When a client in the Northeast recently sold his small business for $15 million, advisor Rob Bradley recommended that the proceeds be invested in a diversified portfolio covering the major U.S. industry sectors and including several global corporate giants. But instead of laying out an allocation of mutual funds and exchange-traded funds, the president of Bradley, Foster & Sargent in Hartford, Conn., made a case for using only individual stocks and bonds.
The entrepreneur agreed, according to Bradley, after hearing that a portfolio without funds would give the advisor more flexibility to limit Uncle Sam’s tax bite. Another big selling point: Using individual securities would avoid duplicating investments in areas where the client already had large concentrations of wealth, like real estate.
“The type of clients we work with usually aren’t impressed with off-the-shelf products,” says Bradley, whose firm manages $2.7 billion. “They want a portfolio tailored specifically to their own tastes that’s managed by a staff they can talk to directly.”
He isn’t alone. The average RIA in the FT 300, the Financial Times’ listing of top registered investment advisors, has close to 32% of client assets in individual stocks and bonds — interestingly, the same percentage as the FT 400 advisors, who mostly work at traditional broker-dealers. These are firms with a high percentage of wealthy clients who have financial needs that mutual funds and ETFs can’t fill.
While funds are fine for clients with smaller accounts, says Robert Carpenter, chief executive at Baltimore-Washington Financial Advisors in Columbia, Md., he says those with assets of $1.5 million or more are better served by a portfolio of individual stocks and bonds. At his firm, which manages $525 million, about 80% of the client base falls into this category. “Building a portfolio from the ground up using individual securities makes the most sense for high-net-worth clients with more complicated tax and estate planning needs,” Carpenter says. “Most people with smaller portfolios just don’t need as much precise tuning of their investment plans.”
Families that make large year-end charitable donations from taxable accounts are better off if those portfolios hold individual securities rather than funds, says Terence Greene, president of Capital Counsel in New York, which has $2.5 billion under management. Advisor and client can unload stocks or bonds selectively, revisiting the investment rationale for each and hanging on to winners. The same advantage applies to tax-loss harvesting. “We find individual stocks provide us with a wider variety of options to manage a multimillion-dollar portfolio in a tax-efficient manner,” Greene says.
Investors with larger portfolios also tend to want the rationale behind their holdings in deep detail, says advisor Bradley in Hartford. But for most of his clients, the discussions of asset-class diversification that would apply to fund selection are too theoretical. “People can understand when you tell them they own a piece of Google or Johnson & Johnson,” Bradley says. “But when you start talking about investing in a large-cap growth mutual fund, they’re less sure about what exactly you’re doing with their money.”
Capital Counsel’s Greene gives clients a one-page summary for each of the 15 to 20 leading companies in their portfolios, making the write-ups comprehensive yet easy to read. He follows up with calls and meetings designed to spark further discussions. “By investing in individual stocks, we find it’s easier to get our clients to gain confidence about investing in great companies and to better understand our investment process,” Greene says.