Investing for high-net-worth clients can be a bit of a high-wire act because they can have significant amounts of money tied up in complex alternative investments. When the panic started with the collapse of Silicon Valley Bank in March, wealth manager Tom Ruggie was relieved that none of his clients were directly invested.
“We got lucky there,” says Ruggie, a certified financial planner and author who is based in central Florida. “But when it came to Credit Suisse, we had a little bit of a scare.”
Ruggie’s firms—a family office business called Destiny Wealth Partners and a financial planning firm called Ruggie Wealth Management—did some work with the troubled financial institution on debt obligations. It turned out that all of the contracts were completed, but if Credit Suisse had failed, Ruggie and his clients would have lost a lot of money because the notes would not have been paid back.
Investors who have money in private equity, hedge funds, and direct investments in start-ups are used to taking on a lot of risk and have the financial capacity to absorb it. Ruggie points to an EY study that a third of those with assets above US$250,000 hold some alternatives in their portfolios, including 81% of ultra-high net worth clients with more than US$30 million. Scares don’t happen often, but when they do, “it’s an eye-opening event,” Ruggie says.
Still, rather than run to safety when things turn sour, Ruggie’s clients are more likely to go back and do it again. “They are usually willing to take risks when everyone else is running for cover,” he says. “When you have something come up, like the current banking crisis or the situation in 2008, a lot of people psychologically don’t do well with uncertainty. But the savvy investors, they look at it as an opportunity.”
Here’s where Ruggie says high-net-worth investors want to put their money today.
How Much Risk?
Not all high-net-worth investing is deep in alternatives. Ruggie says he divides client money into three pools: short-term money in fixed income, mid-range money in traditional equity investments like mutual funds and exchange-traded funds, and then long-term money in private investments.
To decide the ratio, he says “it’s a statistical correlation of how much money you have to how much you need and for how long. There’s no cookie-cutter answer.”
Some clients don’t put more than 10% of their net worth into non-traditional alternatives. Ruggie’s personal portfolio is pushing 40% alternatives, he says. Much of that is tied up in sports memorabilia—mostly an extensive baseball card collection—and some collectible wines, along with direct investments in companies.
Non-fungible tokens (NFTs) are a bridge too far—“I personally can’t see the advantage of investing in something like that, and never recommend for a client to do so,” Ruggie says.
As for cryptocurrency, Ruggie has dabbled, but just for the experience. “I wanted to learn,” he says. “I did quite well, but when clients came to us for advice, our guidance was that it’s off our path. Our client base is more concerned about long-term performance than the gambling aspect of investing.”
How Much Capital is Required?
Ruggie says direct investments in companies can start as low as US$25,000. These are the opportunities that are the most interesting to his clients right now, especially technology-based start-ups.
Some clients also take a step back and put their money into private-equity that then pools investments and finds companies worth investing in. Those typically require putting in at least US$250,000 and the purchaser has to be qualified, with a net worth of US$5 million net. Ruggie’s clients also invest in hedge funds, real estate, and collectibles.
Of these investments, hedge funds are the most liquid. There’s usually a lock-in period of a year, but then money can typically be withdrawn with 30-days notice.
Private equity has much less flexibility. “I tell people to basically anticipate no liquidity at all,” Ruggie says. “My mindset on private equity is that this is long-term money.”
The same goes for most direct investments in companies, which aside from the potential to sell stakes on the secondary market, there’s no ability to get cash out unless the company goes public and the shares appreciate.
The Potential Gain?
The main reason for investing in alternatives is that the potential upside of these investments is unlimited.That’s what makes it worth the risk. The other reason is that many high-net-worth clients have money to put on the line.
“What is excess? It’s a correlation between what you have and what you need,” says Ruggie. “Everyone’s definition of rich is different.”
In a year like 2022, advisers like Ruggie have had to go to clients with bad news about losses for the year and say, they may have outperformed the market but still lost 10% or whatever the number. But for Ruggie, that’s a temporary situation with paper losses.
The rest of the speech goes something like this: “It’s my belief—backed up by my personal investments—that what we’re doing with alternatives is going to outperform the market with statistically less risk than the market over time. It will catch up.”
Chris Dixon, a partner who led the charge, says he has a ‘very long-term horizon’
Couples find that lab-grown diamonds make it cheaper to get engaged or upgrade to a bigger ring. But there are rocky moments.
Wedding planner Sterling Boulet has some advice for brides-to-be regarding lab-grown diamonds, which cost a fraction of the natural ones.
