UHNW turn to fixed-fee consultants
Investment consultants are
seeing increased demand from ultra high net worth clients in search
of advice on which wealth managers they should invest their money
with. The consultants in many respects operate like family offices,
with fixed-fee structures and open architecture investment
models
Ultra high net worth clients are
increasingly appointing consultants to monitor investment
performance because of the complexity of structures and terminology
used by wealth managers. According to a Booz & Co report
released last month, fixed fee external consultants that can help
ultra high net worth (UHNW) clients interpret performance data are
particularly in demand.
Their ability to provide due
diligence and independent investment advice has become a more
sought-after commodity in an investment environment which has a
greater emphasis placed on risk management.
Sanna-Liisa Valtanen, director of investment
consulting at Asset Risk Consultants, said the prevailing trend
among UHNW clients was a change in attitude following the
volatility of the last two years.
“Investors are much more aware of risk and,
following the recent market turmoil, concentrate on the overall
risks in their portfolios much more than when markets were rising,”
she said. “Clients are moving towards absolute return targets over
the long term rather than focusing on relative returns or focusing
on the benchmark.”
Benchmark-based, or passive return strategies,
have been criticised following a decade in which equities
underperformed government bonds. Some investment managers have
started to take the view that the time scale required for a largely
passive strategy to make money is too long, and that clients prefer
the stability of regularly compounded income rather than vast
swings in their fortunes (see PBI 254).
Valtanen, who joined ARC in 2000 after working
in treasury risk management at Barings Asset Management and global
fixed income at JPMorgan, said the investment psychology among UHNW
investors had turned full circle over the last 10 to 15 years.
“In the 1990s, private clients were thinking
in an absolute return manner,” Valtanen said. “They had, for
example, a 7 percent target over a 10-year cycle in their mind,
rather than thinking about having half their portfolio in bonds and
half in equities and comparing them with the benchmark.
“This changed in the late 1990s during the
soaring markets on the back of the TMT [telecom, media and
technology] boom. Investors were chasing the markets and became far
more benchmark, or relative returns, oriented. Since the 2008
crash, investors are again focusing on their ideal return target
over the long term, having become more focused on risk and wealth
preservation rather than pure growth.”
ARC, licensed in Guernsey and Jersey, has
around 60 family relationships and assets under consulting of circa
$5 billion. The business has some similarities with multi family
offices, in that it appoints managers and runs mandates, without
actually offering any of its own products or custody services.
While some family offices, including Stonehage in the UK and
Geneva-based Global Wealth Management, have started offering their
own products, this is not part of the ARC strategy.
Valtanen said independence and impartiality
was one of the most appealing parts of ARC’s offering to UHNW
clients, though she would not reveal the business’s fee
structure.
“We do not run money, and make no day to day
calls on asset allocation or stock selection,” she said.
“We focus on a longer term strategic asset
allocation, rather than dealing with the day to day management of
portfolios. Thus, we are firmly on the client’s side, helping them
to get the best out of the investment world with the aim of
maximising the client’s wealth.”
“Our fees are clean. When we negotiate fees on
behalf of a client we do not take any trails. All of the benefit
goes to the client, so we tend to be fee neutral or fee positive to
the client in reality. It is important to highlight the
independence of the business. There is no incentive for us to
favour ‘Manager A’ over ‘Manager B’.”
The primary services offered by ARC revolve
around risk profiling, strategic risk allocation, manager selection
and performance monitoring. However, as investment consultants, ARC
deals with all wealth management related issues faced by their
clients.
The process with new clients typically starts
by drawing up a client risk profile. ARC then looks at the overall
asset allocation of the client to see if the current portfolio
matches that risk appetite, followed by analysis of the performance
by the existing managers used by the client relative to the
managers’ benchmarks and the peer group.
“We help clients make decisions on an ongoing
basis, help solve problems and help them appoint new managers and
consolidate if needs be,” said Valtanen.
One particularly difficult process for UHNW
investors to go through is when they decide to change investment
manager. The process can be costly, and consultants can often help
smooth this process, along with minimising the associated costs,
according to Valtanen.
“The other reason clients come to us after a
difficult period is that they are thinking about whether their
managers are doing their job well enough,” she added. “Through our
private client indices we have a very valuable tool with which we
can monitor the performance of different managers and we can help
investors find the ones that suit them most. That is not just
purely returns driven – personality has an important role to play
as the relationship between the client and manager can break down
purely due to lack of communication or misunderstandings.”
ARC’s private client indices cover investment
managers in four different currencies across four different risk
profiles: cautious, balanced, steady growth and equity. Around 40
managers feature in its sterling-based index. They sign up to
provide information for the indices, which provides ARC with an
insight into the performance of different investment managers for
different types of client requirements.
Further reading: Family offices becoming more
professional investors