the employer financial institutions and of the clients advised. He concludes his research by presenting his findings regarding the requirement of training for advisers, the perceived complexity of the modern concepts, and the difficulty of using the modern concepts. He believes retail investors are at the biggest risk of not being able to get sound investment advice.
The author presents contradictory evidence to the normal retail investor perception that wealth advisers to family offices and high-net-worth individuals might be using ultra-sophisticated tools that take into account all risk, including market, income, and interest risks, to advise clients. The conclusion as to whether the use of such tools can increase investor returns remains unstudied.