Month: June 2019

Not Investing Responsibly

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The United Nation’s responsible investing body, Principles for Responsible Investment (PRI), could delist up to 50 groups next year, as reported by the FT.

Seemingly, almost a third of the PRI signatories placed on a watchlist by the PRI are at risk of being booted out of the body next year.

Last year the PRI put 180 of its signatories on notice after an annual audit suggested they had not demonstrated a minimum standard of responsible investment activity.

 

Signatories to the PRI, which include asset owners and managers, commit to six principles (See below) designed to embed environmental, social and governance (ESG) considerations into mainstream investing and holding companies they invest in to account on ESG failures.

Signatories must file an annual report to the PRI detailing their progress. And continuing to make progress is key. An organisation has to do more each year. You are either in or you are out!

 

According to the FT article, the PRI last year gave those on the list two years too lift their game. The responsible investment body said 88 on the watchlist made improvements and met the minimum requirements this year. It is also working with 42 signatories who are on track to do so by 2020.

However 50 groups with $1tn in assets have failed to engage with efforts to get them to shape up and are at risk of being delisted. The PRI refused to name names.

As the article highlights “The move comes at a time of greater scrutiny of whether investors are practising what they preach when it comes to responsible investment. “We still have some where they haven’t met with us,” said Fiona Reynolds, chief executive of the PRI, who said it was hard to know why they have not done so. “The aim was always to get people moving, not to delist people.” The PRI also requires that at least half a fund manager’s assets be covered by a responsible investing policy and for there to be explicit commitment to the issue by senior managers.”

 

Raising the Bar on free riders

This comes after the PRI signalled last year they were raising the bar by introducing new minimum hurdles. PRI is also pushing its 1900-plus members to be more active on issues like climate change, human rights and corruption. The SMH reported that collectively this group has US$70 trillion in assets under management.

As outlined by the SMH “The PRI put in place minimum requirements, a move it hopes will strip out free-riders in its ranks while bolstering its relevance, more than 10 years after the PRI’s launch by then-United Nations secretary general Kofi Annan and a group of major institutions……….. “And it wants its members to be more active in holding companies to account on so-called ESG – environmental, social and governance – issues, with climate change risks, fracking, corruption, water rights, modern slavery and child labour among its current areas of focus.”

 

As noted in the SMH article many PRI signatories proudly tout their membership, sustainability reports and marketing materials, but about 10 per cent would not currently meet the proposed new hurdles.

 

Responsible investing is more than establishing portfolio exclusions.

Being a PRI signatory takes a real commitment. Increasingly the PRI is asking signatories to be more active. This includes investors wield their proxy votes against company management when more gentle forms of engagement – like letters to boards and meetings – fail to get results.

Collaborating with the industry is also a key component of being a signatory, e.g. PRI members have collectively pushed for more disclosure on issues like water quality, air emissions, and community consultation and consent by fracking companies, and for improved labour practices in agricultural supply chains.

Also, late last year, the PRI backed the Climate Action 100+ campaign, launched by 200 institutional investors with US$26 trillion in assets under management, which aims to push 100 high-emitting companies including BHP, Rio Tinto and Wesfarmers to curb emissions and boost climate risk disclosure.

 

As outlined in a previous post, increasingly best practice involves incorporating ESG Integration, Exclusions, and Impact Investing into the investment process and implementing across a variety of asset classes i.e. not just equities.

Furthermore, while exclusions adopt a negative approach, increasingly the ESG research is being applied in a positive way i.e. investing in companies with the best ESG practices rather than just avoiding those with the worst practices.

 

Signatory Requirements

PRI signatories are required to report once a year on their activities, pay their fees and declare their intention to invest responsibly via the six voluntary and aspirational principles.

They also have to:

  • have a responsible investment policy that covers at least 50 per cent of their assets under management,
  • name a person within the organisation that is responsible for carrying it out, and
  • spell out who in their group’s senior ranks is accountable for it.

 

As the SMH records they are not particularly high hurdles.

