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What Every High Net Worth Investor Needs to Know

Originally Published: November 20, 2014, Phocion Investments Inc.

In the world of performance returns what you don’t know can hurt you. Most High Net Worth (HNW) investors assume that the published returns on their quarterly statements are accurate. After all, who knows better about their performance than their investment managers who present it to them? The fact of the matter is that performance measurement is inherently intricate and the administrators usually delegated with managing it have minimal investment performance knowledge to provide the most accurate measure of the wealth management of a HNW investor’s investments. Reliance on this and as well as the investment managers own views of his/her performance, HNW individuals should have reason for concern. However, HNW investors can regain peace of mind by engaging an unbiased, third party entity with the necessary expertise in performance measurement who can verify that the returns presented are accurate and provide a critical tool to investors in the assessment of their managers.

The investment management industry tries to minimize all discussion around fees as much as possible because it is in its interest to do so. Investors need to be aware of the fees they pay and their impact on the management of their wealth. It can be difficult to do this since some fees can be hidden and as well as, some investment managers can be “less than forthcoming” in regards to what is actually being paid for custodianship. Furthermore, HNW investors should know whether their fees are in a tax deductible structure and what competing firms charge for similar services. In other words: total fee transparency!

Approximately two-thirds of all investments managers underperform similar passive low-fee investment strategies. Again, this type of relative underperformance discussion is an area in which investment managers deliberately avoid bringing up. Independent third party performance specialists can shed light on performance by producing detailed analyses that offer insight into the impact of fees and the overall effectiveness of managers’ strategies and their ability to execute them. Something not available from managers and their administrators.

It is not surprising to see situations where HNW investor statements contain a long list of previous new equity issues that are practically speaking all underwater. While these issues prove to be immensely profitable for firms and brokers, it leaves investors holding all the losses.

Unbeknownst to most High Net Worth investors whose areas of expertise lie in places other than the world of finance, the type of issues mentioned above are plaguing them. Engaging an independent third party performance specialist is imperative in providing investors the tools and leverage in the decision making process of their wealth management. A little knowledge goes a long way in protecting the hard earned assets of investors.

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