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Navigating wealth management
Lombard Odier Private Bank
Article published in Allnews, September 18, 2018, By Stéphane Monier
A GPS calculates routes based on the road network. A concept applicable to wealth management, according to Lombard Odier’s Stéphane Monier.
Private clients’ investment needs are changing as a result of legislation, regulations and the reorganisation of private banking, as well as a new, more responsible approach adopted by a growing proportion of clients. Wealth management needs to align itself more closely to the liability-driven investment strategies used in institutional management. More from Stéphane Monier, Chief Investment Officer, Private Bank, Lombard Odier.
What direction is private management going in?
The conventional classification of clients, based on the allocation of a risk profile (Conservative, Balanced, Growth), no longer meets their expectations. Performance is complicated to explain and, more importantly, wealth management can seem remote from the needs of a client who does not necessarily want to be put in a box. Today, clients expect a much more personal service that aligns with their vision of the future and their assets. It is much more advantageous to give clients the financial approach to meet their true objectives.
We know the starting point. The destination point is set. So we sail as close as we can get from one point to the other.
How do you go about this?
Using a similar method to institutional allocation. From the outset, we identify the client’s income needs for him to live the lifestyle he wants. We determine the level of capital that it requires and how it should be invested to ensure that the probability of meeting these “essential needs” is as close as possible to 100%. The approach is directly inspired by the liability-driven investment strategies used in managing pension funds. Secondly, we explore what I would refer to as the client’s “aspirational needs”, to which we will allocate the remaining capital, which inevitably means that the probability of achieving them will be lower, for example 60%. We then work on improving this second probability to align ever more closely with the client’s wishes, making sure that obtaining those aspirational objectives never compromises the essential objectives. I would compare this approach to that of a GPS; you know the starting point (the current situation), you fix the destination point and you navigate as closely as possible to get from one to the other, using a pre-programmed itinerary that also corresponds to the client’s personality. This process calls for continuous dialogue with one or more individuals whose lives and aspirations will change.
What do you mean by aspirational needs?
These vary considerably depending on the client’s personality, age and background. They may want to pass their assets on to their descendants at a certain point in time, buy a yacht or launch a major ecological reforestation project.
A trend for ethical investments is emerging.
What happens if there is a hitch, a financial crisis for example?
The diagnostics must be redone and the client’s aspirations possibly revised downwards. Alternatively, the client could also agree to a higher level of risk with the capital being reallocated differently, which would affect the probability of achieving his objectives within the time set.
Are private clients looking at investments more ethically?
That trend is emerging clearly. I would distinguish between two types of clients based on their age, though. Older clients differentiate between investments based solely on financial performance and on philanthropic aims. Younger clients, the millennials, want to combine investment and ethical considerations and are concerned about the environmental, social and governance (ESG) impact they can create through their investments. Some are even prepared to accept lower returns if it ensures that their money is invested in projects with an impact that is directly beneficial to a cause, micro-credit for example. The pointer is different for everyone. There are some for whom the environment takes precedence over all other considerations. For others, respect for human rights is an absolute priority, while good governance is essential for others. This is why we do not simply rely on ESG indicators, which are too standardised, but build up a portfolio for each client that is tailor made, based on the granular data we obtain from specialised agencies and that we classify applying our own CAR (Consciousness, Actions, Results) method.
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