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What High Net Worth Investors Need from a Financial Advisor

Posted by Joseph W. Chase, CFA®

How to Pick a Financial Advisor who is Best Suited at Managing Your Wealth

Selecting a financial advisor can be a difficult and stressful process. How do you know you are choosing the best advisor for you?

You may have needs that should be managed by others, both to free up your time and for the peace of mind that professionals are managing your wealth–and potentially complex planning situations–on your behalf.  

So, what are the factors you should consider when evaluating your advisor to know you are making the right choice for you, your family, and your wealth? Here are several key points to keep in mind.

What You Need: Trust

First and foremost, you have to be able to trust your advisor. You need to know they are working exclusively in your best interests and there are no hidden incentives or conflicts working against you.

How You Get It: Fee-only advisors working in a fiduciary capacity provide you with peace of mind that your interests are aligned with your advisor.

What You Need: High-Touch Service

You should have a direct line to a member of your service team who knows your entire financial situation. Whether you have a question about your portfolio, or would like to discuss your estate planning strategy, the ability to connect with your trusted advisor will allow you to sleep well at night knowing your family’s financial future is being looked after.  

How You Get It: Having a close relationship with your advisor fosters a strong bond of trust that is crucial to a successful long-term advisory relationship. Working with a firm that has a low client-to-employee ratio is one indicator of the level of service you will receive, including quick turnaround times and the ability to see a task through to completion.

What You Need: Efficient Management and Concise Reporting

With your busy schedule, you need an advisor that can operate efficiently, and independent of your day-to-day oversight. This type of relationship allows you to focus on what matters most to you, rather than chasing down tax documents or reading through your estate documents to figure out, for example, who is the trustee of each of your trusts. Working with an experienced advisor will give you more time to spend doing what you love. After all, time is among your most valuable assets.  

How You Get It: Working with a firm that invests in appropriate technology and systems can lead to a more efficient experience for you as the client. Reporting on your financial life must also be done efficiently and clearly. With a complex financial picture, summarizing intricate estate documents, tax considerations, and insurance coverage into succinct and comprehensible reports is a vital component of an advisor’s duty.  

What You Need: Integrated Investment Management & Financial Planning

Portfolio management and financial planning decisions cannot be made in silos. Each investment decision has implications for your tax situation, your estate plan, and your cash flow needs–and vice versa. Your advisor should have an in-depth knowledge of how each of these decisions interacts with other components of your unique financial landscape in order to take all factors into account.

How You Get It: Your advisor should work closely and cooperatively with your other professionals, such as estate attorney, CPA, and insurance agent, to provide a cohesive strategy that fits your goals.

What You Need: Portfolio Strategy and Nontraditional Investments

Once you and your advisor discuss your needs, goals, and constraints, your advisor should thoughtfully construct a portfolio that meets your needs for risk, return, liquidity, and time horizon. Developing your portfolio strategy should be a two-way conversation and your input should be incorporated into the portfolio. Outside of stocks and bonds, alternative asset classes such as hedge funds and private equity can enhance the risk/return profile for your portfolio.  

How You Get It: Working with an advisor who specializes in high net worth clientele can provide you with access to opportunities in alternative asset classes.

What You Need: Family Legacy PlanningYou have accumulated substantial wealth through your hard work. Now that you have your basic needs covered, how do you use your time and your wealth to move higher up in Maslow’s Hierarchy of Needs? What impact do you want to leave on the world? What would you like to leave to your family? What would you like to leave charity?

How You Get It:  These choices are yours to make, and your advisor should help you think through these important decisions to ensure your legacy carries on for decades to come. Through expertise in estate planning, customized investment portfolios, and tax considerations, your advisor should help to turn your goals into an action plan, and then see it through to completion.

Selecting the right advisor for your family is an important decision. As you evaluate prospective firms, think through the items outlined above to determine who will be the right fit for your family for long-term success.

How The Wealthy Stay Wealthy: A High Net Worth Investing Primer

Posted by Joseph W. Chase, CFA®

5 Important Considerations for Preserving and Growing Your Wealth

How high net worth individuals come into their wealth is one thing; how they maintain and grow that wealth is entirely another.

For high net worth investors, wealth preservation and growth is important for several reasons:

There are several tactics for preserving and growing your wealth–whatever your financial and life goals may be.

