Like most wealthy individuals, your clients likely have a significant portion of their net worth held in what are called unique assets. This term includes illiquid investments such as real estate, oil and gas; artwork; timber; closely-held business interests, collectibles, and others.
It is indeed a paradox—and a dangerous one for advisors—that in our obsession with assets under management (AUM), we largely ignore, under-prioritize, and/or potentially mismanage the single largest source of client wealth.
In fact, research shows this asset class represents the majority of the wealth held and transferred across generations. Here’s an excellent example of a breakdown of assets at varying degrees of wealth:
As you can see, illiquid assets such as closely held businesses, represent the largest single asset class for clients with over $10M in net worth. At all levels, unique/illiquid assets represent no less than 30% but upwards of 60% of a client’s wealth. It’s clear that protection and long-term growth of these assets are paramount concerns for your clients.
This reality also creates a degree of a conflict for wealth managers, because advisors and institutions are paid primarily on return maximization of liquid investments.
Mismanaging Unique Assets Means
Clients and AUM Could Soon Be Lost
It’s not just advisors who undervalue the role of unique assets in wealth management. The trust industry itself has a blind spot in the way it handles unique assets — and this creates further financial risk for both advisors and their clients.
In fact, many trust firms are guilty of one or more of the following:
● Disliking dealing with unique assets; and relegating it to lower priority
● Refusing to deal with unique assets and force their clients to look elsewhere
● Encouraging trustees to liquidate such assets, to the detriment to the performance of their overall portfolio and future wealth
For instance, in many cases a trustee may advise a fiduciary to retain a unique, illiquid asset in an account, to ensure that this asset (whether it be art, real estate, closely held business or any other) remains in the family. However, these assets may not provide the return the trust fiduciary is looking for in their management of the account.
Of course, incentives matter. When an organization is not properly incentivized, there is a greater tendency for neglect, mistakes, and mismanagement that can create tremendous fiscal, strategic, operational, and compliance risk.
The Consequences of
Mismanaging Unique Assets
Recently, a Vanguard-Spectrem study surveyed 3,000 investors with net worth from $100,000 to $25 million. These investors were asked to rank the reasons why they might fire/leave their advisor. One fact that was especially illuminating: their primary concern was “maintaining my current financial position,” and their second most important concern was the “financial situation of my family.”
Given what we learned about the percentage of unique assets represent in a client’s net worth, it’s clear how much protection of these assets is essential to “maintaining their current financial position” and “the financial situation of the family.”
Here’s a breakdown of the risks present to both sides when unique assets are deprioritized:
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Fiscal losses - losses for the trustee, losses for the advisor
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Operational losses - dealing with mistakes in unique asset trust management can be incredibly labor intensive (and expensive in lost time, your number one resource)
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Strategic losses - losing clients, and reputational harm that impacts your strategic objectives
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Compliance losses - in extreme cases of mismanagement, the wealth manager opens himself or herself up to potential lawsuits or other compliance problems
For instance, some unique assets require safeguarding against deterioration in the asset’s value, like decline in a real estate market, or devaluing of a business.
It may not be top of mind for advisors, however, if your client loses a great deal of wealth in these areas—and you did nothing to help them—chances are they may pull more of their liquid assets out of your management to compensate. Or they may simply leave to join with an advisor who provides a complete solution.
Could This Get You Fired?
Most advisors are fired or kept based on two factors: performance, and service.
As such, you ideally never want to say “no” to a client, in the sense of not being able to meet his or her needs, and sending them elsewhere.
And yet, the majority of your clients’ wealth WILL be in the form of unique assets — and not having a solution is incredibly short-sighted.
Clients understand that you’re in business to make money; however, clients will tend to favor advisors they feel care more deeply about their needs, their future, safeguarding their current financial position, and protecting their family’s future.
Of all the ways you can disappoint and potentially lose a client, beyond poor communication and underperforming overall—deprioritizing unique/illiquid assets would create the highest probability of a negative event.
Why Are So Many Industry
Professionals So Ill-Prepared?
Given everything we’ve just covered: that the majority of client wealth is held in unique assets, and how these assets are handled can make or break a relationship — you’d think this problem would have been solved long ago.
And yet, it hasn’t been solved. So why is that?
The biggest reason has to deal with the complexity and specialization required to handle each of the subclasses in the unique asset category, which includes:
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Real Estate
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Closely-Held Businesses
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Life Insurance
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Loans & Notes
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Minerals, Oil & Gas
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Intellectual Property
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Tangible Assets & Collectibles
Each of these subclasses has its own distinct policies, procedures and checklists; fee schedules; onboarding procedures and more. It’s impossible for an advisor (or even most trust companies) to have mastery in every one of these areas.
This is why many trustees have begun embracing an outsourced service model focused entirely on this asset class.
What to Look for in Outsourced Unique
Asset Trust Management Partner
When evaluating a potential partner for helping properly administer trusts holding unique assets, it’s critical to do your homework.
This is not easy to do via a Google search. In fact, just searching for regulatory rules, laws, statutes, or policies connected to non-traditional asset management yields very mixed and confusing results.
So much is unclear. Based on our assessment (which includes decades of experience in managing unique, illiquid assets), you want a firm that has:
● Stated and demonstrated specialization in unique asset trust management
● Experience effectively management these non-traditional assets
● The absence of legal or compliance negatives in their history
● High level of excellence/reputation in servicing this area
With all of these in place, you can rest assured that your clients unique asset management needs will be handled properly, which is why we built New York Private Trust upon these factors.
Led by the Milstein family, New York Private Trust is a Delaware-chartered trust company widely acclaimed for their integrity and success over three generations in investing, real estate, banking, manufacturing, energy and international business.
Our firm offers a broad range of fiduciary services, with specialization in effectively managing trusts containing non-traditional assets in all 7 subclasses of the unique asset category.
If you’d like to learn more about New York Private Trust’s service offerings in this area and how to protect against the losses we’ve outlined in this story, we can help. Simply click here to be taken to a dedicated page where you can schedule a call with someone on their team.
Ultimately, your role as an advisor is to protect and grow your client’s wealth. They may have hired you to focus on one particular area, like liquid investment or retirement account performance.
But at the end of the day, wealth is wealth. And the more you can help them with the majority of their net worth and holdings, the deeper and more profitable your relationship will be.
