In the world of high-net-worth (HNW) clients, wealth advisors understand the need for customization and personalized service based on their clients’ specific needs. As Dynamic’s Investment Management capabilities have grown, so too has a specialty area in evaluating complex client situations and delivering simple solutions for HNW clients.

Along with building custom strategies which could include stocks, bonds, ETFs and alternative investments, Dynamic has a selection of unique products to meet specific client situations.

On a recent Resource Call webinar, Dynamic Head of Investment Strategy Kostya Etus, CFA® led the Dynamic team to discuss scenarios and opportunities when serving the unique needs of HNW clients. The following is excerpted from the webinar to spotlight some of the solutions in Dynamic’s HNW arsenal and offer insights from the Dynamic team:

Private Equity

Best Use Case: Alpha Generation

There’s good reason to bring private equity into a client’s overall portfolio, particularly a HNW client, according to Dynamic founder and CEO Jim Cannon.

“Though some are citing studies where the number of public companies are actually declining, one reason you should consider private equity is to further diversify your opportunities… In most cases, a client is looking for an opportunity for outlier returns that will enable them to participate either directly or through a feeder fund in an operating company or portfolio of operating companies that is managed by a private equity firm.

See Broadening the Universe for HNW Individuals: 3 Key Reasons to Consider Private Markets

“Typically, those private equity firms take a position on the board of directors of the portfolio companies. They’re very active in how the companies are managed in a lot of cases, and they can influence the outcomes… Most private equity firms have specialties. You’ll see many of them dealing in energy, healthcare, technology.” When considering private equity, a few things advisors should keep in mind, according to Cannon:

• Make sure you’re dealing with a strong and experienced operator with an extensive, successful track record; realize your money is going to be locked up for five, 10, maybe even as many as 20 years.
• Consider an operator or a fund that is diversified as you can find funds that are less and more diversified.
• Pay attention to the structure of the particular investment; most are formed as partnerships. There’s typically a general partner that leads them and sometimes they’re investing in other funds.
• Look carefully at the fees and make sure your client understands what those are and how they’re going to ultimately impact returns.

Cannon encouraged advisors interested in private equity for their clients to look at CAIS, an alternatives platform and Dynamic partner. There are many private equity alternatives available through CAIS with due diligence by Mercer.

See Dynamic Announces Strategic Partnership with CAIS

Options and Exchange Funds

Best Use Case: Concentrated Stock Positions

 Dynamic COO Craig Morningstar described a scenario: “Oftentimes, you have an individual that worked at a publicly traded company, and they have a large concentration in stock. The client doesn’t want to get out of it because they have a very low-cost basis. So, how do you effectively manage out of it?

“There are various solutions. Among them, custom Options strategies. Sometimes clients see it as just one bucket, but you can literally take an Options strategy and divide it up into different pieces. Some of it can be used for income, another part can be used to hedge out the risk of the concentrated stock position. We’re here to help advisors figure out what’s possible.”

 “There’s a lot of innovation happening in the financial industry. Exchange Funds are another great solution. So, an institution will take the concentrated position that an individual and a thousand other people have; they’ll pull them together into a pool that somewhat resembles a common benchmark, like the S&P 500. Then, the client gets a portion of that pool in terms of units and essentially participates in the growth of the entire portfolio as if they’re owning the S&P 500.”

Here are two benefits:  

• Get diversification. The client is no longer subject to that single stock risk, which can fluctuate widely depending on what may be happening to that company.
• Defer the tax gain. The tax gain can be deferred to a future period of time, essentially through the diversification.

 Defined Benefit Plans

Best Use Case: Corporate Retirement Solutions

Tom McCann, CFP® managing partner of Dynamic-affiliate firm Crestview Capital Management, described a defined benefit plan as a complex retirement plan that:

• Has some of the highest contribution limits
• Is costly to set up
• Requires a lot more active plan management compared to other types of financial or retirement plans, and
• Is often paired with a 401(k) profit sharing plan.

He added, “They’re best for professionals over 50 years old who are comfortable putting away large sums of money every year.

“Typically, that’s at least around $90,000 for at least a five-year time period. So, usually these are high income earners. They want a lot more tax efficiency with their overall planning in addition to just what a standard 401(k) allows for.