It is not that onerous and it is amazing what can be achieved with steady incremental improvements.

 

How to avoid being on the PRI Black List?

A recent UBS Survey highlighted that a lack of internal resources was one of the most important barriers to ESG related thinking. Unclear terminology was another, along with a fear it will hurt financial performance (I hope to blog on this barrier later).

A lack of internal ESG implementation knowledge, particularly on Boards and Trustees can not only be a barrier to taking the first steps toward being a Responsible Investor, it is also a barrier for the advancement and continuous improvement of the Responsible Investing approach the PRI is looking for.

Terminology is a barrier but can be easily overcome.

Furthermore, from this perspective, the first step an organisation should take when adopting ESG and a Responsible Investing approach is to formulate a Policy. This signals a genuine intent to start integrating ESG. The Policy should be Board approved.

Therefore, very surprisingly, the USB Survey found that only a minority of ESG adopters (7%) had established a Policy. This is staggering. 40% of the survey respondents said no – but would like to do this! wow. 30% just said no.

The UBS ESG Survey, Do you or don’t you? Received 613 responses from asset owners, across 46 countries representing EUR19 Trillion in assets.  Not all the respondents were PRI Signatories.

 

Happy investing.

Please see my Disclosure Statement

 

Global Investment Ideas from New Zealand. Building more Robust Investment Portfolios.

 

PRI Principles

Principle 1: We will incorporate ESG issues into investment analysis and decision-making processes.

Principle 2: We will be active owners and incorporate ESG issues into our ownership policies and practices.

Principle 3: We will seek appropriate disclosure on ESG issues by the entities in which we invest.

Principle 4: We will promote acceptance and implementation of the Principles within the investment industry.

Principle 5: We will work together to enhance our effectiveness in implementing the Principles.

Principle 6: We will each report on our activities and progress towards implementing the Principles.

Could Buffett be wrong?

/ Kiwi Investor / 7 Comments

As has been widely reported Warren Buffett frequently comments on the benefits of investing in low-cost index funds.

He’s reportedly instructed the trustee of his estate to invest in index funds. “My advice to the trustee couldn’t be more simple: Put 10% of the cash in short-term government bonds and 90% in a very low-cost S&P 500 index fund,” he noted in the Berkshire Hathaway’s 2013 annual letter to shareholders.

 

Not that I want to disagree with Buffett, I have enormous respect for him, incorporate many of his investment insights and philosophies into my own investment approaches. Albeit, I think he might be wrong on this account.

And this is not to say Index Funds do not have a part to play in a portfolio, nor that investment fees are not important. They are. I do think more portfolios should be invested along the lines of Endowments. Broad diversification is the key.

 

Following Buffett could be the right advice for a young person starting out with many years until retirement.  Such an investor would need to weather the volatility of being largely invested in equities, which is no mean achievement when equity markets can suffer falls of over 40%. A high equity strategy can become horribly undone.

Nevertheless, as one gets closer to retirement and is in retirement Buffett’s strategy is unsuitable.

Similarly Buffett’s strategy is not appropriate for a Pension Fund or Endowment. These Funds are in a similar position to those in retirement. Meanwhile, the equity allocation should be reduced as one gets closer to retirement.

The short comings of a higher equity allocation was highlighted in a recent article  by Charles E.F. Millard, who is a consultant to AQR Capital Management, LLC.

 

Once an investor needs to take capital or income from a portfolio volatility of the equity markets can wreak havoc on a Portfolio’s value, and ultimately the ability of a portfolio to meet its investment objectives.

The key point that Millard makes is that Pension Funds and Endowments are required to make periodic payment obligations. So do those in retirement, they either draw capital or income from the portfolio to sustain a desired standard of living.

 

Ultimately, it the drawing of an income or the payments by Endowments that consume most of the investment returns. “This is why assets don’t just mushroom over time.”

As Millard explains, “each year endowments usually pay out at least 5% of their holdings, and the institutions they support tend to count on those funds. That changes the situation an awful lot.”