Consider Your Level of Investment Risk: Diversified Vs. Concentrated Portfolios

A significant factor in successful wealth preservation and growth is the level of investment risk you decide to take on.

A diversified investment portfolio strategy has long been pointed to as reducing risk and volatility in your portfolio, while a concentrated investment position is largely viewed as more high risk.

It can be argued that with higher risk potential, a concentrated portfolio focused strategically on a handful of market sectors, industries or asset classes could outperform the market, resulting in better-than-market average investment returns. However, when it comes to wealth preservation and growth, which of course requires a long-term view, it is not recommended to take on the higher-risk potential of a concentrated investment strategy.

High net worth investors who generated their wealth through higher-risk, concentrated investments, such as starting a business, for example, should avoid investing a large portion of their wealth into another high-risk area, such as a single start-up company. Even if a large amount of that wealth remains in the business, it is recommended to be more conservative with the wealth outside the business.

Diversifying your wealth in a balanced portfolio offers a more consistent return stream, and there are multiple alternative investments, such as hedge funds and private equity funds, that can improve expected returns and reduce risk. A diversified investment strategy offers several key benefits:

Consider Your Asset Allocation Strategy: Risk Vs. Return

While there are risk considerations with a consolidated versus diversified portfolio strategy, the next part of the discussion concerns managing that risk.

Your asset allocation strategy should be based on how much risk you can afford and are willing to take on, and how much return on your investment you desire. Like a simple math problem, higher risk tends to equal higher return.

Every high net worth investor’s asset allocation strategy looks different based on their lifestyle, priorities, goals, and other individual circumstances. Working with a professional wealth advisor is the best way to ensure your asset allocation strategy is right for you.

When it comes to an asset allocation strategy designed for wealth preservation and growth, your wealth advisor should consider your annual spending habits.

You can afford to take on more risk if your annual spending as a percentage of your net worth is on the lower side.

You should take on less risk if you’re relying on your portfolio for spending needs. With less risk, your asset allocation would keep the value of your portfolio more stable, especially during down markets.

In general, it’s recommended to choose some riskier investments for your asset allocation in order to generate growth, such as stocks and private equity investments, but also add in other asset classes like municipal bonds and hedge funds that can reduce your risk.

Consider Your Portfolio Strategy: Active Vs. Passive Management

When you’re a high net worth investor, your strategy must also take into serious consideration the taxes and fees your amount of wealth will generate.

The goal is to get the best post-fee, post-tax, risk and return profile, but this decision can’t happen in a vacuum. It plays heavily into your asset allocation strategy and how much risk you’re willing to take on. You need to be thoughtful about when to use an active management strategy versus a passive management strategy in a way that optimizes your risk and return.

So, how does this scenario work? It’s all about choosing the right markets in which to be active and passive.

Active Strategy: If you use an active portfolio management strategy, you’ll pay more fees, and only sometime will you end up with an attractive post-fee, post-tax return profile. Active funds, like hedge funds or actively-managed mutual funds, should be used only when they can make up for fees and taxes.

Active strategies work well in less efficient or more complex markets, which typically have less investor or analyst interest and therefore present opportunities to earn true alpha for the level of risk you take on. When you work with a professional wealth advisor, they will be able to identify a good manager in these markets, allowing you to take advantage of those inefficiencies.

Passive Strategy: Passive funds, like Exchange Traded Funds (ETFs), tend to have lower fees and taxes compared to active funds. A passive strategy works well for more efficient markets because there’s little evidence that there is excess return to be made, especially when considering taxes and fees.

Consider Your Long-Term Performance

Another benefit of working with a professional wealth advisor is the ability to continuously improve your investment process with unique opportunities to choose managers with an edge.

Markets are constantly getting more efficient and managers must continue to improve their processes to keep up with changing market conditions. Preserving and growing your wealth is highly reliant on seeking out these managers who have a definable “edge” over the competition.

Consider Your Overall Livelihood

The most important consideration for effectively preserving and growing your wealth is to simply enjoy your life. Don’t obsess over how your investments are performing on a daily basis–instead, hire someone you trust to be a good steward of your wealth so you don’t have to spend your time looking at and thinking about your wealth.

It’s easy to let investment worry creep into your life. We often see these common concerns among our clients:

Here are three ways to relieve yourself of these concerns and get the peace of mind you need to relax and enjoy your life:

Work With an Estate Attorney. All investment decisions for an individual at your level of wealth tie into your estate. Your estate plan and investment strategy should work together and live under one roof, so be sure to work with wealth and estate professionals who can work effectively together on your behalf.

