Board Minutes from the Chairman: October 2021

Today’s Search For Value Add

My partners and I recently enjoyed a getaway weekend with our wives to celebrate our company’s evolution and recent successes. During our time we reflected upon our continued mission at Buchanan and the clients we serve. Amongst several topics, we discussed the significant growth and expansion of our investor group through the positive impact of Investment Advisors. I reference Investment Advisors broadly to address the expanding segment of Registered Investment Advisors (RIA’s), Wealth Managers and Financial Planners and their growing importance in not only stewarding their clients’ investment portfolio but as a guide to navigating the ever-changing complexity of tax and estate laws.

My own personal experiences with Investment Managers provided further insights prompting me to highlight in this quarter’s Chairman’s Minutes the less discussed or less visible benefits of reconciling risk-return, portfolio reconstruction, maximizing after-tax yields and the security of a well thought through estate plan. Thank you to several firms who provided me the necessary insights to better understand their value propositions and platform differentiations.

To begin with, Registered Investment Advisors are all registered with the SEC which generally is required for investment advisors with $100 million or greater in assets under management. Coincidentally we too are a RIA so I understood the disciplines, protocols and compliance required by this designation. Each spoke to their roles of recommending and managing a basket of investments depending on an investor’s net worth, investment goals and risk appetite. They highlighted their fiduciary responsibilities, their use of open architecture in offering their clients both proprietary and external products and their customized approach to reporting. But this is where the similarities ended as each had their own approach to maximizing their value-add quotient.

I posed the same questions to each as to how they might construct an investment portfolio for a new client, how they characterize alternatives, source managers and investment opportunities and their views on risks and opportunities in today’s investment marketplace. Their own questions back to me complicated the exercise but colored the art and science of their craft and the many variables that contribute to a final plan. Are you investing for yourself and your lifetime needs or for an indefinite estate? How much actual liquidity do you need? Are you a passive investor or active investor? Are you a philanthropic investor? Does ESG investing matter to you?

The theme of holistic customization resonated as no two clients are the same though each share the need for yield and how to replace the lost fixed income of their investment portfolios as chronologically exampled with the March 2000 US 10-Year Treasury rate of 6.6% vs today’s rate of 1.6% and PE ratios for S&P in 2000 at 29 and today 34…yes yields are stressed and manufacturing alternatives are emphasized.

My takeaways were numbered as the group emphasized the difference between national investment houses and non-affiliated independent advisors and their fiduciary mindset in serving as an outsourced family office without proprietary product conflict. Each conversation highlighted the premium paid for liquidity in the public markets today and the evolving adjustments to investor mindsets about how much liquidity do you really need and what are you paying for that liquidity in lost opportunity cost.

It is true that historically, bonds provided insulation to portfolios during periods of volatility but today can no longer provide that same level of protection. As such, alternative investments have risen to the forefront of many investment advisor conversations as an appropriate portfolio diversifier and risk managed yield enhancer.

Historically, alternatives have been misunderstood as a segment of one’s portfolio that took on increased risk, volatility and illiquidity. Today however, the alts moniker provides a wide array of investment options within private credit, private equity, venture capital, hedge funds, real estate, and infrastructure. This grouping of investments is not only less correlated to the broader stock and bond market but can provide enhanced returns through accessing certain investments that were previously only available for the ultra-wealthy.

Though conversation Alpha for this added segment of investing can be intoxicating, each representative stressed the importance of understanding and quantifying the nuanced risk factors of this profile of investing. Most now design a modified portfolio away from a typical high percentage of fixed income and equities with ranges of 25-50% in alternative asset classes with disciplined allocations to current yield vs total yield.

Interestingly, much of the discussions were not necessarily focused on investments and yields but equally on the framing of asset protection, wealth preservation, estate transfer and tax management efficiency as part of the greater investment discussion. In fact, it was this segment of their job responsibilities that they suggested was the real value add of their work…both from a psychic and economic standpoint.

In each case my sources conveyed thoughtfully the subtle distinctions between lost opportunity costs, sleep at night liquidity, educating the next generation and the passive vs engaged clientele. I recall one conversation where an advisor referenced a recent certification that he had secured called a RLP…otherwise known as a Registered Life Planner. Think of this as a financial planner meets life coach. Seemingly today’s investment manager must also have a high EQ to balance their disciplined financial acumen with the emotional and individual life experiences of each of their customers.

Our own journey as a RIA has certain similarities and differences as we are not responsible for a client’s greater investment portfolio, nor their tax and estate planning but instead as a manager of one segment of their investable portfolio specifically within the real estate space. As a fiduciary to those that invest with us directly or through an investment advisor, we prioritize and most enjoy educating our clients to help guide them to better understand the details of their investments, be it the risks, their offsetting mitigants and expected outcomes. While our primary responsibility as a manager is to source excellent investment opportunities, we realize that by maximizing reporting transparency and investment education we can alleviate certain perceived risks associated with investing within the alternative space. We appreciate your trust and confidence in investing with our firm.

Best to all,

View and download a full PDF copy of this quarter’s Board Minutes here.