Let’s look at the math. Millard explains”

”and assume that each year the endowment pays out 5% of its assets. In that case, starting at $1 million, the endowment would not have the $5.3 billion Buffett imagines. Rather, after having paid out almost $145 million along the way, the endowment would have less than $150 million remaining”

Still a great result, but far from the billions assumed by Buffett.

It is also worth noting that a Pension’s obligation (liability) can continue to grow as employees retire and live longer. The Pension Fund has no ability to reduce its payouts and must manage this risk.

 

This is where market volatility comes into play, particularly drawdowns – a large fall in the value of the market.

“In a prolonged stock market drawdown, those growing benefit payments will consume a larger share of the shrunken plan assets.  So, they can’t take too much solace in long-run optimism when in the intermediate run they’re already paying out much of their capital.”

 

This is a key point. You can’t take comfort in the long-term returns from equities when you are running out of money!

Equity markets do fall in value and this is why institutions with meaningful annual pay-out obligations are not invested only in equities.

 

No argument that equities will not outperform over the longer term, this is highly likely. Yet this observation fails to recognise the volatility inherent in equities.

Millard:

“Over Buffett’s 77 years investing, the endowment CIO would see fund assets decline in 23 out of 77 years (when equity returns didn’t cover the 5% distribution), and in the average bad year, the fund would shrink by -12%. But at least an endowment may be able to reduce its spending; a pension fund can’t, so in a bad year, the fraction of pension assets that must be paid out increases substantially. This is why most institutional investors subscribe to a concept that Buffett seems to hate – diversification. He’s said it’s “a protection against ignorance.” We think it is more a protection against hubris.”

Diversification is key.

“It is worth noting that Institutions do not seek to maximize potential long-term returns, without regard to risks. They often seek to maximize the likelihood that they can meet their payout obligations. They seek to be reliable payers of those obligations. And in the case of pensions, they also seek to make it possible for the employer to have somewhat predictable and affordable contribution obligations. A portfolio of stocks alone doesn’t do that. That’s why asset class diversification is a bedrock principle of modern investing.

 

In short, institutional investors have different goals and obligations to Buffett.

For those in retirement, their goals and obligations are more closely aligned with the Pension Fund and Endowment, than Buffett and Berkshire Hathaway. Those closer to retirement need to make sure that market volatility does not impact them and their ability to sustain the standard of level they wish to maintain in retirement.

 

Happy investing.

Please see my Disclosure Statement

 

Global Investment Ideas from New Zealand. Building more Robust Investment Portfolios.

Sustainable Responsible Investing Spectrum

/ Kiwi Investor / 6 Comments

The terminology used in relation to Responsible Investing can be confusing. For example, often the terminology Responsible Investing gets confused by some to mean exclusively Ethical Investing or Social Responsible Investing (SRI).  Both of which have been shown to deliver below market returns.  They are separate activities along the Responsible Investing continuum.

At an institutional Funds Management level Responsible Investing (RI) has been associated with the United Nations Principles of Responsible Investing (PRI).  PRI has six principles, see below.

Often sector/stock exclusions are implemented and/or an overlay or integration of taking into consideration Environmental, Social and Environmental (ESG) criteria is employed.

This approach to RI has been around for some time, particularly in Europe and Australia.

It is now well established that considering or integrating ESG information leads to better-informed investment decisions.

 

However, the Sustainable Development Goals (SDG) are an important recent development. The SDG are a collection of 17 global goals set by the United Nations General Assembly in 2015 for the year 2030.

The SDG take Responsible Investing, sustainability, to the next level by making it more tangible and measurable.

 

As a result, there is a growing and important change in the approach toward RI, from just avoiding those companies with a negative impact on the environment to investing in companies that have a positive way.

Therefore, SDG have impacted RI in a couple of important ways:

  • The RI continuum has become more defined with the increased focus on Impact Investing.  As presented in the Table below, the RI continuum moves from “Financial Only” to “Impact Only”
  • Industry terminology is moving on from RI to Sustainable Investing.

