Also, it is our view that wealth enhancement will not be an easy proposition using a long-only equity/fixed income model. High net worth clients may be able to keep pace with inflation and perhaps generate enough income to pay their annual income taxes. However, after inflation, taxes and fees, it will be difficult to grow wealth without taking advantage of institutionally priced Aspirational Solutions and Niche Growth Strategies. An appropriate allocation to these asset classes can support wealth enhancement well above the S&P 500. Of course, to achieve these nuanced returns, clients must stay focused on internal fund fees, friction costs, placement fees, spreads, commissions, carries/preferred fees, management and transaction fees. In some private market investments, fees can erode portfolio returns by a few to several hundred basis points prompting clients and their advisors to question their validity.
We believe that the firms who focus exclusively on long equity/fixed income strategies will evolve into the bank/brokerage firm model or financial ROBO advisor. Furthermore, regardless of their fees, they will be primarily down-market within the financial services industry. Eventually, clients will not be able to justify paying a fee for average performance on actively managed investment products. Rather, they will increasingly utilize passive funds to avoid the manager fees completely. This is what the industry refers to as the mass affluent. As a result, many RIAs will begin to operate much like the retail brokerage model.
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