Framework for Strategic Asset

Allocation for Private Individuals using

Behavioural Finance
&
Gap Analysis and Strategy
Formulation: Competition Landscaping
in Private Banking Space

Project Report on Summer Internship

at
ICICI Bank

Submitted to: Submitted by:

Prof. M. Venkateshwarloo Arpit Tiwari

Roll No. 20
PGDIM-15
 Certificate

This is to certify that Arpit Tiwari, Roll No. 20, PGDIM-15 has completed a 2-month Summer
Internship at ICICI Bank from April 13 th 2009 to June 12th 2009.

This report is submitted towards the fulfilment of the requirements of the 4 th Module of the PGDIM
course of NITIE, Mumbai.

PROF. M.VENKATESHWARLOO

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 Acknowledgement

I would like to take this opportunity to thank everyone associated with me on this endeavour.

I thank the Director of NITIE Mumbai, Dr. Shubhas Awale, for giving us the opportunity to work in
prestigious organizations around the country.

I thank Prof M.Venkateshwarloo for his constant support and guidance, failing which this effort
would have amounted to nothing.

I thank the entire Financial Solutions Group at ICICI Bank for all their help. I especially thank my
Guide, Mr. Rupesh Satnaliwala and my Mentor, Ms. Radhika Jain as this whole project was under her
supervision.

Finally, I thank my parents, relatives and friends for their never ending support and good wishes.

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 Table of Contents
EXECUTIVE SUMMARY...............................................................................................................4

COMPANY BACKGROUND..........................................................................................................5

OBJECTIVES OF THE PROJECT.....................................................................................................6

Project Title................................................................................................................................6
Project Brief................................................................................................................................6
Project Description.....................................................................................................................6
Traditional way of Asset allocation.........................................................................................6
Global Private banking industry..............................................................................................8
METHODOLOGY.........................................................................................................................9

MODELLING AND ANALYSIS.....................................................................................................11

Analysis of current strategic asset allocation model at ICICI Bank............................................11

Pros and Cons of current asset allocation model......................................................................12
Models studied and analysed...............................................................................................13
Details of wealth allocation framework...................................................................................15
Risk Allocation.......................................................................................................................20
Asset Allocation....................................................................................................................22
Likelihood of achieving goals: Scenario Analysis...................................................................23
Key recommendations..............................................................................................................30
FUTURE SCOPE.........................................................................................................................31

LIMITATIONS............................................................................................................................32

ACADEMIC CONTRIBUTION......................................................................................................33

BIBLIOGRAPHY/REFERENCES...................................................................................................34

ANNEXURES.............................................................................................................................35

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 Executive Summary
The project work can be divided into two parts. These are:

a> Developing framework for Strategic Asset Allocation for Private Individuals using Behavioral
Finance
b> Competition Landscaping in Private Banking space

The focus of first part was to first analyze the existing model of Strategic Asset Allocation for Private
Individuals used by Financial Solutions Group (FSG) of International Banking Group of ICICI Bank. An
in-depth analysis of current model revealed pros and cons of the current model.

A need for a model which captures individual’s risk elements in an effective and efficient manner
was felt. Inclusion of behavioral finance in traditional framework was required to effect the same.

Four models were studied and analyzed in detail. These models were evaluated for criteria which are
desired in a good model. These criteria were incorporation of client’s risk elements, ease of
explanation, flexibility, ease of implementation, cost efficiency etc.

Finally a wealth allocation model was chosen and recommended for implementation. Some
additions and modifications were done to this model to suit ICICI Bank needs.

This model follows a compartmentalization approach to Asset Allocation and creates three buckets
catering to different needs of an individual. A step by step procedure was developed to implement
this model in ICICI Bank.

The second part of the project was a competition analysis with respect to positioning/branding
strategy, approach to advisory services, advisory considerations and products and services provided
to private clients.

Here top ten banks which provide private banking services were compared. The products and
services were classified into different categories for analysis. The focus was to suggest strategy,
products and services etc. which would help ICICI Bank become a strong player in Private Banking.

This also involved talking to Relationship Managers of ICICI Bank in DIFC (Dubai International
Financial Centre) region.

Based on these talks and above comparison suggestions were made for strategy, products and
services.

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 Company Background
ICICI Bank (formerly Industrial Credit and Investment Corporation of India) is India's largest private
sector bank by market capitalization and second largest overall in terms of assets. Bank has total
assets of about USD 77 billion (at the end of December 2008). The Bank also has a network of 1,449
branches and about 4,721 ATMs in India and presence in 18 countries, as well as some 24 million
customers (at the end of July 2007). ICICI Bank offers a wide range of banking products and financial
services to corporate and retail customers through a variety of delivery channels and specialised
subsidiaries and affiliates in the areas of investment banking, life and non-life insurance, venture
capital and asset management. ICICI Bank is also the largest issuer of credit cards in India. ICICI Bank
has got its equity shares listed on the stock exchanges at Kolkata and Vadodara, Mumbai and the
National Stock Exchange of India Limited, and ADRs on the New York Stock Exchange (NYSE).

The Bank is expanding in overseas markets and has the largest international balance sheet among
Indian banks. ICICI Bank now has wholly-owned subsidiaries, branches and representatives offices in
18 countries, including an offshore unit in Mumbai. This includes wholly owned subsidiaries in
Canada, Russia and the UK (the subsidiary through which the hisave savings brand is operated),
offshore banking units in Bahrain and Singapore, an advisory branch in Dubai, branches in Belgium,
Hong Kong and Sri Lanka, and representative offices in Bangladesh, China, Malaysia, Indonesia,
South Africa, Thailand, the United Arab Emirates and USA. Overseas, the Bank is targeting the NRI
(Non-Resident Indian) population in particular.

