Marin Community Foundation
Investment Habits of the UHNWI
Research

INSIDE THE BUBBLE: THE INVESTMENT HABITS OF THE WEALTHY INVESTOR

Originally published by AllAboutAlpha [link] on April 13, 2016

The wealthy have always worn a mantle of mystery: their gated communities, private memberships, exclusive clubs and the like emphasizing this “otherness.” Their investment management activities are no different; most high-net-worth investors employ a professional advisor to stand between them and those who clamor to serve them.

Yet the wealthy share many of the same investment goals and objectives as institutions. They want returns balanced by reasonable risk, some form of income, long-range planning that fits their current and future anticipated needs, and diversification among assets. Wealthy investors are as suited for alternative asset allocations as the foundations, endowments, and institutions that have been actively investing in them for decades. But the strategies most successful in accessing the wealthy community require a different set of tactics. Data and analysis take a backseat to interaction and education when breaking through to the wealthy audience.

FOLLOW THE MONEY

US Trust released a survey, Insights on Wealth and Worth®, in late 2015, which revealed some interesting findings about these investors. The survey encompassed a cross section of 640 high-net-worth and ultra-high-net-worth adults with at least $3 million in investable assets, equally divided among those who have between $3 million and $5 million, $5 million and $10 million, and $10 million or more.

  • First, 66% use some type of professional financial advisor such as a private banker, wealth manager, broker or financial planner, with about 25% relying on a private banker or wealth manager as their primary advisor.
  • Second, among the two-thirds of the wealthy using a financial advisor, they are also notably more likely to be using non-traditional investments in their portfolios.

BREAK ON THROUGH TO THE OTHER SIDE

So, how should alternatives managers get the ball rolling with these elusive but potential investors? Start with what is important to them. The high net worth community has been very clear on several fundamental values they consider core: relationships, trust, expertise, and guidance. Investment managers need to show that they share these core values before they can hope to persuade these investors to consider their offerings. Tactically, there are several avenues managers can explore in this effort.

  • Begin by building a relationship with their advisors. Most managers hold fast to the notion that, if they could only get an opportunity to sit down in front of an investor, they can sell them on their conviction and ability to deliver great results. What these managers fail to understand is that these high net worth investors are not the primary individuals they should pursue. As the survey findings reflect, most of these investors rely on the guidance of financial advisors to drive their investment activities. Managers who try to go directly to the investor often find themselves blocked or ignored, not because they are unsuitable, but because this method is outside the introductory channel preferred by most wealthy investors.

Time spent persuading advisors of the unique and attractive elements of their alternative offering will be time well spent in gaining introductions to the right types of high-net-worth investors who could potentially invest with them. This advisor outreach can be done in a number of ways: identification and individual contact, attendance at industry organizations and events where these advisors congregate, and referrals to appropriate advisors through professional networking.

  • Demonstrate integrity to earn their trust. Managers must show a history of consistent, ethical, and reliable decision-making and execution to impress upon advisors and high net worth investors that they are worthy of exploration. Prior to beginning the relationship-building process, managers should take a personal inventory and get clear on articulating and demonstrating examples of this holistic behavior. They might assemble a short list of references that support this integrity looking back through their personal and professional lives. This might include prior work, volunteer activities, personal interests and affiliations, and others.
  • Explain your process and abilities through storytelling and case studies. The power of communicating through examples is an underappreciated investment tactic in alternatives. Relying on performance history, peer rankings, and data analysis doesn’t resonate as powerfully as insightful interaction with the wealthy audience. Crafting two or three comprehensive investment examples can bring this less-appreciated and often misunderstood strategy into focus for advisors and investors, while helping them relate to their own portfolio objectives.

As a general guideline, managers might articulate why a particular investment target was attractive to them for their strategy approach, what was the market environment surrounding this target at the time of initiation, what occurred during the holding that supported or detracted from its position, and what outcome resulted from the exit of the position for the manager’s portfolio. A flow such as this illustrates in tangible form market opportunity, strategy approach and execution, and the value-add of the alternative investment differentiated from general market performance. This outline works regardless of specific strategy, and is more memorable than a dry recitation of performance data to the majority of high net worth investors seeking to be educated about alternative investments.

  • Educate them about the advantages of alternatives. Besides creating these strategy-specific case studies, managers can join the broader discussion of education by creating various forms of communication about the advantages of alternatives. While the institutional investment community is well-stocked by analysts, consultants, and investment management professionals with research, white papers, surveys, and regular reports on the discipline of alternative investing for portfolio allocation, there is a paucity of such material tailored for high-net-worth investors.

Most of the material currently available superficially discusses differentiation and non correlation in portfolio allocation. Adding the unique voices and expertise of alternative managers who build such products is much needed and desired by the advisors and investors who will ultimately select offerings from these managers. These managers can:

  • lend their commentary as industry experts to financial channels read by advisors and investors,
  • create their own educational newsletters or blogs highlighting a market perspective and outlook,
  • offer themselves to alternative conferences or events as speakers or moderators.

Persuasion is the key to all these tactics. Managers who embrace both education and implementation of strategy will make greater inroads with the hard-to-crack advisor and high net worth community that is open to learn from them.