Shoot for your goal

Individuals can benefit from goal-based asset allocation

Managing money for individuals is very different from doing it for institutions. This was a simple, yet very profound, observation that Jean Brunel, a veteran in the global wealth management industry, made in 2001.

He set up his own venture, Brunel Associates, to offer customised wealth education and analysis to high and ultra-high networth individuals.

Different strokes

So, what are some of the differences between institutional investors and individuals that a wealth manager must consider? “A pension fund or a foundation may have a single goal, but individuals have many goals and often sub-goals within these. There may also be multiple time horizons to plan for in case of families”, says Brunel. They also differ in how they look at return, tax consideration and, importantly, risk. His observations come from a 35-year career in wealth management. He was chief investment officer of JP Morgan’s global private bank, US Bankcorp and at GenSpring Family Office.

Brunel explains how to tackle risks for individuals. “Risk must not be defined as volatility or variability in returns. After all, people really do not mind upside volatility. Risk must be measured as the probability of missing a goal”, he says.

Playing defence

For example, if someone wants to maintain his lifestyle, he would want to know the probability of the portfolio not being able to meet this goal. “The goal is important and not something one can compromise, at least in a short term of less than five years. It is not easy for anyone to lower the standard of living quickly. Hence, it must be met with over 95 per cent probability”, he explains.

The certainty of meeting a goal depends on the importance attached to it. Brunel uses four simple words to articulate this. “There are needs, wants, wishes and dreams. Needs are goals such as lifestyle that are not up for debate. Wants are goals they are serious about, which they will be able to meet even if funds fall short. At the other end, dreams are things they hope to do but would be quite ok if they are not met”, he says.

Best shot

Brunel then constructs the client’s portfolio based on the risk profile captured bottom-up. For each goal, there is asset allocation done to meet the risk target set. As there are usually multiple goals, the final portfolio is created as the sum of all the individual portfolios.

There are other unexpected benefits of this approach. “Often, the asset allocation may show that the family is setting aside a chunk of their capital for, say, maintaining their lifestyle. ”, he notes. He noticed that one family spent a lot on living expenses that pevented it from meeting its next set of goals — leaving a certain inheritance. They had to spend less or leave less to their children. “They opted in favour of their children”, he says.

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