International Business Group

The primary task of the IBG is to develop and implement the global components of ICICI Bank’s
Universal Banking strategy. IBG has the following business teams:

 Country Teams

 NRI Services

 International - Financial Institutions Group

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 Objectives of the project
Project Title

a> Framework for Strategic Asset Allocation for Private Individuals using Behavioural Finance
b> Gap Analysis and Strategy Formulation : Competition Landscaping in Private Banking Space

Project Brief

a> Framework for Strategic Asset Allocation for Private Individuals using Behavioural Finance
 To develop a comprehensive strategic asset allocation model for private individuals
 To incorporate individual’s risk factors in the model
b> Gap Analysis and Strategy Formulation : Competition Landscaping in Private Banking Space
 To suggest strategies, products and services required to make ICICI Bank a major
player in Private Banking space
 To identify positioning/branding strategy of top private banks

Project Description

a> Framework for Strategic Asset Allocation for Private Individuals using Behavioural Finance
Traditional Way of Asset Allocation: In traditional way Asset Allocation is done by using
Markowitz Modern Portfolio Theory (MPT). In MPT framework an efficient frontier is
calculated based on risk return characteristics of each of the portfolios. Each point on the
efficient frontier represents a portfolio for which return is maximum for a given value of risk
or alternatively risk is minimum for a given level of return. Once this frontier is obtained the
point on the frontier where an individual’s utility function is tangential to efficient frontier is
the point of optimum asset allocation for that individual. (Refer Exhibit 1 below)

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 Exhibit 1
Need for a behavioural finance based model: There are two main drawbacks of traditional
MPT. These are:
 Traditional MPT does not take into consideration perception of risk of individual, it
talks about and incorporates risk at aggregate level i.e. at market level and ignores
individual risk.
 The utility function as described earlier is measured at some future or “terminal”
point in the time horizon. In other words, the individual is assumed not to be
sensitive to how the portfolio reaches that terminal state, but focused only on that
terminal point. This is a sensible assumption in the world of institutional investing. It
is however a less obvious fit in the world of the individual investor. Individuals are
more sensitive to changes in states than to absolute constructs. Thus, an individual
whose portfolio, though substantially up in value from a year ago, is down from a
recent peak will probably be less happy than another whose portfolio has risen less,
but in a smoother manner. This focus on change rather than absolute levels must
tell us that individuals will tend to be “path dependent:”

Behavioural finance addresses both the issues discussed above and hence the need to
develop a model based on behavioural finance.

b> Gap Analysis and Strategy Formulation : Competition Landscaping in Private Banking Space
Private Banking at ICICI Bank: Private Banking at ICICI Bank is channelized through their GPC
(Global Private Clients) channel. The business model used to be a sales driven model
whereby ICICI Bank used to sell (it still continues to use this model in some location) its own
as well as third party products to its clients irrespective of the fact that whether those
products are suitable for them or not.
This model though simple to implement suffers from one major drawback i.e. it does not
consider suitability of a product to client’s needs and preferences. A client can get a highly
risky product irrespective of the fact that he has regular income needs and he is risk averse.
To eliminate this drawback ICICI Bank changed its sales driven model to advisory based
model in 2007 with launch of advisory services in DIFC region. It plans to launch this service
in Singapore also.
Advisory is facilitated by FSG (Financial Services Group) of International Banking Group.
There are Solutions Managers in FSG group who develop strategic portfolio for a client.
Generally 5-6 RMs (Relationship Managers) are mapped to each Solution Manager. Solutions

7
Managers are also responsible for giving tactical calls to their client’s when favourable
market conditions are prevalent.
Global Private Banking Industry: Globally private banking is there for decades. Major Private
Players include UBS, Citibank, HSBC etc. There has been a tremendous increase in number
of wealthy individuals globally. This fact has opened a lot of new opportunities in this field.
ICICI Bank has first mover advantage as it is the Indian Bank with largest international
presence. Over the years its international business has grown by leaps and bounds.
In spite of this success story ICICI Bank still is a very small player in this big area of private
banking. It has yet to make its brand visible in people of non Indian origin.
To tackle this challenge it needs to develop effective strategies and innovative products and
services. Since private banking business is based wholly on Trust it should learn from the
leaders in the industry.
The motivation of this study was to learn about the strategies of top private banks and what
are they doing, so that ICICI Bank can see where it stands now and where it want to go in
future and what path it can take to reach that point.

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 Methodology
a> Developing framework for Strategic Asset Allocation for Private Individuals using Behavioral
Finance
The methodology used for this part of the project was to evaluate different models of
strategic asset allocation; these are the models which incorporate an individual’s risk
preferences. Each of these models was evaluated based on few parameters. These
parameters are:
 It should incorporate clients’ risk elements in consideration apart from market risks
 It should be easy to explain to clients’ if need arises
 It should be flexible so as to allow modifications as a result of change in clients’
preferences, situations, and changes in lifestyle etc.
 It should be sustainable
 It should be easy to implement
 It should be cost efficient
At the same time there are various constraints which involve tradeoff and a good subjective
judgment. These constraints are:
 It should be decided whether model should be subjective/intuitive or it shall be
rigorous quantitative in nature.
 Also a decision must be taken regarding tradeoff between ease of calculation vs.
accuracy.
Finding these models involved searching Wealth Management Journals, Internet, Wealth
Management Magazines and other sources.
b> Gap Analysis and Strategy Formulation : Competition Landscaping in Private Banking Space
The methodology followed for this part was to check all the information related to private
banking provided by top ten banks providing private banking services.
List of top ten banks providing private banking services was taken from
www.euromoney.com. Once this list was found, information provided on the website of
each of the banks was analysed. There were few aspects which were evaluated. These
aspects are:
 Positioning/Selling/Branding
 Advisory approach
 Advisory Considerations
 Products : Products were further subdivided into following products
• Banking

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 • Investing
• Financing
• Research
 Services : Services were further subdivided into
• Financial Advisory
• Exclusive Services
• Online Services

Comparison based on these parameters was captured in a excel sheet for each of these
banks.

