Practical analysis for investment professionals
21 July 2017

Weekend Reads from India: Mental Accounts and an Exploding Middle Class

Posted In: Weekend Reads

Retail investors, with their varied illusions about wealth, are the weakest link in the financial services ecosystem.

Often these investors don’t receive the attention they deserve. No one benefits when you focus more on your client’s pot of gold than their needs. Relationships that overlook client interests are unsustainable.

Pioneering thought leadership from Jean Brunel, CFA, and others is changing the way private wealth is managed — and for the better. Brunel and his colleagues have provided a robust framework for managing client wealth. He states that identifying and managing client goals is central to the wealth management practice. This is a principle many wealth advisers overlook.

Brunel shared his insights during an engaging master class session on “Goal-Based Wealth Management in Practice” at the 2nd India Wealth Management Conference.

At its core, goal-based wealth management is about identifying and meeting client goals, Brunel says. Unlike modern portfolio theory (MPT), a goal-based framework requires advisers to think and communicate in a language that clients better understand. For example, Brunel prefers to look at a client’s needs, wants, wishes, and dreams. Not meeting these objectives would naturally result in nightmares, fears, worries, and concerns for the client.

Funding and investing money is another key part of this framework, providing a bridge between client savings and financial market returns. Continuous feedback on performance and assessing changes in a client’s perception is the final step in Brunel’s four-stage goal-based model.

For those looking for academic insights, a 2010 paper on “Portfolio Optimization with Mental Accounts,” by Sanjiv Das, Harry Markowitz, Jonathan Scheid, CFA, and Meir Statman, provides an important theoretical basis for goal-based wealth management. According to the authors, the aggregate allocation across portfolios based on goals (mental accounts) is mean variance efficient.

In India, the middle class is growing larger and richer at an explosive pace. Wealth advisers in India are likely to face unprecedented demand. Brunel has two pieces of advice for them:

  1. Be ethical and the client money will follow and be retained longer.
  2. The younger your clients are, the higher a proportion of their incomes should be put into equities.

Below is a list of links I found interesting. Happy reading.

Wisdom on Markets

Wealth Management


Writing and Behavioral

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All posts are the opinion of the author. As such, they should not be construed as investment advice, nor do the opinions expressed necessarily reflect the views of CFA Institute or the author’s employer.

Image credit: ©

About the Author(s)
Shreenivas Kunte, CFA, CIPM

Shreenivas Kunte, CFA, CIPM, is director of content at CFA Institute, where he contributes financial market insights about India and the developed world. Previously, he taught at and managed SP Jain’s Trade and Applied Research lab, which he helped found. Kunte also served as a country trading strategist at Citigroup’s Tokyo office. He actively contributes to the development sector in India and is an external research scholar at the Indian Institute of Technology Bombay.

Ethics Statement

Beyond the easier to understand, important codes of conduct, “Ethics” for me is awareness; an endeavor for right thought and action.

2 thoughts on “Weekend Reads from India: Mental Accounts and an Exploding Middle Class”

  1. Savio Cardozo says:

    Hello Shreenivas
    I read your article with great interest – a lot of thought provoking information in it, particularly as you raise points that are important to folks around the world.
    In my own limited experience giving people advice (I am not a professional financial adviser nor a money manager so I offer my experience purely from something like the Barber’s perspective – the guy with homespun advice in the excellent book called the Wealthy Barber) I have found a couple of things:
    1. People, myself included, have no clue what their long term goals are in terms that can be quantified into meaningful measures that can be implemented into an investment strategy on a consistent basis, after fees and taxes, that could be proven to have successfully met these goals on an ex-post basis. Granted the quarterly meetings to fine tune this might help but the odds are against the investor, the financial planner, and the money manager to have executed this consistently. Institutional investors, particularly pension funds, with life spans that exceed us mere mortals, might qualify for this kind advice as in the long run the ups and downs mostly even out.
    2. There is a substantial amount of literature published through CFA’s Research Foundation, such as Lifetime Financial Advice, several excellent readings in the CFA program, and non CFA sponsored research, that dispute the notion that 100 minus age should be the equity weighting – there is growing evidence that a lot of us will live well beyond an age that can be sustained through investments in public equity or the implied shift in allocation to safer investments like bonds. The only hope for the vast majority of us is to advocate for government insured DB plans instead of DC plans, and I have seen some sustainable models of how this might play out. The investment industry is to be faulted for the rush to DC plans in search of fee gathering at the expense of investor’s savings and providing for an affordable retirement.
    I love your second last point “Be ethical and the client money will follow and be retained longer.” – this truism is probably why people stay with some advisers for a lifetime, not because they have made money, but because the trust has never been compromised.
    My advice has always been “I have no clue. But if you know someone who can let you into the Medallion Fund please let me know. If not, put your eggs into many baskets (which might explain why Quantopian is still around), read, attend meetup groups, and do not retire – continue getting some employment income into the bank account as long as you physically and mentally can – you may be the lucky few who will not need it.”
    On a final note I have newfound optimism that algorithmic trading can generate the tangency portfolio that is the nirvana in mean-variance optimization.
    Best wishes and happy weekend

    1. Shreenivas says:

      Many thanks, Savio, for sharing your thoughts. Thanks, for the reference on the book too. Point 1, well taken. Should mention though that many (finance professionals included) struggle to make it to the planning stage.

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