Is Your Wealth Manager Adding Value

By Michael Episcope

Thirty years ago, wealth managers typically built investment portfolios using stocks and bonds alone. These were the only products at their disposal and made it possible for them to scale a book of business. “Smart managers” secured clients by claiming they could consistently beat the market, but we now know this is no longer possible.

The adoption of passive investing has commoditized a once valued service, and the wealth management world is fighting obsolescence.

The robo-advisor market has automated the portfolio construction and management process, offering better results at a fraction of the cost. o-Robadvisors 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.

High Performing Portfolios

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.

Related: Bond ETF Investors & Active Strategies Ahead

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.

Private Markets and Investing

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.