Industry Analysis


Individual Investment Processes for the 21st Century

Arjuna Sittampalam, Editor, IMR Magazine



For the most part, private individuals have come a poor second in terms of the attention paid to their problems by the asset management industry. The solutions put forward in the two in-depth academic studies conducted by EDHEC-Risk Institute, summarised in the preceding two articles, go a long way to redressing the balance. These solutions, if adopted by the industry as is needed, will put individuals closer to par with leading institutional investors, with respect to the techniques and advice available for their specific needs.

The two papers on the goals-based framework and mass customisation complement each other very well. Together they are applicable to the entire wealth spectrum of individuals with the former The two papers on the goals-based framework and mass customisation complement each other very well. Together they are applicable to the entire wealth spectrum of individuals with the former covering the mass affluent upwards and the latter addressing the needs of the more average investor. These solutions could trigger some much-needed revolutionary changes in asset management.

The goals-based framework, while introducing path-breaking precision to the implementation of individuals’ goals, will make the dialogue between an individual and his/her advisor more sophisticated. The ingenious solution to the mass customisation problem of allowing large numbers to address their specific needs just by investing in two funds will vastly improve the lot of future retirees. These people, coping with investment decisions that they are not qualified for and suffering from inadequate advice, are shooting in the dark when applying their hard-earned savings towards achieving a reasonable retirement income. However, the fact that a solution is available and should be adopted does not mean that it will be. A powerful push is required from the industry to start with. Three groups have to adapt. Fund management companies have to not only provide new types of funds but also be proactive in propagating the new processes in a committed manner.

The advisory sector has to recognise and accept the superiority of the new solutions compared with what they are accustomed to. Previously, they had nothing better available and had to resort to fairly broad groupings of funds but the future is a different matter.

Finally, end-investors have to have a basic understanding of why the investment solution is much better for them than any vehicle they used before. The industry will not find it easy to change direction. Both asset managers and advisors have to consider costs of training staff, new computer systems and the time needed to educate clients. Time and money is already invested in existing products which most institutions would be reluctant to abandon without strong motivation.

In fact, any commercial organisation would be reluctant to change its business model and product portfolio unless confident that the appropriate market exists. This is the classic chicken and egg argument. The market cannot arise without the supply and in turn, suppliers need to be assured of some demand.

In the past, innovative funds were introduced, classic examples of which are index funds, exchange-traded funds and hedge funds; but these are all funds. The new solutions represent investment processes, not just products and there has to be collaboration between asset managers and the intermediaries from the word ‘go’. Perhaps the solution is for a few enlightened asset management companies to take the lead and undertake the training and supporting of advisors who are willing to participate.

Fortunately, some of the current trends in the industry militate in favour of change. The most important impetus comes from the downward pressure on fees with active managers being squeezed by passive and smart beta vehicles. Industry consolidation is widely predicted. The economies of scale offered by mass customisation could encourage some of the survivors to kickstart the process. Note that BlackRock has announced its intention to shift its investment decision-making to more computerised practices, relying less on human involvement.

In spite of Trump’s presidency in the US being unenthusiastic about the new rule mandating fiduciary advice, it looks as if that is the way of the future with the momentum being unstoppable. If the new processes can be shown to be obligatory in a fiduciary ‘best advice’ sense, then the pressure for advisors to adopt it could be intense and the rest of the world could follow.

Hitherto, the industry has been able to sell products with high distribution charges which many advisors had every incentive to recommend without much regard for the customer’s best interests. It will be different in the future. Digital disruption reinforcing the pressure for higher fiduciary standards will help with the propagation of a much-needed focus towards goals-based solutions.

If the new solutions are included in academic curricula, much progress could be made. Widespread industry applications of Modern Portfolio Theory took off with the vast increase in the number of alumni learning about it at universities. This year, the CFA Institute announced the introduction of fintech and robo advisory elements into their syllabus, remarkably within a few short years of their widespread usage. Should the CFA and other organisations incorporate the new approaches in their examinations, a major breakthrough becomes more likely.

Capital markets can also make important contributions. Some of the finer detail in the goals-based and mass customisation solutions ideally need sophisticated instruments such as zero-coupon bonds, indexed vehicles and particular types of options. Even many developed markets in various countries do not have access to these and the two papers certainly have limited applicability in many emerging financial markets worldwide.

The new approaches should have universal applicability and financial markets should help to ensure this. If market impediments are removed and innovation is encouraged by governments, even developing markets could leapfrog many of their developed counterparts in using the available sophisticated tools. This can already be seen in Asia with respect to derivatives.

With ageing societies in many countries, inadequate pensions potentially pose social problems. Furthermore, it is widely accepted that long-term savings are in the interests of society. Individual savings and retirement provisions, therefore, are of vital concern to society as a whole and governments need to play a part.

The impact of taxes was pinpointed as a problem, though minor in effect, in the goalsbased framework paper and governments can and should do something about this. Pension schemes are already exempt from taxes. Perhaps the same should apply to other longterm savings.

The new robo advisory trend is fast growing. At this stage, it is difficult to predict whether the new proposals will compete with them or come in at the top end as the cream of partly-automated systems for individuals.

The fund management industry is not in very good odour, as many leaders admit. Keith Skeoch, the joint CEO of the new Standard Life Aberdeen group, has written in FTfm that the industry needs to rebuild trust. If the asset managers pick up the baton of implementation following the new ideas, then it could go a long way in repairing its image in society.

This is the fourth of a group of related articles on retirement investing. Please see the previous three on “Retirement Goal-Based Investing”, “A Path-Breaking Solution for Individual Investors’ Problems” and “TailorMade Funds with Economies of Scale” and the next one on “Multi-Asset Products and Solutions”. o access the full edition please click on


  • Deguest, R., L. Martellini, V. Milhau, A. Suri and H. Wang. 2015. Introducing a Comprehensive Investment Framework for Goals-Based Wealth Management. EDHEC-Risk Institute Publication (March).
  • Martellini, L. and V. Milhau. 2017. Mass Customisation versus Mass Production in Retirement Investment Management: Addressing a Tough Engineering Problem. EDHEC-Risk Institute Publication (May).
  • Rutter Pooley, C. 2017. CFA revamps examinations to cover big data and roboadvice. Financial Times (11 May).
  • Skeoch, K. 2017. The Investment Industry Needs to Rebuild Trust. FTfm. (03 July).