Structured products and new forms of goal-based investment solutions will have a disruptive impact on the retail and private wealth management industry, where existing practices still mostly rely on costly attempts at summarising investors’ preferences in terms of risk-aversion (balanced funds), time horizon (target date funds) or capital guarantee (structured products), according to the EDHEC-Risk institute.
According to the academic institution, through an efficient use of dedicated performance and hedging building blocks, as well as a suitably designed allocation to these building blocks, goal-based investing generates a 50% greater probability of achieving investors’ important or aspirational goals compared with traditional personal wealth managemente (PWM) approaches.
The success or failure of satisfying investors’ objectives does not critically depend upon the stand-alone performance of a particular fund nor that of a given asset class, it said in a release ahead of masterclass to be held next March.
“It depends instead upon how well the performance of the investors’ portfolios dynamically interacts with the risk factors impacting the present value of investors’ goals as well as the present value of non-tradable assets and future income streams, if any,” it said in the release.
“The traditional product-centric approach, which focuses on allocating more or less to stocks and bonds as a function of some estimated risk-aversion parameter, needs to be replaced by a goal-based investor-centric approach to wealth management.”
New investment framework
In particular, the wealth management industry should embrace an investment framework based on risk aversion, since “a crude one-dimensional summary of the complex set of investors’ meaningful objectives” cannot ensure that any particular goal that is essential to the investor can be achieved with certainty.
The masterclass brochure can be downloaded through the following link: Masterclass on Individual Investor Solutions
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