How advisors create financial plans when they don't manage all a client's assets

Having the entirety of a client’s assets under management understandably makes a financial advisor’s job much simpler. It’s akin to a chef having all the necessary ingredients at their fingertips.

Hey, it’s much easier to cook a gourmet meal when you don’t have to leave the kitchen.  

Unfortunately, that’s rarely the case because so much wealth now sits in private businesses, real estate, crypto, digital assets, insurance products and alternatives. As a result, wealth managers are increasingly being forced to adjust their planning approach as more clients hold significant assets outside managed accounts.

Jamie Hopkins, chief executive officer of Bryn Mawr Trust, says the digitalization of wealth has challenged the old model of planning that only looked at brokerage or retirement accounts, so advisors are being pushed into holistic planning that spans both on-platform and off-platform assets. 

“I often tell advisors that digital asset management has become one of the biggest overlooked risks in retirement and estate planning, so if you ignore these assets then you are ignoring real risk,” Hopkins told InvestmentNews.

Practically speaking, that means deeper discovery, formal inventories of hard to value and digital assets, and written plans that integrate those holdings into tax, cash flow, and estate strategies instead of treating them as side bets.

Patrick Thompson, investment management partner with Callan Family Office, says his planning process begins with his firm’s proprietary planning solution, which gives him a clear understanding of a client’s objectives, including goals that can span multiple generations.

“This technology enables us to deliver fully integrated advice across both managed and unmanaged positions. We also use a customizable private-capital pacing analysis tool, which allows us to model and plan across clients’ entire private-investment portfolios. Together, these capabilities ensure that our recommendations align with each client’s full financial picture and long-term objectives,” Thompson told InvestmentNews.

Scott McClatchey, senior wealth advisor at Ballast Rock Private Wealth, says the extreme correlations recently seen in public stock markets are causing many individual investors to hold significant assets, especially gold, outside traditional brokerage accounts. This forces advisors to broaden their financial planning scope even for simple asset allocation decisions, let alone performance tracking and benchmarking.  

McClatchey employs investment design, management, and planning tools such as Addepar and eMoney to not only track all holdings clients may have, regardless of how or where they are held, but also to properly categorize and benchmark those disparate assets into appropriate asset classes. 

“Developing the financial plan is our starting point, because we don’t feel we can provide proper investment recommendations until we see how the piece or pieces we’re managing fit into the entire aggregate portfolio,” McClatchey told InvestmentNews.

Concentrating on concentrated holdings

When it comes to concentrated positions in a private company or a handful of real estate properties, Hopkins says the first lever is usually to build more flexibility and safety around the edges, which can mean more cash reserves, high quality fixed income, or guaranteed income to offset that business or concentrated risk.

“I remind clients that diversification is still one of the few free lunches in finance, so if most of their net worth is tied to one enterprise or building, we will generally dial down risk in their liquid portfolio and revisit insurance, liability protection, and estate documents at the same time. End of day, it comes back to planning and what the client wants to accomplish,” Hopkins said.

He adds that advisors are also using trusts, buy-sell agreements, charitable trusts and gradual sale or gifting strategies so families can reduce concentration over time without blowing up their tax picture or succession plans. 

For clients with exposure to outside private companies, whether a closely held business or outside private equity funds, Thompson starts by conducting a detailed review of cash flow considerations from these assets to fully understand a client’s overall liquidity profile. In his view, knowing whether a private investment is in a drawdown phase, where capital contributions are required, or in a liquidation phase, where distributions are expected, is essential to managing overall liquidity and risk.

Outside investments are also important as part of the private capital pacing modeling that he uses when building out the managed alternatives allocation. That’s because a client’s existing liquidity profile and risk exposures often influence the assumptions and targets he sets for their long-term allocation to private capital.

“If a client has outside exposures to venture capital, we often reduce the strategic allocation to this asset class within the managed private capital allocation to avoid unintended concentration risk exposures,” Thompson said.