Most people only have investments in a retirement account that consists of a few mutual funds. For these investors, the first rung of professional financial advice is the financial adviser. They will accept a client with any amount of money and place them in common mutual funds or index funds. The next rung on the financial advice ladder is the financial advisory firm that has a minimum requirement of investable assets like $250,000, or $500,000, or even $1 million. These firms will offer more active management but the investments will still primarily be in stocks, mutual funds, annuities, and index funds. A higher rung on the adviser ladder is called wealth management companies. Their minimum requirement may be $10 million or $25 million of investable assets.
The wealth management approach to investing only has a few extra components over more modest portfolios. At this level of wealth, annual distributions from a portfolio should never exceed 3% if the money is going to last for generations (or at most, only a portion of the portfolio earnings for a given year). Second, they will assess someone’s financial cash flow needs over the next 5 years and buy bonds maturing at intervals that will coincide and fund these needs.
The main portion of the portfolio will be a diversified portfolio that anyone may recognize:
- U.S. Equities: Small, Medium and Large capitalization
- Foreign equities: Europe, Far East, Emerging and Frontier markets
The components for these equity positions may be index funds or leading companies within these categories, and the specific allocation to these positions may go up or down with the current market outlook.
The final portion of the portfolio is devoted to investments only legally allowed for accredited investors (someone who has an income over $200,000 or a net worth over a million, excluding their home). These investments only permitted to accredited investors include hedge funds, private equity funds, private placements, venture capital, private lending (shadow banking), direct real estate and oil wells, and long/short strategies. Although these are the sexy investments that make the news, they represent the smallest portion of the overall portfolio where a little more risk is taken to reach for higher returns since the other two elements of the portfolio are relatively safe.