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The Institutional Solution to Quickly Scale Retail Advisers' AUM
A slight variation of the financially-engineered solution we used to aggregate $1.5 billion of family office money can be utilized by smart financial advisors to generate commensurate AUM.
That solution not only provides your clients’ institutional-level performance, but it can also triple your revenue without adding a single additional client.
It all starts with making merit-based allocation decisions…
It’s not about following industry-standard heuristics: the 60/40 portfolio, 85%+ allocations to traditional assets, diversification for the sake of diversification, etc. It’s about allocating to what is objectively best.
How do you know what’s best?
The answer is relatively simple: the best assets are those with the lowest risk (which is the probability of loss weighted by the expected degree of that loss, not standard deviation), highest return (geometric mean), and liquidity characteristics (maximum drawdown duration required to achieve the expected return) that match the time horizons of clients’ mandates—all as measured across a minimum of one complete market cycle. This subject is thoroughly contemplated in the technical paper An Intuitive True Total Risk-Adjusted Performance Measure and Characteristics Matrix.
You’ll find that when you exercise the thought leadership to do what’s right as opposed to what peer pressure dictates, your portfolios will look a lot more institutional.
What do sophisticated institutional portfolios look like?
Optimal risk-adjusted performance is only found in financially-engineered strategies that take advantage of arbitrage opportunities unique to private markets. Instead of being 85%+ allocated into the dumb money risk dump that is public markets, you’ll find the most sophisticated institutions are allocated 60%-70%+ into private market arbitrage strategies.
The funds that wrap this level of performance and sophistication, however, typically have high minimums: 7-figures and up, which is why they’ve typically been the sole domain of the institutional space.
So, how can the retail market access this stuff?
While institutional-grade private funds may be out of reach for the individual retail investor, when an entire RIA’s client base is aggregated, entire portfolios of these funds can be designed and constructed under a fund of funds.
The result is institutional performance packaged under a single product where minimums can be set as low as the RIA would like (typically around $200k).
If the RIA has an interest in increasing revenue, it can manage its own fund of funds and collect an additional well-earned one and ten in addition to its standard management fee. If that sounds like too much trouble, such funds of funds can be managed by third parties.
To sweeten the pot for everyone involved even more, a GP stakes fund can be built into the structure to further boost performance.
So, how do you communicate all this apparent complexity to retail clients? You may find the answer surprising…
While the math and financial engineering expertise required to design and execute this level of performance is incomprehensible to most, analogous to the iPhone, the output is simple and directly answers the fundamental, intuitive demands of every retail investor:
I want the highest returns, with the least amount of risk, within a given timeframe.
Here are the fundamental measures for the best hedge fund strategy we have on our platform (you’ll notice that it’s not nearly as good as the private market strategies you just saw):
Return: 20.27% (This is how much you should expect to earn each year.)
Risk: 16.92% (This is the amount of loss you should expect to withstand each year to achieve the return.)
Liquidity: 20 months (Under the worst case scenario, this is how much time you’ll need to realize your return. In other words, this is how much time you’ll need for the investment to become effectively risk free.)
While the math to arrive at those numbers is relatively complex, how hard is that analysis to communicate?
Imagine having the risk, return, and liquidity measures for every investment product you consider. What would that do for your portfolio construction and confidence in it?
How differentiated would your firm become?
And how appealing do you think this merit-based approach would be to your clients—both existing and potential?
As a boutique investment bank and quant-driven alternative asset management firm, we can provide you both the ruler to accurately measure the quality of any investment and the vehicle for you and your clients to access the most exclusive institutional strategies.
Ethics alone should dictate that every RIA adopt these solutions, but most RIAs with any significant AUM are “fat and happy”. Their clients don’t demand better, so they have no interest in doing better.
Through our adjacent public charity, we can provide additional incentive for RIAs to do what’s objectively best for their clients…
We publish investment educational resources such as #1 international bestseller The Shadow Banker’s Secrets: Investment Banking for Alternatives, its companion masterclass, theoretical research in quantitative finance, in addition to nonacademic articles and papers via social and traditional media.
The result is that we have generated a following of over 100,000 accredited investors and 10,000 financial institutions.
We have no interest in owning or managing a retail-facing firm, but we do want to see our retail following have an opportunity to benefit from the solutions they’ve heard and seen us describe to them.
So, what’s the answer? An outsourced wealth management desk.
We’d like to provide our accredited investor followers a retail solution by referring all of them to an RIA that is able and willing to understand and execute the merit-based approach I described.
We don’t want any of your fees; their yours. We only insist that you understand and allocate to what is objectively best.
If your AUM is over $50 million (ideally over $500 million),
If you have the intellectual capacity and interest to understand the basics of modern risk-adjusted performance measures and financial engineering principles, and
If you are willing to adopt merit-based portfolio construction principles that may include substantial alternatives allocations with a methodology that more closely resembles sophisticated institutions than traditional retail advisors,
You’ll never need to market for another client again.
Take the first step, read The Shadow Banker’s Secrets: Investment Banking for Alternatives to get introduced to the quantitative fundamentals and referrals’ expectations you’ll need for a productive conversation, then schedule your free private consultation.