High-Net Worth Investors Not Keen on Index Funds

[Olav23]

MutualFundWire.com

by Company Press Release

[SIZE=+3]A[/SIZE] new study from Advsior Perspectives found that high- and ultra-high net worth investors (HNW/UHNW), who have assets are managed by RIAs, don't have the same affinity for index funds as individual investors. The study found that HNW/UHN are indexing only 3.8 percent of their marketable securities. Individual investors, on the other hand, in total index 10 to 15 percent of their assets.

Advisor Perspectives today released a study showing that high- and ultra-high net worth (HNW/UHNW) investors, whose assets are managed by Registered Investment Advisors (RIAs), are indexing only 3.8% of their marketable securities. This is in stark contrast to overall data for individual investors. According to Burton Malkiel, author of A Random Walk Down Wall Street and a leading proponent of index funds, individual investors in total index 10-15% of their assets. The study's data shows that wealthy investors using a financial advisor employ active management, in the form of separately managed accounts and actively managed mutual funds, for the vast majority of their assets.

The Advisor Perspectives study is based on the firm's proprietary database, which consists of approximately $50 billion in assets coming from RIAs serving HNW and UHNW clients. The database is segmented by account size, and the average account size in the tier representing the largest accounts is $3.7 million, ensuring that the results accurately reflect the investments of HNW and UHNW investors.

The study's other significant findings include:

* HNW and UHNW investors have 23.8% of mutual fund assets in index funds and exchange traded funds (ETFs). This is in excess of the mutual fund industry average of 10.8% of mutual fund assets in index funds. However, the finding means that only 3.8% of their total assets are indexed, since mutual funds represent only 15.8% of those assets.

* Only 1.0% of assets are indexed to broad-based U.S. market indices (the Dow, S&P, or broader market indices). The remaining 2.8% is indexed to international markets and to subsections of the U.S. markets.

* Wealthy investors make significantly greater use of ETFs than do other investors. Indexed ETFs comprise 78% of index funds in the study, as compared to 36% for the mutual fund industry.

* Barclays, a recognized leader in the ETF market, is the leading mutual fund company in the database, with 12.8% of mutual fund assets.

The database reflects investments in marketable securities and does not include alternative investments (e.g., venture capital, private equity, hedge funds, etc.). If alternative investments were included, the portion of assets indexed would be further reduced.

"Wealthy investors use financial advisors to achieve returns in excess of the market, through their expertise in asset allocation and fund selection," commented Robert Huebscher, CEO of Advisor Perspectives. "Wealthy investors are sophisticated enough to invest in index funds on their own, so it's not that surprising that advisors are using separately managed accounts and actively managed funds to achieve superior results. Now we know the extent to which they are doing this."

 

[rockyj]

... found that high- and ultra-high net worth investors (HNW/UHNW), who have assets are managed by RIAs...

Seems a self-defining sample (i.e. those advised by advisors take advisors' advice).

"Wealthy investors are sophisticated enough to invest in index funds on their own, so it's not that surprising that advisors are using separately managed accounts and actively managed funds to achieve superior results..."

I suspect the study in question didn't demostrate anything regarding comparative returns, despite the quote.

 

[LOL!]

Suppose I want a value tilt and a small cap tilt. Technically, a large cap value fund or ETF cannot be an index fund because someone has to decide what is "value". Same for small cap value. Same for international value. Same for emerging markets value. I don't think a TIPS index fund exists.

Thus one can say they don't have index funds when they still are using primarily ETFs, low expense ratio funds, and/or passive investing style.

Wealthy investors use financial advisors to achieve returns in excess of the market, ....

I haven't seen any data to show that wealthy investors who use FAs do in fact achieve returns in excess of the market. Does anybody have data that I am unaware of?

 

[ats5g]

At least we now know that the wealthy are made up of a lot of suckers.

Gee, I wonder why the wealthy use ETF's and not plain old index funds. Could it be because the ETF's can generate commissions for some advisors while the index funds don't? Or it could just be that to use an advisor, you probably have to have a brokerage account, and purchasing ETF's is generally cheaper than cheap index funds.

I wonder how many of them use DFA. saluki, anyone?

- Alec

 

[cute fuzzy bunny]

Seems a self-defining sample (i.e. those advised by advisors take advisors' advice).

DING!...ah, you know the rest...

I'm pretty sure that many ultra high net worth investors dont invest in mutual funds at all...or a lot of equities either...

This is a bit like a banana company labeling the product "LOW FAT!". Sure...so are rocks...

 

[JustCurious]

Suppose I want a value tilt and a small cap tilt. Technically, a large cap value fund or ETF cannot be an index fund because someone has to decide what is "value". Same for small cap value.

Really? Tell that to Vanguard, because they have a Value Index Fund (VIVAX), and a Small Cap Value Index Fund (VISVX), not to mention their Mid Cap Value Index Fund.

