What should you do when a client wants to invest in something that’s completely off your radar? We asked wealth managers for their most memorable stories and how they deal with the challenge.
Roberto Martins - Itaú Private Bank
Fifteen years ago, my team was experimenting with the idea of integrating risk factors from clients’ businesses into their asset allocation decisions.
While this topic had been widely discussed, with strong arguments for and against, there was not a clear approach to this idea at the time. Simply put, if the client had a significant business, we would try to quantify the amounts and sources of risk that could be managed either by asset allocation alone, or with active hedging strategies.
In my second real case of putting this into practice, a banker asked us to analyze the portfolio of a client who had three lines of business: health insurance, healthcare and cemeteries. You can imagine how puzzled we were. That seemed to be the ultimate vertical integration of all times! To cut a long story short, we concluded that the three businesses were so idiosyncratic that there was little we could suggest on our side.
That came, of course, after a couple of meetings where we heard enthusiastic cross-selling opportunities and discussed the idea that the client should invest in biotech companies that could find the cure for diseases that were the main driver of the firm’s business growth.
This may not even have been the most unusual investment analysis I have ever received (believe me, there have been worse), but it helped me get a grasp of the idea that sometimes common sense is just the best analysis. Quant methods can only go so far.
Ismael Perez - Aqua Wealth Management
Our high-net-worth clients constantly receive investment offers from their friends and acquaintances.
For example, the daughter of one of my clients was told by a friend about an opportunity to invest in an internet site. The company had been up and running for a few years and was ready to take a significant leap in its business, for which it needed capital. The amount to be invested, while respectable, was not significant in relation to the family’s assets.
The matriarch of the family was also interested in keeping her daughter motivated and involved in their investments, but did not want to make a bad investment. In the initial analysis, we didn’t think they should go forward as it didn’t seem like a good investment. We had concerns that the company had missed its opportunity to become a success.
We contacted a private equity fund that made these types of investments and asked them to consider this opportunity. In return, we asked to have access to their due diligence reports and to be able to co-invest with them should they approve it. The due diligence was negative and the fund rejected the investment.
We shared our findings with our clients. It was a very thorough due diligence report, with all the arguments explaining why the investment was being rejected and comparing it with other start-ups in terms of potential for growth and value. After seeing all of the analysis, the family decided they should not invest.
Eduardo Anton - Andbank Wealth Management
If you asked me that question last summer, I would have said that the most unusual investment questions from clients were those related to how to invest in bitcoin. But today, those questions are part of our day-to-day business, even with Uber drivers.
I would say the most challenging questions are related to non-regulated assets, as we try to provide the most accurate information to our clients while being careful not to issue an investment recommendation. When dealing with this type of client request, we always consult and follow the guidance of our compliance department. This ensures the correct handling of client inquiries on non-regulated assets.
We believe we need to be particularly well-informed about the cryptocurrencies for our clients. We decided to partner with a research firm based in Florida called Standpoint Research, which offers professional and independent coverage on cryptocurrencies.
That said, all of our clients’ concerns represent a challenge to us at Andbank. We believe that providing our clients with the most accurate and timely information is the key to success in our long-term partnership with them.
This article was originally published in the February 2018 edition of Citywire Americas.