A previously highly valued service given by wealth managers, who construct investment portfolios using just stocks and bonds, has become commoditized due to the rise of passive investing. Thirty years ago, these were the only options they had for purchasing anything. For a long time, “smart managers” were able to attract clients by promising to outperform the market regularly.
The Robo-advisor industry has reduced costs while increasing portfolio development and management efficiency. For traditional wealth managers, it is becoming increasingly difficult to justify providing a similar service at a much higher cost in light of the rapid rise in the popularity of Robo-advisors among a younger generation of investors eager to take advantage of the advantages offered by technological advancements.
Wealth managers must find new ways to provide value to their clients’ portfolios and set themselves apart as this sector becomes increasingly commoditized. In the end, private real estate and other alternatives allow investors to earn large profits unrelated to stock prices. Because it takes time, effort, and expertise to find the best private opportunities, many wealth managers ignore the private market. They force their clients to find the investments independently, even though a diversified, high-performing portfolio requires a mix of public and private investments.
Sixty percent of the certified investors we questioned recently said they intended to reduce their stock holdings in search of these better prospects. Another interesting fact is that 90% of our 550 investors put money into one of our most recent private real estate funds without the assistance of their wealth manager. Having been a real estate fund manager and private investor for many years, I can attest to the value of diversifying one’s portfolio with real estate and other alternative assets.
David Swensen, the chief investment officer for Yale University’s endowment, is a prominent proponent of contemporary portfolio theory and has successfully employed it to make the endowment’s public and private investments more productive. His record of annualized returns over the last twenty years of 12.1 percent is the best among endowments. It has made him envy every portfolio manager in the world; he has accomplished this feat largely through the use of alternative investments, such as real estate and venture capital. Swensen’s knack for selecting exceptional managers is the key to his success as a private investor. A skilled manager can use private markets’ inefficiencies to generate superior profits because they are less competitive than public ones. Finding these exceptional managers calls for specialized knowledge and skill, which is why it contributes so much to the investor’s bottom line.
Many wealth managers do not present their clients with the best options when presenting their clients with private real estate and alternative investment alternatives. Multibillion-dollar managers like Blackstone and Carlyle, or high-fee non-traded real estate investment trusts, are the de facto recommendations. As private real estate is not an industry in which higher fee goods lead to higher profits or where bigger is better, this is just a wonderful strategy to earn mediocre or below average results. It has been found that the larger the management, the lower the returns on investments. According to historical performance data, the average manager who invests less than $300 million in real estate will outperform the top-tier multi-billion-dollar manager. Investments in well-known companies are seen as “secure” by both the wealth manager and the customer, making them a popular choice. Since investment of $50 million into a fund doesn’t generate enough revenue for companies like J.P. Morgan, Goldman Sachs, and Morgan Stanley, these institutions would never refer clients to smaller real estate managers.
We collaborate with many original wealth managers who see the significance of alternatives in a portfolio and the benefits of working with boutique real estate firms. Many of these organizations have an in-house investment researcher whose sole responsibility is to find new fund managers and niche market opportunities. Despite competition from Robo-advisors, they continue to expand their AUM and provide excellent service to their clientele by conducting in-depth research on their behalf. By providing their customers with an improved offering and a unique approach, they are increasing value for those customers.
In the past ten years, the advising industry has been revolutionized by more transparency and technological advancements, and this trend will only accelerate. Today, technology is being created to commoditize almost every facet of wealth management, and the 40-basis point full-service account is on the horizon. Integration of AI into digital advising platforms is rapidly approaching. But picking alternative investments isn’t something that can be mass-produced. There are almost infinite unique investment opportunities, but finding them calls for plain old-fashioned diligence and investigation. Those who can provide this service to their customers will succeed, while those who cannot see their profits decline and their client base disappear. The only option to increase market share in a field with headwinds is to embrace private real estate and other alternatives to build a better portfolio for the customer. And this is what retail investors need and want.
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Come join us! Email me at mark@dolphinpi.us to find out more about our next real estate investment.