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Going Private With Your Investments

By: Rob Barbara
September 2007

If you belong in that category of ‘high net worth’ investors, there’s a compelling case for you to leave the ‘retail’ investment category and move up to private investment management and private client status.

Private investment management is the level above mass-market retail funds. This level has private individuals and families with substantial investable assets as clients. It also invests on behalf of endowments, foundations, and pension funds.

As private investors, they receive special benefits commensurate with the size of their portfolios. These benefits include access to exclusive managers who are not available to retail investors, more direct relationships with the firms managing their money, and lower and more transparent fees.

Although private investment management has always been around, it still remains relatively unknown. Part of the reason is terminology. They may also be known as investment counselors, private asset managers, institutional managers, and discretionary money managers, all of which essentially fill the same roles. They service selected clients who have larger sums of money. Some firms specialize in certain areas of this spectrum, but generally the business model is:

  • to focus on quality investment management
  • to service fewer clients in more direct relationships (meaning no third-party brokers or fi nancial planners)
  • to offer lower fees than those carried by retail investments

Private investment firms usually aren’t household names. That lack of awareness may be one of the reasons why people aren’t sure if they qualify as private clients. Some chartered accountants and estate lawyers involved with their clients’ finances will often recommend private investment firms, but many people with substantial portfolios are still unaware of any alternatives to retail funds.


This private client business model has many benefits for investors. Private investment firms have one focus, investment management. This strict focus on investment management manifests itself in a portfolio team that spends its time on research, analysis, and finding good investment opportunities for its clients. As a result, strong talent is often attracted to these firms which enables their portfolio managers to dedicate more time to researching and investing. This focus tends to result in better investment performance.

The private client business model also enables firms to work directly with clients, as opposed to diffusing their activities through brokers and financial planners. This direct relationship approach is reflected in a lower fee structure – which we’ll discuss further on.

However, another true benefit is greater accountability, directly from the firm managing your money. In a retail environment, when you factor in third parties, there can be several layers between you and the actual people managing your money. That makes it difficult to receive precise information, manager rationale, or overall accountability.

Then there’s objectivity. Unless they are fee based, all brokers and financial planners receive some form of compensation from retail investment firms – whether through commissions, trailer fees, and profit sharing or wrap programs. Any compensation associated with the sale or distribution of financial products or services immediately removes objectivity. Private client firms offer discretionary investment management based on client objectives, their investment knowledge and tolerance for risk, and their investment horizon. Many encourage clients to seek independent financial advice through fee-based advisors, tax advice from their accountants, and estate planning assistance from their lawyers. All of these activities are not associated with the ‘sale’ of the investment or embedded in the investment management fees.


Another benefit of being a private client is lower fees. Distribution fees – or financial planning fees, trailer fees, commissions, and wrap programs – make retail fees much higher than private client fees. A recent academic paper revealed that the average Total Expense Ratio (TER) is 2.2 per cent.1 Most private investment firms have fees that are, on average, half of that. A savings of one extra per cent per year for a $1 million portfolio means a $10,000 reduction in fees. This can add up dramatically over the years.

Private client fees are also more transparent. It can be very difficult to unpack and analyze retail investment fee structures. Although fees are listed in simplified prospectuses and in other legal documents, retail investment companies do not generally provide an ongoing account of the fees they deduct from individual investor accounts. In other words, when you receive your statements, you know the investment company has deducted fees, but the amount and nature of the fees are unclear. This lack of fee disclosure is contrary to the direction towards which most industries are moving. These days, many service providers offer extensive breakdowns of their fees on their client statements. With retail fund statements, retail investment firms deduct the money from your account and you have no idea how much you’ve paid.

Generally, private investment management firms have simple fee structures because they charge only for investment management and minimal expenses. Some firms send quarterly invoices or statements so you know exactly what you’ve paid your manager. (Your accountant may also advise that your investment management fees are tax deductible.)


Even though becoming a private client is an attractive alternative to retail investing, a direct relationship or lower and more transparent fees should never be a reason to move your investments. The key reason should always be quality investing – strong performance (long-term and absolute) and investment manager accountability.

Firms delivering strong performance results often demonstrate several characteristics. These include:

  • a primary focus on investment management
  • management of the intake of funds
  • active investment management (versus indexing)
  • a disciplined focus on the long-term

Firms that create these conditions often attract the best talent and talent and effort are important drivers of above-average performance.

Size and managed intake of money affect performance. Retail funds often take in large sums of money when times are good and vice versa when times are not so good. There is considerable evidence in the investment management industry that large assets under management can have a negative influence on performance results because managers are forced to find places for large sums of money which can lead to investing in inferior opportunities or chasing already hot stocks. The flip side is also troubling for managers. They may be forced to sell great investments simply because skittish investors want their money out.

Investment counselors mostly choose to manage the intake of money. Some will close off investments or temporarily suspend taking on new clients so they can ensure they are able to find good investment opportunities for their clients’ money.

Active management styles can also lead to strong absolute returns, rather than just providing relative performance consistent with index returns. Managers who invest in many of the companies listed on an index, say the TSX/S&P, may end up being ‘closet indexers.’ They end up only doing as well as the index. If the index is up, these managers are up. If the index is down, these managers are down. The problem is that managers who hold a portfolio that mirrors an index can never do better than that index – especially after their higher fees are deducted. If you are receiving index returns, you are likely better off in the least costly alternative, an index fund.


One of the keys to achieving absolute returns is taking a long-term approach and avoiding ‘short-termism.’ Retail managers often cling to the index because they feel obligated to deliver defendable short-term results. Quality managers know that you often need to look opposite the crowd in the short term in order to deliver good longterm results. This takes time and patience. Investment counselors concentrate on more sophisticated investors who are often less reactionary than retail investors. A long view and patience are critical to delivering strong absolute gains over time.

Manager accountability and humility are also indications of quality. Are your manager’s interests aligned with yours? A true test of aligned interests and conviction is if your managers are willing to invest their own money alongside yours. Quality managers believe in their talents and investment approaches, and they show it by putting a significant sum of their own personal wealth on the line with their private clients.

You can tell a lot about the quality of investment managers by the way they handle their mistakes or any bad news. However, let’s be clear about this, even Warren Buffet makes mistakes. How you handle them demonstrates character and a true investor focus. The beauty of being a private client is you have a direct relationship with the firm managing your money so you are in a better position for accessibility and accountability in good times and in bad. Successful managers take responsibility for their actions and learn from their mistakes. They don’t blame negative results on market conditions, currency, foreign markets, politics, or whatever. Many factors are out of everyone’s control, but quality managers always find opportunities regardless of uncontrollable factors. And, superior managers take responsibility for all of their actions – good and bad.

Rob Barbara is managing director of Beaujolais Private Investment Management.

1. Ajay Khorana, Henri Servaes and Peter Tufano, ‘Mutual Fund Fees Around the World – Working Paper.’ May 7, 2006.

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