Switch to strategic planning

PUBLISHED : Friday, 07 November, 2008, 12:00am
UPDATED : Friday, 07 November, 2008, 12:00am

With the financial crisis making the creation of wealth through investment a difficult process, it is now more important than ever for private bankers and asset managers to manage their clients' money with a carefully thought-out strategy.

Yan Lau, managing director for wealth management (key clients) at UBS in Asia-Pacific, said investment houses that remunerated client advisers based on commissions tended to focus more on conducting individual transactions rather than making sure their clients' assets were allocated in a way that suited their needs.

'I would like to see industry practitioners follow a more disciplined asset allocation approach. Right now, private bankers tend to respond slavishly to client 'demands'. For example, structured products were very much in demand last year, so they were promoted regardless if they really meet the investment objectives of the client.

'Asset allocation also tends to be determined by what's fashionable in the market, and what's easy to sell, and by the background of the banker. For example, if the adviser was previously a stock broker, then, he or she will have a natural tendency to talk more about stock ideas with clients, and accordingly clients will invest more in stocks versus other assets. In most cases, I suspect the bias is unintentional.'

'Nevertheless, a disciplined, and carefully thought-out asset allocation strategy is in the best interests of the client over the long-term,' he said.

At UBS, asset allocation begins with figuring out 10 factors. The main ones are the client's expected return, risk tolerance, need for liquidity and time horizon for investment. Other aspects include personal preferences, tax, legal issues, and succession planning.

Based on this analysis, an adviser, with support from experts within the bank, then makes a strategic asset allocation using seven asset classes: cash, equities, bonds, real estate, commodities, private equity and hedge funds.

The bank also adopts a 'core and satellite' approach whereby the core portion of the investment is planned with a long-term horizon in mind, with objectives revisited every year. The 'satellite' portion is designed to allow clients to capture shorter-term market opportunities.

Meanwhile, investment house JF Asset Management adopts a similar strategy. Geoff Lewis, head of investment services, said: 'Our clients are advised on an individual basis. We don't use off-the-shelf strategies but tailor-make a customised solution.'

By crafting a portfolio around factors like an individual's age, when they would require their money, life goals, expected return, risk appetite and current exposure, JF Asset Management ensures clients are well placed to capture every opportunity that arises.

Those who can take a five-year view should be investing in broadly diversified and simple products to maximise opportunities in the current market, Mr Lewis said. Diversification is, however, not a strategy Hong Kong investors have embraced, with many still focused on speculative buying and making a quick buck.

'Diversifying your portfolio is more important now than in times when the market is good,' said Bruno Lee, HSBC's head of wealth management for Hong Kong. 'But people still feel more comfortable about investing in products they know about, namely Hong Kong and China stocks, and often forget about diversification.'

With more funds at their disposal for investment in sophisticated products, the wealthy have been relatively better at spreading their risks, though Hong Kong equities remain a favourite.

The globalisation of equity markets is not only pushing investors to diversify, but has also heightened the need to review portfolios at least twice a year. 'Most people don't review their portfolios regularly because they still take a speculative approach and don't always understand that their risk exposure has exceeded their tolerance level,' Mr Lee pointed out.

'Some wealth managers tend to push only the high-performing funds and neglect to run asset-allocation models. They tend to focus only on the products rather than the overall portfolio strategy,' noted Kevin McGlynn, a wealth manager at Financial Partners. Each individual is vastly different and there is no one rule for all as such, added Mr McGlynn.