Investing Education

How Your Wealth Manager Should be Adding Value to Your Portfolio

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The adoption of passive investing has commoditized a once valued service provided by wealth managers, who used to build investment portfolios solely using stocks and bonds. These were the only products readily available to them thirty years ago. “Smart managers” would win business by claiming they could consistently beat the market, which is no longer possible.

The robo-advisor market has automated the portfolio construction and management process, offering better results at a fraction of the cost. Robo-advisors have been around less than ten years but are now household names amongst a younger generation of investors who embrace the benefits of technology, making it more difficult than ever for traditional wealth managers to justify providing a similar service at a much higher cost.

As this market becomes more and more commoditized, it means that wealth managers need to turn to other solutions to add value to their clients’ portfolio and differentiate themselves. Ultimately, what investors want are opportunities that offer high returns without correlation to stocks, which alternatives such as private real estate provide. Diversified high-performing portfolios require a mix of both public and private investments and yet so many wealth managers ignore the private market, leaving their clients to find the investments themselves, because it takes time, effort and expertise to find the best private opportunities.

We recently surveyed our accredited investors and found that 60% of respondents said they planned on decreasing their equity exposure in search of these better opportunities. Also, 90% of our 550 investors invested directly in one of our recent private real estate funds without the help of their wealth manager. As a long-time investor in private real estate and a real estate fund manager, I have personally realized the benefit of investing in real estate and other alternative assets first hand, and I’m not alone.

David Swensen, CIO of Yale University’s endowment, has been a champion of modern day portfolio theory and has utilized both public and private investments to optimize portfolio performance. His track record of 12.1% annualized returns over the last twenty years — earned without taking extraordinary risk — is the best amongst endowments and has earned him the envy of every portfolio manager in the world, and alternative investments such as real estate and venture capital played a big part in achieving this performance. Swensen’s secret sauce in private investing is his ability to pick top managers. The private markets are less efficient than public markets, enabling a good manager to exploit market inefficiencies and deliver outsized returns. Finding these top managers takes honed expertise, which is why it’s such a driver of value to the investor.

Many wealth managers who present private real estate and other alternative investment opportunities to their clients are simply not including the right opportunities. The de-facto recommendations are multibillion-dollar managers such as Blackstone and Carlyle or high-fee non-traded REIT’s. Unfortunately, this is only a great way to achieve average or below average returns, as private real estate is not a business where high fee products lead to better returns or where bigger is better. In fact, there is a strong inverse correlation between manager size and investment returns. Historical track records in real estate tell us that the average manager investing less than $300 million will outperform the top tier multi-billion-dollar manager. But big names are easy for wealth managers to sell to clients because they are considered “safe” investments for both the manager and the client. Companies like J.P. Morgan, Goldman Sachs, and Morgan Stanley would never bring clients to smaller real estate managers because investing $50 million into a fund doesn’t generate enough revenue for their businesses.

To be fair, we do work with many innovative wealth managers who understand the important role alternatives play in a portfolio and the value that can be gained from investing with smaller managers in the real estate space. Many of these companies employ a full-time investment researcher dedicated to identifying fund managers and unique opportunities in the market. They conduct exhaustive due diligence on behalf of their clients and are significantly growing their assets under management despite the headwinds posed from robo-advisors. They are adding value by delivering a better product and a differentiated solution to their clients.

Transparency and technology have changed the advisory market drastically and will continue to do so even more over the next ten years. Technology is being developed today to commoditize virtually every area of wealth management and the 40 basis point full-service account is right around the corner. Artificial intelligence incorporated into digital advisory platforms will soon be a reality. What can’t be commoditized is the selection of alternative investments. There are an endless number of proprietary strategies and investments, but it requires good old fashioned hard work and research to uncover them. Those who deliver this service will prevail and those who don’t will watch margins erode and clients flee. Embracing private real estate and other alternatives is not only a way to construct a better portfolio for the client, but also may be the only way grow market share in a field with robust headwinds. More importantly, this is what individual investors expect and want.


This article was originally published on ValueWalk.

This article is intended for informational and educational purposes only and is not intended to provide, and should not be relied on, for investment, tax, legal or accounting advice. The information is provided as of the date indicated and is subject to change without notice. Origin Investments does not have any obligation to update the information contained herein. Certain information presented or relied upon in this article may come from third-party sources. We do not guarantee the accuracy or completeness of the information and may receive incorrect information from third-party providers.