For private clients, the standard response from the wealth industry is to park the money into stocks and bonds with the % mix dependant on the age and risk profile. For example, Vanguard’s LifeStrategy’s portfolios, with its cheap ongoing fees, are great vehicles if that’s all the private client wants to do.
However, the attitudes of private clients are changing with many wanting to invest beyond just stocks and bonds. For example, a research paper by EY says 53% of private clients are willing to pay more to get access to alternative investments.
Whilst private markets are a large opportunity and were previously seen as the preserve of the UHNWI or family office space because of their high minimums, fractionalization has unlocked the doors for this being an investing reality for private clients.
Now, because wealth managers have experience in dealing with family offices and UHNWIs, it’s possible to help private clients who are now expanding into private assets to think like a family office. After all, family offices have traditionally mixed illiquid and liquid assets and have experience with how best to allocate them.
So, let’s look at how a family office typically allocates money:
It’s notable that even within alternatives, there are a myriad of sub-asset classes where family offices allocate to. Plus, these allocations change over time: 15 years ago, hedge funds would have been the largest sub-asset allocation but now it is direct private equity investments.
For private clients, they also can allocate across the sub-asset classes within the alternatives space with a range of fractionalized equivalents:
Now, as a wealth firm, you may not have access to fractionalized alternatives and as such may be loath to give any advice. But where you can add value is by showing the private client how a family office would allocate across different asset classes and specifically alternative sub-asset classes. It would still be up to the private client to make their own allocation decisions, but at least you would have lent them a friendly helping hand and built trust.