Keep Calm and Rebalance. When you have a diversified portfolio, which we recommended earlier in this post, you have more than just stocks and bonds impacting your investments. When the stock market is down, you have other investments that are going up or remaining stable to provide a cushion for your wealth and peace of mind–even in down markets.

Work With Other Wealth Professionals. Everything from your estate plan to your insurance to your charitable intentions should align with your long-term financial goals. Hire a wealth advisor who can oversee your wealth, and also works with other professionals on the different aspects of your wealth planning strategy.

While there are several important considerations for preserving and growing your wealth, it all comes down to working with a wealth advisor who not only has the capability of implementing the most appropriate investment strategies for your unique situation, but can work with other wealth professionals to help you achieve your goals.

Learn more about why working with an independent, fee-only Registered Investment Advisor like Lake Street Advisors can benefit the preservation and growth of your wealth at

Illustrating the Power of a Grantor Retained Annuity Trust

Posted by Joseph W. Chase, CFA®

Transfer Wealth to Future Generations While Minimizing Tax Impact

When used appropriately, a Grantor Retained Annuity Trust, or GRAT, is a powerful tool by which to transfer wealth to future generations.  

A GRAT is a trust in which the principal is repaid as an annuity to the grantor (the maker of the trust), with interest, typically over multiple years. If the principal grows at a rate higher than the interest rate applied to the annuity payment, the remaining value is transferred to the heirs without triggering a gift tax.  

To illustrate the mechanics of how a GRAT works, the image below outlines what a one-year GRAT would look like, but in reality, these are typically structured to be in place for two or more years.

GRAT Chart

In this example, a husband and wife with $35 million of personal assets transfer $5 million into a GRAT.  The interest rate, based on the 7520 rate, is assumed to be 2% in this case, which means the husband and wife will receive their $5 million, plus 2% interest, back from the GRAT after the end of the GRAT term. 

The investment assets in the GRAT have appreciated by 8% after one year, bringing the total value of the GRAT to $5.4 million. The annuity payment to the husband and wife is $5.1 million ($5 million of principal plus 2% interest), and the remaining $300,000 is transferred to a “Remainder Trust” for the benefit of their heirs.  

The remainder trust is not subject to estate tax, resulting in a potential estate tax savings of $150,000 based on our example above (assuming a 50% combined federal and state estate tax rate).

GRATs are a very effective tool to help you fulfil your goals of creating an enduring family legacy. There are several considerations when choosing to use a GRAT–contact us to learn more about a GRAT and whether this type of trust is right for your personal situation.

What to Look for in an Investment Advisor

Posted by Joseph W. Chase, CFA®

Know You’re Working With a Wealth Advisory Firm You Can Trust

The world of wealth management is complex, and there are typically several firms involved in the management of a portfolio. We are often asked about the differences and similarities between Multi-Family Offices, Registered Investment Advisors (RIAs), Brokers, Asset Managers, and Custodians. There can be overlap in these firms; often, one firm checks several of the boxes. So how should you decide what firm, or firms, to work with to manage your wealth?

Registered Investment Advisor

Independent Fee-Only Registered Investment Advisors (RIAs), such as Lake Street Advisors, offer unbiased investment management and financial planning services with no hidden incentives. They are held to a standard of fiduciary duty, are not limited to a certain set of investment products, and are not paid any commission.

RIAs come in several shapes and sizes, with service offerings varying from firm to firm. RIAs typically manage the investment portfolio, and may provide additional services such as estate planning, tax optimization, insurance advice, and bill pay.

Having one advisor oversee your entire portfolio is a prudent approach–while there should be ample diversification within the investment portfolio, there is no need for multiple advisors running portfolios in parallel. In fact, this approach can create inefficiencies and adverse tax consequences.


Brokers are financial advisors working within a large bank. Unlike an RIA, they are not held to a fiduciary standard and are often paid on commission, meaning the products they put in client portfolios could be of benefit to the broker but detrimental to the client. Due to their affiliation with a large financial institution, they often provide proprietary funds, which means more fees for the bank, and they trade through their firm’s brokerage, which can lead to misalignment of interests and excessive trading in client accounts. Additionally, brokers are limited only to the investments on the firm’s platform, whereas RIAs have an almost unlimited opportunity set.

