Within the financial services industry, professionals commonly distinguish between two broad classes of services – Institutional vs. Retail. “Institutional” refers to institutions like hedge funds, mutual funds, pension funds, etc., i.e. a collection of demanding “sophisticated” investors, who are assumed to know how different financial products are supposed to work. In the chart below, everything except Hedge Fund, Mutual Fund and Pension Fund could fall in the Retail category of clients, assessed in terms of the level or quality of services delivered.

Institutional vs. Retail Financial Services

“Retail” refers to services for individual investors (or trusts, family offices, etc.), who may or may not be sophisticated investors, but are generally assumed not to be. The retail category I think falls victim to “dumb’ed down” versions of institutional products, with the primary goal of growing distribution, and in turn, assets under management. Most mutual fund products (available to trade in your brokerage account) would easily fall into this bucket. One example of this you can probably relate to is the “help” you get by virtue of being given a limited choice of say five mutual funds to choose from in your company-sponsored 401K account. It’s not like anyone expects you to understand how any of those products really work anyway. You are still going to click on the fund named “aggressive growth” …

Looking past the technical definition of “sophisticated investor” typically based on some sort of income or net-worth level qualifications, and/or financial industry experience, my view is that the vast majority of individual investors in the world would likely fall in the unsophisticated bucket for two reasons: 1) because they lack either time or expertise to actively manage investments for their own good, and 2) because they can be relatively easily coaxed into paying for things they don’t need or even things that might hurt their investments, only because they may not be equipped with frameworks to process everything.

This means there are a lot of people in the world that can benefit from “institutional grade” active investment management services, which may either not be available at all, or reserved for the select few – individuals or institutions. “Institutional grade” primarily refers to 1) higher quality of Equity Research, and 2) application of institutional best-known practices across the board.

Our core strategy for our new firm is to make institutional grade active portfolio management more accessible (in the chart this is the portion labeled “Independent Investment Advisor” and below). We plan to accomplish this in three ways – 1) simplify the product offering and the fee structure, 2) lower the threshold for client participation without compromising the investment strategy, and 3) actively educate clients about our investment process as well as research on specific investments through a transparent structure.

As more individuals learn to invest with our help, we are confident they will feel compelled to spread the knowledge.

Disclosures and Disclaimer