Portfolio vs. Planning: How to Win & Retain High Net Worth Clients

by Aaron Hodari

Updated April 10, 2024, at 4:30 PM

Even when clients know what they want, it’s still pertinent to counsel them on the bigger picture. It deepens the conversation, increases trust and confidence, and makes it hard for them to go anywhere else.

We had a prospect experience a significant liquidity event. He was a partner in a technology company and sold a portion of their business to a private equity firm. This sale gave him cash in the bank (for the first time) while also retaining a large amount of equity in the business going forward.

The client was knowledgeable and had a firm understanding of investment concepts. That said while interviewing other advisors and us, we were competing with him using an entirely passive investment approach he would do on his own. He was looking for a reason not to do that. But it seemed that was the likely outcome unless you could provide real quantifiable value.

During our meetings, we focused on the benefits and downsides of passive investing. However, more importantly, we focused on a broad look at his estate. Like wealth, goals, risks, and investment preferences (turns out, he hated equity investing). By taking a planning-based approach, we were able to win the client’s business, develop a great relationship with him, and get a referral to the partner.

Active vs. Passive Investing

Vanguard founder Jack Bogle started the debate of active versus passive investing when he created the first index fund in 1975. Hundreds of additional index funds, countless studies, and one historical recession later, passive investing has become a household concept and is accepted as the preferred method of investing for millions of investors.

For many investors, the best solution might be a passive one. If they have a modest net worth and don’t require much financial planning, the diversified investment options provided by robo-advisors and passive opportunities may be as cost-efficient and diversified as possible.

On the other hand, a high net worth individual is likely to have more needs. Optimizing a portfolio for complexities like estate planning and tax efficiency will likely require a more active approach to allocate assets. The high net worth clients we work with typically need a more diversified allocation beyond stocks, bonds, and cash into assets such as real estate, insurance, private equity, and other alternatives.

Drilling Down for High Net Worth Clients

Research has found that active managers are more likely to outperform their benchmark on a net-of-fee basis in certain asset classes. This is true in international equities, where the median active fund manager exceeds over 1.5% per year. That’s a return well worth the fees of active management, and the same holds in small-cap investing.

There are some asset classes where the median manager can’t even beat the benchmark on a gross-of-fee basis. Add fees on top of that and active management becomes hard to justify.

Different portfolios and clients require different levels of customization, and both active and passive strategies can achieve a client’s objectives. We believe there’s no one-size-fits-all solution. A carefully planned approach specific to the client will yield the best portfolio—often including active and passive strategies.

Low Correlation Diversification for HNW Investors

Markets have ridden an exciting rollercoaster of activity, and current ambiguities on forward-looking market projections have forced the hand of many extremely high net worth investors to be entrepreneurial in their thinking.

Depending on an investor’s risk tolerance, we recommend that a portion of their portfolio should have some correlation to the broader market, with the balance diversified into other asset classes that correlate. This diversification is necessary to avoid systematic risk or the chance of being overexposed into one type of asset class or market. How do investors achieve returns and diversification at the same time?

There are many types of risks investors can take, and not all of them are stock market risks. When building a diversified portfolio, we look for diversification within each asset class but spend much time looking for ways to diversify across different asset classes.

Alternative investments provide the opportunity to get exposure to various risks different from the stock (economy) and bond (interest rate) markets. We look to private equity, private debt, real estate, merger arbitrage, quantitative, and other strategies to diversify the risks in a client’s portfolio.

Our Solution: A Holistic High-Net-Worth Approach

At Schechter, we’re believers in building a portfolio that takes both active and passive approaches into account. We’re even bigger believers in the idea that no two investors require the same method.

Every one of the clients we work with has different sets of needs and goals. It’s our job to find that balance. By educating the client on the investment landscape, the way we develop portfolios, and our general thought process; we can add value from an investment perspective.

The next step is to understand the big picture so we can design something tailored to those clients. Let’s go back to the story of our tech client. By identifying that he retained a significant stake in the business going forward, we identified an estate tax and estate liquidity issue.

If the client and his wife were to pass away, the entirety of the liquidity in their estate would go to pay estate taxes, and it still wouldn’t be enough to cover the bill. Being in their late 70’s, there was a real chance this would occur and create issues for their heirs.

We used this opportunity to put an insurance policy in place to cover this risk, bringing their attorney and accountant into the situation. By identifying the threat and bringing in other members of our client’s team, we solidified our place as the quarterback for the client’s financial life.

It started with investments, moved onto planning, and ended with a great client and a referral to their business partner. During the interview process, the client touched no less than seven people at our firm. We’ve found that multiple touch points, great interactions, and a holistic approach lead to great outcomes. Clients most often aren’t just looking for an investment.

They’re looking for a plan.

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About Aaron Hodari, CFP®, CIMA®:
Aaron Hodari, CFP, CIMA, is Managing Director of Schechter. Aaron works with high net worth individuals, families, business owners, and their advisors to bring them institutional quality investment management and advanced financial planning solutions. Aaron heads the firm’s branch of Private Capital, including deal sourcing, due diligence, deal structuring, and market opportunity identification. He’s also instrumental in the development of correlated and non-correlated investment alternatives, helping identify investment allocations and manager selection.

About Schechter:
Schechter is a boutique, third-generation wealth advisory and financial services firm. For 80 years, our multi-disciplined team consisting of JDs, CPAs, LLMs, CLUs, PFSs, CAPs, MBAs, CFA® charter holders, CFP® practitioners and CIMA® consultants have been quietly advising wealthy families on financial matters including: Institutional quality investment advisory services, private capital and alternative investments, advanced life insurance planning, income and estate taxes, business succession and charitable planning.

Securities for Schechter Wealth dba Schechter offered through Chalice Capital Partners, LLC (Chalice), member FINRA / SIPC. Schechter and Chalice are affiliated but do not share common ownership. Advisory Services for Schechter offered through Schechter Investment Advisors, LLC (SIA), a registered investment advisor. Schechter Private Capital, LLC (SPC), which concentrates on advising private funds, is also a registered investment adviser. Schechter, SIA and SPC are affiliated and share common ownership. Certain principals of SIA and SPC are also registered representatives of and sell security products for compensation through Chalice. Chalice has no affiliation with SIA and SPC.

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