Asset Manager

Within your portfolio, there could be stocks and bonds, but more likely you will own a mix of several exchange traded funds (ETFs), which are pools of stocks and/or bonds that trade like stocks; mutual funds; and perhaps alternative investments such as hedge funds and private equity funds.

Asset managers are responsible for making the investment decisions within the funds, such as trading stocks and bonds or making venture capital investments. Some are active managers, meaning they only buy the stocks they think are going to do really well, and some are passive managers, meaning they seek to replicate the performance of an index, such as the S&P 500.

Asset managers play an important role in your investment strategy; however, they will not be responsible for setting and maintaining your portfolio strategy or setting your asset allocation targets.  Those responsibilities should be left to an independent advisor, ideally a Registered Investment Advisor.  It is typically prudent to have assets invested with several asset managers for diversification purposes.


Custodians are responsible for the safekeeping of your funds and securities and typically provide trading services in addition to holding your investment assets. Firms such as Schwab and Fidelity offer low-cost trading of stocks, ETFs, and mutual funds, and securely hold your assets. We do not believe there is a need to diversify among different custodians, and prefer to consolidate the holdings of each family with one custodian. This strategy provides operational and tax reporting efficiencies and, in our view, does not increase risk.

When developing a wealth management plan, you should find an advisor that checks all the boxes:

The advisor should work with asset managers that charge reasonable fees for the management they provide. Your advisor will recommend a custodian to hold your assets, which should be a reputable firm with reasonable fees for the level of service they provide.

Advisor Comparison

Definition of Registered Investment Advisor (RIA):
A person or firm that, for compensation, is engaged in the act of providing advice, making recommendations, issuing reports or furnishing analyses on securities, either directly or through publications.

Impact Investing Strategies are In High Demand

Posted by Joseph W. Chase, CFA®

Why Advisors of High Net Worth Investors Should Pay Attention

Impact investing continues to gain popularity among investors seeking opportunities for their wealth to create positive change in the world.

As of 2016, $8.72 trillion of investment assets under professional management were managed with an impact mandate. That amount represents more than 20% of total professionally-managed assets in the United States, up from just over 10% in 2012. Advisors who ignore this trend are limiting their own potential and, more importantly, could be falling short of their clients’ expectations.

Not Just a Passing Trend

Investor demand for impact investing strategies is significant. According to Morgan Stanley, 75% of investors are interested in sustainable investing, including 84% of women and 86% of millennials. As wealth is passed down to future generations, advisors should expect an increasing demand for impactful strategies.

Motivations for impact investments are as broad and diverse as the individuals who seek to make a positive change in the world. Some investors are looking for a general alignment of their views with the holdings in their portfolio, while other investors are very specific about their goals, requiring highly-customized impact investments. Examples of these types of investments range from empowering women entrepreneurs in Africa to advancing cancer therapy research.

Advisors have not yet caught up with demand; fewer than half of investors have implemented sustainable strategies into their portfolios. This disparity creates an opportunity for advisors at the forefront of impact investing.

Why Impact Investing Hasn’t Caught Up with Demand

The lack of adoption could partially be explained by the perception that impact investing results in lower returns. Once viewed as an indirect charitable cause (giving up return to support noble causes), impact investing is becoming increasingly viewed as a viable performance-generation strategy.

Recent studies show that impact-oriented funds have outperformed their traditional peers, and impact-oriented benchmarks have outperformed traditional benchmarks. This outperformance holds true at the company level as well. Companies rated as “The Best Companies to Work For” have achieved outperformance relative to industry peers. Companies that have begun sustainability initiatives have also observed positive financial results:

It can be debated whether the sustainability investments caused the financial improvements, or if forward-thinking management teams tend to invest in sustainability projects, producing superior financial returns.

Some investors, especially those with very specific impact goals, are accepting of below-market-rate returns. A 2017 survey shows that about 2 out of 3 impact investors seek risk-adjusted market-rate returns, while 18% target below-market-rate returns that are closer to market rate, and 16% have a target return closer to capital preservation.

Overall, the results have been similar to expectations; 3 out of 4 respondents said returns were in-line with expectations, while 9% were underperforming, and 15% were outperforming.

How Do You Know if an Impact Investment is Making an Impact?

