- June 1, 2019: Vol. 6, Number 6

Roundtable: Lessons lost on RIAs


Family offices, foundations and endowments have been teaching many lessons about effective investing, particularly with regard to alternatives and real assets. Unfortunately, many RIAs still are neither paying attention nor adopting the strategies that have profoundly enriched many family offices, endowments and other investing organizations.


Clint Edgington
Beacon Hill Investment Advisory

A primary difference between single-family offices and the registered investment adviser’s retail clients they serve is the time horizon they have and are judged upon. While retail clients can be patient, most often their time horizon, and therefore how they judge their RIA, is much shorter, perhaps even as short as just one year. Family offices investing for their own accounts, however, have time horizons that can span generations. A longer timeline allows the family office to invest in longer-term illiquid assets. Why is that a good thing? Substantial evidence shows such investing provides a liquidity premium that can increase returns for patient investors. In addition, this longer time horizon allows the taxable family offices to look beyond nominal expected returns and focus instead on expected after-tax returns, which are more critical. These factors created by a longer horizon give a family office an advantage. RIAs would improve service to their clients by communicating this in their client meetings and providing alternative investments that benefit from both the liquidity premium and tax benefits; such as real estate funds, opportunity zone funds, and other similar investments.


Kenneth Munkacy
Senior managing director
Kingbird Investment Management

Funds are comfortable territory for many registered investment advisers, but they shouldn’t be their sole strategy. RIAs would be wise to learn from the many innovative family offices who are investing directly into operators, asset allocators, club vehicles and more. Alternative investments are playing an increasingly prominent role in family office portfolios, and value-added real estate, in particular combines bond-like attributes of current income with the potential for capital appreciation — much like dividend-paying stocks and ETFs, but often with less volatility. There is a particularly strong case for RIAs to consider direct investments in real estate as more economists are starting to raise alarm bells about the early warning signs for a recession. Now is the time for RIAs to prepare their clients’ portfolios for the next economic downturn. Multifamily investments are particularly defensive and worthy of consideration to further insulate portfolios against a broader market decline and inflation.


Daniel Wildermuth
Kalos Financial

Endowments are increasingly embracing private markets with allocations to alternative investments by larger endowments averaging nearly 60 percent. Public market exposure continues to shrink as Yale’s minimal 3.9 percent exposure to domestic equities illustrates. By contrast, few RIAs add meaningful allocations to non-public market sectors, such as private equity, natural resources or hedge funds, although some may include a small slice of more easily accessed and understood real estate. In past years, the lack of updated pricing information and illiquid structures prevented advisers from charging fees, essentially preventing RIAs from adding private investments to client portfolios. Ironically, even if the investment was in a client’s best interest, an RIA could not recommend it because of regulations! Today, while some RIAs are slowly embracing non-public market exposure, change and progress remains very limited. Challenges include lack of experience, different investment structures, slow custodian adoption, limited access to many types of investments, and even simply inertia. In addition, public markets have been performing very well in recent years, making a focus on traditional equities easy to justify. Yet, as the long-running bull market grows older amid increasingly questionable economic fundamentals, RIAs may be wise to adopt the common practices long applied by endowments.


Adam Dretler
Diversified Trust (Nashville office)

When serving a family in a single-family office capacity, there are countless areas that need focus: trust administration, risk management, family business advisory, estate planning, family philanthropy, tax and, of course, investment strategy, to name just a few. However, one critical area that is often overlooked is family governance and investment policy — or, put more simply, creating guidelines and guardrails for the investments that future generations will be participating in. Early generations being served by a single-family office tend to have similar goals — the wealth is new, and the mandate often times is simplicity and preservation. What tends to be missed, however, is memorializing this with investment policy and family governance. By creating these “playbooks,” future generations, whose needs, goals and wants may be very different than the founding generation, will have enough engagement, involvement and flexibility to help determine the allocation necessary for their desired lifestyle, without feeling the disorganization that often results when there is no structure at all. With appropriate guardrails, leadership and engagement, the rising generations should feel blessed to have such resources, as opposed to the more common result where beneficiaries feel burdened by family wealth and believe their individuality is not recognized. While hard to think about when establishing a single-family office, or when choosing an outsourced partner, there will be a time down the line when subsequent generations are in leadership roles. If the road map for where you’re trying to go and how you’re going to get there is broken from the start, the likelihood of disappointment at some point along the way is much more probable.


