For affluent investors, the relationship with an advisor is a complicated one.
Investors who make full use of the investment opportunities in the market call upon their advisor to manage dozens of different investments requiring frequent shifts in allocation. It requires both time and a careful analysis of the markets involved.
But few investors turn over all of their assets to advisors. There are some products investors prefer to manage while handing over other products to their advisor.
While each investor-advisor relationship is different, there are trends in terms of which assets investors prefer to handle. Spectrem’s latest study on the wealthiest investors examines those trends and comes up with insights that help advisors understand how investors choose which funds are managed by the advisor and which are managed by the investor.
In The Wealthiest Americans, Spectrem studied investors with a net worth of more than $25 million, examining virtually every facet of their financial lives. Included in the study were questions regarding managing their money, and how that task is split between investor and advisor.
The question put to the investors was: “Who is primarily responsible for managing this money?” The question was asked about several different product types, from corporate bonds to precious metals.
Among the wealthiest investors, the majority manage the different funds themselves, but the percentages run from 56 percent (handling municipal bonds and municipal bond mutual funds) to 72 percent (managing hedge funds).
The question advisors need to ask themselves is why? Why do investors prefer to handle certain funds themselves? Is the cost of advisor services the main culprit, even for investors with significant wealth?
The fact of the matter is that most wealthy investors like to have a hands-on approach to their investments. According to the Spectrem study, 70 percent of the wealthiest investors enjoy investing, and that percentage increases among younger investors. They like to keep their hands in, and managing some of their investments themselves is a way to do that.
Perhaps it is the lack of fluctuation in municipal bond investing that causes investors to turn those products over to their advisor. The 56-44 split between investor control and advisor control in those products is the closest of them all, and may be a function of the fact that municipal bonds aren’t a sexy investment product. They are perceived to be stable and advisable but not particularly active.
On the other hand, 70 percent of investors manage their U.S. equity funds themselves, including stocks, mutual funds and exchanged traded funds. The activity in those markets is such that an investor could relish the opportunity to manage those funds rather than let their advisor have all the fun.
In almost every case, the older the investor, the more they are likely to manage their own accounts. For instance, while 66 percent of the wealthiest investors under the age of 51 manage their own hedge funds, 85 percent of those investors over the age of 65 do so.
That difference could be a factor of time available to manage investments. Even among the wealthiest investors, older people have more time to spend on investing than do younger people.
Top Takeaways for Advisors
This topic is all about separation of duties. Investors turn over certain asset class management to advisors for particular reasons, and it might behoove advisors to know what those reasons are. Why are investors more likely to let advisors handle municipal bonds but not equities? The answers will probably differ from client to client, but knowing the answer could make it possible to convince investors to turn over more product management to the advisor in the future.
©2016 Spectrem Group