Scott Welch, CIMA®

This article articulates why a goals-based approach to wealth management can be beneficial for advisors by:

• Highlighting some of the potential flaws of the more traditional approach;
• Discussing a why vs. what portfolio- construction approach;
• Illustrating what a goals-based approach might look like from a proposal- generation and performance-reporting perspective; and
• Summarizing how advisors might use a goals-based approach to differentiate themselves in an increasingly… Show more

This article articulates why a goals-based approach to wealth management can be beneficial for advisors by:

• Highlighting some of the potential flaws of the more traditional approach;
• Discussing a why vs. what portfolio- construction approach;
• Illustrating what a goals-based approach might look like from a proposal- generation and performance-reporting perspective; and
• Summarizing how advisors might use a goals-based approach to differentiate themselves in an increasingly digitized and commoditized wealth management industry. Show less

The high-net-worth (HNW) and multi-family office (MFO) markets are in a constant state of evolution, and the next 3–5 years will see a pace of change that will make Moore’s Law proud.

As a starting point for addressing the question of how to take advantage of this accelerating pace of change, it is worthwhile to examine some of the trends with HNW investors and MFOs since the financial collapse of 2008. At a “macro” level, one tectonic shift facing MFOs is that the growth and evolution… Show more

The high-net-worth (HNW) and multi-family office (MFO) markets are in a constant state of evolution, and the next 3–5 years will see a pace of change that will make Moore’s Law proud.

As a starting point for addressing the question of how to take advantage of this accelerating pace of change, it is worthwhile to examine some of the trends with HNW investors and MFOs since the financial collapse of 2008. At a “macro” level, one tectonic shift facing MFOs is that the growth and evolution of dis-intermediated informa- tion, social media, and “online advice” will be disruptive forces in the wealth manage- ment industry. The next generation of investors is technology savvy, more collaborative, less trusting of tradition, and more socially conscious.

How, then, should advisers and MFO professionals serving investors and families sharing these characteristics build portfolios and run their businesses? How can they help clients achieve evolving goals and objectives and/or take advantage of industry trends? Are there “best practices” among successful, profitable, and fast-growing advisers that can be identified, analyzed, and adopted?

This article summarizes six available tools or solutions available to MFOs that can empower them to build portfolios and manage practices that are well positioned to address the sophisticated and evolving demands of the HNW families of the future. Show less

How should advisors to HNW investors and families be building portfolios and running their businesses? How can they help clients achieve evolving goals and objectives, and/or take advantage of industry trends? Are there "best practices" among successful, profitable, and fast-growing advisors that can be identified, analyzed, and adopted?

This article summarizes "six habits" we see successful advisors deploying to address the sophisticated demands of HNW investors.

In the article we summarize our perspectives on what "state of the art" performance reporting should include and how wealth managers and advisors can use those reports as important business development, client retention, and practice management tools.

Opinions and use of alternative investments have fluctuated wildly
since they became popular with high net worth (HNW) investors
in the early 1990s. The events of 2008 resulted in many investors developing a serious aversion to the limited partnership structure that alternative investment strategies were most commonly housed in. The subsequent explosion of "AI" mutual funds was one result of this aversion. So where is the industry headed now?

This article first revisits the… Show more

Opinions and use of alternative investments have fluctuated wildly
since they became popular with high net worth (HNW) investors
in the early 1990s. The events of 2008 resulted in many investors developing a serious aversion to the limited partnership structure that alternative investment strategies were most commonly housed in. The subsequent explosion of "AI" mutual funds was one result of this aversion. So where is the industry headed now?

This article first revisits the argument for including alternatives within diversified portfolios, not ignoring the events of 2008–2009 but also applying a longer lens to historical performance. It then analyzes the trends and developments in alternative investing over the past five years and discusses how they dictate a different conversation with investors about their purpose, acceptable or unacceptable trade-offs, and appropriate ways to incorporate alternatives in well-diversified portfolios. Show less

The conversation between advisor and investor about alternative investments has changed. Given the growth of mutual fund products, an aversion to LPs is no longer a reason to avoid alternative strategies. Assuming that an investor’s sophistication and investment objectives warrant including alternative investments within a diversified portfolio, the conversation needs to focus on the characteristics an investor expects and desires from that alternative exposure: What is the appropriate… Show more

The conversation between advisor and investor about alternative investments has changed. Given the growth of mutual fund products, an aversion to LPs is no longer a reason to avoid alternative strategies. Assuming that an investor’s sophistication and investment objectives warrant including alternative investments within a diversified portfolio, the conversation needs to focus on the characteristics an investor expects and desires from that alternative exposure: What is the appropriate trade-off between performance, risk, liquidity, fees, and regulatory oversight?

One result of such conversations may be an eventual acknowledgment that “alternative investment” is an unfortunate misnomer; that the real discussion is about what constraints investors want on the construction and management of diversified—and ultimately pretty traditional—portfolios. Show less

The endowment model did not “fail” in 2008, and should not be discarded as a long-term investment philosophy. It is true, however, that the different time horizon, investment objectives, and liquidity profiles between large endowments and other investors should be understood and planned around.

With these differences in mind, “endowment model” for most high net worth investors should mean:
• Broad diversification;
• Intelligent use of active vs. passive investment strategies… Show more

The endowment model did not “fail” in 2008, and should not be discarded as a long-term investment philosophy. It is true, however, that the different time horizon, investment objectives, and liquidity profiles between large endowments and other investors should be understood and planned around.

