Asset-Liability Management in Private Wealth Management

Abstract

The objective of this article is to shed light on the potential benefits of asset-liability management techniques, originally developed for institutional money management, in a private wealth management context. The authors show that much of the complexity of optimal asset allocation decisions for private investors can be captured through the addition of a single state variable—liability value—which accounts in a parsimonious way for investors9 specific constraints and objectives. An asset-liability management approach to private wealth management has a direct impact on the selection of asset classes because it requires a consideration of the liability-hedging properties of various asset classes, that would, by definition, be absent from an asset-only perspective. An asset-liability perspective also leads to the use of the liability portfolio as a benchmark, or numeraire, acknowledging that, for private investors, terminal wealth per se is not as important as the investor9s ability to achieve goals, such as preparing for retirement or buying property.