Wealth Management (eBook)

Cover 1
Contents 6
Preface 12
Private banking 16
Private banking defined 18
Introduction 18
Private banking clients 19
Organizational challenges in private banking 22
Security and secrecy requirements 25
A private banking roadmap 27
Household debt and private banking 30
The ownership society’s recycling pattern 33
Synergy of private banking and institutional investments 35
Know your customer and his or her profile 39
Introduction 39
The sense of ‘know your customer’ 40
A system approach to wealth management 43
Wealth management according to client profile 47
Why knowledge engineering can assist the investor 49
A financial advisory expert system for currency exchange 52
Caveat emptor and reputational risk 55
Who is accountable for failures in fund management? 58
Business opportunity: fees and commissions from private banking 61
Introduction 61
Trades, investments and private banking customers 63
Establishing a strategy for fees and commissions 66
Unbundling the management fee 69
Different companies have different private banking aims 72
Performance and remuneration of investment managers 74
Simulation of portfolio performance 77
The impact of business risk 80
Risk and return with investments 83
Introduction 83
Basic notions of risk assessment 84
Mitigating the risk of losses 87
Prerequisites for rigorous risk control 90
Fine-tuning the philosophy of investments 93
Risk and return with implied volatility 96
Risk-adjusted pricing: an example with credit risk 99
An introduction to stress testing 101
Asset management 106
Asset management defined 108
Introduction 108
Asset management and capital mobility 110
Asset allocation strategies 112
Asset allocation and the shift in economic activity 116
Real estate property derivatives: a case study 118
Passive and active investment strategies 121
A critical view of alternative solutions 125
The portfolio’s intrinsic value 127
Business models for asset management 131
Introduction 131
Choosing the investment manager 133
Don’t kill the goose that lays the golden egg 135
The contribution to asset management by contrarians 138
Asset management as an enterprise 141
Hedging strategies followed by portfolio managers 144
Deliverables and performance in administration of assets 147
Past performance is no prognosticator of future results 149
Outsourcing and insourcing wealth management 153
Introduction 153
Risk and return with outsourcing 155
Internal control and security are not negotiable 157
Custody only, mid-way solutions and discretionary powers 159
Building up the investor’s portfolio 163
The option model of investing 167
Efficiency in private banking and asset management 169
The private banking profit centre 173
Trust duties and legal risk 178
Introduction 178
Trusts and trustee responsibilities 179
Legal risk and the case of tort 182
Reasons behind legal risk and cost of litigation 185
Legal risk and management risk correlate 187
Mishandling the client: small cases that can lead to legal risk 191
Big cases of legal risk: high-tech crime and identity theft 193
Merck and Co.: legal risk with Vioxx 195
Derivative financial instruments, structured products and risk control 198
Derivative financial instruments defined 200
Introduction 200
Derivatives and hedging 201
Underlying and notional principal amount 204
From notional principal to financial toxic waste 208
Derivatives that became institutionalized 212
Private banking derivatives and the paper money trauma 214
Dr Alan Greenspan on derivatives and the case of hedge funds 217
George Soros on derivatives 221
Structured financial products 224
Introduction 224
Structured products and capital protection 225
Structured versus synthetic products 228
The role of strategists, traders and modelling controllers 231
Aftermath of design factors on risk profile 234
Structured investments are not liquid 237
A secondary market for structured instruments 240
Dynamic threshold mechanism 242
Controlling the risk taken with structured products 244
Introduction 244
Credit risk and exposure at default 246
Credit risk transfer and hazard rate models 249
Credit risk volatility and bond spreads 252
A case study on General Motors 256
Liquidity risk in an ownership society 258
General and specific market risk 260
Stockmarket bubbles and damage control 263
Risk management and the ‘Greeks’ 265
Case studies with the three main classes of structured products 268
Fixed income structured products 270
Introduction 270
Fixed interest structured products defined 273
Constant proportion portfolio insurance 276
FISP versus CPPI: a comparative study 279
Borrowing through issuance of derivatives 281
Capital protection notes and bondholders’ risk 285
Structured instruments with underlying credit risk 288
Embedded derivatives for the ownership society 290
Practical examples with fixed income derivatives 294
Introduction 294
Money rates, money markets and financial instruments 296
Inflation-linked notes 299
Stairway notes (step-ups) 303
Callable reverse floaters 305
Accrual notes 308
Fixed and variable rate notes 311
Bull notes 312
Equity-type structured products 315
Introduction 315
Headline risk and the nifty-fifty 318
Equity derivatives defined 321
Players in equity derivatives 324
Risks taken with analytics 326
Criteria used for dynamic rotation 330
Equity derivatives swaps 331
The use of embedded barrier options 333
Practical examples with equity-type derivatives 337
Introduction 337
Equity index and basket structured notes 339
Absorber certificates 341
Early repayment certificates 343
Enhanced yield certificates 345
Reverse exchangeable certificates 346
Potential share acquisition certificates 347
EUR complete participation securities 349
US dollar non-interest-bearing note linked to equity 351
The strategy of pruning the basket and reallocating securities 351
Currency exchange structured products 353
Introduction 353
Currency transactions and economic exposure 355
Exchange rate volatility and risk control 358
Mismatch risk and carry trades 361
Forex rates and structured instruments 364
Dual currency structured products 367
A US dollar/Asian currency basket and a forex benchmark fund 369
Conclusion 372
Appendix: Derivatives as a tax haven 374
Introduction 374
Wealth tax 374
Derivatives, offshores and private individuals 376
Companies have been masters in using derivatives and offshores 377
Shifting the risk with no return to the household sector 379
Cynics look at the private banking client as a cash cow 381
Index 384