Institutional investing techniques can help advisors provide wealthy individual clients with a more structured investing approach, says Steve Horan at the CFA Institute.
The institute awards the chartered financial analyst designation and helps set high standards for its 100,000 members. Horan, the institute's head of professional education content and private wealth, says the technique known as the asset liability approach that is used for institutional clients, such as pension funds, insurance companies, endowments and others, can be used to help individual clients plan successfully.
Some 30% of CFA members also handle private clients, most with between $1 million and $5 million to invest. The number of CFA members who want to take on private clients is growing, Horan says.
"The asset liability approach is a different starting point for the conversation between the advisor and the client," Horan says. "It takes the approach used in institutional planning and applies it to individuals, which is a more disciplined approach to wealth management."
When managing a fund for an institution, the advisor determines the assets that will be paid into the fund and then makes investments that will generate enough money to cover the liabilities it will eventually have in the form of payouts.
To use such an asset-liability approach for high-net-worth individual clients, one of the first steps is to account for all assets, not just the ones in the portfolio. For example, human capital is an asset, one that is much higher for a young person than one near retirement, Horan says. Social Security is an inflation-proof asset that a person cannot outlive.
The liabilities are the goals the person has-paying for children's college education, retirement or a new house-and the advisor need to build a plan that shows assets will cover those liabilities.
"Financial advisors may think of these elements, but we want them to put it into a basic, structured framework that clearly shows the assets against the liabilities, which allows them to make better investments," Horan explains.