Investment Strategy: Make or Buy?

Gentlemen, the so-called UHNWI, i.e., the ultra-high-net-worth-individuals, are being heavily courted by banks, asset managers and multi-family offices. Does this also mean they get the best service at the lowest price?

Riccardo Petrachi (RP): UHNWI clients often award mandates to several banks, which is why they can easily compare conditions and services. At the very least, this puts them in a good negotiating position and allows them to make targeted use of the specific strengths of individual providers.

Mark Schindler (MS): To fully benefit from this, however, you need professional investment expertise. It is also very important that the mandates of the individual banks are well coordinated. In practice, when working with several banks, the overall view is often lost, and the mandates of the individual banks are poorly coordinated.

Even if the individual bank partners perform well, this may result in a suboptimal asset allocation of total assets. In the worst case, potential returns are impaired, or unnecessary risks are taken.

What is your advice in such cases?

MS: The be-all and end-all is a consolidated overview of all banking relationships. You may even be able to prepare simple consolidations of less complex assets yourself. But as soon as things get more complex, it's worth working with a bank you trust. Banks archive data over long periods and, thanks to bank client confidentiality, the highest level of confidentiality is also guaranteed.

We have developed our solution for this purpose, the so-called Wealth Portrait, which provides an ongoing overview of total assets.

RP: Such an overview is a prerequisite for understanding the interrelationships and mutual dependencies between the individual asset components at different banks. Only with this understanding can the strategic asset allocation of total assets be optimized.

What does it need for such an overview?

RP: First, a huge amount of data. In other words, databases with historical price information, but also prospective assumptions about the likely development of the global capital markets. You also need very powerful IT tools for quantitative analysis, for example, to calculate correlations or carry out simulations. Smaller organizations often do not have the resources and means to master the complexity of this task.

MS: The human factor should not be underestimated either. Asset allocation should not only be based on mathematical optimization, but also on human experience gained over several market cycles. It is therefore important to draw the right conclusions from correlation analyses and capital market simulations.

For example, we benefit enormously from our many years of experience in managing the portfolio of our owner, the Princely Family of Liechtenstein. We have recently started to apply this experience to a new service, the so-called outsourced investment office.

Could you elaborate on this?

RP: The basic idea is simple: instead of clients having to set up and maintain their own costly investment office with permanent employees, they outsource such an investment office to LGT. It is therefore a classic make or buy decision. By outsourcing to LGT, clients benefit from all LGT's resources and infrastructure, including our investment specialists, without having to take care of it themselves.

How is such an outsourced investment office organized?

RP: The most important element is certainly the Investment Committee, which meets regularly once a quarter, for example, to discuss certain topics and make strategic investment decisions. However, its tasks also include investment controlling, i.e., monitoring the investment guidelines as well as returns and risks at the level of total assets and liquidity.

How do you put together such an external investment committee?

MS: As a rule, it consists of a fixed core team. This usually includes the client themselves, or a representative appointed by them, as well as the client's relationship manager from LGT and an investment specialist who prepares and chairs the investment meetings as the client's personal investment officer. His or her tasks also include coordinating the specialists called in.

Which specialists do you usually consult?

MS: That always depends on the specific issue. For topics relating to strategic or tactical asset allocation, for example, this could be our Head of Research & Strategy. Or someone from Quantitative Research when it comes to optimizing the long-term portfolio structure. It is often also about the sustainability of the portfolio. If, for example, the overall assets are to be screened for hidden environmental risks, we call in a colleague from Sustainability Research.

With UHNWI, often special asset classes are involved, such as private markets or impact investments. In addition to our in-house specialists, we also involve colleagues from our partner companies LGT Capital Partners and Lightrock in such matters.

In your opinion, what is the most important advantage of such a setup?

RP: An outsourced investment office can be tailored to the client situation. Let me illustrate this with an example: Let's say a business family would like us to tell them what impact we expect current megatrends to have on companies in their industry in the portfolio. To this end, we could commission an equity specialist to carry out a specific analysis on this topic and bring it into line with our economic and market assessments.

Together with our Head Research & Strategy, this analysis would be fed into the Investment Committee so that the impact on the overall portfolio could be evaluated. Based on this, the Investment Committee would then discuss and decide to what extent the client can prepare for this possible scenario and make any necessary portfolio adjustments.

For which UHNWI clients is such a service useful?

MS: Our primary target group is families, but also foundations, with assets in the CHF 50 to 300 million range. An in-house investment office is generally too expensive for assets of this size.

And how does LGT charge for this service?

MS: The industry standard is 10-30 basis points on the total portfolio, depending on the size. We operate within this range.

RP: However, you must put these fees in relation to the potential benefits: Just one better strategic investment decision can already more than compensate for the costs.

Riccardo Petrachi has been Head of UHNWI Solution Partners at LGT Bank Switzerland since 2016 and Head of UHNWI Europe at LGT Private Banking since 2021. After holding positions in investment banking, including at Goldman Sachs in New York, London and Zurich, he worked in leading positions in private banking at UBS and as Head of Private Banking at Rothschild Bank in Zurich.

Mark Schindler has been a Senior Investment Consultant UHNWI at LGT Bank Switzerland since 2019 and has headed the Swiss Investment Consulting UHNWI team since 2022. Previously, he worked for various banks and asset managers as a portfolio manager in the areas of alternative investments, hedge funds and multi-asset class portfolios and was a financial risk consultant at Arthur Andersen.