“Often these individuals don’t have many employees because these employees are eligible and because these plans are subject to non-discrimination rules, so they do have to put money away for those employees as well. But one of the benefits for it is, let’s say that it’s a professional that is in their peak earning years and they really want to accelerate putting money away on a tax deferred basis, this is where a defined benefit plan can come in.

“So, it’s often your business owners, partners or key employees. The contributions that are put into a defined benefit plan are 100% tax deductible and the earnings continue to grow tax deferred and then the tax taken out just like an IRA. So usually when the plan is terminated, if they retire, that money is just rolled right over into an IRA at that point for you to manage.” He reminds advisors:

“With a defined benefit plan, you have to be really careful with how you manage them, because again, there’s actuarial computations that go into how much the individual can put away in the retirement plan. And you, as the advisor, play a key role in that, because the contributions are determined ahead of time based upon the performance of the account in the previous year.”

Hedge Funds

Best Use Case: Defensive Position

 Etus explained how hedge funds can make a good addition to a diversified portfolio: “Though they’re a more complex structure, they try to squeeze out some kind of a market mispricing while eliminating market risk.”

When it comes to hedge funds, there’s no one size fits all, but for the most part, the idea is that you get stable returns, according to Etus. “The point is to not lose too much money and earn a little bit of gain over time.”

An example of a hedge fund Etus has studied is merger arbitrage. He explained how it works:

“The investment manager buys a company they believe is a high acquisition target. Typically, you would want to buy them before the acquisition announcement. However, even if you do it after the announcement, there’s still the potential the deal doesn’t go through…

 “When the deal goes through, the firm that’s being acquired usually shoots up in price—that’s the market anomaly the hedge fund is trying to capture. And then they sell that company.

 So, you’re banking on the deal going through. If it doesn’t, the company usually drops, so there’s risk associated with that. To strip out a piece of that risk, the fund will typically buy the firm being acquired and short out either the broad market or the firm that’s making the acquisition, because typically they have a negative reaction.”

Etus summarizes, “You’re not trying to participate with the market. You’re just trying to make that little bit of alpha generation and keep doing that over time. Regardless of market environment, whether markets are up or down, is what makes hedge funds generally uncorrelated as far as alternatives go. So not correlated with stocks and not correlated with bonds.”

 For additional resources on Dynamic’s High-Net-Worth Solutions, download the fact sheet here. Watch for access to the webinar, “Simple Solutions for Complex HNW Client Situations,” coming soon!

As always, if you have complex HNW client situation, reach out to Dynamic’s Investment Management team at (877) 257-3840, ext. 4 or investmentmanagement@dynamicadvisorsolutions.com. We’ll take a deeper dive into the situation and product line to help you find the right solution.

Disclosures

This commentary is provided for informational and educational purposes only. The information, analysis and opinions expressed herein reflect our judgment and opinions as of the date of writing and are subject to change at any time without notice. This is not intended to be used as a general guide to investing, or as a source of any specific recommendation, and it makes no implied or expressed recommendations concerning the manner in which clients’ accounts should or would be handled, as appropriate strategies depend on the client’s specific objectives.

This commentary is not intended to constitute legal, tax, securities or investment advice or a recommended course of action in any given situation. Investors should not assume that investments in any security, asset class, sector, market, or strategy discussed herein will be profitable and no representations are made that clients will be able to achieve a certain level of performance, or avoid loss.

All investments carry a certain risk and there is no assurance that an investment will provide positive performance over any period of time. Information obtained from third party resources are believed to be reliable but not guaranteed as to its accuracy or reliability. These materials do not purport to contain all the relevant information that investors may wish to consider in making investment decisions and is not intended to be a substitute for exercising independent judgment. Any statements regarding future events constitute only subjective views or beliefs, are not guarantees or projections of performance, should not be relied on, are subject to change due to a variety of factors, including fluctuating market conditions, and involve inherent risks and uncertainties, both general and specific, many of which cannot be predicted or quantified and are beyond our control. Future results could differ materially and no assurance is given that these statements or assumptions are now or will prove to be accurate or complete in any way.

Past performance is not a guarantee or a reliable indicator of future results. Investing in the markets is subject to certain risks including market, interest rate, issuer, credit and inflation risk; investments may be worth more or less than the original cost when redeemed.

Investment advisory services are offered through Dynamic Advisor Solutions, LLC, dba Dynamic Wealth Advisors, an SEC registered investment advisor.

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