Many private wealth managers seek to outsource the management of client investment portfolios. Investors with $10 million or more have new investment expectations, and outside portfolio managers must have certain capabilities to keep up with these needs. The high-net-worth investor requires more portfolio customization than ever before.
Separate account structure or "a la carte" menu formats are widely available to clients outside the high-net-worth category and no longer competitive.
When competing for clients, the successful wealth advisor will offer sophisticated portfolio management services that are truly tailor-made for each client. This article explains how a wealth manager can identify investment managers who offer state-of-the-art portfolio management for high-net-worth clients.
Outsourcing And Its Importance
Private wealth managers have always been interested in outsourcing the management of client investment portfolios. Even though most usually manage some of their clients' investment assets themselves, they may not have adequate staff for handling all types of asset classes. A firm with a 30-year track record of managing traditional long-only equities and bonds in a balanced strategy, for instance, may outsource an emerging market equity sleeve to a manager with an established track record, substantial infrastructure and significant assets under management in the strategy. Or they may outsource the management of a private equity strategy because of the specialized expertise and research that is required. Outsourcing essentially extends the staff for private wealth managers who prefer not to add their own full-time resources to build out a strategy.
Market research suggests that many private wealth managers outsourced at least some of their asset management strategies over the last year. Since private wealth managers keep searching for new ways to gain high-net-worth market share, the outsourcing trend should continue.
Driving The Outsourcing Demand
As high-net-worth clients become more educated about their portfolios and compare notes among their peers, most will become familiar with sophisticated management models that have gained popularity. In the past, the state of the art for wealthy clients' investment portfolios was simply separate account management, in which a financial advisor assembled a diversified portfolio handled by a variety of professional investment managers. With the advent of broker-sponsored "wrap platforms," separate account management migrated to investors who had less than those in the high-net-worth category, making such investment practice common. The need for better quality services for investors in all wealth categories has caused a "downward migration" of high-end services. This movement is a seismic shift, like offering first-class services to coach-class prospects. All now enjoy services that were formerly available only to those in the next higher category of wealth.
From the private wealth manager's perspective, it has been much easier to compete by moving down in client size rather than up. The ultra-high-net-worth space is a crowded, highly desirable market category. Gaining any market share is challenging. By offering high-net-worth-like services to those with smaller accounts, private wealth managers have more easily gained clients in the battle to win more market share.
Private Wealth Managers Outsource Tailored Portfolios
Lean staffing at most wealth offices limits the areas of quality concentration. Even the largest private wealth managers need to outsource portions of their portfolios, because the range of expertise is simply not available at one firm. Even if wealth advisors strategically decide to add expertise in house, unless they buy an established manager with a five-year track record, the office will have to incubate a funded portfolio (not a cashless "model") for about five years before employing the strategy in an asset allocation scheme. At smaller staffed wealth advisors, most principals wear many hats, and it is virtually impossible to add intensive investment management to the mix. Outsourcing is an obvious solution.
The Rise Of The "Tailored Portfolio"
If a coach-class flyer can now travel like a first-class client, what is left to attract a first-class prospect? The answer is a true custom portfolio, the equivalent of Air Force One accommodations. The high-net-worth base has now reached upward to the models that once were uniquely employed by the world's wealthiest investors. These custom portfolios offer structures not found in the lower minimum wrap models. The goal of these state-of-the-art strategies is to offer better risk-adjusted returns against very client-specific circumstances and constraints. These investment structures could be called "tailored portfolios."
Tailored portfolios have surpassed the core-satellite/SMA approach to managing accounts and are truly the state of the art for high-net-worth investors with assets of $10 million or more. The core-satellite/SMA portfolio used to be enough to engage most sophisticated clients. Basic core investments such as U.S. equities and fixed-income strategies were supplemented by active managers of more esoteric strategies, such as emerging market, high yield, private equity, hedge funds, etc. Private wealth managers often designed the mix of asset classes to match the risk profiles of each client, but it was difficult to accommodate client-specific idiosyncrasies within the limitations of the model. Enter the tailored portfolio approach.
Most "new money" prefers the tailored approach because it better fits their circumstances. Entrepreneurship, scientific discovery and business ventures are more complicated sources of wealth in the 21st century. These new generations of wealthy clients usually present more financial complexities that often don't fit the core-satellite formalism. Their estates require more customization than ever before.