Can Institutional-Style Factor Analysis Benefit Retail Wealth Management?
Earlier today, the Journal of Financial Planning published Kendrick Wakeman’s article on the opportunities factor analyses present to wealth management. The purpose of this article is to further the conversation on potential future practices in the industry.
Excerpts from Wakeman’s article:
“One of the advantages of factor analysis is we can break investments down into their drivers of return to get a better picture of the risk and return drivers in the portfolio.”
“In 2008, many investors looked at asset allocation pie charts showing that their investments were distributed across a great many asset classes, giving them the impression that they were well diversified. What the pie charts did not show was that underlying many of their asset classes were common risk factors that actually lead to less diversification than they had thought.”