When it comes to money management it seems that the "privilege" of having access to "alternative investments" such as hedge funds and private equity through the elite "wealth management divisions" at large banks and brokerage firms didnt give them an investment edge.
It also seems the very wealthy were no more thorough in making sure they actually understood their investments. And when their investments went sour it seems they were not hesitant to blame it all on their investment advisor.
In other words when it comes to investments the very rich should also follow the same simple rules as the rest of us : invest in a diversified portfolio of low cost investment vehicles that you understand
from the Financial Times my bolds my comments in italics
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span style="font-weight:bold;">The rich rethink concept of risk
By Lauren Foster
Published: January 13 2009 0
Over the years, Tiger 21, a New York-based peer education group of self-made multimillionaires, has held sporadic conference calls for members to discuss investment topics. But as the global financial crisis worsened last summer, and many scrambled to understand the unfolding disaster, the organisation began to schedule calls on alternate Friday afternoons, immediately after the market close....
"Many members who had unblemished track records as entrepreneurs really had not fully appreciated the risks in their portfolios," says Michael Sonnenfeldt, founder of Tiger 21, a group whose 170 members manage personal investment portfolios from $10m to $700m. "One of the biggest surprises was how complex the world of finance is. [The crisis] has exacted not just a financial toll but often an emotional toll and a family toll."
From Wall Street to the City of London, the message is the same. "There is almost no escaping it," says David Craig, chief investment officer and managing director at Sand Aire, a London-based multi-family office. "Wealthy families are not immune and their wealth faces some of the same threats as others. There is the potential for some to find themselves poorer as a result of these extraordinary circumstances."....
.... At the very least, the financial crisis has put renewed emphasis on understanding risk - be it counterparty risk, operational risk or leverage - and a premium on wealth preservation.
"[Clients] want to understand the embedded risk in their portfolio to a much greater extent," says Gayle Schumacher, chief investment officer at Coutts, the UK private bank. "The past [few months] have really focused people on their tolerance of risk."
For some wealthy clients, recent events have provided a painful lesson in the perils of excessive borrowing.......
As a result, wealthy clients who had too much leverage are rethinking their exposure and are seeking advice on what is the prudent amount.
"The theme that is emerging is risk management," says Paul Patterson, head of RBC Wealth Management, British Isles. "Leverage has always been something that by its nature increased the returns and increased the risks. We had such a long run that people started [to forget] about the risks of leverage.".....
While private clients generally understand the relationship between risk and return, many of the sophisticated financial instruments they invested in were so complex that the risks were not always obvious.
"Ultra-high net worth clients are pretty savvy - they typically understand what they are investing in and the risks they are taking," says Mr Patterson. "But what this crisis has shown is that no one is infallible." (does this mean these people thought some investors were infallible up until last year ?)
Dean Junkans, chief investment officer for Wells Fargo Private Bank, thinks some clients will opt for more straightforward investments. "Investors are saying: 'Let's make sure we know what we own and pay attention to things like operational risks and knowing the prime broker and the counterparty in a structured product, and the amount of leverage'," he says. "I think that if clients didn't pay attention to that before, certainly they will be paying attention going forward. (in other words when it comes to investments the very rich were no different than most other investors) Advisers will get less pressure from clients for complex products."b(call me a cynic but is it just possible than the advisors were incentivized to sell those high fee complex products and therefor pushed them more than the "straightforward investments")
Mr Sonnenfeldt says for many Tiger 21 members it is "very much a back-to-basics kind of situation"....
Some wealthy investors are rethinking their exposure to hedge funds and private equity.
A survey in October by the New York-based Institute for Private Investors, a peer networking organisation for ultra-wealthy families, found more than three-quarters of respondents said "few" to "none" of their absolute return managers had produced positive returns in this down market. More than 70 per cent said they "feel less inclined to hire a hedge fund manager".
IPI members, who have a minimum portfolio size of $30m, reported a similar feeling about hiring private equity managers.
(and in the out of touch (or is it let's keep the fees rolling in department):
JPMorgan's Mr Duffy, however, does not believe disaffection with alternative assets is widespread among the ultra-wealthy. "In a time when everything does seem so complicated there is definitely a sub-set who would like life to be a bit simpler. But I wouldn't say we've heard that in a very loud way," he says.
"I think people understand the risk benefits of the alternative asset class. It's a case of not wanting to throw the baby out with the bathwater. There are going to be managers who don't come back from their challenges - that happens in every business cycle.
According to a survey by Prince & Associates, a US wealth research firm, 81 per cent of investors with $1m or more in investable assets planned to take money away from their adviser, while 86 per cent said they would tell other investors to avoid the firm of their adviser.
Only 2 per cent would recommend their firm to others.
(somehow I dont think the numbers were nearly the same when these advisors were recommending high fee, leveraged investments that were performing well and the client did not fully understand. While I certainly am criticial of my peers it is hard to believe that many of the 86% who would not recommend their current advisor, simply were unrealistic in their expectations of investment performance)......
(but I am not surprised by the following, although as a "non brand" advisor I am certainly biased. In my view "brand companies are more likely to push higher fee investment vehicles both conventional and "alternative")
The dissatisfaction was higher at "brand" companies than at "non-brand" or boutique wealth advisers. Seventy per cent of clients of brand firms plan to leave their adviser, compared with 29 per cent at non-brands.
"Over the years we have found there is a high degree of inertia with the client/adviser relationship, and unless something goes terribly wrong, the client won't change things," says Hannah Grove, principal of HSGrove Private Wealth Consultancy and an equity partner of Prince & Associates. Often it takes a trigger event, like the recent market meltdown, for them to take action."
"A lot of the ultra-wealthy are shocked at the fact that some of the companies they were working with have disappeared," she says.
"There is a real loss of confidence in some of the traditional providers."....
Financial advisers suffer pain in the blame game
US millionaires are disenchanted with their financial advisers after losing 30 to 40 per cent of their net worth since mid-August, according to a report by Spectrem Group, a consultancy specialising in the affluent and retirement markets.
(Now that's interesting, these investors are disenchanted with their advisors after their accounts suffered losses pretty much in line with the market)....
..."While they blame the government and Wall Street directly for the situation,(and some apparently do) many millionaires are not happy with their advisers' performance and few say they will increase the work they give to advisers."
Indeed, just 36 per cent of respondents felt their adviser performed well during the crisis and only 14 per cent said they would increase their use of financial advisers in the future.
The report says advisers "are on trial" and investors will reassess how they perform over the next year.....
Nearly all the millionaires surveyed - 90 per cent - feared a prolonged economic downturn lasting up to another two years.
I
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