 

The Continuum of “Responsible Investing”

Financial Only Limited or no regard for environmental, social or governance practices
Responsible (ESG) Mitigate risky environmental, social or governance practices in order to protect value
Sustainable Adopt progressive environmental, social or governance practices that may enhance value
Impact (a)

Financial

 Address societal challenges that generate competitive financial returns for investors
Impact (b)

Likely below market Returns

  

Address societal challenges which may generate a below-market financial return for investors
Impact (c)

Require below Market Returns

 Address societal challenges that require a below market financial return for investors
Impact Only Address societal challenges that cannot generate financial return for investors

The information in the above Table is sourced from: Lessons from Social Impact Investment Taskforce: Asset Allocation Working Group, 12 December 2014.

 

Using the Table above, the RI continuum starts at “Financial Only” considerations and ends at “Impact Only” considerations.  Using this continuum the following observations can be made in relation to the objective(s) each RI category is focusing on achieving, there is an overlapping nature:

  1. Generating competitive financial returns are an object starting from Financial Only and persisting to Impact (b).
  2. The objective of mitigating Environmental, social and governance risks starts from Responsible (ESG) and continues right through to Impact Only
  3. The Pursuit of environmental, social, and governance “opportunities” starts at Sustainable and is maintained through to Impact Only
  4. The goal of focusing on measureable high-impact solution obvious begins with Impact (a) and until Impact Only.

 

Therefore, as mentioned, RI is increasingly encompassing sustainability. Sustainable Investing.

The UN-backed Principles for Responsible Investment explains sustainability investing as follows: “We believe that an economically efficient, sustainable global financial system is a necessity for long-term value creation. Such a system will reward long-term, responsible investment and benefit the environment and society as a whole.”

Fund managers, such as RobecoSAM, would use the term sustainability investing to mean “the pursuit of superior financial returns coupled with positive environmental, social and corporate governance outcomes”.

Sustainable Investing can be thought of as having three main components:

Integration

Using ESG information to improve the risk and return profile.

Exclusions

Avoiding investment in areas of controversial products or business practices.

Impact

Investing for socioeconomic impact alongside the financial returns.

 

Each of these components could be done in isolation or in combination with each other.

Increasingly best practice is incorporating all three components into the investment process and implementing across a variety of asset classes i.e. not just equities.

Furthermore, while exclusions adopt a negative approach, increasingly the ESG research is being applied in a positive way i.e. investing in companies with the best ESG practices rather than just avoiding those with the worst practices.

 

Overtime, I hope to cover off each of the Sustainable Investing components outlined above in separate posts and will provide links.

 

I will leave the final thoughts to RobecoSam, where they quite rightly draw the link between sustainable investing and delivering competitive financial returns from investing.

Finance has a role to play!

“Financial materiality is the critical link at the intersection of sustainability and business performance. More specifically, investors should focus on identifying the most important intangible factors (sustainability factors) that relate to companies’ ability to create long-term value. For instance, lowering energy consumption in manufacturing processes results in significant cost-saving opportunities and has a direct impact on a company’s bottom line. Going a bit deeper, financial materiality is defined as any intangible factor that can have an impact on a company’s core business values. These are the critical competencies that produce growth, profitability, capital efficiency and risk exposure. In addition, financial materiality includes other economic, social and environmental factors such as a company’s ability to innovate, attract and retain talent, or anticipate regulatory changes.

These matters to investor because they can have significant impacts on a company’s competitive position and long-term financial performance. “

 

These sentiments were echoed in a recent FT article.

 

Happy investing.

Please see my Disclosure Statement

 

Global Investment Ideas from New Zealand. Building more Robust Investment Portfolios.

 

UNPRI Principles

 

Principle 1: We will incorporate ESG issues into investment analysis and decision-making processes.

Principle 2: We will be active owners and incorporate ESG issues into our ownership policies and practices.

Principle 3: We will seek appropriate disclosure on ESG issues by the entities in which we invest.

Principle 4: We will promote acceptance and implementation of the Principles within the investment industry.

