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The investment management industry is built for two distinct categories: institutional clients and individual investors. While institutional advisors serve large, multibillion-dollar pensions and sovereign entities, by contrast, wealth management firms work with clients who fall on the other end of the spectrum – retail investors with roughly $500,000 to $5 million of investable assets.
But what if an individual amasses the wealth of a large company? Since the industry isn’t built to serve people with $100 million or more in assets, these investors fall to traditional wealth managers who largely offer a one-size-fits-all approach, even when working with this different breed of investor.
Funneling the ultra-wealthy into the same channel as a mass affluent or high net worth investor is akin to your regular mechanic working on a sedan in a garage versus a Formula One mechanic working on a race car at the track. Tools and outcomes are mission-driven, and retooling is necessary when working with clients whose circumstances have evolved along the wealth spectrum.
Ultra-wealthy investors have unique needs and goals. While a typical high net worth client is focused on the next dozen years, these more deep-pocketed clients – like their institutional counterparts – have a much longer time horizon. Often, they are looking to the next several decades and considering how their finances will impact multiple succeeding generations.
From an investment portfolio perspective, America’s wealthiest clients are more comparable to institutions and would be wise to adopt a similar investment approach – one rooted in universally accepted academic investment theory and sophisticated portfolio construction techniques.
A different kind of investing
How is institutional investing different from retail investment?
First and foremost, institutions have unrivaled access to investments and people. Large pensions and endowments partner with exclusive money managers who limit their availability and protect their proven prowess to navigate a variety of market cycles. There are barriers to entry, and some of these managers hand-select their own investor base. Institutional investors can access and assemble a team of managers who bring complementary, style-specific asset and niche-management approaches.
Further, institutions can reach the full investment landscape, including opportunities in both emerging and established markets, as well as illiquid strategies that extend beyond stocks and bonds to real estate, natural resources, hedge funds, and private capital, both debt and equity. With their higher-risk capacity, institutional investors can gain exposure to venture capital, tech innovations, and other opportunities at the frontier of economic development, putting them in an enviable position.
When major shifts or dislocations occur in the economy, large institutions have access to niche – often fleeting – markets, allowing them to move quickly during an event such as COVID-19 or the financial crisis, which triggers a short-lived buying opportunity. Conversely, bulge bracket and wire-house retail shops may have lengthy processes for setting up a new strategy, which complicates their ability to be a first-mover. Without these hurdles in place, institutional investors can be nimbler and more responsive to major dislocations, enhancing their return opportunities.
Beyond access and reach, institutions have the benefit of scale – they enjoy lower cost structures and fee advantages due to the size of their investment portfolio. And when their portfolios are constructed correctly, a skilled advisor can often find enough savings at the solution or product level to more than compensate their own expenses.
Missed opportunities?
Once ultra-wealthy clients understand the disparity between institutional and retail investing, they will likely want to know why more $100-million-plus clients don’t invest like an institution?
Unfortunately, many self-made entrepreneurs may not know what they’re missing. These investors often remain with the same financial advisor instead of scaling up to a firm that has the capabilities and unique experience of serving the small handful of families that fit into this category. Although longtime financial advisors may have the best intentions, they simply can’t access the same caliber of services and offerings. The truth is that these clients have outgrown their advisors.
While it might seem tempting for these rarified investors to work directly with institutional investment firms that serve pensions and government entities, this can also be a costly mistake.
The upper echelon investors and institutions are different in two crucial ways. Unlike institutions, ultra high net worth investors have to pay taxes, so they must consider their results on a net-of-tax basis. Further pensions, endowments, or government entities, are typically run by committees. However, advisors serving well-heeled clients tend to work with multiple branches of a family, each with their own philosophy, goals, and parameters. A skilled advisor must know how to communicate and collaborate with clients, who bring different views, preferences, and perspectives.
When top investors select a potential provider, they should consider the following:
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Independence: Ultra-wealthy clients should work with a fiduciary, not a wire-house or brokerage firm, with the freedom to consider all options and choose investment opportunities that are in the client’s best interests.
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Reach: Select an advisor who can cast a wide net, not individual management shops that have made a name in only one category such as stocks, real estate, or private equity. Firms should have a global reach with multiple options among broad categories, with the ability to expand further to explore new options.
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Customization: Complex investors need a personalized plan, not a cookie-cutter, “heat and serve” mindset. Work with an advisor who will listen, respond, and provide client-specific solutions.
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Holistic services: As clients with complex needs, ultra-wealthy families should select a firm that provides complementary services, not one-trick-pony shops. Ideally, firms will have collaborative capabilities, orchestrating services such as advice, planning, investments, tax, administration, education, financing, trusts, family dynamics, and more to enhance the client experience and deliver superior results.
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Top partnerships: Wealth management firms serving the wealthiest clients must have established partnerships that provide access to institutional-quality resources, including manager research, technology, and more.
Life and relationships change, and ultra-wealthy investors shouldn’t settle for the status quo. They can reorient to a solution that best meets their new and evolving needs.
Ultimately, America’s wealthiest investors must recognize the importance of working with a provider who can deliver the best of both worlds: access to institutional-quality investments and strategies, with the counsel suited solely for the small sliver of clients that can invest like an institution.
Douglas W. Evans is Chief Investment Officer at Callan Family Office. In this role, Doug leads Callan Family Office’s rigorous investment process comprised of research, investment strategy, portfolio construction, and risk management. He spearheads the development of the firm’s investment capabilities, thought leadership, and cultivating partnerships to enhance positive outcomes for client portfolios. Additionally, he serves as a key liaison between the firm and the Callan Institute, which is widely recognized as one of the investment industry’s leading research and education forums.
In his current role, Doug draws upon more than three decades of experience in providing discretionary investment portfolios across liquid and illiquid assets and serving as an outsourced CIO for ultra-high-net-worth families, foundations, and endowments. With a strong macro perspective, Doug is a sought-after speaker and regularly appears in media and industry conferences.
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Advisor Perspectives welcomes guest contributions. The views presented here do not necessarily represent those of Advisor Perspectives.