Fulfilment of investment objectives : a comparative analysis of portfolio construction by individual investors and professional asset managers

Abstract

Breakthroughs in financial trading technology have empowered investors to engage directly in the financial markets; providing alternatives to traditional wealth management institutions. This study is a comparative analysis of portfolio construction by professional asset managers and individual investors. The aim is to assess each investment approach and determine which path best leads to the fulfilment of investment objectives. Representatives from financial institutions, including banks, financial advisory firms and brokerage firms, were chosen by means of criterion sampling. This sampling method was also applied to select execution only investors, who also have a portfolio management agreement. The objectives were met through six semi structured interviews and a survey questionnaire. Thematic analysis identified the emerging themes and the main elements within portfolio theory. There was a general consensus among respondents that financial literacy is increasing and that the local market is widening in terms of market participants, volume and liquidity. It is evident that application of portfolio theory in portfolio construction is limited for individual investors. Positive findings emerged only for online traders. Prone to behavioural biases in investment behaviour, most individual investors lack the discipline to construct and manage optimal portfolios in line with their risk tolerance, investment objectives and constraints. The study showed that professional asset managers fail to incorporate behavioural bias in their risk profiling system. Despite this shortcoming that needs to be addressed, this study concludes that professional asset managers added value to the achievement of investment objectives, through portfolio rebalancing in line with market conditions and investor’s circumstances. The significance of the changing wealth management landscape cannot be ignored. The study recommends that traditional wealth management services work in a synergy with interactive online client portals, to enhance the advisory-client relationship, and fulfil investment objectives in this increasingly digitalised environment.