Rethinking private client investment

By Mark Noble | April 29, 2009 | Last updated on April 29, 2009
4 min read

(Orlando, FLA) — There is a growing consensus at the CFA Institute’s annual conference in Orlando, Florida that basic tenets associated with efficient market theory and the capital asset pricing model have failed to protect retail assets in the downturn.

An example of this view was expressed by renowned investment theorist Andrew Lo from the Massachusetts Institute of Technology, whose keynote address outlined how a well-diversified portfolio with a long-only portfolio of equities will likely not add any value.

One reason, Lo pointed out, is that sources of alpha have become increasingly scarce. Markets have become crowded and strategies duplicated, creating increasingly correlated asset classes. And so, even well before the downturn, there was little opportunity for managers to add value.

Lo added that the culture of financial firms makes it difficult to adapt a contrarian strategy since businesses are driven by current performance. They aren’t going to shut down profitable trading divisions even in the face of data that suggests the strategies those traders apply will soon be out of favour.

“The psychology of greed makes these crises unavoidable,” Lo told conference attendees.

Creating a strategic asset allocation and then putting clients into selected funds has rarely been a winning strategy if you look at recent ten-year rolling returns. Adding value to clients using new techniques in asset allocation, taking a page from alternative spheres of investment study — such as behavioural science — may become more prevalent.

For CFA charter holders, many of whom employ active investment strategies, this type of news is bittersweet as it challenges many of their assumptions about investing, which remain strongly rooted in the teachings that markets are efficient.

It also highlights a probable demand for more attentive active management of client portfolios, particularly on the private client side. There will be greater demand by private investors to have a CFA personally managing their money. If they are going to pay fees for management advice, wealthy clients will demand a higher level of expertise.

“As consumers and regular investors become more educated about how the markets work you need a higher level of expertise in investment knowledge,” says Janine Guenther, a regional director with TD Private Client in Vancouver and Canada’s representative to the president’s council of the CFA institute.

John Rogers is a CFA, and the new president of the CFA Institute, which is based out of Charlottesville, Virginia. In an interview with, he noted that global membership of the CFA designation topped 100,000 this year. A greater proportion of this growth came from emerging capital markets in Asia and the Middle East.

In mature markets such as North America, there continues to be a strong growth of candidates coming from individual wealth management as wealthier investors move away from mutual fund firms and brokerages and opt for an investment advisor who creates an asset pool made up of individual securities.

The failure of buy-and-hold strategies using a portfolio of mutual funds and the scarcity of alpha-generated returns by these portfolios is expected to continue to drive interest in customizable asset allocation strategies that are tailored to the risk and time horizon of private client investors.

“Between 25% and 35% of our members report themselves as being involved in private wealth practice. More and more of them are involved in managing money for individuals, and that is reflecting a trend in the industry as a whole,” Rogers says. “More private practices are springing up as the bank/mutual fund model gives way in some extent to the growth of smaller firms.”

The CFA Institute is ramping up the amount of education it offers around private wealth management, introducing a curriculum that goes beyond investing and addresses broader planning issues such as wealth insurance and tax and estate planning.

According to Rogers, Canada is a good template for the penetration the CFA designation can achieve. There are more than 12,000 CFA charter holders in Canada, the highest per capita in the world. This has created an environment where it is now rare to see anyone but a CFA managing institutional money.

Increasingly, CFAs are becoming the standard professionals to manage discretionary private wealth in Canada, Guenther says.

“In Canada, if somebody is investing less than $100,000 they are likely dealing with an advisor at their local bank branch. With assets between $100,000 and $300,000, you’re talking to a planner who’s likely to invest your money in funds. At the $300,000 level you’ll probably be talking to a broker,” she says. “Over 500,000, you’re talking about serious money and you’re going to want to own individual securities, and have a plan for yourself with an investment policy statement.”

The failure of alternative investments to provide adequate diversification, combined with forecasts of diminished returns at the conference, means wealth managers may have to completely overhaul their clients’ asset allocation.

With a de-leveraging of the financial markets, expectations of returns may look more like their long-term historical average, Guenther says.

“I think everyone [here at the conference] is looking for a base — an opportunity to right the ship so to speak. Really what we’ve seen so far is a call for getting back to basics. We need to rebuild portfolios because it seems market conditions will be different for the next while. In particular, the diversification equation may look a little bit different at least in the short term,” she says. “Risk management has always been a big part of the [CFA] curriculum; it seems the tools have changed. I think we’re going back to many of the plain vanilla investment products. Risk management is going to be associated with understanding the needs of your client and making sure they understand what those expected returns can be.”

In the coming days, stay tuned to, which will continue to offer coverage of the CFA Institute’s conference, summarizing a number of the ideas and topics presented at key presentations.


Mark Noble