Wealth management and mediocrity

When it comes to wealth management, two things readily come to mind for most investors: Brand name institutions, such as UBS and Vanguard, and sophisticated portfolio management skills.

The full extent of wealth management services varies by type and product.

A 2016 study by WealthBriefing UK, in association with Avaloq and Deloitte Switzerland, lists at least eight types of wealth management professionals. (Europe being a more mature market for wealth management relative to Asia.)

Source: WealthBriefing UK

Retail bank is the most common point of entry; Privileged services is the next tier offered to affluent and high-net-worth individuals; and finally, there are Private Banking services, generally starting at USD5 mil investable assets, offered to ultra-high-net-worth individuals.

Service providers in each of these eight categories offer different value add. See the below table for a self-report of each category’s core strength.

Source: WealthBriefing UK

As an emerging fund, Alphalytics’ setup straddles both the External Asset Manager and Fund Manager categories.

Ok, that’s great. But how does knowing the breadth of wealth management firms benefit an investor? Just show me the products and offerings.

Investment products and returns have a pecking order. Simply put, the higher your net worth, the wider the range of instruments on the product shelf.

Here is a very simplified take (by potential return and risk level):

For instance, at some Private Banks (for UHNW individuals), the less transparent part of the financial system (i.e. private markets) — which includes unlisted and untraded assets like venture capital, real estate, private equity, infrastructure and direct lending — will be on the product shelf.

What most investors do not realize is that most private wealth management firms are resellers of investment products designed by fund managers and asset managers.

Think of most, though not all, private wealth management firms as primarily a distribution channel, not the original equipment manufacturer (OEM), of investment products.

And the truth is that most of such investment products are mediocre.

In fact, most investors who are willing and able to formulate their own investment strategies might be better off investing their own money instead of paying the 1% or more fees – for investment performance can be fleeting, but fees are forever.

As a starting point for hedge fund products, investors can reference the BarclayHedge, Eurekahedge, and Preqin databases.

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