“If you’re trying to get your man to propose, they’ll propose faster if you offer this as an option,” says Boulet, of Raleigh, N.C. Recently, she adds, a friend’s fiancé “thanked me the next three times I saw him” for telling him about the cheaper lab-made option.
Man-made diamonds are catching on, despite some lingering stigma. This year was the first time that sales of lab-made and natural mined loose diamonds, primarily used as center stones in engagement rings, were split evenly, according to data from Tenoris, a jewellery and diamond trend-analytics company.
The rise of lab-made stones, however, is bringing up quirks alongside the perks. Now that blingier engagement rings—above two or three carats—are more affordable, more people are dealing with the peculiarities of wearing rather large rocks.
Esther Hare, a 5-foot-11-inch former triathlete, sought out a 4.5-carat lab-made oval-shaped diamond to fit her larger hands as a part of her vow renewal in Hawaii last year. It was a far cry from the half-carat ring her husband proposed with more than 25 years ago and the 1.5-carat upgrade they purchased 10 years ago. Hare, 50, who lives in San Jose, Calif., and works in high tech, chose a $40,000 lab-made diamond because “it’s nuts” to have to spend $100,000 on a natural stone. “It had to be big—that was my vision,” she says.
But the size of the ring has made it less practical at times. She doesn’t wear it for athletic training and swaps in her wedding band instead. And she is careful to leave it at home when traveling. “A lot of times I won’t take it on vacation because it’s just a monster,” she says.
The average retail price for a one-carat lab-made loose diamond decreased to $1,426 this year from $3,039 in 2020, according to the Tenoris data. Similar-sized loose natural diamonds cost $5,426 this year, compared with $4,943 in 2020.
Lab-made diamonds have essentially the same chemical makeup as natural ones, and look the same, unless viewed through sophisticated equipment that gauges the characteristics of emitted light.
At Ritani, an online jewellery retailer, lab-made diamond sales make up about 70% of the diamonds sold, up from roughly 30% two years ago, says Juliet Gomes, head of customer service at the company, based in White Plains, N.Y.
Ritani sometimes records videos of the lab-diamonds pinging when exposed to a “diamond tester,” a tool that judges authenticity, to show customers that the man-made rocks behave the same as natural ones. “We definitely have some deep conversations with them,” Gomes says.
Not all gem dealers are rolling with these stones.
Philadelphia jeweller Steven Singer only stocks the natural stuff in his store and is planning a February campaign to give about 1,000 one-carat lab-made diamonds away free to prove they are “worthless.” Anyone can sign up online and get one in the mail; even shipping is free. “I’m not selling Frankensteins that were built in a lab,” Singer says.
Some brides are turned off by the larger bling now allowed by the lower prices.When her now-husband proposed with a two-carat lab-grown engagement ring, Tiffany Buchert, 40, was excited about the prospect of marriage—but not about the size of the diamond, which she says struck her as “costume jewellery-ish.”
“I said yes in the moment, of course, I didn’t want it to be weird,” says the physician assistant from West Chester, Pa.
But within weeks, she says, she fessed up, telling her fiancé: “I think I hate this ring.”
The couple returned it and then bought a one-carat natural diamond for more than double the price.
When Boulet, the wedding planner in Raleigh, got engaged herself, she was over the moon when her fiancé proposed with a 2.3 carat lab-made diamond ring. “It’s very shiny, we were almost worried it was too shiny and was going to look fake,” she says.
It doesn’t, which presents another issue—looking like someone who really shelled out for jewellery. Boulet will occasionally volunteer that her diamond ring came from a lab.
“I don’t want people to think I’m putting on airs, or trying to be flashier than I am,” she says.
For Daniel Teoh, a 36-year-old software engineer outside of Detroit, buying a cheaper lab-made diamond for his fiancée meant extra room in his $30,000 ring budget.
Instead of a bigger ring, he got her something they could both enjoy. During a walk while on an annual ski trip to South Lake Tahoe, Calif., Teoh popped the question and handed his now-wife a handmade wooden box that included a 2.5-carat lab-made diamond ring—and a car key.
She put on the ring, celebrated with both of their sisters and a friend, who was the unofficial photographer of the happy event, and then they drove back to the house. There, she saw a 1965 Mustang GT coupe in Wimbledon white with red stripes and a bow on top.
Looking back, Teoh says, it was still the diamond that made the big first impression.
“It wasn’t until like 15 minutes later she was like ‘so, what’s with this key?’” he adds.
Chris Dixon, a partner who led the charge, says he has a ‘very long-term horizon’