The recent study from the Institute of Private Investors (IPI) was quite revealing of the investment trends and attitudes toward advisor relationships by the ultra-wealthy.
The main takeaway from a media perspective is that, to attract these clients, advisors need to make them partners in the asset management process. This is something many advisors are reticent to do with clients at any asset level.
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Of course, the real key to developing relationships with families of wealth lies much deeper. It involves identifying the real issues families of wealth face. And those issues are not so very different than those faced by those with lower net worths.
The study primarily reflected the views of investors with at least $30 million in assets; 40% of respondents have assets of $200 million or greater. But these numbers don't matter nearly as much as those following.
Fully 32% of respondents with up to $50 million in assets say they are comfortable handing over the entire management piece to their advisors. That means the other 68% are not.
Ever since the double whammy of the Madoff scandal and 2008 financial crisis, those with serious investment dollars have begun to think twice about offering complete trust to their advisors.
Only 28% of families now say that they are confident their current investment strategies could effectively manage future geopolitical crises or domestic policy shifts.
Only 38% of advisors surveyed felt confident saying their firms had less conflict of interest, more reasonable fees, and greater transparency than they did five years ago.
These statistics are only further testimony that our industry as a whole continues to have the wrong focus, regardless of what marketing materials may say.
Contrast these figures with the 36% of families who turn over the management reins entirely to someone they have in-house, usually a family member or someone well-known to the family.
Also contrast them with the mere 10% of families outsourcing their CIO function as a result of the Dodd-Frank redefinition of a family office who give that person full discretion.
Truth is, even trusting someone in-house has its risks, risks that are much less easy to identify. If that in-house person is a family member, it can easily breed distrust among family members who had no say in that person’s appointment.
It’s not unusual for family leadership to blindly trust family members or advisors close enough to be considered part of the family—something the IPI report says they are very reluctant to do with external advisors.
This poses an even greater threat to the family wealth than a Madoff, a Stanford, or a domestic policy shift.
Family dynamics can make it difficult for other family members to challenge such an appointment even when there is evidence of subpar management ability and those family members have the right to do so.
The real message from the report is that families of wealth—even those with fewer assets than represented in the IPI study—desperately need a different type of relationship with their advisors, whether those advisors are in-house or external.
Keeping a closer eye on investment strategies and their implementation as well as dealing with advisors they know more closely is a good first step on the part of families. Partnering with clients in devising and implementing an investment strategy is indeed a step in the right direction for advisors.
But the advisor-family client relationship that most benefits
families of wealth is one that offers not only the objectivity of someone who is technically external to the family but also someone who has taken the time to know the entire family—not just leadership—intimately and fully.
Such an advisor can help the family identify goals that are authentic to them, then jointly design an investment strategy to help them achieve those goals.
Even more importantly, this person can give the family—especially leadership—the courage to make difficult decisions at critical points that they might otherwise not address, either because the dynamics in the family inhibit them or because they are fearful of what's happening in the markets.
This is the time when they need an advisor whose philosophy of wealth management begins with the entire family's view of success. Why shouldn’t that advisor be you?