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.
Innovative Wealth Managers
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 has 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 republished with permission from Value Walk.