Any investment process should start with a thorough understanding of the investor problem. Individual investors do not need investment products with alleged superior performance; they need investment solutions that can help them meet their goals subject to prevailing dollar and risk budget constraints.
In a new publication entitled “Introducing a Comprehensive Investment Framework for Goals-Based Wealth Management,” EDHEC-Risk Institute develops a general operational framework that can be used by financial advisors to allow individual investors to optimally allocate to categories of risks they face across all life stages and wealth segments so as to achieve personally meaningful financial goals. This research was conducted with the support of Merrill Lynch Wealth Management as part of EDHEC-Risk Institute’s research chair on a “Risk Allocation Framework for Goal-Driven Investing Strategies.”
One key feature in developing the investment framework for goals-based wealth management is the introduction of systematic rule-based multi-period portfolio construction methodologies, which is a required element given that risks and goals typically persist across multiple time frames.
“This paper is an important milestone in the practice of goals-based wealth management. It provides an analytically rigorous and practical approach for developing and implementing the next generation of dynamic, outcome driven investment solutions that can substantially improve our ability to help clients achieve personally meaningful goals,” said Anil Suri, Managing Director and Head of Portfolio Construction & Investment Analytics at Merrill Lynch Wealth Management.
“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 improvements in the probability of achieving investors’ important or aspirational goals that can reach 50% or more compared to traditional approaches. 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. In particular, an investment framework based on risk-aversion, 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,” said Professor Lionel Martellini, Director, EDHEC-Risk Institute.
A copy of “Introducing a Comprehensive Investment Framework for Goals-Based Wealth Management” can be downloaded via the following link:
EDHEC Publication Introducing a Comprehensive Investment Framework for Goals-based Wealth Management