 

[aenlighten]

Presumably many are in hedge funds

and other private equity and real estate owned situations. Will the Bancrofts sell the WSJ or not? I don't think the returns have been great, but when you are in that ballpark, control is more important. This may be their opportunity to realize those returns, or they may just wait until a future opportunity.

 

[BigMoneyJim]

I was playing the mental exercise the other day of "how would I invest tens or hundreds of millions of dollars?" It occurred to me that mutual funds are less attractive because I could buy an index-ish portfolio with lower trading fees than a mutual fund would charge in yearly fees. Or at least I think I could...it was more of a concept exercise and not a researched cost-benefit analysis.

I would still prefer mutual funds over having a personal financial manager. Don't believe me? Give me a few dozen million dollars and I'll show you.

 

[Spanky]

"Wealthy investors use financial advisors to achieve returns in excess of the market, through their expertise in asset allocation and fund selection," commented Robert Huebscher, CEO of Advisor Perspectives. "Wealthy investors are sophisticated enough to invest in index funds on their own, so it's not that surprising that advisors are using separately managed accounts and actively managed funds to achieve superior results. Now we know the extent to which they are doing this."

It's so hilarious.

 

[travelover]

I wonder how HNW/UHNW are defined. Heck, some of us are probably HNWs and don't even know it!

 

[saluki9]

I wonder how HNW/UHNW are defined. Heck, some of us are probably HNWs and don't even know it!

The standard definition of HNW = $500K+

UHNW = $2.0M+

 

[saluki9]

At least we now know that the wealthy are made up of a lot of suckers.

Gee, I wonder why the wealthy use ETF's and not plain old index funds. Could it be because the ETF's can generate commissions for some advisors while the index funds don't? Or it could just be that to use an advisor, you probably have to have a brokerage account, and purchasing ETF's is generally cheaper than cheap index funds.

I wonder how many of them use DFA. saluki, anyone?

- Alec

The "study" sounds a little flawed in many ways. Failing to include ETFs as indexed investments sounds like a big problem.

As for DFA, they make up a small % of the market. for the most part they will not allow an adviser to use their funds unless they swear on the book that they either are or will soon be fee only (as in no insurance or brokerage commissions)

The fact is that most advisers and most brokers really believe they can beat the market. I (and the firm I work for) is of the belief that our clients can be better served by controlling risk, educating clients about how markets work, and orienting people to viewing their investments towards accomplishing goals as opposed to beating indexes.

 

[bssc]

My first thought is I wonder how many of them have annuities inside their IRAs since that is what their advisor told them was best.

I also agree that the quote at the end of "Wealthy investors are sophisticated enough to invest in index funds on their own, so it's not that surprising that advisors are using separately managed accounts and actively managed funds to achieve superior results." seems fuzzy.

If indexed funds outperform 70% of the actively managed funds, how do wealthy investors "achieve superior results"? Or is it that the advisors achieve superior results. Where are the customers' yachts anyway? Do advisors of high net worth people have special access to a crystal ball to determine in advance which funds will have those results? I would disagree with his phrase "it is not surprising" because if they could do this, it would be surprising to me.

 

[ERD50]

If indexed funds outperform 70% of the actively managed funds, how do wealthy investors "achieve superior results"? Or is it that the advisors achieve superior results.

Maybe it depends where you put the emphasis:

Wealthy investors use financial advisors to achieve returns in excess of the market,

It says they use them to achieve above-market returns. It does not say that they actually succeed.

Kinda like 'I am going to use this new fad diet to lose weight....'

More seriously, any mention of 'risk adjusted' returns?

-ERD50

 

[Spanky]

If indexed funds outperform 70% of the actively managed funds, how do wealthy investors "achieve superior results"?

They own the other 30%.

Or is it that the advisors achieve superior results.

They receive big commission checks and year end bonus.

Do advisors of high net worth people have special access to a crystal ball to determine in advance which funds will have those results?

They also have intuition, foresight, wisdom, inside info and time machine.

 

[ladelfina]

"Advisor Perspectives" .. they must think we are retarded!

argh.. what a dumb article.

I'm still unclear as to the real categorization of the people actually holding these accounts.

The database is segmented by account size, and the average account size in the tier representing the largest accounts is $3.7 million, ensuring that the results accurately reflect the investments of HNW and UHNW investors.

Is it made clear whether these multi-million$ accounts are 100% of the person's holdings or 50% or 10% (with the other 90% in indexes, for example?). Maybe you have $50 million and invest $3 million with some advisor just for the heck of it.. to see what happens.. While no one likes to throw money away..you're not going to cry over fees at that point the way you would if you are at the brink of ER and watching your pennies like most people here.

It's also unclear whether "managed accounts" at some multi-million-dollar level actually offer access to IPOs and hedge funds and real estate or private-equity deals or high-yield corporate bonds that the "average investor" doesn't touch. Like the Yale portfolio scenario, that extra edge could give them better returns than run-of-the-mill mutual funds.

