Direct investing can present some new and unique opportunities for high net worth individuals (HNWI) and families not typically available through wealth management firms. For example, you may be presented with legitimate investment opportunities through acquaintances; that’s fair and good. As more asset managers seek to get funding, they too, are opening their doors to partner with family offices and HNWIs. However, there are many factors to consider that can influence the outcome of direct investments, even at the funding stage, should you bypass the advice of a wealth advisor. Here’s what you need to know about direct investing.
Competition from institutional investors
When you invest directly, you don’t truly know what competition you are up against. The purchasing power of entire organizations can’t be underestimated. Further, it’s difficult to know how many general partners and corporations there are ahead of you in negotiations, or what percentage of equity ownership you will ultimately have in comparison. It is wise to find a way to compare the deal to similar opportunities elsewhere if you’re going the route of direct investing. Without market comps, it isn’t dissimilar to investing blindly, which is very high-risk.
It’s common for HNWIs to not disclose all their investment accounts to one wealth advisor. That is understandable from a personal privacy standpoint. However, your assets are not necessarily any less safe being managed through an advisor at a single financial institution. We’re not talking about a scenario like exposure risk from having all your brokerage and savings accounts with the same financial services company. Your assets are not custodied with your wealth advisor’s bank; they are administered by any number of other custody services banks through third party relationships established with the funds you are invested in.
However, there are generally accepted standards that all advisors must follow to be successful. When you invest directly, you lose some of the risk management your wealth advisor builds into the strategic allocation of your portfolio when that investment isn’t included. Ask your advisor under what scenario might tactical asset rebalancing be needed.
Management fee reductions
People want to diversify their assets, but they generally want to do so in a way that can reduce management fees. This is arguably the primary reason for the rapid increase in the percentage of direct investing. This is understandable. You may pay your wealth manager a quarterly consulting fee or a percentage fee on the combined market value of total current assets under advisement (AUA). You pay a fund management fee of 2% and maybe a 20% kicker should the fund exceed its primary internal rate of return (IRR) goal. This is not a negligible amount, and while you are paying for the expertise and experience of your advisor to help you mitigate risk, there may be times when you can forego this for other options.
Does it make sense to invest directly?
It’s important to note that when you invest in private markets through your investment advisor, you are making a direct investment as a partner of that fund. By having a consultant, you gain the benefit of an investment services firm that has already gone to bat for you by researching that fund, “buy list” designation, and underwriting of the fund. Wealth management firms can sometimes leverage the buying power of their clients to negotiate lower fees with fund managers.
If you are concerned that the investments you are being presented do not align with your values, be sure to communicate that to your advisor. There will likely be opportunities for you to make conscientious investments in private equity. Many multi-strategic funds invest in several underlying industry sectors, with each making of a percentage of the total commitment amount. Decline to invest in the sector that you do not want to support. If enough family offices go their advisors for investment opportunities that emphasize environmental, social and governance (ESG) factors, and socially responsible investments (SRI), then that will encourage advisory firms to begin researching new strategies.
The value of having a wealth manager
SD Mayer is a full-service investment advisory firm which specializes in guiding HNWIs and family offices like yours through the novelties. If you’re thinking about making a direct investment, they will give you an honest assessment of it. The wealth management team has decades of experience across all asset classes and vetting fund managers and their underlying investment strategies for their clients. Direct investing may be a viable possibility for you, but it’s very important to take a comprehensive look at the scenario before making decisions that carry greater risk.
Whether you’re an experienced investor, busy small business owner, or just getting started SD Mayer has the expertise you need to succeed. We tailor our strategies to your needs, and help you build a bright future—for you and everyone that depends on you.