In addition to above comparison an analysis of ICICI Bank’s existing positioning strategy,

products and services, positioning of advisory, areas of strength and weaknesses was made.
The procedure here was first to prepare a questionnaire covering all the aspects discussed
above. Then each of these questions was asked to RMs (Relationship Managers) and SRMs
(Senior Relationship Managers). The rationale of asking these questions to RMs and SRMs
was that these are the people who actually represent ICICI Bank in front of clients so their
views on these issues provide very valuable insight into these aspects. Responses of each of
the RM and SRM was tabulated in excel format.

Based on this and the comparison of banks providing private banking recommendations
were made regarding strategy, products and services.

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 Modelling and Analysis
a> Developing framework for Strategic Asset Allocation for Private Individuals using Behavioral
Finance
Analysis of current strategic asset allocation model at ICICI Bank: In existing asset allocation
model the first step is to gather all the information about a client using FFFQ document also
known as Financial Fact Finding Questionnaire.
FFFQ: This document has three subsections. These sections are:
 General Information: It consists of questions and details about family, current asset
allocation among three asset class which are debt, equity and alternatives, personal
assets and liabilities, income requirement, investment experience etc.
 Investment attitude questionnaire (IAQ): This contained various objective type
questions to judge investment attitude of a client. Each question had four options
and each choice had different points attached to it. Based on the response of a client
his total score is calculated. There are five ranges of score and depending on the
score of a client and the range in which his scores fall determined a client’s
subjective risk profile. There were five types of profiles. These were in order of
increasing risk tolerance
 Risk Averse
 Conservative
 Balanced
 Growth
 Aggressive
 Investment preferences: It asks client for information on their preferred asset
allocation, their liquidity needs, time horizon, investment goals, estate planning
needs and any other information which might be helpful in determining their
strategic asset allocation plan.

Based on the subjective risk profile of an individual his assets are allocated to debt, equity
and alternatives based on already decided weights to each of these asset classes. For
example for a risk averse client a typical allocation would be 80% debt, 20% equity and 0%
alternatives. Also within each asset class the weights depend on market conditions and client
requirements.

Currently in ICICI Bank there is no advisory on debt instruments, allocation within this asset
class depends on client’s and RM’s discretion. FSG only tells what portion of client’s total

11
asset will be in debt. For equity, they provide advisory in equity based Mutual fund.
Currently there are eight types of mutual funds which ICICI Bank offers to their clients. Asset
allocation to these mutual funds depends on liquidity, income and growth needs of clients.
For alternative investments allocation depends on market condition and good judgement.

From time to time, based on market situations tactical calls are given to clients and these
calls do affect the strategic asset allocation but in the long run it tend to stick to strategic
asset allocation.

Pros and Cons of current asset allocation model: Current model is good in the sense that it is
easy to understand and implement. Also it takes client’s goals into consideration. It is more
important for a client to meet his goals rather than just earning a good return on his
investments. Additionally risk profiling of the current system takes into account both
elements of individual risk i.e. ability to take risk which is an objective measure as well as his
desire to take risk which is a subjective measure.

On the other hand this model is highly subjective; there is no reasonable way to ensure that
client’s goals will be met. While it takes into account the objective measure of client’s risk
i.e. his ability to take risk it does not translate this into any scale or any quantitative
measure. Also since there is no optimization used, asset allocation may be sub optimal.

These all deficiencies in current model requires introduction of new model to strategic asset
allocation.

Approaches to strategic asset allocation problem: In current literature there are two
approaches by which various wealth managers, practitioners and pioneers in this field have
tried to solve strategic asset allocation problem.

 Bucketing or Compartmentalization approach: This approach divides all assets,

liabilities, goals etc. into various sections and each section is used to fulfil a particular
need of a client. In essence it creates various sub portfolios out of all the assets and
each sub portfolio meets some distinct need of an individual. Risk is defined
according to type and criticality of goal.
 Total portfolio or traditional approach: This approach tries to solve strategic asset
allocation problem by using a single portfolio approach. All goals and objectives are
tried to be met with a single portfolio. Traditional MPT approach is this approach
only.

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Models studied and analysed: Four models were studied for selecting one model for ICICI
Bank asset allocation model. Details of all the models are given below:
 Goals based investing: Goals based investing is an essentially a bucketing /
compartmentalization approach model. Here different strategies are made for each
of the goals investors might have. Each goal will have a different risk measure. For
example for a goal of income generation the risk would be defined as the probability
of not getting required income in a particular month and suitable strategy for this
goal would be to invest in annuity generating instruments. Similarly there can be
goals of liquidity, capital preservation, growth etc. and there would be suitable
strategies for these as well.

Exhibit 2 depict the philosophy of goal based investing

Goals-based investing improves upon traditional approaches in the areas of

measuring risk, risk profiling, and managing behavioural biases.

 Wealth Allocation Framework: This is also one of the bucketing /

compartmentalization based approach. It creates three buckets based on the
components of risk covering individual’s conflicting behaviour of being greedy and
having fear for loss at the same time. The buckets and their rationale of creation are:
1> Personal Risk: This protects an individual from personal risk. This means
protecting oneself from anxiety regarding a dramatic decrease in one’s lifestyle.
2> Market Risk: One need to take on market risk in order to grow one’s wealth
segment and maintain one’s lifestyle.
3> Aspirational Risk: One could take on aspirational risk if one desire to break away
from one’s wealth segment and enhance your lifestyle.