Measuring the performance of impact investments is multifaceted and requires additional metrics compared to traditional investments. Financial returns can be measured just like traditional investments, but measuring the actual impact of an investment is a bit more nuanced.

One hesitation some investors have is the fear of not knowing what their money is doing to change the world. Recently, a number of metrics have begun to surface to measure impact. These metrics include IRIS (Impact Reporting and Investing Standards), USSPM (The Universal Standards for Social Performance Management), GIIRS (Global Impact Investment Rating System), and the United Nations Sustainable Development Goals. Additionally, many impact managers provide customized impact reports for their clients’ portfolios.

Impact investing has come a long way over the past decade. As investor interest continues to gain momentum, advisors must adapt to their needs to stay relevant.

Infrastructure Investment Opportunities Existed Before Trump’s Plan

Posted by Joseph W. Chase, CFA®

A Rationale for Adding Infrastructure Exposure to Your Investment Portfolio

The White House recently announced the “Legislative Outline for Rebuilding Infrastructure in America”, a 53-page plan to stimulate $1.5 trillion of investment in infrastructure in the US. While there are valid points to both the pro and con arguments for the plan, we’d like to share our insights into our process and rationale for obtaining infrastructure exposure in an investment portfolio.

The immediate potential beneficiaries of infrastructure investment are companies that provide design and construction services for infrastructure projects, as well as the producers of materials needed for such projects.

While there are exchange-traded funds (ETFs) that specialize in these types of companies, we prefer to pick up this exposure through broad equity market index vehicles, as we believe the US equity markets are generally efficient. We also believe that, to the extent infrastructure investments boost GDP, the rising tide will lift all ships, so to speak, and broad equity markets will benefit.

Taking an Informed Approach to Infrastructure Investing

We define infrastructure as essential physical assets required by society to function that generate stable, growing cash flows, which are typically linked to inflation. In our view, the best long-term approach to infrastructure investment is to own the physical assets.

Examples of attractive infrastructure assets for investment can include:

These assets are typically natural monopolies (it doesn’t make sense to have two highways running in parallel, for example), and are government-regulated, allowing for a specified rate of return on investment for the owner. Cash flows generated by these assets typically have low correlation to short-term changes in the economic cycle, but grow over time with long-term population and GDP growth, as cars driving on a toll road increase, for example. The regulated nature of these assets allows for long-term contracts with built-in inflation escalations, meaning cash flows are predictable over long periods of time and increase with inflation, providing an investment portfolio with some insulation from rising costs.

A Global Opportunity

For governments around the world to close the $50 trillion funding gap in infrastructure over the next 15 years, infrastructure spending would need to increase from $2.5T annually to $3.3T, according to McKinsey. For reference, the World Bank reports that approximate total annual government spending was $12.5T globally in 2016.

This funding gap has increased willingness to open the doors to private ownership and operation of infrastructure in some countries, which provides capital to government owners of infrastructure. That capital can in turn be used to relieve the debt burden taken on to build said assets, and can eliminate the need for governments to continue spending to maintain the assets.

Examples of private ownership include the passing of a law in India in June of 2016, allowing for foreign ownership of airports. Additionally, governments in Colombia and Australia have recently sold transportation and power generation assets to private owners.

Here in the US, we aren’t accustomed to privately-owned roads and bridges, but other infrastructure assets, such as electric grids and energy pipelines, are often owned by private enterprises. In other parts of the world, privately-owned roads, bridges, and other infrastructure is common.

The White House’s infrastructure plan provides a few avenues to encourage private ownership of infrastructure assets:

The need for capital is especially acute in rapidly-growing emerging market countries, which account for 60% of the total funding need. This situation creates an opportunity for investors to gain exposure to emerging market countries–emerging market economic and consumer activity in particular–rather than exposure to broad emerging market equities, which includes companies that rely on exports for a significant portion of their revenue.

How to Choose the Right Infrastructure Exposure for Your Investment Portfolio

Exposure to infrastructure investments can be obtained through publicly traded or private investment vehicles, and both types of exposure have the potential to benefit a diversified portfolio. Private funds are structured in a similar manner to private equity funds, in which the investor makes a capital commitment to a fund that is drawn over several years as the fund manager invests in various infrastructure projects. Private funds typically invest in development projects and distressed assets that need a turnaround to achieve peak earnings (referred to as Development Stage and Opportunistic assets).

