January 11, 2013

Ultra-HNW Families Don’t Cede Control to Advisors: Study

As asset levels increase, families less likely to abdicate control

Probably a consequence of Bernie Madoff: If you “only” have $49 million, a new study finds, you might not trust your advisor as much as you should.

The Institute for Private Investors (IPI) reports that only 32% of families under the $50 million asset threshold said they were comfortable giving their advisors full discretion to make portfolio changes as the advisors saw fit. As asset levels increase, families are even less likely to abdicate control. For families whose assets exceed $200 million, just one in five (20%) give their managers full discretion; 44% allow limited discretion; and 36% say they must approve all decisions.

“Post the financial crisis, investors have realized they cannot abdicate the ultimate responsibility for overseeing their wealth,” Mindy Rosenthal, IPI executive director, said in a statement. “We are seeing a clear trend toward investors taking an active role in partnership with the advisor.”

IPI, a subsidiary of Campden Wealth, provides investment education and networking resources to its membership of ultrahigh-net-worth families. IPI member families have minimum assets of $30 million, and four in 10 families have assets of $200 million or more. Seventy-five families and 14 advisors responded to the survey, conducted via member questionnaires in the fourth quarter of 2012.

In other findings:

  • Families exhibit more trust with in-house CIOs. Fully 36% of families who rely on an in-house chief investment officer (CIO), who is typically an individual well-known to the family or even sometimes a family member, turn over the reins entirely. By comparison, just 10% of families who outsource the CIO function give managers full discretion; the remaining 90% retain input on the decision-making process, with 35% having nondiscretionary managers; 61% of families reported hiring an outside CIO.
  • Investors and advisors are both concerned about conflicts of interest. Just 37% of investors reported seeing improvements in the business models of firms regarding conflicts of interest. The remaining 63% see no progress or continue to see problems inherent in the system. Just 38% of advisors expressed confidence that their own firms’ business models contain less conflict of interest and more reasonable and transparent fees than they did five years ago.
  • Investors are not confident in their investment strategy. Just 28% of families said they were confident their current investment strategy could handle future risks such as geopolitical crises and domestic policy shifts. Fully 49% were neutral, and 23% expressed major concern.
  • Families continue to spend despite uncertainty. Families do not seem to feel much pressure when it comes to spending, despite concerns about an uncertain future.  Just 28% agree that the lower-return environment has “created significant pressure” on either their spending or on their way of looking at wealth management in general. 
  • Fiduciary standard is important; 83% of investors expect the advisors and/or money managers they employ to operate under the fiduciary standard. Fully 17% were either neutral or did not feel it was important. All of the advisors, including those from brokerages that were not fiduciaries, agreed it is important for their firm to uphold the fiduciary standard.
  • Families outsource less. The majority of families, 51%, are outsourcing lessthan they did five years ago. Just 26% are outsourcing more.
  • More families employ facilitators. Almost four in 10 (37%) of investors have employed a family consultant or facilitator. For those who have, the experience was mostly positive (62%). 41% of investors agreed that “dealing with family dynamics plays a bigger role in our family today.”
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