Michael Felman
MSF Capital Advisors

More family offices are incorporating direct investments into their overall investment strategy. RIAs have traditionally shied away from these type of investments as they don’t typically have the skillset to properly evaluate these opportunities. Also, there are not many external diligence firms to which RIAs can outsource this function. Therefore, RIA firms would have to hire more staff, which increases their cost of doing business. From a risk perspective, direct investments tend to be riskier as your investment is being made into a one-off situation as opposed to a blind pool approach. On the other hand, direct investments, if properly done, can be used to enhance returns of your overall portfolio. Your direct investment portfolio can replace part of your actively managed alternatives portfolio. Besides reduced fees, direct investments allow next-generation family members to become more involved in the financial matters of the family. This would allow the RIA to interact in a meaningful way with the next generation of the family. Eventually, the next generation will need a financial adviser, which gives an RIA already working with the next generation a clear advantage. Therefore, an RIA that is not incorporating direct investments into their clients’ overall investment strategy is clearly missing the boat.


Richard Wilson
Family Office Club and Centimillionaire Advisors

One big difference in single-family office investing and how RIAs approach wealth management seems to be, for families we typically work with, in their treatment of direct investments. Many ultra-wealthy families break their wealth up into three compartments and manage those in distinct ways. These families typically have different team members, consulting firms, or whole teams dedicated to their traditional highly-diversified bucket, their cash-flowing commercial real estate assets as a second area, and their direct investments into operating businesses as a third area. This allows families to outsource the defensive portion if that is not their strength, use independent sponsors and property managers for cash-flowing real estate investments, and perhaps manage directly with full control in the space where their wealth was created. This gives them control, transparency, and helps focus their energies on where they will produce the most value. The insight here is that since most RIAs only advise on the diversified bucket of assets — for families worth more than $10 million — they end up doing direct investments with little oversight, guidance, focus or strategic framework. We see this often with $10 million to $30 million families, and the gap in solutions is even more pronounced once families get close to or over $100 million net worth to the centi-millionaire level.


Maria Elena Lagomasino
CEO and managing partner
WE Family Offices

Most wealth advisers are focused on the impending transfer of wealth to the next-generation heirs. But before it goes to the next gen, in many cases the wealth will be inherited by the wife. But what happens if and when the wife is unprepared to manage the family’s financial affairs? There are several things a woman can do to prepare herself to manage her family’s financial decisions in the event of her husband’s eventual death or incapacitation. First, a woman should know what she owns, her family’s cashflow needs and sources of income. Second, understanding the over-arching purpose of the family’s wealth is important so general planning can be accomplished. Third, establishing a regular, ongoing process to manage the family’s wealth and make decisions can help establish control. These steps can help give her the confidence to make decisions about her family’s financial welfare.


David Wertheim
Senior client portfolio manager

Many RIA firms, in particular up-market practices, are showing an increased willingness to implement real assets in their strategic asset allocation. That is inclusive of direct real estate, REITs, listed infrastructure and commodities, among others. The education and asset-class acceptance level have certainly increased in the RIA community over the years. The benefits of real assets are generally well understood — specifically portfolio diversification, alternative income generation, a potential hedge against inflation and, in some cases, higher risk-adjusted returns. It is difficult to pinpoint the exact average asset allocation to real assets in the RIA marketplace, but after working with RIA consultants in the channel for the past two decades, I would assess the direction is generally toward an increased allocation to the broad basket of real assets, a range more akin to what we would see with institutional investors.

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