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 All assets, liabilities, goals etc. are divided among each of these buckets and then
allocations are made based on risk profile of a client in each of these buckets.
Likelihood of meeting a client’s goals is estimated and an iterative process is
followed till the time success is achieved.
 Holistic Optimization of goals: This model is based on total portfolio approach. It
approaches problem of strategic asset allocation as a simultaneous solution of asset
location and goal planning. It also incorporates impact of taxes in model
construction. First step is to divide the asset locations into taxable and tax exempt.
The logic behind is that some assets which are subject to high taxes must be placed
in tax exempt locations which makes them give better after tax returns. Similarly tax
efficient financial instruments can be put into taxable locations. Once this is
complete projection of future cash flow associated with each goal is done. Inflation
also needs to be incorporated in this estimation. After this present value of each set
of goals is calculated and in order to prioritize these goals target value of probability
required achieving these goals is set. After this using some standard solver
optimization is done. A series of optimization is done for each of the goals and some
constraints. For example for first goal optimization gives the combination of assets
that would create an expected portfolio return with the largest risk adjusted spread
to the required expected return for meeting first goal. A probability value of meeting
that goal is also estimated. Second optimization would be optimizing asset mix with
a constraint that probability value of first goal shall not go below a desired
probability value. This process is carried out for all subsequent goals. At the end of
this process one has an optimum portfolio which meets all of these goals with
desired probabilities.
 Discretionary Wealth Framework: This approach is also one of the complete
portfolio approaches as described earlier. In this model all assets including those
related to human capital and the present value of personal spending requirement,
including those for retirement, lifestyle and wealth transfer are put into a implied
balancesheet.
Discretionary wealth is what remains after subtracting the present value of personal
spending requirements from assets. As the non-discretionary present value of
personal spending requirements’ “liability” becomes a smaller and smaller
proportion of total assets, the discretionary assets becomes asymptotic with the
total portfolio. This ratio determines the how conservatively the asset portfolio

14
 should be managed. If this ratio is large there is greater need to manage the
portfolio conservatively and if the value becomes small aggressive approach to
portfolio management can be taken. In this model all the assets are treated as one
portfolio.
After evaluating each of the models on the parameters described in methodology section
Wealth allocation Framework was found to be most suitable for ICICI Bank needs and it was
suitably modified to make it more implementable as per the requirements of ICICI Bank.

Details of Wealth allocation framework

To develop a comprehensive wealth strategy the definition of portfolio was expanded to
cover all assets and liabilities such as investments, home, mortgage, and human capital.
Human capital can be loosely defined as earning potential. A person’s portfolio should allow
him to achieve the following three purposes:
• Protection from anxiety/poverty: This is referred to as protection from personal risk.
• Ability to maintain his standard of living and status in society, i.e., keep up with family and
friends. In order to do this, investors must earn a rate higher than inflation and thus take
on market risk.
• Provide an opportunity to increase his wealth substantially or meet his aspirational goals.
This involves taking on some aspirational risk.
So an ideal portfolio must provide:
1. The certainty of protection from anxiety.
2. The high probability of maintaining one’s standing.
3. The possibility of substantially moving upwards in the wealth spectrum.

In this framework risk allocation precedes asset allocation. Exhibit 3 illustrates each risk
dimension with its corresponding objective and trade-offs.
In summary:
• Allocations to the personal risk bucket will limit loss of wealth, but will yield below-market
returns.
• Allocations to the market risk bucket will provide risk-adjusted market returns (this is the
Markowitz framework).
• Allocations to the aspirational risk bucket should yield higher-than-market returns, but
with the risk of substantial loss of capital

15
 Exhibit 3
Investors should have very different performance expectations for the assets allocated to
each of the three risk buckets, and these expectations must be benchmarked against
appropriate indices (Exhibit 4). The idea of having a different benchmark for each of the
three parts of the portfolio is an important one. In the first bucket one pays for and receives
safety. In the third bucket one gets outsized returns, unfortunately accompanied by a
significant probability of loss of capital. These two parts of the portfolio, in general, will
behave differently than the middle portion, which can be benchmarked against risk-adjusted
market indices. In fact, often the entire portfolio will be mean-variance inefficient, when
viewed in the narrower mean-variance framework, but will provide more robust protection
and upside, when viewed over a wider range of outcomes.
• Assets in the personal risk bucket should be expected to appreciate at below-market rates.
Suitable benchmarks are the Consumer Price Index or three-month LIBOR. Suitable risk
measures could use downside risk rather than volatility.
• Assets in the market risk bucket follow the standard Markowitz framework. Their
performance can be compared to a standard benchmark constructed from appropriate
weighting of the S&P 500 and an aggregate bond index. Similarly, the Sharpe ratio can be
used to provide a suitable risk-adjusted measurement.
• Assets in the aspirational risk bucket should significantly outperform standard market
indices when they succeed. Examples of such benchmarks could be Forbes magazine’s Cost
of Living Extremely Well Index (CLEWI) (Yen [2001]), a hedge fund index, or a large alpha

16
 over a standard market index. Other risk measures could incorporate default probabilities
or use upside risk rather than volatility.