Principle 5: We will work together to enhance our effectiveness in implementing the Principles.

Principle 6: We will each report on our activities and progress towards implementing the Principles.

The balancing act of the least liked investment activity

/ Kiwi Investor / 1 Comment

A recent Research Affiliates article on rebalancing noted: “Regularly rebalancing a portfolio to its target asset mix is necessary to maintain desired risk exposure over the portfolio’s lifetime. But getting investors to do it is another matter entirely—many would rather sit in rush-hour traffic! “

“A systematic rebalancing approach can be effective in keeping investors on the road of timely rebalancing, headed toward their destination of achieving their financial goals and improving long-term risk-adjusted returns.”

Research Affiliates are referencing a Wells Fargo/ Gallup Survey, based on this survey “31% of investors would opt to spend an hour stuck in traffic rather than spend that time rebalancing their portfolios. Why would we subject ourselves to gridlock instead of performing a simple task such as rebalancing a portfolio?”

 

I can’t understand why rebalancing of an investment portfolio is one of least liked investment activity, it adds value to a portfolio overtime, is a simple risk management exercise, and is easy to implement.

It is important to regularly rebalance a Portfolio so that it continues to be invested as intended to be.

 

A recent article in Plansponsor highlighted the importance of rebalancing. This article also noted the reluctance of investors to rebalance their portfolio.

As the article noted, once an appropriate asset allocation (investment strategy) has been determined, based on achieving certain investment goals, the portfolio needs to be regularly rebalanced to remain aligned with these goals.

By not rebalancing, risks within the Portfolio will develop that may not be consistent with achieving desired investment goals. As expressed in the article “Participants need to make sure the risk they want to take is actually the risk they are taking,” …………..“Certain asset classes can become over- or under-weight over time.”

Based on research undertaken by BCA Research and presented in the article “Rebalancing is definitely recommended for all investors, perhaps more so for retirement plan participants than others, as they are more likely to be concerned with capital preservation than capital appreciation.”

The following observation is also made “While a portfolio that is not rebalanced will have a greater allocation to equities during a bull market and, therefore, outperform a rebalanced portfolio, all rebalanced portfolios outperformed an unbalanced portfolio during periods leading up to market corrections and recessions,” Hanafy says, citing a BCA Research study which looked at three main rebalancing scenarios of a simple 60/40 portfolio since 1973.

The potential risks outlined above is very relevant for New Zealand and USA investors currently given the great run in the respective sharemarkets over the last 10 years.

When was last time your investment fiduciary rebalanced your investment portfolio?

 

Rebalancing becomes more important as you get closer to retirement and once in retirement:

“There are two main components to retirement plans: returns and the risk you take,” …… “When you do not rebalance your portfolio, a participant could inadvertently take on too much risk, which would expose them to a market correction. This is important because, statistically, as participants reach age 40 to 45, how much risk they take on is far more important than how much they save. When you are young, the most important thing is how much you save.”

Rebalancing Policy

As the article notes, you can systematically set up a Portfolio rebalancing approach based on time e.g. rebalance the portfolio every Quarter, six-months or yearly intervals.

It is not difficult!

Alternatively, investment ranges could be set up which trigger a rebalancing of the portfolio e.g. +/- 3% of a target portfolio allocation.

Higher level issues to consider when developing a rebalancing policy include:

  • Cost, the more regularly the portfolio is rebalanced the higher the cost on the portfolio and the drag on performance. This especially needs to be considered where less liquid markets are involved;
  • Tax may also be a consideration;
  • The volatility of the asset involved;
  • Rebalancing Policy allows for market momentum. This is about letting the winners run and not buying into falling markets too soon. To be clear this is not about market timing. For example, it could include a mechanism such as not rebalancing all the way back to target when trimming market exposures.

 

My preference is to use rebalancing ranges and develop an approach that takes into consideration the above higher level issues. As with many activities in investing, trade-offs will need to be made, this requires judgement.

