EDHEC Study: European Wealth Managers Fail to Customize Risk Management

A survey of European wealth managers, released Wednesday by EDHEC-Risk Institute, found that these investment professionals want to offer their clients customized risk management, but generally fail to do so.

The survey, which EDHEC conducted as part of the Private Asset/Liability Management(ALM) research chair in partnership with Ortec Finance, drew on responses from 159 private wealth managers whose clients include both mass affluent (financial assets of less than $1 million) and ultra high-net-worth individuals (financial assets of more than $30 million). Respondents work in private banks, asset management firms and family offices, more than half of which organizations manage upward of $1.3 billion.

The key findings of the survey:

• Private wealth managers see the relationships with their clients as the principle source of value they add, but they fail to exploit this close relationship to customize the services they offer their clients. When they design portfolios for clients, they more frequently take into account market factors than their clients' individual characteristics. They often assess their clients' level of risk aversion, but accord much less importance to such individual risk considerations as longevity, individual income and individual spending objectives.
• Private wealth managers also generally fail to provide state-of-the art means of horizon-dependent asset allocation. Current practice is inconsistent in the sense that horizon effects are recognized as important, but the factors that generate horizon effects—stochastic outside income and time-varying equity risk premia—are not. Managers rarely work with explicit models of mean reversion of the equity risk premium. Seventy-seven percent of respondents do not model long-term equity returns at all.
• Private wealth managers see the potential of taking into account client-specific spending objectives, but only a handful actually try to realize this potential. The methods they are most familiar with are traditional investment analysis, which focuses on direct alpha generation (fundamental and macroeconomic analysis), or fund-selection concepts, which focus on accessing alpha indirectly (performance analysis and due diligence). By aiming mainly at alpha, these concepts are unrelated to client-specific spending objectives, and managers acknowledge that they are of little value in achieving these objectives.

EDHEC-Risk Institute is part of EDHEC Business School. Established in 2001, the institute is a European center for financial research and its applications to the industry.