How to make Masters of The Universe Happy

Recent large Private Equity investments in RIAs got our attention and caused us to ask why do Private Equity firms think that wealth management is such a great investment?

In our opinion Wealth Management firms might not have the obvious inefficiencies that can be solved and drive Private Equity value.

The analogy that helps me is buying a suit. When it’s time to buy a new suit for work, I have two clear choices.

One option is to buy a custom suit from a master tailor near my office in downtown San Francisco. The other is buying an off-the-rack model from Joseph A. Bank or a department store.

As I was thinking about this recently, I was struck by the similarities between selecting a suit and choosing a wealth advisor — either an RIA or a wirehouse broker.

There actually is a lot more to that decision than meets the eye, so it’s worth comparing the two choices. Both types of suits — like both types of wealth managers — have their own merits. The key is ensuring that the buyer makes an informed decision.

The Perfect Fit

An independent advisor is much like the artisan tailor.

When I’m wearing a bespoke suit, I feel like a master of the universe. The suit fits perfectly, looks distinctive and expresses refinement. My name is embroidered on the inside, which dials up the mojo even further.

Like the craftsman, the independent wealth manager might be located in a smaller office near a client’s office or home. When clients visit them, they’re greeted and known by name by everyone in the office. Clients are treated special because everyone knows they actually are important — that individual or family is helping keep the lights on.

When a client sits down with an independent advisor, the wealth management solutions are always customized. The client gets access to the finest money managers on the planet. The asset allocation is tuned to their specific needs. If the client doesn’t fit into one of the major risk profiles, “conservative,” “moderate,” “aggressive,” the wealth advisor will improve the allocation.

Want to do direct deals in real estate? No problem. The RIA will factor that holding into the client’s overall asset allocation. Many advisors will also conduct the due diligence for that opportunity. If you’re looking at an equity private placement or a direct alternative investment, the independent advisor will often help you evaluate those opportunities too.

Not Worried About The Comp Plan

Most independent advisors are amenable to assets outside of their direct control. That’s because client-centric RIAs are focused on the long game — client satisfaction that turns into client referrals. The freedom of choice RIAs have is quite different from the more restrictive rules at wirehouses, which discourage many outside holdings.

Most RIAs also deliver one of the most important pieces of information clients can’t seem to readily obtain from wirehouses: A clear summary of fees and performance reporting that doesn’t require the detective skills of Sherlock Holmes.

The bottom line is that the custom approach — whether it’s working with an RIA or purchasing a made-to-order suit — may take longer, but the results are superior.

The Off-The Rack Option

If I’m in a rush, and my wallet is a little pinched, I will head to Joseph A. Bank or the mall to buy a suit. The off-the-rack version doesn’t look or feel as good, but the benefit is that I can wear a 42-regular out the door.

Like mass producers of suits, wirehouse brokers try to make their customers feel terrific in a different way — by creating an aura of quality and invincibility. An expensively produced ad on CNBC or during the Super Bowl helps clients validate their decision to go with a wirehouse. Walking into a gleaming office tower in a financial district equates to big money, which tends to make people feel better.

As for the asset allocation strategy, wirehouse advisors must follow a cookie-cutter approach because of compliance restrictions needed to minimize the risks associated with thousands of advisors giving advice. These solution works for many, but not for those who truly want something unique. It’s simply not possible to oversee tens of thousands of advisors — and far more clients — without clear-cut guidelines that narrow the universe of investment opportunities.

When it comes to the actual investment choices, wirehouse offerings are good. But are they great? In truth, too many name brand money managers made their reputation in prior investment cycles are recommended to wirehouse clients.

At the end of the day, I have a clear preference for custom suits, especially if the price is in the same zip code as a department story brand. Since there really is no difference in disclosed fees between wirehouse brokers and RIAs, the choice seems obvious.

Wouldn’t we all look better in a custom-made suit, rather than an off-the-rack number that several other people at the meeting are wearing?

Hopefully recent investors in RIAs recognize this difference.