The liability management component is quite often the weak spot in most systems that deliver model portfolio solutions or within organisations that do not believe the planning and management of financial needs is part of the portfolio construction, planning and management process.

It will have three functions.

This component directly relates the organisation's asset management expertise, asset allocation, security selection and current investment strategy to the client's personal financial needs and risk preferences.

Effectively, it makes all the decisions regarding the construction, planning and management of assets to meet financial needs over time based on the investment planning decision rules and their interaction with central investment security selection, asset allocation and strategy and investment discipline.

This component effectively handles the thousands of decisions that need to be made to relate portfolio structure to financial needs while managing risk and return.

It will adjust central low risk investment strategy and security selection to meet the size and timing of a client's personal financial needs.

It will relate future inflows (income and capital), future outflows (expenditure form income and capital) to the planning of the future allocation and the management of the current allocation as it changes to reflect changes in future financial needs.

It will adjust the central investment equity strategy, security selection and asset allocation and select and manage an appropriate portfolio for that client's financial needs and risk preferences.  

It will determine when the portfolio needs to be rebalanced to meet both changing financial needs as well as changing market valuations, since the decisions over financial needs have a direct impact on portfolio rebalancing.

Asset and liability modelling

While the ability to value and allocate and relate valuation to allocation in real time is key to the asset management component of such systems, the ability to model the ability of assets to meet needs over time is critical to the ability of the liability management component to meet its objectives.

These systems do not just forecast future wealth, the asset and liability modelling actually integrates financial needs into portfolio structure and models this.  This is critical to the ability of systems to manage the risks to the ability of assets to meet financial needs and plan effectively for meeting future financial needs from your portfolio.