Wealth Management: Private Banking, Investment Decisions, and Structured Financial Products

391 Pages·2005·2.18 MB·English

by  Dimitris N. Chorafas

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Wealth Management
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Wealth Management
Private Banking, Investment Decisions
and Structured Financial Products
Dimitris N. Chorafas
AMSTERDAM • BOSTON • HEIDELBERG • LONDON
NEWYORK • OXFORD • PARIS • SAN DIEGO
SAN FRANCISCO • SINGAPORE • SYDNEY • TOKYO
Butterworth-Heinemann is an imprint of Elsevier
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Butterworth-Heinemann is an imprint of Elsevier
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First published 2006
Copyright © 2006, Elsevier Ltd. All rights reserved
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ISBN 13: 978-0-7506-6855-2
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Contents
Preface xi
Part 1: Private banking 1
1 Private banking defined 3
1.1 Introduction 3
1.2 Private banking clients 4
1.3 Organizational challenges in private banking 7
1.4 Security and secrecy requirements 10
1.5 A private banking roadmap 12
1.6 Household debt and private banking 15
1.7 The ownership society’s recycling pattern 18
1.8 Synergy of private banking and institutional investments 20
2 Know your customer and his or her profile 24
2.1 Introduction 24
2.2 The sense of ‘know your customer’ 25
2.3 A system approach to wealth management 28
2.4 Wealth management according to client profile 32
2.5 Why knowledge engineering can assist the investor 34
2.6 A financial advisory expert system for currency exchange 37
2.7 Caveat emptor and reputational risk 40
2.8 Who is accountable for failures in fund management? 43
3 Business opportunity: fees and commissions from private banking 46
3.1 Introduction 46
3.2 Trades, investments and private banking customers 48
3.3 Establishing a strategy for fees and commissions 51
3.4 Unbundling the management fee 54
3.5 Different companies have different private banking aims 57
3.6 Performance and remuneration of investment managers 59
3.7 Simulation of portfolio performance 62
3.8 The impact of business risk 65
4 Risk and return with investments 68
4.1 Introduction 68
4.2 Basic notions of risk assessment 69
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4.3 Mitigating the risk of losses 72
4.4 Prerequisites for rigorous risk control 75
4.5 Fine-tuning the philosophy of investments 78
4.6 Risk and return with implied volatility 81
4.7 Risk-adjusted pricing: an example with credit risk 84
4.8 An introduction to stress testing 86
Part 2: Asset management 91
5 Asset management defined 93
5.1 Introduction 93
5.2 Asset management and capital mobility 95
5.3 Asset allocation strategies 97
5.4 Asset allocation and the shift in economic activity 101
5.5 Real estate property derivatives: a case study 103
5.6 Passive and active investment strategies 106
5.7 A critical view of alternative solutions 110
5.8 The portfolio’s intrinsic value 112
6 Business models for asset management 116
6.1 Introduction 116
6.2 Choosing the investment manager 118
6.3 Don’t kill the goose that lays the golden egg 120
6.4 The contribution to asset management by contrarians 123
6.5 Asset management as an enterprise 126
6.6 Hedging strategies followed by portfolio managers 129
6.7 Deliverables and performance in administration of assets 132
6.8 Past performance is no prognosticator of future results 134
7 Outsourcing and insourcing wealth management 138
7.1 Introduction 138
7.2 Risk and return with outsourcing 140
7.3 Internal control and security are not negotiable 142
7.4 Custody only, mid-way solutions and discretionary powers 144
7.5 Building up the investor’s portfolio 148
7.6 The option model of investing 152
7.7 Efficiency in private banking and asset management 154
7.8 The private banking profit centre 158
8 Trust duties and legal risk 163
8.1 Introduction 163
8.2 Trusts and trustee responsibilities 164
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8.3 Legal risk and the case of tort 167
8.4 Reasons behind legal risk and cost of litigation 170
