In simple terms, there are two kinds of investor-advisor relationships: one in which the investor asks the advisor to “invest my funds in whatever way you deem best” and one in which the investor asks the advisor to “invest my funds in the manner I deem best”.
Certainly, there are relations that straddle those two examples, but, in general, investors either have a specific strategy they prefer for their investments, or they plan to depend on the strategy suggested by their advisor.
Some investors have definite and distinct ideas about how their investable assets should be handled, and look to their advisor to determine the best products and services to implement the investor’s strategy.
As the normal part of an introductory conversation, advisors and investors discuss risk tolerance, the investor’s goals for investments, and the long-term plans an investor has for their financial life and the lives of their family.
But many investors know precisely how they would handle their investments if they decided to go it alone. They employ advisors because they do not have the time or the interest to do the work themselves, but they want the advisor to operate within the strategy they would use if they were so inclined to do the investing themselves.
In Spectrem’s wealth segmentation series study Asset Allocation, Portfolios, and Primary Providers, investors were asked to describe in detail their investment strategy. The results showed that there is a strong desire to be careful and not reckless with investment decisions.
The best example comes from the most popular choice in the study. Thirty-seven percent of Ultra High Net Worth investors with a net worth between $5 million and $25 million said they preferred a buy-and-hold investment strategy. This was described in this manner: “I buy and hold in order to minimize transaction costs and to allow investments to grow despite the short term ups and downs of the market.”
These are investors who do not want to play the market. They want in, they want to invest and contribute to the growth of particular products and companies, but they do not want to have frequent transactions in their portfolio.
Advisors should consider such a strategy without prejudice against it. It is not necessarily a conservative strategy, it is the strategy of someone who takes the long view of investing, someone who will take advantage of opportunities as long as they appear to be a stock that has “legs’’ and will grow over time.
The buy-and-hold strategy is not for everyone. The second most popular choice among wealthy investors was an “active’’ strategy, which is almost exactly opposite the “passive’’ approach. An “active’’ investor does want to play the market game, “moving in and out of investments depending on the economy, investment performance and other factors”.
There are investors who want a portfolio which allows them to check the same ticket symbols every day, and others who want to bob and weave through the stock market, looking to land an aggressive punch.
The Spectrem study suggested other investor strategies, such as Index Strategy (using market index investments for long-term growth), Contrarian Strategy (picking good companies in down markets to buy many shares at low prices), and Momentum Strategy (purchasing investments based on current performance). None of those were the strategy of more than 4 percent of UHNW investors.
However, for advisors, it is significant to note that only 2 percent of UHNW investors said they “have no strategy”. That means almost every investor you meet has an opinion about handling investments, and advisors should learn a client’s strategy and act accordingly.