“Private” Practice

The May issue of Atlantic Monthly features the cover story, “Why I Fired My Broker“, which mulls the misgivings of middle and upper income Americans contemplating the consequence of their investment advisor relationships. Like so much of the new populist propaganda…it isn’t pretty for advisors.

In a video interview about the column, Jeff Goldberg, the article’s author, describes garden-variety vendors of investment advice as, “…these Jiffy Lube kind of places. They’ll take your money. They’ll invest it in the same things that everybody else is being invested in.”

Is that a cruel but fair commentary? It is if advisors keep doing what they have been doing yet (insanely) hope for different results…and good luck securing new clients amidst the new prevailing wisdom. Face it, with the exception of advisors that embraced alternative asset classes and/or market timing, the vast majority of advisors portfolios were marked to market in the selloff and their clients have likely lost a generation of investment opportunity that may never be made up.

In prior posts at www.venturepopulist.com we have posited and proofed the problem;

• Stocks are not worth their risk premia and bonds look downright scary.
• MPT, B&H and traditional asset allocation models have been completely discredited
• Diversification is not easily achieved because in crisis all correlations go to one.

But we also spoke to the solution;

• The vast majority of private wealth in America is the result of participation or investment in private venture….such as business start-ups, venture capital and private equity.
• The HNW investor understands and appreciates the wealth-creating potential of private venture investing (PVI)…in many cases that is how they became wealthy.

Advisors could materially improve their value proposition, their competitiveness and their client’s portfolios by developing PVI competency and integrating the asset class into their practices.

Why I Hired My Advisor

I know too well that this message will be lost on 80% of advisors who view private investments (in start-up or existing businesses, private equity or venture capital) as a new problem, rather than a solution. That’s probably the way it should be as it is likely that only 20% of IAs possess the capacity and the client-base that could support and embrace the asset class.

But every advisor benefits from a discussion that introspectively considers the true value proposition that they provide to their investment client. Invariably, portfolio performance (relative to client objectives) will always be a factor that advisory clients consider when they evaluate their advisors.

Advisors should be open to asset classes that have a proven history of being non-correlated to equity markets and providing exceptional relative and absolute returns over intermediate-term market cycles.

The performance of the private investment category is indisputably compelling and speaks for itself. The most recent Thomson Reuters US Private Equity Performance Index data released through 2008 show the “All Venture” category (which includes data from early/seed, and later-stage VC funds) returned 17% over the last 20 years against the 6.1% return of the S&P. Over return periods less than 20 years the performance relative to equity indices has been even more compelling.

Venture Populist seeks to assist advisors (and investors) by advocating the integration of private venture investing into more investor relationships and portfolios and providing a forum and resource for like-minded professionals and investors.

Advisors that allocate to private venture investments claim that they differentiate their practice (from their advisor peers that are pursuing the same HNW clients) and strengthen their advisor-client relationships by increasing the quantity and quality of the advisor-client dialogue.

Private wealth and family office portfolio managers consistently maintain that the majority of their client dialogue (at the portfolio level) is spent discussing private investments. Have you ever noticed your reflection in the glazed pupils of investor’s faces when you discuss Modern Portfolio Theory or the Efficient Market Hypothesis? That’s a monologue. Discussing the prospects of a private investment in a start-up, emerging or established business…with a HNW investor who made his money in business…and you have dialogue. Business people enjoy talking about business. That provides the advisor with an excellent opportunity to engage clients on a different level than advisor-client, vendor-customer, or salesmen-prospect. Rather, as two professionals contemplating a joint business transaction.

In subsequent posts I will speak to additional ways that an advisor’s practice is positively impacted through PVI including;

• Better client retention rates,
• The development of a collaborative client “community” within the practice,
• Incentivizes for clients to refer new clients to the practice, and most importantly,
• The increased potential for improved portfolio performance,

while radically differentiating his practice from his peers and invigorating the value proposition to the client.

(c) Prescient Advisors

www.venturepopulist.com