“Personal” Risk
“Market” Risk “Aspirational” Risk
Do Not Jeopardize Basic
Maintain Lifestyle Enhance Lifestyle
Standard Of Living
Protective Assets Market Assets Aspirational Assets
Below market returns for Market returns and market Above-market returns with
Expected Performance
below market risks risks high targeted risks
S&P 500
Consumer Price Index CLEW Index
Sample Benchmarks Lehman Agg. Bond Index
3-month LIBOR Absolute Return Value
MSCI World Index
Downside Risk Standard Deviation
Upside Return Measures
Scenario Analysis Sharpe Ratio
Risk Measures Manager Alpha
Sortino Ratio Beta
Scenario Analysis
Roy Ratio Scenario Analysis

Low Risk/Return Risk/Return Spectrum High Risk/Return

Exhibit 4
Classification of Assets
To classify an asset both the type of asset and the purpose it serves in the portfolio determine the
placement of each asset into one of the three different risk buckets. Therefore, the same asset can
belong in different buckets for different individuals. Assets that provide some degree of stability or
principal protection clearly fall in the personal risk bucket.
Examples are cash, short-term government-backed Treasury bonds, TIPS (i.e., bonds that provide
inflation protection in exchange for a lower yield), principal-protected mutual funds, annuities of
certain kinds, and option hedges such as puts and collars.
Other assets that we now include in this bucket are:
• Primary residence, offset by the liability of a mortgage;
• Insurance on automobile, home, catastrophe, disability, life, offset by the premiums;
• Human capital, i.e., earning power, offset by educational debts.
Most conventional securities fall into the market risk bucket, as long as they are part of a diversified
portfolio. Alternative investments like funds of hedge funds, commodities, etc., can belong here as
part of a diversification strategy, as long as transaction costs, liquidity constraints, and manager risks
are mitigated. Executive stock options, concentrated stock positions, single-manager hedge funds,
leveraged investment real estate, and call options are examples of investments that fall in the
aspirational risk bucket. A family-owned business that forms a significant part of an individual’s
wealth would also belong here. For more examples see Exhibit 5

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 “Personal” Risk
“Market” Risk “Aspirational” Risk
Do Not Jeopardize Basic
Maintain Lifestyle Enhance Lifestyle
Standard Of Living
Protective Assets Market Assets Aspirational Assets
- Cash
- Home Purchase - Equities
- Home Mortgage - Broad size and Style
- Safe Investments and Sector Exposure
- Alternative Investments
- US TSY(Short Duration) - Fixed income
- Private Equity
- TIPS - Credit Quality and
- Hedge Funds
- Principal Protected Duration diversification
- Investment Real Estate
Funds - Cash (reserved for
- Investment Concentration
- Annuities to provide safe opportunistic investing)
- Small Business
source of income and - Strategic investments
- Concentrated Stock and
hedge longevity risk - Funds of funds
stock option positions
- Hedging through - Liquid non traditional
calls/puts/collars investments e.g.
- Insurance commodities
- Human Capital

Low Risk/Return Risk/Return Spectrum High Risk/Return

Exhibit 5
Implementation Steps:
Exhibit 6 gives a step by step procedure to implement this model in developing a strategic asset
allocation model for private individuals. These steps are:
1. Gather complete diagnostic information:
• Understand lifecycle details
• Determine client goals and priorities
• Assign cash flows and timelines to each goal
• Classify current assets and liabilities
• Include current and future cash flows
• Risk questionnaire to determine client risk factors and personal danger zone
2. Perform risk allocation and asset allocation, portfolio construction:
• Categorize and evaluate current state
• Make intuitive adjustments
3. Compute likelihood of achieving goals using:
• Scenario analysis
4. Readjust:
• Risk allocation
• Client goals & cash flows

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• Asset allocation within each risk bucket
5. Repeat Steps 2 to 4 till success and optimum balance are achieved.
6. Check robustness of solution to market and client risk factors.
• Market risk factors: crash
• Client risk factors: inflation
7. Implement.
8. Review and readjust as needed.
Each of these steps needs to be analysed and developed in more detail to make it implementable in
ICICI Bank’s context

1. Gather complete diagnostic

information

2. Perform risk allocation and asset

allocation, portfolio construction

3. Compute probability of achieving

goals

4. Readjust risk allocation, Client goals and cash flows, Asset

allocation within each risk bucket

Is success and optimum No

balance achieved?

Yes

5. Check robustness of solution to market and

client risk factors

6. Implement

7. Review and readjust as needed

Exhibit 6

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Risk Allocation:
As explained earlier there are two aspects of an individual’s risk. These are financial ability to take
risk which is an objective measure and desire to avoid risk which is a subjective measure.
To determine financial ability to take risk we need to understand lifecycle details, current net worth
including non investment assets. Also we need to determine client’s goals and priorities. The next
task would be to scale the objective risk measure so that one can quantify objective risk measures.
The approach is similar to one described in discretionary wealth framework. This can be done as
described below:
 Estimate present value of total worth of an individual including his total human capital i.e.
his total earning potential. This can be done by using his current income and expected
increase in income over the years. The knowledge of his number of years in work i.e. the
difference between his retirement age and his current age is also required. By assuming a
constant growth rate in income and assuming a suitable discount rate this estimate can be
completed by using equation below:

1+ g n+1

PVHC=I∗[
1+ r {( ) }
−1
∗( 1+r ) ]
( g−r )
Here PVHC is present value of human capital, g is expected growth rate in income, I is current
income, r is suitable discount factor, n is difference between his expected retirement age and his
present age.

Present value of total worth can be calculated using formula given below:

PVTW =PVHC+ All other assets

PVTW is present value of total worth.

 Second step is to estimate present value of total liabilities. This requires factoring each and
every expenditure which a person is expected to incur in his life time i.e. this goes beyond
retirement as well. The expenditure needs to figure both i.e. general day to day expenditure
as well as expenditure which are made rarely and cost a lot. Addition of family members also
needs to be considered. Since inflation erodes value of money and increases price levels as
well it also has to be incorporated in this. This requires a lot of estimation and detailing.
 Once this step is completed one can calculate present value of total net worth by subtracting
present value of total liabilities from total worth of a person.
 Repeat this process for a large number of old and current clients.
 Calculate average and standard deviation of this data.

