Managing client expectations when things are going well

Speaking with The ifa Show, Viola Private Wealth executive chairman Charlie Viola knows this well, particularly due to the fact that he works with ultra-wealthy clients looking to enter the private investment market.

“The private market is huge and there is so much opportunity in that private market space,” Viola said.

“If you’re somebody who’s got $5–50 million, there’s only so many CBA and BHP shares that you want to own. So it was really important that live to the theory of two things: asset quality and diversity. As a result, we wanted to make sure that we were giving clients access to different types of investments, generating their returns in different ways and making sure we were generating revenue for clients especially through the cycle.”

Private markets, for those breaking into the space, have enormous potential to generate income. However, while high risk can produce high reward, it can also produce losses just as easily, with it being important that advisers in this space manage expectations.

“Sometimes if you are generating these significant outsized returns but you’re taking a greater level of risk to generate those, that’s not always a good thing,” Viola said, highlighting that complacency and overconfidence can open clients to unnecessary risk.

For Viola, risk mitigation and expectation mitigation go hand in hand, with diversity in one’s portfolio key to achieving this.

“The reality is risk mitigation 101 is diversity … We’ve all been told since we started in these games that you don’t put all your eggs in the same basket,” he said.

“For investors, [we often have to have] a difficult conversation. [They might ask] or at least ‘why wouldn’t we just keep buying Australian banks? Or why wouldn’t we just keep investing in the Nasdaq? Or why wouldn’t we just have gone and bought Nvidia?’ And ultimately, while those assets have done exceptionally well for a very long period of time, it is purely around getting people back within the risk return matrix.”

Viola likened the greater diversity of investing in private assets to playing a game of roulette, highlighting that while having all your chips in one place can create enormous returns if it pays off and may seem like a tempting gamble, it comes with too much risk: “To use the roulette as the analogy, the more chips you have on the table, the greater the chance you are of returning, [but] it dilutes your return.

“It’s no different to investing. It increases your chance of winning; it dilutes the multiple that you’re going to get on your money … it’s the same with diversity from an investment point of view.”

Ultimately, what a concentration in a small basket of assets, even ones that are outperforming, results in is an “over-apexing” of the risk being taken for the possible return.

“What we would much rather do is generate a return that may well be 200 or 300 basis points below what that return might be over the short term to generate a return that is slightly lower, but we’re taking significantly less risk to do it,” Viola said.

“Therefore, our conversations with investors is that we want to have a 50-year time horizon with everything that we do. We want to be diverse, we want to generate returns in different ways.

“If we give a little bit away on the upside by not taking the additional risk, that’s OK because by decorrelating our risk purely away from financial markets, we will end up with better medium- to long-term returns. But it has been a difficult conversation where equities have basically done all of the heavy lifting or a lot of the heavy lifting over the last five or seven or 10 years.”

To hear more from Charlie Viola, tune in here.