HomePrivate WealthArticlesHow HNW Investors And Their Advisors Can Optimize Portfolio Customization

How HNW Investors And Their Advisors Can Optimize Portfolio Customization

Michael Featherman, CFA, is head of advisor sales and wealth consulting at Envestnet|PMC, Envestnet’s portfolio consulting group (“the advisor to the advisor”). In this role, Featherman is responsible for ensuring Envestnet|PMC’s experience in asset allocation, investment manager selection, direct indexing and tax/ESG overlay capabilities can be harnessed to help enhance portfolio construction for financial advisors and their clients. He is also in charge of PMC’s advisor sales efforts. 

Russ Alan Prince: What is Envestnet|PMC’s Private Wealth Consulting service, and how are you serving advisors and high-net-worth individuals?

Michael Featherman: Our Private Wealth Consulting suite offers customized investment solutions and white-glove service for individual and institutional investors with more than $1 million of investable assets. We think of private wealth consulting as the “easy” button for financial advisors seeking investment management capabilities for providing a high-net-worth individual investor or institutional investor with a customized portfolio and client experience. 

As part of this service, we give advisors direct access to a wide spectrum of management options for customizing and personalizing portfolios. Client portfolio managers from PMC are assigned to the advisor and each of their accounts and consult with the advisor and their clients to understand what customization is required. Sometimes, it’s as simple as a client wishing to retire after 25 years, and they wish to build a portfolio for retirement income. In other cases, a client will have more specialized requests, like preparing for a liquidity event or alignment with values related to environmental, social and governance—ESG. 

Whatever the requirement, we help to enable the advisor to customize across asset allocation and security-level parameters. We can also blend active and passive management in portfolio construction, depending on the asset class. For example, U.S. large cap tends to be a very efficient asset class, so we prefer to go passive on that to pass along cost savings. Emerging market equity large cap, though, lends itself to active management and stock-picking, which is typically more expensive but tends to give you a greater chance of generating returns. In addition, we offer direct indexing capabilities.

Crucially, we don’t rely on proprietary products when helping advisors construct portfolios. Our service model is entirely focused on making it as easy as possible for advisors to tailor portfolios for clients as much as they can while scaling their business. 

Prince: What are the most significant pain points facing HNW individuals from a portfolio-construction perspective?

Featherman: Portfolio construction certainly involves picking securities, but that’s not all. HNW investors are not a homogeneous group. They have different pain points, and needs, based on their circumstances and outlooks. 

Our team has conducted research into the different types of HNW investors and what they need from their advisors. For example, there are the millionaires next door, who have $1 million to $5 million in investable assets. The majority of them are self-made, so most did not inherit significant wealth or grow up in exclusive country club neighborhoods. Typically, as do-it-yourself investors, they have tended to invest in passively managed vehicles, and market conditions helped them become millionaires. Therefore, advisors need to drive home why their portfolio construction experience and capabilities can add value. They can do so using interactive, collaborative technology solutions to educate these investors and walk them through how they can better construct and evolve their portfolios. 

Then, there are the mid-tier millionaires—MTMs—who have $5 million to $30 million in investable assets. Many are owners of small and medium-sized businesses, so they’ve been working hard instead of just saving, saving and saving. They definitely have a bigger appetite for risk, and they’ve made money through their businesses, so now they’re seeking out institutional risk management. They want to make sure their money is invested in a way that is fundamentally risk-managed. They don’t just need someone who can build a portfolio well, but someone who can also help with estate planning because they’re approaching retirement, and many are unprepared to pass on their wealth. To that end, MTMs can benefit from a central advisor who can coordinate activities with third-party service providers, like accountants and lawyers, to implement complex wealth management strategies or access advice on other services, such as insurance. 

Finally, there are the ultra-high-net-worth—UHNW—investors who have $30 million or more in investable assets. Most of them are self-made entrepreneurs seeking to generate income from their assets. Because of their wealth, they are personally affected by political changes to tax policy, including estate taxes. Therefore, they are seeking advisors who can provide sophisticated tax and estate planning support and can help their portfolios navigate volatility across market cycles. Many of them have large chunks of assets that are illiquid, such as real estate, and they are concerned about having enough liquidity to support themselves in retirement. 

Prince: Are there any commonly requested overlays to be implemented within these portfolios?

Featherman: The biggest overlays we offer on top of portfolios are tax and impact. Tax overlays are by far the most popular on our platform, but impact overlays also dominate the conversation when ESG is a focal point for an institutional or HNW investor. 

Our tax overlays are designed to eliminate short-term capital gains across portfolios. They seek to accomplish this by transitioning low-cost-basis stocks over multiple tax years and ensuring portfolios align with client-specific, long-term capital gains tax budgets. With our impact overlay, advisors can help clients choose from 23 values-based screens to personalize their portfolios so that they align with the ESG causes that are important to them. 

The focus on ESG can vary by region, depending on where an investor lives. For example, I’m based in Denver, where a lot of people depend on the oil and gas industry, but investors in the Northeast might want impact screens that target fossil fuel companies. 

The information, analysis, and opinions expressed herein are for informational purposes only and represent the views of the speakers, not necessarily the views of Envestnet|PMC. The views expressed herein reflect the judgment of the speaker as of the recording date and are subject to change at any time without notice.

Russ Alan Prince is the executive director of Private Wealth magazine and chief content officer for High-Net-Worth Genius. He consults with family offices, the wealthy, fast-tracking entrepreneurs and select professionals.


Most Popular