 

As noted above, it appears that rebalancing is an un-liked investment activity, if not an over looked and underappreciated investment activity. This seems crazy to me as there is plenty of evidence that a rebalancing policy can add value to a naïve monitoring and “wait and see” approach.

I think the key point is to have a documented Rebalancing Policy and be disciplined in implementing the Policy.

 

This also means that those implementing the Rebalancing Policy have the correct systems in place to efficiently carry out the Portfolio rebalancing so as to minimise transaction costs involved.

Be sure, that those responsible for your investment portfolio can efficiently and easily rebalance your portfolio. Importantly, make sure the rebalancing process is not a big expense on your portfolio e.g. trading commissions and the crossing of market spreads (e.g. difference between buy and sell price), and how close to the “market price” are the trades being undertaken?

These are all hidden costs to the unsuspecting.

 

A couple of last points:

  • It was noted in the recent Kiwi Investor Blog on Behaviour Finance that rebalancing of the portfolio was an import tool in the kit in helping to reduce the negative impact on our decision making from behavioural bias. It is difficult to implement a rebalancing policy when markets are behaving badly, discipline is required.
  • The automatic rebalancing nature of Target Date Funds is an attractive feature of these investment solutions.

 

To conclude, as Research Affiliates sums up:

  1. Systemic rebalancing raises the likelihood of improving longer-term risk-adjusted investment returns
  2. The benefits of rebalancing result from opportunistically capitalising on human behavioural tendencies and long-horizon mean reversion in asset class prices.
  3. Investors who “institutionalise contrarian investment behaviour” by relying on a systematic rebalancing approach increase their odds of reaping the rewards of rebalancing.

 

It is not hard to do.

 

Happy investing.

Please see my Disclosure Statement

 

Global Investment Ideas from New Zealand. Building more Robust Investment Portfolios.

 

Technology focus that will transform the Wealth Management Industry – Robo Advice alone won’t be enough

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The Professional Wealth Magazine (PWM) argues that Private Banks must take “goaled-based tech to heart”.

In their recent article they see technology assisting Wealth Managers in the following areas:

  1. Customer facing;
  2. Client relationship management; and
  3. Goals-Based wealth management Investment Solutions.

The first two are well known, the third, as PWM note, is flying under the radar. Combined they are the future of a successful wealth management business.

Quite obviously Robo Advice models use technology. Nevertheless, Goals-Based wealth management provides the opportunity for greater customisation and a more robust investment solution that better meets the needs of the customer.

Therefore, technology will play a major role in delivering more customised Investment Solutions to a wider range of people.

 

Technology is going to play a major role in the industry’s transformation.

As has been argued: “In order to be part of the fourth industrial revolution, the people-centric industry of wealth management must transform the production, customisation and distribution of retirement solutions, …..”

(See my first Kiwi Investor Blog Post, Advancements in Portfolio Management, for an article written by Lionel Martellini, of EDHEC Risk Institute, that appeared in the Journal of Investment Management in 2016: Mass Customization versus Mass Production – How an Industrial Revolution is about to take place in money management and why it involves a shift from investment products to investment solutions.)

 

The PWM article covered a recent symposium held in Paris focusing on fintech, quantitative management and big data, the technologically-led trends transforming the global industry.

The participants at the symposium gathered to consider: what should be the role of technology in client acquisition and servicing, data analysis, and portfolio management?

With regards to technology in general PWM note, “Private banks need to put technological solutions at the heart of their operations if they are to meet the demands raised by clients and relationship managers, though there will always be a need for human interaction”

However, having acknowledged that technology is critical for a successful Wealth Management business of the future, it appears to be a difficult issue to address. PWM “calculate that of the 150 global private banks we monitor closely for technological, business, customer-facing and portfolio management trends, less than one third have implemented a serious technological solution to the challenges encountered by their clients and relationship managers.”

“Many have only devised client-interfaces such as online forms, apps and screens allowing choices of services. But a handful have gone much further…….”

 

Under the radar

PWM noted that “…there is probably one technology-led sphere which is totally under-appreciated by the industry, which was highlighted at the summit. This is that of goals-driven wealth management (GDWM), ….”