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  Assuming a normal distribution plot this data and then calculate ranges of values of total net
worth required for intervals of 10% probability distribution from probability distribution
function. For example calculate value of total worth required for ranges 0%-10%, 10%-20%,
etc. till 90%-100%.
 Develop a scale where an individual can be assigned a certain value depending on his
present value of total net worth.
 Update this data by repeating the whole process once a year since there will be changes in
income levels, growth rate, inflation rate and other parameters involved in above
calculations.

ICICI Bank’s FFFQ document already quantifies the subjective risk aspect i.e. desire to take risk.
Factors which are critical in evaluating this aspect is minimum wealth level which is personal danger
level and target return rate of individual.

Once one has values of both these aspects of individual risk one can plot this on risk allocation graph
to determine risk profile of an individual. (Refer Exhibit 7)

Balanced
Aggressive
Subjective Risk Measures

Growth
Desire to Avoid Risk

Risk Averse Balanced

Conservative Growth

No allocation to aspirational bucket

Objective Risk Measures

Ability to take Risk

Exhibit 7

After finding the risk profile of a client check from the risk allocation chart (See Exhibit 8), what shall
be the desired risk allocation for that type of client? This allocation is derived from past data and
thumb rules. It is result of good judgement and there is no quantitative base for this allocation.

21
 Risk Allocation Ranges
Personal Market Aspirational
Risk Averse 60.00% 40.00% 0.00%
Conservative 50.00% 45.00% 5.00%
Balanced 45.00% 50.00% 5.00%
Growth 35.00% 55.00% 10.00%
Aggressive 30.00% 55.00% 15.00%

Exhibit 8

Asset allocation:

Divide all assets and liabilities (includes future liabilities as well) into each of the three risk buckets as
per the definition of the buckets as described earlier and find the net worth of each bucket. Find the
percentage worth of each bucket as compared to total worth. (See Exhibit 9)

“Personal” Risk
Do Not Jeopardize “Market” Risk “Aspirational” Risk
Basic Standard Of Maintain Lifestyle (y%) Enhance Lifestyle (z%)
Living (x%)
Protective Assets Market Assets Aspirational Assets
Asset 11 Asset 21 Asset 31
Asset 12 Asset 22 Asset 32
Liability 11 Liability 21 Liability 31
Liability 12 Liability 22 Liability 32
Net Net Net

Exhibit 9

Ask intuitive questions on current asset allocation. These questions could be:

 Does the client have correct risk allocation among different buckets given his various goals,
needs, wants, risk profile etc.?
 Does the client have the right asset allocation within each bucket?

22
For each of the bucket check following things:
Personal bucket: Check liquidity, risks due to rising interest rate, check cash flows etc.
Market risk: Check whether it is fully diversified or not.
Aspirational bucket: Check if allocation to this bucket is not disproportionately very high.

Make adjustments:
Based on the responses from above questions and ideal asset allocation based on a client’s risk
profile make suitable adjustments. For example make suitable adjustments i.e. spread risks, sell
some assets and buy some, convert mortgages from floating to fixed or vice versa based on future
prediction. After doing readjustment again find the net worth in each of the bucket and calculate
percentage net worth with respect to total net worth. (See Exhibit 10)
“Pe rsona l” Risk
“Market” Risk
Do Not Jeopa rdize “Aspira tiona l” Risk
Ma intain Lifestyle
Ba sic Sta nda rd Of Enha nce Lifestyle (z'%)
(y'%)
Living (x '%)
Prote ctive Asse ts Marke t Assets Aspirationa l Asse ts
Asset 11' Asset 21' Asset 31'
Asset 12' Asset 22' Asset 32'
Liability 11' Liability 21' Liability 31'
Liability 12' Liability 22' Liability 32'
New Net New Net New Net

Exhibit 10
Likelihood of achieving goals: Scenario Analysis
Scenario analysis is a simple tool to check portfolio performance in different market scenarios.
Exhibit 11 presents a simple table to evaluate portfolio performance in six different scenarios. For
each scenario one has different return values for each of the buckets. Multiplying the total net worth
of the bucket with this return figure will give us net worth of that bucket in a particular scenario.
Also summing the net worth in each of the bucket we can get total net worth of all the buckets
combined together. This analysis can be done for both current as well as recommended asset
allocation. Once the correct allocations have been made in the three buckets, the middle bucket
should be diversified as prescribed by MPT.

23
 Personal Market Aspirational Net Worth Net Return Net Worth Net Return
Description
Portfolio (%) Portfolio (%) Portfolio (%) ($) (%) ($) (%)
Short – Term
1 4 -20 -100
Underperformance
Long – Term
2 4 0 -50
Underperformance
3 Likely – I 4 7 -20
4 Likely – II 4 7 20
5 Optimistic 4 10 50
6 Long Shot 4 20 100

Exhibit 11

The return figures in each of the buckets for different scenarios can be estimated using global
outlook of economy, research reports, Advisory Council (Advisory Council is a committee comprising
global experts, economists etc. who provide regular insights into world’s economy, views on
different markets, views covers different asset classes and different geographic markets. Once the
return for each type of asset is estimated, the return for a particular bucket is just the weighted sum
of returns on all the assets forming that bucket.

Exhibit 12 shows how Scenario Analysis can be used to check likelihood of goal completion. In this
particular exhibit net worth of a portfolio is plotted for each of the scenarios listed above and
comparison of the performances between current and recommended allocation.

