To the average investor, how rich people manage their portfolios is likely a mystery. Do they have access to secret tools and vehicles that the rest of us don’t? Can the average person benefit from using their techniques?
It is true that rich people use methods not always available to the rest of us. And the approach that money managers employ for well-heeled clients often differs from investors with more modest portfolios.
While some might call them rich, the investment industry prefers to call them high-net-worth (HNW) clients. Historically that has meant a person with net investable liquid assets of at least $1-million. That excludes the value of a principal residence, registered accounts such as RESPs and RRSPs, and net of all debt.
But while their investments may be larger in size, they are usually made up of the same kinds of assets as those with smaller portfolios. As a result, many firms define high net worth as an individual or family with liquid investable assets in excess of $5-million, and ultra-high-net-worth (UHNW) as those whose liquid net worth is greater than $25-million.
One of the firms making that distinction is Montreal-based wealth manager Blue Bridge. Ronald Mayers, senior vice-president of wealth management, says his firm takes a much different approach to investing for high-net-worth investors, as they can access far more investment opportunities. These include private equity, venture capital, high yield debt, infrastructure, real estate, agriculture, commodities, currencies and hedge funds.
While of course there are no guarantees, these investments can often present returns that are superior to more widely available investment products.
One area Mr. Mayers highlights is venture capital – that is, directly funding private companies. Not only are there usually minimum amounts required for such investments, the greater risk associated means they make sense only if you can invest in more than one.
“You generally don’t succeed by picking one or two deals at a time,” he says. “You either want to develop a portfolio or be willing to stay at it until you achieve a result that compensates you for your prior losses as well as an outsized return.”
Mr. Mayers also notes that high-net-worth investors who are entrepreneurial often invest not only money but also their time, taking board seats in startups where their experience can provide guidance to management, protect their investment and contribute to the return they hope to achieve. He also points to high-net-worth networking opportunities that have recently been formalized by organizations such as Tiger 21.
Speaking of Tiger 21, here is how its members, more than 500 high-net-worth investors in North America and London, were investing in the first quarter of this year:
- Real estate, 30 per cent
- Public equities, 23 per cent
- Private equities, 21 per cent
- Cash and cash equivalents, 10 per cent
- Fixed income, 9 per cent
- Hedge funds, 5 per cent
- Commodities, 1 per cent
It’s not a surprise that real estate plays a key part in the portfolios of wealthy investors. Property has an inherent and tangible value that stocks and bonds do not. As well, real estate provides diversification, as its value traditionally does not closely match the ups and downs of stock and bond markets.
And perhaps the most important factor driving interest of late: Real estate has been one of the world’s top performing sectors over the past 20 years, with the Toronto and Vancouver markets notable hot spots.
Mr. Mayers and his firm take a “family office” approach to managing the affairs of their high-net-worth clients. Family office refers to a comprehensive (and tax-efficient) structure to manage a family’s financial affairs. Among Blue Bridge’s staff are trustees, lawyers and accountants who provide full management of the affairs of its clients.
Like family offices, Canada’s banks are also increasingly taking a more comprehensive approach with wealthy clients.
Brad Simpson, chief wealth strategist and head of portfolio advice and investment research at TD Wealth Management, says the bank’s approach integrates estate planning, business succession, income taxes, investments, philanthropic goals and family governance.
Mr. Simpson recognizes that wealthy people have more avenues for investment. In addition to the alternative investments mentioned earlier, they collect art and even vintage wine.
“Alternative investments can have higher risk and the potential for higher returns,” he says. “But the opposite can also be true. The key is to do the required amount of diligence.”
One question wealthy investors must make is whether they are willing to accept more risk while seeking higher returns, or are more interested in preserving wealth. “Every client has a unique set of financial goals they want to achieve,” Mr. Simpson says.
Mr. Mayers has found that a person’s net worth can influence their investment choices, but does not determine that mix.
An investor who has sold his or her business, for instance, may become focused on capital preservation because they want the proceeds to last. On the whole, those with more capital than they need for living and retirement are willing to take greater risks, he says, though he sees wide variation in approach among his clients.