And how does one even parse this:

Wealthy investors are sophisticated enough to invest in index funds on their own, so it's not that surprising that advisors are using separately managed accounts and actively managed funds to achieve superior results. Now we know the extent to which they are doing this.

What is the definition of the "extent"?

Ha! ... in fact the "truth" is buried here, in the first bullet point:

mutual funds represent only 15.8% of those assets

Soooo "mutual funds are better than index funds because rich people buy a higher percentage of mutual funds vs. index funds (in their managed accounts) compared to the general population"

BUT (what the article should say is) "rich people only invest 16% of their money in mutual funds, including index funds".

!!!

Talk about trying to put lipstick on a pig.

 

[FinanceDude]

Most UHNW investors have advisors, and I don't see that changing anytime soon.

Reality is that most folks in that net worth area are not comfortable doing things themselves, whether they can or not. They view it as risk transference.

Investment PRODUCTS ARE commoditized, investment ADVICE is not............

So, I guess the REAL discussion is what is ADVICE worth? To most on this board, nothing...........

 

[FinanceDude]

They own the other 30%.

They receive big commission checks and year end bonus.

They also have intuition, foresight, wisdom, inside info and time machine.

Most UHNW investors are nowhere near any mutual funds, they are invested in real estate, hedge funds, managed futures, ETF's and individual stock accounts with private money managers.

 

[FinanceDude]

My first thought is I wonder how many of them have annuities inside their IRAs since that is what their advisor told them was best.

Very few, if any....unless the local insurance guy was a college buddy...........

 

[Olav23]

Most UHNW investors have advisors, and I don't see that changing anytime soon.

Reality is that most folks in that net worth area are not comfortable doing things themselves, whether they can or not. They view it as risk transference.

I think this is only part of the case. I think it is also very much about priorities. I assume UHNW individuals are very busy people. Do they need to concern themselves with asset allocation, or is it a better utilization of their time to focus on their core business/philanthropy/outside interests?

I'd say they could read one of the Bogle guides and be 95% of the way there. But then again, I could read car repair for dummies and change my own oil, tune up my car, fix it when it breaks down, etc. But I choose, instead, to spend my time on other things and rely on a car mechanic for that .001% of my time that I need that service. (as opposed to spending months learning the mechanics of the car, and keeping that knowledge up to date, to use that skill .001% of the time)

 

[FinanceDude]

I think this is only part of the case. I think it is also very much about priorities. I assume UHNW individuals are very busy people. Do they need to concern themselves with asset allocation, or is it a better utilization of their time to focus on their core business/philanthropy/outside interests?

It is most likely the second part of the last sentence above.

I'd say they could read one of the Bogle guides and be 95% of the way there.

UHNW is usually viewed as folks above $5 million in investable assets. Folks with that kind of money generally are not DIY, and will not be anytime soon...... they're not going to read a book and start moving $5 million around..........

 

[igsoy]

I wonder how HNW/UHNW are defined. Heck, some of us are probably HNWs and don't even know it!

Ranks of high net worth people rises 8.3%*worldwide - Jun. 27, 2007


This article cites a report for 2006. The categories are a bit unclear. It implies that HNWs have over 1M in investable assets(obviously not counting home equity) and there are 2.9 million people in that category in the US, 9.5 million worldwide. It definitely says that UltraHNW is investable assets over 30 million dollars, and counts 95k of them but it doesn't say if that's US or worldwide.

 

[MasterBlaster]

Thats the wikipedia definition of HNW ($1MM) and UHNW($30MM)

High net worth individual - Wikipedia, the free encyclopedia

my personal definition of a high net worth individual is considerably higher. I would define a high net worth individual as someone who has invested assets that could generate income at the top 10 percent of all income or greater. An Ultra-High net worth indivual is someone whos assets could generate income in the top 1 percent of all incomes.

 

[igsoy]

Thats the wikipedia definition of HNW ($1MM) and UHNW($30MM)...

...I would define a high net worth individual as someone who has invested assets that could generate income at the top 10 percent of all income or greater. An Ultra-High net worth indivual is someone whos assets could generate income in the top 1 percent of all incomes.

I searched for these income figures and came up with figures for 2005:
top 10%= income of 100,000 and above. Achieving this yearly income (at 4-5% SWR) would require having assets of, say 2 to 2.5 million to be called HNW.

top 1%= income of 348,000 and above. Achieving this yearly income (at 4-5% SWR) would require having assets of 6.96 to 8.7 million to be called UHNW

You'd have to inflate these figures a little to relate it to 2006.

 

[Olav23]

I found this in another recent article on the growth of the ultra-rich:

High-net worth individuals are those with $1m (£500,000) to invest in financial assets excluding first homes. Ultra high-net worth individuals have $30m at their disposal.

Super-rich get wealthier faster | | Guardian Unlimited Business