Public infrastructure vehicles are typically Limited Partnerships or Corporations, and are traded on major stock exchanges such as NYSE, allowing for an investor to buy and sell the investment daily. Compared to private funds, they tend to own lower risk assets that are already in operation, and perhaps in need of minor operational improvements to maximize earnings (known as Core and Core Plus assets).

Public vehicles have the benefit of higher liquidity and less operational/development risk, and typically have a lower expected return than a private fund. Public and private infrastructure investments exhibit relatively low correlation to major asset classes, which helps to diversify portfolios and can reduce overall portfolio volatility.

Owning productive infrastructure assets over the long term can be an attractive addition to an investment portfolio, due to the long-term visibility into cash flows, a natural hedge to inflation, and returns that exhibit low correlation to other major asset classes.

Impact Investing Can Make Money While Making Change

Posted by Joseph W. Chase, CFA®

What to Expect if You Decide to Pursue an Impact Investment Strategy

Your investments should strive to meet all your objectives, whether that is solely focused on the bottom line, or also having an impact on the world around you. In addition to securing a financial future, more and more individuals and families are choosing to invest in strategies that are focused on making positive change.

Impact investing is growing in popularity with investors as an opportunity to meet their long-term investment goals, while seeking to make a positive, lasting impact on the world.

What is Impact Investing?

It is difficult to boil impact investing down to a single definition, as its meaning can vary from person to person, depending on the overall impact they wish to make.

Since there is no “one size fits all” method to crafting an impact-oriented portfolio, it’s beneficial to work with a knowledgeable financial advisor who can help you develop a cohesive strategy. Successful impact investing allows you to accomplish impact-oriented goals as well as financial objectives.

Here we explore the 3 strategies related to investing with an impact in detail and explain what you should expect from your advisor.

  1. Exclusionary Impact Investing

Exclusionary investing refers to the practice of restricting certain types of investments from being held in your portfolio. Common restrictions include oil and gas exploration companies, tobacco companies, gambling stocks, and firearms manufacturers. If you are interested in an exclusionary impact investing strategy, you should expect your financial advisor to help you customize a portfolio that eliminates exposures to specific industries. This can be done by removing certain asset classes, or by placing restrictions on separate account managers to exclude certain holdings. You can choose to restrict certain industries and/or specific stocks, all while maintaining exposure to the rest of the market as part of a well-diversified portfolio.

From a broad economic perspective, the practice of exclusionary impact investing could theoretically raise the cost of capital on companies that are not socially responsible or impactful, making it more expensive for these companies to raise capital in the future.

  1. Inclusionary Impact Investing

Unlike exclusionary investing, inclusionary investing seeks out certain types of investments, or investments with certain characteristics, in which to allocate capital. This approach is best suited to active management, often obtained through mutual funds, because evaluating criteria that fits an impact mandate is a qualitative and quantitative endeavor best handled through active management.

Depending on personal preferences, different funds may be suitable for different individuals and families. Some funds use systematic criteria to tilt exposures to companies with better ESG rankings. Other funds are dedicated solely to holding environmentally-friendly companies. Some seek out companies with responsible governance practices such as higher-than-average female representation on their executive teams and boards of directors. If you are interested in an inclusionary impact investing strategy, you should expect your financial advisor to leverage relationships with fund managers to provide recommendations that are best suited to your goals.

The economic rationale for this approach is that companies with a long-term environmental and social record and better corporate governance may deliver better results for their shareholders over the long term.

  1. Direct Funding of Impactful Companies

Directly investing in impactful companies can be done both in public and private companies. Stock picking in public companies can be a time-consuming endeavor, and for even the most experienced individual investors the results may be disappointing. Working with an advisor to identify long-term opportunities may yield better results.

You may be presented with opportunities to make early-stage investments in private start-up companies with impactful products or services. Direct funding in start-up companies can have high return potential; however, they also come with commensurate risk. If you are interested in a private direct investment strategy, your advisor should help evaluate the investment’s merits, potential risks/rewards, and help to size investments appropriately to be part of a well-diversified portfolio.

An Allocation to Impact Investing Can Make Money and Make Change

Impact investing as part of a diversified portfolio can make a difference for both society and your wealth. If you wish to make a positive change in the world around you, you should work with a financial advisor who can help you do it in a way that’s balanced for your cause and for your financial future.

When are Robo Advisors an Effective Option for Investors?

