Survey says: How to support clients (or not) when they want alt investments

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When it comes to high-net-worth families, the goal is often to stay wealthy, not shoot out the lights seeking amazing returns. No wonder so many choose alternatives to diversify their holdings and avoid the volatility and unpredictability of traditional equity and fixed-income investments.

Whether their clients are filling a cellar with world-class vintage wines or investing in new businesses or infrastructure, family offices need to know how to accommodate these requests for non-traditional and non-correlated investments.

Here, three family office professionals tell how they decide whether an alt investment deserves to become a core part of a portfolio – and where they draw the line.

Mindy Mayman, partner, Richter Family Office, Montreal

“I’m sure somebody who buys watches and wine will tell you they appreciate over time, but I’m not sure their motivation is financial return. Yes, they tend to appreciate, but they also satisfy the desire for a personal collection.

“So while there’s no reason these clients can’t afford an art, wine or watch collection, we have to frame the decision around, ‘How much of your money do you want sitting in this type of asset?’ They don’t produce income. Sometimes they are cost centres. If you have an expensive collection, you’re going to pay insurance and, in the case of vintage cars, maintenance.

“Clients normally will accumulate these types of assets on their own. As an advisor, I am not an art, wine or watch expert. I’m not capable of saying, ‘You need to own this model or that model.’ My only involvement would be to help clients think through how much money they should consider allocating to this class of assets. I have to keep their overall objective in mind, so I would encourage them to set a budget.

“When it comes to things like investing in companies or other types of alternative investments, we would certainly work with our clients and do plenty of due diligence. We incorporate that into their asset allocation and their portfolio management picture. But even financial alternative investments have the characteristics of being illiquid. If I lent money to private businesses or bought into a real estate fund or an apartment building, most of them tend to have an illiquid character, too.

“The one benefit of real estate investments is that they can give regular income or cash flow, something clients wouldn’t get from other types of assets.

“The other role we often play is being that sober second opinion. Clients who are wealthy have a plethora of opportunities in front of them. Some of this job is helping them think through which ones they should let go of, which ones they should take advantage of, and how they can go about doing that.”

Douglas Byblow, family office executive, Calgary

“Often the starting point for the family office is having that direct touch point with the client and understanding the client’s interest and needs. Experienced family office executives can be proactive in sourcing reputable experts and brokers from the outset. They will lean on their extensive network of family office peers and subject matter specialists to ensure they’re asking the right questions and receiving appropriate advice.

“All of this is done with the goal of providing objective guidance and support to the family without the pressures that arise when a family is dealing directly with a broker who may have a vested interest in a rapid transaction.

“But sometimes the family purchaser has already identified the asset, and then it’s a question of really diving in and working alongside the expert advisors already in place. In many cases, the assets are so niche and so specialized that it is really the sign of good judgment to simply coordinate the process with the expert advisors, legal and other specialists.

“I tend to encourage the family to take a goals-based investment approach for their portfolio more broadly. Put in practical terms, it may be that a family member is prepared to devote five or 10 per cent of their investable wealth in trophy assets, and they understand the reason why they’re doing it: for the appreciation and long term wealth preservation.

“By categorizing these investments into a goals-based bucket, you avoid the challenges of becoming rapidly overweight in any one category, including these types of alternative assets.”

Neil Nisker, co-founder and executive chairman, Our Family Office Inc., Toronto

“On May 22, I’m celebrating my fiftieth anniversary on Bay Street. I’m serious. How many people do you know who have been working for 50 years? I’ve been around the block and know what works. So if a client’s friend says, ‘Look, I’m starting a new business, do you want to put a million dollars in?’ The client could be worth $50 million, but I say, ‘Has your friend built a business before? Is he putting money in? How much skin does he have in the game? Is he eating his own cookie?’

“If he doesn’t have a track record, and this is just a venture capital investment, understand you’re taking a huge amount of risk for a huge amount of return. It’s like going to Las Vegas or buying a lottery ticket. When you buy a lottery ticket, you don’t buy a thousand dollars’ worth of lottery tickets, you buy five dollars’ worth – because all you can lose is five dollars.

“So it’s easy to say, ‘Go ahead and invest it, but put a hundred thousand dollars in your friend’s business, not a million. If you lose a hundred thousand dollars, maybe he’ll still be a friend. If you lose a million dollars, he’s not going to be your friend.’

“We don’t get into art and wine. I have a criterion that says I need a three-year track record. And we have capital market assumptions, meaning we need to have an idea of what something is going to trade at. What are the returns going to be for the next five years? Similarly, what is the volatility of cryptocurrency? The price of Bitcoin five years from now? It could be $200,000 or it could be $2,000. So how can I invest my clients’ money in something I don’t have a clue about?

“For a client wanting to buy barrels of whiskey, I would say, ‘Go for it.’ But I’m not going to buy it for him and I’m not going to recommend it. All of these investments that don’t have a track record or a volatility number beside them, you don’t know where it will be five years from now. That’s risky. That is gambling.”

Responses have been edited for clarity and brevity.

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