8.5 Legal risk and management risk correlate 172
8.6 Mishandling the client: small cases that can lead to legal risk 176
8.7 Big cases of legal risk: high-tech crime and identity theft 178
8.8 Merck and Co.: legal risk with Vioxx 180
Part 3: Derivative financial instruments, structured products and
risk control 183
9 Derivative financial instruments defined 185
9.1 Introduction 185
9.2 Derivatives and hedging 186
9.3 Underlying and notional principal amount 189
9.4 From notional principal to financial toxic waste 193
9.5 Derivatives that became institutionalized 197
9.6 Private banking derivatives and the paper money trauma 199
9.7 Dr Alan Greenspan on derivatives and the case of
hedge funds 202
9.8 George Soros on derivatives 206
10 Structured financial products 209
10.1 Introduction 209
10.2 Structured products and capital protection 210
10.3 Structured versus synthetic products 213
10.4 The role of strategists, traders and modelling controllers 216
10.5 Aftermath of design factors on risk profile 219
10.6 Structured investments are not liquid 222
10.7 A secondary market for structured instruments 225
10.8 Dynamic threshold mechanism 227
11 Controlling the risk taken with structured products 229
11.1 Introduction 229
11.2 Credit risk and exposure at default 231
11.3 Credit risk transfer and hazard rate models 234
11.4 Credit risk volatility and bond spreads 237
11.5 A case study on General Motors 241
11.6 Liquidity risk in an ownership society 243
11.7 General and specific market risk 245
11.8 Stockmarket bubbles and damage control 248
11.9 Risk management and the ‘Greeks’ 250
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Part 4: Case studies with the three main classes of structured products 253
12 Fixed income structured products 255
12.1 Introduction 255
12.2 Fixed interest structured products defined 258
12.3 Constant proportion portfolio insurance 261
12.4 FISP versus CPPI: a comparative study 264
12.5 Borrowing through issuance of derivatives 266
12.6 Capital protection notes and bondholders’ risk 270
12.7 Structured instruments with underlying credit risk 273
12.8 Embedded derivatives for the ownership society 276
13 Practical examples with fixed income derivatives 279
13.1 Introduction 279
13.2 Money rates, money markets and financial instruments 281
13.3 Inflation-linked notes 284
13.4 Stairway notes (step-ups) 288
13.5 Callable reverse floaters 290
13.6 Accrual notes 293
13.7 Fixed and variable rate notes 296
13.8 Bull notes 297
14 Equity-type structured products 300
14.1 Introduction 300
14.2 Headline risk and the nifty-fifty 303
14.3 Equity derivatives defined 306
14.4 Players in equity derivatives 309
14.5 Risks taken with analytics 311
14.6 Criteria used for dynamic rotation 315
14.7 Equity derivatives swaps 316
14.8 The use of embedded barrier options 318
15 Practical examples with equity-type derivatives 322
15.1 Introduction 322
15.2 Equity index and basket structured notes 324
15.3 Absorber certificates 326
15.4 Early repayment certificates 328
15.5 Enhanced yield certificates 330
15.6 Reverse exchangeable certificates 331
15.7 Potential share acquisition certificates 332
15.8 EUR complete participation securities 334
15.9 US dollar non-interest-bearing note linked to equity 336
15.10 The strategy of pruning the basket and reallocating securities 336
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16 Currency exchange structured products 338
16.1 Introduction 338
16.2 Currency transactions and economic exposure 340
16.3 Exchange rate volatility and risk control 343
16.4 Mismatch risk and carry trades 346
16.5 Forex rates and structured instruments 349
16.6 Dual currency structured products 352
16.7 A US dollar/Asian currency basket and a forex benchmark fund 354
16.8 Conclusion 357
Appendix Derivatives as a tax haven 359
A.1 Introduction 359
A.2 Wealth tax 359
A.3 Derivatives, offshores and private individuals 361
A.4 Companies have been masters in using derivatives and offshores 362
A.5 Shifting the risk with no return to the household sector 364
A.6 Cynics look at the private banking client as a cash cow 366
Index 369