Posted by Joseph W. Chase, CFA®

The Benefits and Drawbacks of Utilizing a Robo Advisor for Your Wealth Management Strategy

Choosing a financial advisor is an important and often difficult decision. Certain situations call for certain solutions; however, in today’s financial landscape there are more options than ever, including robo advisors. We dug into the robo advisor trend to explore the benefits and drawbacks of this investment option.

What Are Robo Advisors and Where Are They Offered?

Robo advisors are online portfolio management tools that allocate client capital to a diversified mix of exchange traded funds (ETFs). ETFs are typically low cost index tracking vehicles that trade throughout the day on exchanges, much like a stock. Some ETFs invest in stocks, some invest in bonds, and others hold alternative assets such as commodities or real estate. Robo advisors determine the right mix of stocks, bonds–and, in some cases, alternatives–for their clients’ portfolios based on their risk tolerance and time horizon, which is often determined by an initial survey conducted when opening an account.

There are several robo advisors in the market today. Betterment and Wealthfront are two of the leaders, with others such as WiseBanyan and Personal Capital also growing their assets under management. Fidelity and Schwab, well-known as low-cost online brokerages, have also recently begun offering robo advisor solutions.

While robo advisors are a relatively new solution to wealth management, the conceptual framework has existed for decades. Vanguard and other fund families have offered balanced mutual funds, which provide a similarly diversified mix of stocks and bonds, with varying levels of risk and expected return to match the preferences of the client.

These solutions can be effective for some investors, particularly young professionals with smaller portfolios, who are looking for a solution that will require less maintenance and allow them to focus on their career rather than managing their investment portfolio. However, there are some drawbacks to this solution as well.

As the Name Implies, Robo Advisors Lack the Human Element

While some robo advisors offer the ability to discuss your portfolio with an actual human, they do not typically have a physical office available for customers to visit or a team of experienced experts that are available to discuss the portfolio. This solution works for some investors, especially during strong bull markets, but it is much more difficult to stay invested and maintain, or add to, your portfolio during difficult markets.

Having a trusted advisor help you through difficult markets can mean the difference between a successful long term outcome and a discouraging experience. When establishing risk profiles for accounts, robo advisors ask questions like “The global stock market is often volatile. If your entire investment portfolio lost 10 percent of its value in a month during a market decline, what would you do?” When establishing an account, it can be tempting to say that you would buy more, as we are all taught to buy low and sell high. In reality, it can be difficult to execute this strategy without the guidance of a trusted advisor.

Robo Advisors Don’t Offer Active Management Strategies

Robo advisors typically invest solely in passive index ETFs, which have the benefit of low costs and performance that is consistently aligned with the overall market. This approach tends to work well for many segments of the market, but it can also mean that investors are missing out on alpha generation opportunities in less efficient markets, such as small cap international equities. At Lake Street, we believe a mix of active and passive strategies results in the optimal risk/return profile for investment portfolios.

A Robo Advisor is Unable to Oversee Your Entire Portfolio

Many investors who use robo advisors also have savings invested in 401(k)s or other employer-sponsored plans. Having an advisor oversee and understand the entire picture can improve returns and reduce risk by ensuring the proper overall diversification and allocation.

You Don’t Get the Benefit of Financial Planning Services

Having an advisor that can oversee your investment portfolio, tax situation, and estate plan can add significant value. When all components of a family’s financial picture are managed in a coordinated manner, investors benefit from a cohesive strategy. Using a robo advisor for your wealth management doesn’t provide that type of holistic financial planning.

A Robo Advisor Won’t Take Advantage of Additional Asset Classes

While some robo advisors offer alternative asset exposure through commodities and real estate, there are no options to include potentially higher-returning asset classes such as private equity and venture capital. While not available to all investors due to portfolio size and liquidity constraints, these asset classes have historically outperformed traditional asset classes (as measured by Cambridge Associates US Private Equity Index against S&P 500, MSCI AC World, Bloomberg Barclays Aggregate Bond Index, Wilshire REIT, Bloomberg Commodity Index and HFRI Equity Hedge over the 20 year period ending 12/31/2016) and can add a meaningful benefit to a portfolio.

Robo advisors are an easy-to-use and low-cost tool that are a great solution for many investors. However, there are limitations and drawbacks that should be considered before choosing to use a robo advisor rather than a team of trusted experts.