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The traditional approach to private wealth management is ‘misguided’ and retail investors should adopt portfolio optimisation techniques used by institutional investors, according to a new report from a European equity house.

The study from EDHEC-Risk equity management found that while private clients are routinely asked all kinds of questions about their current situations, goals, preferences and constraints, the resulting service and product offering most often boil down to a rather basic classification in terms of risk profiles with no link to the recommendation.

The study suggested that by using asset-liability management (ALM) advisers could ensure private wealth managers are able to offer their clients investment programs and asset allocation advice that improves the probability of meeting their individual objectives.

It said taking an ALM approach to private wealth management generated two main benefits, the first of which was better asset class selection, the second being better risk definition.

Lionel Martellini, scientific director at EDHEC-Risk and one of the co-authors of the study said: “The proximity to clients is often seen as the raison d’être for private wealth management. Yet when it comes to tailoring an investment strategy, investment advice often comes up short because it does not really take into account the private client’s true objectives.

”Obviously, one should not manage money in the same way depending on whether the client is planning to use the money to prepare for retirement, to purchase a real estate property or to pay for the kids’ education. Failing to properly account for what the money is needed for leads to misguided private asset management advice.”

Published in the Financial Times

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Written by Magda M Ali

February 16, 2010 at 11:58 pm

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