Comparison of Performance Under Different Scenarios

6500000
6250000
6000000
5750000
5500000
5250000
5000000
4750000
4500000
4250000
4000000
3750000
3500000
3250000
3000000
2750000
2500000
2250000
2000000
1 2 3 4 5 6

Exhibit 12

24
Probability of achieving goals: Using z values of normal distribution

There is one more method to calculate probability of achieving goals. This is done by using statistical
method. The assumption involved here is that portfolio returns follows a normal distribution curve
and return and standard deviation figures are known. Steps involved are:

 Calculate the present value of cash flows required to meet the goal

 Convert this to required return from portfolio in terms of percentage returns

 Calculate average return and standard deviation of the portfolio using historical values
 Calculate z values using following formula:
(x−μ)
z=
σ
√n
Here x is required rate of return, μ is historical rate of return, σ is historical standard
deviation and n is the number of years data taken into account.

 Calculate probability using probability distribution function

Iteration:
If probability of achieving goals is less that desired then readjust:
 Risk Allocation
 Client goals and cash flows
 Asset allocation within each bucket
Repeat this process until the optimum balance and desired probability of success is achieved.
Also incorporate market shocks in Scenario Analysis e.g. market bust like Credit Crunch etc.
Advantages of suggested Wealth Allocation Model:
 Highly intuitive
 Easy to understand and explain
 Easy to implement
 Sustainable
 Flexible
 Cost Efficient
 Integrate all aspects of client's risk factors
b> Gap Analysis and Strategy Formulation : Competition Landscaping in Private Banking Space
Analysis of information obtained from the website of top banks providing private banking
services:

25
Branding

 UBS : It position itself as a bank with high client focus and high degree of
customisation
 Citigroup : They mention about their proprietary asset allocation methodology called
‘Whole Net Worth methodology’ of investment and also they boast about their global
presence
 HSBC : It has an international network, people and range of products and services
 Merrill Lynch: It boasts about its ultra high net worth clientele. Approximately one
fourth of Forbes Top 500 CEOs are Merrill Lynch clients
 Deutsche Bank : It sells itself on global presence and excellent quality of Relationship
Managers
 JP Morgan : It brands itself as provider of exceptional depth and breadth of services
 BNP Paribas : It has excellent pool of human and technical capital
 Societe Generale : They have an innovative open architecture approach
 ABN Amro : It positions itself on its clientele base and strength of group
Advisory Approach:
 Understand, Propose, Agree and Implement, and Review approach coupled with life
cycle approach (Various stages in a person's life and associated needs) : UBS
 Manage, Develop and Preserve approach and work with independent financial
advisors and other financial institutions : HSBC
 Focus on holistic health plans : Citigroup
 Four areas of wealth planning i.e Family, Business, Finances and Real Estate and
lifecycle approach : SG
 Employment of global resources and expertise for investment advisory : ABN Amro
 Screening, Fundamental Research, Portfolio Construction and Implementation
approach, focus on relationship building, provides detailed brochure for each service :
Credit Suisse
 Exclusive Access, Custom Services, Expert Advisors approach : Merrill Lynch
 Advisors' compensation based on clients' performance : JP Morgan
 Case studies on website to demonstrate the advisory approach
 Wealth management magazine
Advisory Considerations:
 Lifestage of a person

26
  Return Objectives
 Current financial situation
 Reference Currency
 In addition to Risk attitude, Investment horizon, Cash flow needs, personal priorities,
liquidity etc
Products (Banking):
 Variety of bank accounts
 Variety of Deposits
 Cards and Travelers' cheque
 Payment Services
 Overdraft and bridge over facilities
 Sweep accounts
 Personal Credit Lines
 Treasury and Foreign Exchange
 Corporate banking

Products (Financing):
 Loans (Secured as well as Unsecured) of various tenor
 Mortgages
 Letters of credit
 Credit facilities for foreign exchange, precious metals etc.
 Speciality financing
 Residential and commercial real estate financing
Products (Investing):
 Equities
 Fixed Income
 Structured Products (Notes and Warrants)
 Mutual Funds
 Private Equity
 Hedge Funds
 Foreign Exchange and Commodities
 Liquidity Management
 Separately and discretionary managed accounts (Large number of mandates
 Insurance

27
  Real Estate and Exchange Funds
Products (Research):
 Financial Research and Analysis
 Funds Research
 Capital Markets trends research
 Manager search and selection research
Services (Financial Advisory):
 Pension provision
 Retirement
 Tax Advisory
 Structuring business assets
 International transactions and relocation services
 Fund restructuring and administration
 Trading
 Active Advisory
 Portfolio Management
 Concentrated Stock Management
 Risk Management
 Business Valuation
Exclusive Services:
 Family office services
 Philanthropic planning
 Gift and Estate Planning
 Corporate Wealth Management
 Speciality Asset advisory
 Custodian Services
 Gold and Numismatics
 Corporate Employee Financial Services
 Aircraft Advisory
 Sports Advisory
 Home Advisory and Concierge Services
 Islamic banking
Business Services/Services targeted to specific professionals
 Executives

28
  Business owners
 Independent financial advisor
 Various financial intermediaries
 Law firms and attorneys
 Media and Sports person
Online Services
 Online monitoring of portfolio
 Customized research reports
 Relationship reports
Analysis of responses of the questions asked with RMs and SRMs:
Positioning of ICICI Bank
 NRI / Clients of Indian origin :
 They already know about bank
 India based offerings
 Global Presence
 Financial results
 Non NRI clients
 History
 Singapore based accounts
 First Indian bank to be listed on NYSE
 Key differentiators: India based products primarily deposits, venture capital and PE
funds
 Alternate bank in the ranks of 3-5 (AUM wise)
Positioning of advisory

 Tell them about customisation

 FSG team and experts in the team
 Benefits of advisory
 Portfolio Management services provided by FSG in terms of regular updates and
outlook is well appreciated by clients
Products in demand but not offered currently
 Global products
 US based products
 Gold exchange products
 Structures

29
  Very few varieties of bonds
 Local currency products
Weak Areas
 Lack of online platform
 Booking over telephone
 Services
 Products
 Poor in communication

Key recommendations based on analysis of both i.e. comparison of top ten banks in private banking
space and responses of RMs and SRMs

 Advisory approach shall be put on website of ICICI Bank in detail.

