Chapter 17 - Asset-Liability management for individual investors

Abstract

This chapter considers theoretical and practical developments that are currently driving the remarkable growth of individual asset liability management (ALM) applications as part of the fund management industry worldwide. A personal financial planning is a decision problem faced by an individual whose aim is to manage his consumption and investment decisions to achieve a set of real or financial targets, given his current and expected income, over a long-term horizon. ALM has emerged as an ideal framework to address this type of decision problem under uncertainty, in which the achievement of a strategic objective is made conditional on the effective management of assets and liabilities over time. The individual problem can be regarded as an extension of a personal investment consumption model with a limited number of investment opportunities and a rich set of individual and regulatory constraints with a long-term objective. The peculiarity of the individual ALM problem comes from the extent and implications of a modeling approach, which in principle is expected to capture the different features of the management of a financial position with a typically long-term horizon, up to and sometimes beyond retirement for an investor whose preferences may very well change over the planning horizon. The stochastic programming approach to ALM has thus emerged as an effective and appropriate way to address and analyze the personal financial planning problem. The generality of the individual problem from the financial point of view is considered here looking at several application areas, such as private banking, pension fund management, personal financial planning, and wealth management.