With these differences in mind, “endowment model” for most high net worth investors should mean:
• Broad diversification;
• Intelligent use of active vs. passive investment strategies (i.e., cost/benefit optimization of active management fees);
• A prudent use of alternative investments determined by personal liquidity constraints;
• A long-term time horizon; and
• Investment discipline through full market cycles.

Investors who built portfolios in this manner, including a reasonable allocation to alternative investments, may have seen their portfolios decline in 2008 but, over a longer horizon, they have enjoyed improved returns, lower risk, and more consistent performance.

Despite the current anti-endowment model rhetoric, the core/satellite approach – adjusted appropriately for the characteristics of individual investors – still represents the best way to build investment portfolios for long-term success. Show less

The impact of the financial collapse of 2008 and early 2009 continues to reverberate through the wealth management industry.

In addition, the events of 2008 shook long-practiced investment paradigms – much of what we told our clients for years were the keys to long-term investment success seemed to fail us, right when we needed them most. Investors questioned not only our profession but also the quality of our advice.

Just to round out the picture, much of the wealth management… Show more

The impact of the financial collapse of 2008 and early 2009 continues to reverberate through the wealth management industry.

In addition, the events of 2008 shook long-practiced investment paradigms – much of what we told our clients for years were the keys to long-term investment success seemed to fail us, right when we needed them most. Investors questioned not only our profession but also the quality of our advice.

Just to round out the picture, much of the wealth management industry charges its clients on a percent of Assets under Management (AUM) basis. With the markets crashing and clients moving what was left to cash, even those advisors who managed to retain their clients saw revenues fall dramatically, putting their enterprise viability at risk and leaving them working harder for less money. Overall, it was a challenging and difficult time for wealth advisors to high net worth (HNW) clients.

And yet…

Market disruptions always put money into motion. The overwhelming consensus is that, as the markets (perhaps) recover and investors begin to put money back into riskier assets, the migration of clients to new advisors will be immense. Perhaps counter-intuitively, disruptive markets are frequently the best times for advisors to grow their practices – if they embrace the new realities of what clients want and expect from them.

This article discusses appropriate “best practices” for wealth management firms, post-2008. It segments the discussion by addressing three specific questions: What has not changed, what has changed, and what has really changed. Advisors who successfully deliver differentiated and tax-effective investment portfolios, move beyond sharing data and information and, instead, provide their clients with wisdom and knowledge, and who can rebuild client trust in a post-Madoff world will be the ones best situated to capture the massive client and asset migration expected to take place over the next several years.
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The empirical disconnect between market reality and many of the underlying assumptions of MPT is well known and has been understood “since inception”. Therefore, it is inaccurate to state, “MPT failed in 2008". It might be more accurate to state that, because of the Minsky-like stability of the capital markets for the past twenty years, many market practitioners inappropriately or sloppily applied MPT.

Nevertheless, we did learn – or relearn – many invaluable lessons from the events of… Show more

The empirical disconnect between market reality and many of the underlying assumptions of MPT is well known and has been understood “since inception”. Therefore, it is inaccurate to state, “MPT failed in 2008". It might be more accurate to state that, because of the Minsky-like stability of the capital markets for the past twenty years, many market practitioners inappropriately or sloppily applied MPT.

Nevertheless, we did learn – or relearn – many invaluable lessons from the events of 2008. Among them:

• Uncertainty is NOT the same thing as risk;
• Portfolios are more risky than indicated by traditional MPT metrics;
• Most portfolios are more risky than investors can tolerate in the event really bad things actually happen;
• The real menace is not “known risk”;
• We do not need to “throw the MPT baby out with the 2008 market collapse bathwater”; and
• We do not need to wait for an academic or theoretical breakthrough to improve our portfolio and risk management capabilities.

Can we improve the risk/return profile of client portfolios without throwing out our existing models and/or learning higher mathematics? 2008 certainly reminded us that MPT and Mean Variance Optimization do not capture all the risk in an investment portfolio. Furthermore, we re-realized in a very nasty way the fact that correlations are not static and, in particular, increase during times of market distress. Finally, many investors learned, the hard way, that risks like counterparty risk and liquidity risk are very real, but are not quantified or captured with MPT risk statistics.

Perhaps “Modern Portfolio Theory” does not really need more and/or better “theory”. Perhaps all it needs is a heavier dose of investor common sense and Modern Portfolio “Reality”. Show less

The concept of core/satellite investing is not new – the idea of building a strategic “core” of inexpensive, tax-efficient investments to meet long-term portfolio objectives and surrounding that core with more expensive, high-performing satellite managers has been around for a long time. Most of the literature on the subject, however, shares a common characteristic – it is written by academics or practitioners for other academics or practitioners.

Likewise, the “separation of alpha and… Show more

The concept of core/satellite investing is not new – the idea of building a strategic “core” of inexpensive, tax-efficient investments to meet long-term portfolio objectives and surrounding that core with more expensive, high-performing satellite managers has been around for a long time. Most of the literature on the subject, however, shares a common characteristic – it is written by academics or practitioners for other academics or practitioners.

Likewise, the “separation of alpha and beta” – arguably the most industry-changing, paradigm-busting trend in investment management today – is largely written about in highly quantitative and academic terms.

What this article attempts to do is present the arguments for a core/satellite investment approach in a practical, non-technical manner – the way it might be explained to a potential investor or new client. While the use of some terminology is somewhat unavoidable, the intent here is distill – that is, hitchhike on – the quantitative and academic work that has been done on this subject and present it in an intuitive and easy-to-understand way. The focus will be on (i) why it makes sense to include a healthy allocation to passive and/or tax-enhanced index strategies, (ii) why a diversified portfolio should include alternative investments, and (iii) how to build an intelligent core/satellite portfolio. Show less