Executives at privately-held firms tend to have a larger percentage of their net worth tied into their businesses than their counterparts at public companies. That’s why a good institutional investment partner will look at not only a mid-sized company’s financial goals, but address the financial needs of its business owners and executives as well.
“Generally, a mid-sized business is going to have a closely-held ownership: either one entrepreneur, a partnership or a small group of people,” explains Morgan Rector, regional manager of wealth and institutional management at Comerica Bank. “There tends to be a higher level of dependence in terms of where these individuals see their net worth and income coming from than in a public company.”
Smart Business spoke with Rector about investment strategies.
What are some of the most important factors that a CEO or business owner should consider when they plan their investment strategies?
First, you want to make sure that you’re working with an institution that you’re comfortable with and is a good fit for your company. If you’re a mid-sized company or larger, you don’t want to work with a financial institution that is so small that they don’t have the breadth, the products or the services that meet your needs.
Secondly, you want to be able to sit down with somebody, like your investment advisor or banker, who understands all of the different products and services and how they fit the specific needs of your company. Start a dialogue with your financial institution, which should discover the specific needs and risk characteristics of the business, and match up an investment strategy that fits with those needs and characteristics.
What are some common mistakes that businesses make in their wealth management strategies?
It’s not unusual to see executives or business owners have strategies that are way too conservative with respect to the needs of the company or themselves. If they’re looking at a longer time horizon, or if they need to grow their asset base, they can integrate investment in stocks and asset classes, other than high-quality fixed income, into an overall investment strategy. What we tend to see are companies that can accommodate more risk — and really need more — in order to accomplish their financial goals.
When investing in global markets, how can a business best strike a balance between risk and return?
You can get a better understanding by modeling historical results and seeing how the international financial market, and investments in those markets, track with local markets. This way, you might find that by layering in some exposure to international markets, you might create more diversity in your investment portfolio, lower the risk and potentially increase the return.
Do you recommend one entity to keep tabs on investment opportunities, administrate trusts and oversee tax issues?
From a convenience and a trust standpoint, that may serve you. It is important to find an entity that is solid financially and one where you don’t have the risk of potential financial issues. With one entity, you get the convenience of packaging all these things together so you’re getting communication all at the same time and all in one statement. On top of that, it’s easier for that entity to integrate all of the different things you’re doing so that there is an interrelationship. I’m a proponent of that, but it depends. If it is a smaller entity, maybe one that hasn’t been around that long, you might look to create some diversity so if there is a problem it won’t drag down the whole financial picture.
What type of questions should one ask when looking for an institutional management partner?
Some of the key questions are: “How long have you been in business? What’s your financial backing? How strong are you? What has your performance been in the past?”
Beyond those, it’s really seeing the type of questions that the financial advisor asks you. If you go into someplace and they quickly say, “We can do it. Just tell us what you want and we’ll give it to you,” then you’re probably in the wrong place. But if you go into someplace and they say, “Let me ask you a lot of questions so I understand what you’re about, what you’re looking for, what your risk tolerance is, and what your time horizon is,” that’s going to give you an indication that you’re in the right place. Because you’re in a place where your financial advisor is customizing something to meet your specific financial needs and is not just giving you off-the-shelf products.
MORGAN RECTOR is regional manager of wealth and institutional management at Comerica Bank. Reach him at (310) 281-2471 or [email protected].
