Total Wealth Allocation: Liquidity, Longevity, and Legacy

Abstract

In general, households use old technology for asset allocation decisions. Target-risk portfolio models are pervasive across the industry, and risk-profile questionnaires continue to form the foundation for strategic asset allocation decision-making. Better technology would utilize liability relative optimization and a holistic balance sheet and incorporate behavioral finance considerations. However, these concepts have not been integrated into most practitioners’ businesses, even though the core work on each was completed 20–30 years ago. The authors propose a scalable, total wealth model for integrating liability relative optimization into households’ portfolios. The basis for the model is an asset segmentation approach that refl ects the nuances of a households’ balance sheet and future objectives and enables liability relative optimization and total wealth considerations to be applied appropriately.

TOPICS: Portfolio theory, wealth management, in portfolio management, performance measurement