On the other side is the investment team, which is led by Chris Flemming, whose job it is to continue reviewing the firm’s asset allocation model, against which it will then stack up the various client offerings.
The firm’s investment team is made up of Flemming, one qualified actuary, two part-qualified actuaries, two PhD students and two other graduate students.
This team models capital market assumptions for 14 asset classes. These assumptions look at expected returns, volatilities and co-variance matrices for all the asset class pairs.
These assumptions then feed into the asset allocations and fund risk-profiling services.
Starting with a quantitative process that looks at the history of each asset class, the firm then derives its expected return assumptions based on a ‘build-up’ process, starting with a gilt yield and then adding a risk premium for each new asset.
This is then discussed with an external investment committee to determine whether or not the assumptions that have been made are meaningful and sensible.
Asked how the firm is dealing with extraordinarily low bond yields, Goss says it has adjusted its long-term expectations.
However, he notes: “We are careful about how we do that, because our aim is to provide a long-term benchmark clients can trust. We spend a lot of time looking at long-term history when we are thinking about volatility and co-variance.”
Technological twist
The other big challenge facing the firm and, indeed the wealth management sector, is the manner in which the end-client’s relationship to technology is changing.
“In some ways it can be constructed as the fireside chat of old versus technology,” says Goss.
“Traditionally, a wealth manager would have that fireside chat and if they were experienced, they would get a good feel for what the client’s risk tolerance is and what they are trying to achieve.”
He says the challenge to that model for wealth managers is threefold.
First, there are a lot of these discussions going on across the business, and each manager will have a different view of risk and return and a different interpretation of what the client is saying, which, from a risk-management point of view is difficult to manage.
Second, it presents a regulatory challenge because it is almost impossible in that environment to provide the type of audit trail now required.
The third challenge, Goss says, is aimed at those firms that want to continue to grow.