 Case studies elucidating advisory approach shall be mentioned on website.
 Company can work with law agencies as well as client’s independent financial advisors in
order to earn confidence of a client.
 Islamic Banking can be offered in DIFC region by having strategic tie ups with local players
 Breadth as well as depth of products needs to be increased
 Relationship Managers should educate client about importance of advisory services
 Online services shall be developed for clients.
 Booking over telephone shall be introduced.
 Communication to clients shall be made in a effective manner

30
 Future Scope
a> Developing framework for Strategic Asset Allocation for Private Individuals using Behavioral
Finance
 Effect of taxes on the asset allocation model should be studied
 Evaluation for suitability of various measures of risk should be done
 Optimization of assets in personal risk and Aspirational risk bucket shall be studied in
more detail
 Performance parameters of alternative investments needs to be studied in more
detail so as to calculate probability accurately

b> Gap Analysis and Strategy Formulation : Competition Landscaping in Private Banking Space
 Positioning strategy of different banks should be studied from perspective of clients
as well as relationship managers
 Client’s perception of ICICI Bank shall be analysed by talking to clients
 Feasibility of introducing Islamic banking by ICICI Bank in DIFC shall be studied

31
 Limitations
a> Developing framework for Strategic Asset Allocation for Private Individuals using Behavioral
Finance
 Creating buckets in asset allocation introduces sub optimality in asset optimization
 Risk weight allocation does not have a quantitative base and is based on good
judgment
 Wealth allocation model gives underperformance in normal markets which can lead
to less terminal wealth if normal market conditions exists for a long period of time

b> Gap Analysis and Strategy Formulation : Competition Landscaping in Private Banking Space
 Whole analysis was based on the data available on website of various banks which
makes it dependent on the accuracy of data
 This analysis does not consider legal issues involved in introducing new products or
services in many countries so many products suggested for introduction may
actually not be introduced due to legal issues
 Responses of RMs may suffer from some cognitive and other biases which
compromises accuracy of analysis

32
 Academic Contribution
 Knowledge of Organizational Behaviour applied to Financial Behaviour
 Knowledge of business statistics
 Knowledge of financial management (time value of money concept, present value, future
value etc.)
 Extensive support from journals and white papers

33
 Bibliography/References
1. Brunel, Jean. “Revisiting the Asset Allocation Challenge Through a Behavioral Finance Lens.”
The Journal of Wealth Management, Vol. 6, No. 2 (2003), pp. 10-20.
2. Chhabra, A., and L. Zaharoff. “Setting an Asset Allocation Strategy by Balancing Personal and
Market Risks.” The Journal of Wealth Management, Winter 2001, pp. 30-33.
3. Chhabra, Ashvin B. “Beyond Markowitz: A Comprehensive Wealth Allocation Framework for
Individual Investors.” The Journal of Wealth Management, Spring 2005, pp. 8–34.
4. Wilcox, J. “Harry Markowitz and the Discretionary Wealth Hypothesis.” Journal of Portfolio
Management, Vol. 29, No. 3,(2003), pp. 58–65.
5. Fowler, G.B., and V. de Vassal. “Holistic Asset Allocation for Private Individuals.” The Journal
of Wealth Management, Vol. 9, No. 1 (2006), pp. 18–30.Vuyk, C. (2003).
6. Nevins, Daniel. “Goals-Based Investing: Integrating Traditional and Behavioral Finance.” The
Journal of Wealth Management, Spring 2004, pp. 8–23.
7. Brunel, J.“How Sub-optimal - If At All - is Goal-Based Asset Allocation?” The Journal of
Wealth Management, 8 (Fall 2006).
8. UBS website, information about strategy, advisory, products and services extracted from
http://financialservicesinc.ubs.com/wealth/Home.html
9. Citibank website, information about strategy, advisory, products and services extracted from
https://www.privatebank.citibank.com/our_services/individuals_families.htm
10. HSBC website, information about strategy, advisory, products and services extracted from
http://www.hsbcprivatebank.com/services/index.html
11. Merrill Lynch website, information about strategy, advisory, products and services extracted
from http://www.pbig.ml.com/publish/mkt/pbig/index.html

34
 Annexures
Annexure I: Questions for RM

New Clients

1. How do you get a lead/contact on the new client? Is there some standard way across ICICI
bank or standard way developed by you?
2. How do you position ICICI bank in front of a new client?
Strengths of ICICI bank
Types of services
Range of products
Differentiators
Attractive features of a product or service which sets it apart from similar products provided
by other banks
3. How do you position advisory services of ICICI bank? Do you do it separately or is it a part of
overall bank positioning?
Again for advisory services how do you pitch?
4. Why should a HNI choose ICICI bank's services over other banks providing similar services or
products?
5. Have you found out any specific service/s or product/s which are in demand and currently
not offered by ICICI bank? What effect it had in terms of client relationship?
6. Has there been an instance where a client drifted away from the bank after showing
reasonable amount of interest? If yes what were possible reasons?
7. What do you think is the first impression of the client about ICICI bank?
8. What do you think are the areas where ICICI bank is not that strong?
Existing Clients
1. Is there any measure to evaluate the quality of service provided?
a. Response time
b. Average client complaints per month
c. Efficiency and effectiveness of the solution provided
2. Are there any follow ups about the satisfaction levels?
3. Is there any demand by existing clients to offer a particular type of service/products?
4. What do you think is the impression about the ICICI bank in existing clients' mind?
5. Has there been a instance where a existing customer drifted away from ICICI bank? If yes
what could be possible reasons according to you?

35