Bridging the investment theory gap

Private clients rarely come to UBS with a neat bundle of assets organized according to the latest diversification theory. Many are entrepreneurs who have built up and kept their assets in their life’s work – their company. Some are families in the process of inheriting an extensive legacy of real estate. Others are senior executives required to hold a large portion of their compensation and assets in their employer’s securities. Such clients, however wealthy they might be, would be categorized as “inefficient” by investment theorists whose knowledge is drawn from textbooks.

Usually, it is up to the expertise and judgment of client advisors to bridge the gap between theory and practice. They have to understand how much risk their client is willing to shoulder, consider any emotional constraints, and then use the resources, investments and services their firm provides to build an effective investment portfolio. This is the reasoning behind UBS’s “Core-Satellite” approach. Once a client has entrusted his or her assets to UBS and a specific risk / return profile has been set, the client advisor meets with the client to decide what assets belong in the core – and what should be set off as a satellite investment or asset. Client advisors have some discretion as to what belongs in the core. To ensure consistent performance, however, they will usually recommend that the core should be a set of well-diversified marketable securities wrapped in a number of discretionary mandates with several different strategies.

The meeting then turns to the satellite portion of the portfolio. If the client has inherited a legacy ownership stake in a company, for example, the client advisor would usually recommend they be managed separately by the client or the advisor, depending on what is wanted, and in a way that does not significantly compromise the absolute risk of the portfolio as a whole. The same would hold true for property – or investments of a more speculative nature that the client clearly has expertise in and feels comfortable taking.

With the “Core-Satellite” approach, UBS can effectively meet various types of client demand. A general rule of thumb is that, irrespective of the assets they want to bring to UBS, around one third of clients expect a financial institution to manage all their assets through discretionary mandates. Around half want to be able to influence key investment decisions, although they generally prefer to delegate daily asset management responsibilities. The last sixth want to keep investment decisions completely in their own hands while having a financial expert to turn to for advice. Having a flexible investment approach that builds portfolios with both core and satellite components ensures that UBS comfortably bridges the gap between hard theory and daily practice.