 

Goals-Based investing is an improvement on the generic industry approach. Rather than viewing your investments as one single diversified portfolio, where the allocations are primarily based on your risk tolerance and the concept of risk is measured by volatility or standard deviation of returns, Goals-Based investing creates distinct milestones (goals) that are closely aligned with the priorities in your life.

Goals-Based investing closely matches your investment assets with your unique goals and objectives (customisation). It is the Wealth Management counterpart to Liability Driven Investing (LDI), which is implemented by pensions and insurance companies where their investment problems are reflected in the terms of their future liabilities (expected future insurance claims), much like a Wealth Management client’s future priorities (goals). LDI is also implemented by Pension Funds, particularly those with Defined Benefits, which are known future liabilities/cashflows.

Goals-Based Investing offers a more robust investment solution, provides a closer alignment of retirement goals and investment assets. It will also help investors avoid some common behavioural biases, such as regret and hindsight bias.

The benefits of Goals-Based Investing are a:

  1. More stable level of income in retirement;
  2. More efficient use of capital – potentially need less retirement savings;
  3. Better framework to make trade-off between allocations to equities and fixed income; and
  4. Improved likelihood of reaching desired standard of living in retirement.

In summary, a Goals-Based investment strategy increases the likelihood of reaching a customer’s retirement income objectives. It can also achieve this with a more efficient allocation of capital. This additional capital could be used for current consumption or invested in growth assets to potentially fund a higher standard of living in retirement, or used for other investment goals e.g. endowments and legacies.

 

As the PWM article points out, technology is allowing “wealth managers to use institutional tools, helping clients to prepare for key life events….. Length of investment terms, risk tolerances, prices, taxes, depreciation levels can all be plugged into a model by relationship managers. Optimal asset allocations can then be arrived at and modified to plan for specific goals.“

“While few private banks currently approach this topic seriously, it surely must become the wealth management paradigm for the future. It will still require human wealth managers to advise clients and shepherd them through the process, but it will put an algorithmic system at the centre of the asset allocation decision. There is no substitute for this and it will most likely steal the very soul of wealth management.”

The Bold is mine, LDI is an institutional tool implemented to meet specific goals.

 

This is beyond a straight forward Robo Advice model and the filling out of a generic risk profile questionnaire. Technology is being applied to determine more customised investment solutions, taking into consideration a greater array of personal information and then implementing an investment solution using more advanced portfolio techniques, such as LDI.

 

The article covers other technology related issues in relation to wealth management, such as increasing competition from the likes of Google, Facebook, Alibabas and Tencents.

Importantly, PWM see room for a human element in all of this.

 

PWM conclude we are at the beginning of the industry’s “revolution”, technology will play a part in the success of the modern wealth manager and in capturing the next generation of investors:

“The battle for the hearts and minds of the next generation and for the soul of wealth management has yet to be fought and won. But the opening salvos have been fired.”

“Private banks have interesting weapons in their armouries. Some still need to be modernised for effectiveness. But at the moment, those that appear to be vital for future success appear to be GDWM (goals-driven wealth management) tools, networking apps and screens for impact and ethics.“

“The private bank of the future will manage, introduce and evaluate, as well as working closely with the next generation. These disciplines require a raft of technological systems and an army of relationship managers, not just to operate them, but to take the output which they deliver and use this to help build a long-term relationship with families of the future.”

Again bold is mine.

 

The future, according to PWM, is a raft of technology solutions with Goals-Based investing as the underlying investment solution.

The appropriate use of technology and the mass production of customised investment solutions will be the Uber moment for the Wealth Management industry. The technology and investment knowledge is available now.

The customisation of investment solutions involves a Goals-Based investment approach, based on the principles of LDI.

A winning outcome will be the combination of smart technology and the mass production of customised investment solutions that more directly meet the needs of the customer in achieving their retirement goals.

 

Happy investing.

Please see my Disclosure Statement

 

Global Investment Ideas from New Zealand. Building more Robust Investment Portfolios.