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22 Nov 2010

Private Client Investing - One Size Does Not Fit All

It goes without saying that all investors want to be assured of only the best service and knowledge when it comes to the decision of whom to trust for financial advice and investment assistance.  So how does one choose between using a multi-disciplinary service organisation – a ‘one-stop shop’ - such as an investment bank, versus the services offered by a specialist investment management business?

Private client wealth management is complex and according to Darron West of Foord Asset Management, it is this complexity associated with wealth that is part of the pretext for private client wealth management.

In some quarters, the solution to managing this complexity has manifest in a proliferation of “one-stop” multi-disciplinary service organizations that offer all manner of products and services.

“There is little doubt that such an offering is convenient, however, it might be neither optimal, nor effective, nor particularly empowering for the client,” warns West, who advises that personal portfolio clients would be far better serviced by a specialist asset management company.

“Tailor-made portfolio management is a highly specialized vocation; it is a synthesis of an appreciation for and the skill to manage the particular risks and complexities faced by high net worth investors.  A focus on asset management also means that there are no competing incentives to cross sell services such as a brokerage where the focus is not on generating the best risk adjusted returns.”

The extent and magnitude of risks confronting personal clients are considerable, indeed, some are even unique, and all of these risks require specialist attention to be managed optimally.  Often, these clients are able to articulate their requirements very specifically and credible tailor-made investment management necessarily involves the ability to translate those requirements and their attendant risks into a suitable customized portfolio which suits the client’s needs.

According to West, a customized investment portfolio for a high net worth client must take account of factors including income requirements and spending patterns, longevity, risk tolerance, taxation, ease of realization (liquidity), legal formalities and structures, geographic diversification and time horizons.

“Most personal portfolio clients tend to appreciate the benefits of having a long investment horizon.  Consequently, such clients also understand the merits of owning a portfolio that comprises only the best, most appropriate investment ideas.  Also, since no one achieved wealth by being penny wise and pound foolish, personal portfolio clients should insist that managers are not paid to regress to some mean return or implement industry average portfolios. Rather, managers should be paid to generate their returns with conviction.  Hence, whilst there is obvious merit in using diversification as often (but not as much) as possible, the best performing portfolios tend to be those with a small selection of high conviction holdings.”

“Personal portfolios are often free of regulatory and other constraints that dictate the extent of investment in asset classes not ordinarily available to collective investment schemes,” says West.  “A tailor-made investment mandate may permit a particular investment activity that, when practiced by a proficient manager, may lead to greater returns being earned with lower overall risk.”

“Private portfolio clients looking to achieve the best possible returns on their investments would be well advised to choose a specialist firm where they are also assured of no conflicts of interest, personal attention, a focus on detail and the reward of results through specialist knowledge and insight,” concludes West.

Note to editor:  It should be noted, that while these portfolios are concentrated around best ideas, effective portfolio management means that the portfolio cannot be too small.  Taking various factors into consideration, Foord’s guideline indication is that one would need at least R5 million to construct an effective personal portfolio.



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