Firm Says Asset Allocation Tools are Decades Behind, Cites Need for Improved Optimization
Madison, NJ – February 4, 2010Brinton Eaton, a boutique wealth advisory firm, today released a white paper, What We Should Be Demanding from Our Asset Allocation Software, that calls on technology vendors to improve their capabilities for optimizing asset allocation and managing risk.
“The events of late 2008 showed us what happens when investors rely on simplistic models and fail to recognize their limitations. The asset allocation programs that are commercially available, even to financial planners and sophisticated investors, are not nearly as good as they can be at capturing reality,” said Jerry Miccolis, CFA®, CFP®, FCAS, MAAA, principal at Brinton Eaton, co-author of the paper and co-author of Asset Allocation For Dummies® (Wiley, 2009).
The white paper outlines several capabilities that are currently missing from financial planning software:
- The ability to conduct asset allocation optimization over multiple time periods rather than year-by-year
- Algorithmic capabilities for rules-based rebalancing
- Acknowledgement that investment returns are rarely normally distributed
- Realistic risk metrics; there is too much reliance on standard deviation, and not enough on other metrics such as risk of underperforming a specific benchmark, etc.
- A sophisticated understanding of correlations and volatility
“Using multiple time periods, and incorporating rules-based rebalancing, would change the very nature of the optimization process and guide the asset allocation program to look for the combination of assets that would produce the highest returns for the lowest risk in the real world. Along with using non-normal probability distribution, measuring risk against benchmarks and incorporating a more sophisticated understanding of correlations and volatility, financial planning software could greatly help reduce wrong decisions and better manage investment risk,” said Miccolis.
According to industry thought leader Michael Kitces, publisher of The Kitces Report, this is an issue for all financial advisors as, “enhancements to the portfolio design process can be made to incorporate these concerns.” Concepts from the white paper were featured in a two-part series in The Kitces Report, December 2009 and January 2010.
The white paper is available at http://www.brintoneaton.com/library/research-briefs-white-papers.
About Brinton Eaton:
Based in Madison, NJ, Brinton Eaton is a boutique advisory firm with a proud history of serving affluent individuals and their families across multiple generations. The firm helps its clients protect, grow, administer and ultimately transfer their legacy of wealth through a full range of integrated services, including lifetime cash flow projections, financial/tax/estate/retirement planning, investment management, charitable giving, and business succession planning. Brinton Eaton’s clients tend to be corporate executives, professionals, entrepreneurs, and retirees with investable assets over $2 million. For more information, visit www.brintoneaton.com.
Media Contact:
Patty Buchanan
FastLane Public Relations
(973) 670-1203
pbuchanan@fast-lane.net
