I have been advising ultra-high-net-worth families (“family offices”) for over 25 years. I believe when it comes to their investment portfolios, there is one commonality among family offices. Wealthy families invest their money to stay wealthy and to grow their wealth with a long-term approach that utilizes more strategies than the typical retail investor employs. In addition to stocks and bonds, they tend to invest directly in real estate equity, as well as being a secured lender in the real estate space. They also may invest in private equity and venture capital funds to provide a diversified investment approach.
Unfortunately, retail investors often believe these non-traditional investments are only available to the ultra-wealthy. But I believe all qualified investors should have the ability to invest like these families do instead of being relegated to a typical 60% stocks/40% bonds retail-type portfolio that’s commonly recommended. To take a family office investment approach involves incorporating alternative investments and finding good opportunities with favorable fees in addition to solid risk-adjusted returns that are not highly correlated to the success of the more traditional stock and bond markets.
There has been an explosion of these non-correlated investments over the past few years. Unfortunately, many of these investments charge high fees, which diminishes the chance for successful outcomes. High fees can make a great deal mediocre and a poor deal even worse.
A client of my firm’s who recently retired from an executive position in the real estate industry was approached about investing in a promising real estate deal. The client asked whether I knew the group or had ever invested with them before. I said I knew the group well, but our firm had never invested with the organization. We had looked at past deals and could never get over the excessively high upfront and ongoing fees. Our client passed along the group’s investment opportunity for us to review, and the fees were some of the highest and most complex I’ve seen. It’s one thing to find a strong operator, but another to find one with the potential for a solid return without potentially deal-ruining fees.
If you want to invest like the super wealthy, it is imperative to find an advisor who can help you source investments that fit your overall financial situation and goals. As an investor, you must determine the level of experience your advisor has in any non-traditional areas you want to invest. Ask about past performance and whether your advisor invests their own money in the deals they show you. Also, be sure to find out if the advisor is receiving any compensation from these third-party investment operators.
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