The difference between retail and institutional investments used to be pretty clear, and investors in each category knew which pool of options to choose from.
But since the 2008 financial crash, the solutions that could actually generate interesting returns for retail investors have significantly shrunk, leaving savers with very few alternatives.
As a result, many started venturing into the institutional space which, historically, has far greater and more attractive growth opportunities.
This, however, comes at greater risk, not only in terms of investments, but also due to retail investors’ lack of knowledge around how this space actually works.
And the results could be catastrophic.
For instance, the collapse of investment firm London Capital & Finance; which left over 11,600 investors £237m ($309.6m, €262.5m) out of pocket after putting their money in highly speculative mini-bonds, exemplifies how difficult the investment landscape can be to navigate for the non-sophisticated.
One thing is clear, however; the once rigidly defined lines between the worlds of retail and institutional are definitely blurring, but what does that mean for individual investors?
To understand the implications of this phenomenon, International Adviser reached out to key industry players.
A good thing
Jams Pearcy-Caldwell, chief executive of the Aisa Group, believes the meeting of the two spaces was made possible by recent regulations.
“In the UK, the introduction of RDR meant that retail and institutional investments, their charges and accessibility, became available due to transparency for most clients.
“As such, institutional class investments quickly became the norm when advising, which has led to massive benefits for clients and advisers alike.”
And Cooper Abbott, chairman and president, Carillon Tower Advisers, argues that the blurring doesn’t necessarily need to be a negative thing for clients.
“Bringing an institutional perspective to retail investments can be positive — enhanced allocation tools focusing on risk and return, inclusion of diversifying asset classes, and manager selection can be powerful drivers for improving investment outcomes.”
Pros and cons
But what investors must keep in mind is that there are major differences between retail and institutional which are inherent to the nature of the investments and the individual or entity investing in them.
Abbott continued: “While most institutions have very long-term investment goals, retail investors must deal with the realities of mortality, specific life-cycle needs, estate planning, and tax considerations.
“As a result, not all investments may be suitable for retail investors, due to time frame, liquidity constraints, and investment sizes.
“One area of clear benefit from institutional approaches is identifying quality managers that can deliver consistent risk-adjusted performance. With commingled funds properly implemented and priced, this can provide democratised access to the world of investment.”
Look at value
Simon Black, head of investment management at Dolfin, believes that investment managers have a key role to play when it comes to providing access to retail investors.
“We have seen fees coming down across retail investment opportunities and the concept of what a retail client is able to own getting larger.
“Passive ETFs have become increasingly segmented allowing for more idiosyncratic risk and exposure to be taken within a client portfolio. ETFs have also become cheaper, and there are more 0% fee ETFs on the market available for retail investors.
“Whilst the complexities of some institutional investments have not yet been replicated in retail investments, part of our role as investment managers is to look at value added given the complexity. Frequently the additional complexity adds to small increases in risk adjusted returns, which takes us more into the realm of institutional investors with strict benchmark criteria.
“For retail private clients the focus would be on whether the expected additional outperformance outweighs the additional complexity and concerns over suitability. We have seen that with CoCos in the marketplace as investors were buying higher yielding bonds as the hunt for yield continued.”
Quest for yield
But John Stainsby, head of client group UK at Axa Investment Managers, believes that regardless of how differentiated investment segments were, any investor is a client with goals that need to be achieved somehow.
“The lines between retail, wholesale and institutional investors have always been somewhat artificial. Whether you are an investment consultant working with institutions or a financial adviser, you are working with a client to meet their goals and overcome their investment challenges.
“In the low interest rate environment, we’ve seen in recent years, these efforts have tended to coalesce around a search for yield.
“This search for yield is drawing investors towards alternative investments which can be linked to complexity, illiquidity or scarcity premiums – traditionally only accessed by the largest of institutional investors – but now moving closer into the mainstream.
“For example, we are now seeing both smaller institutional investors and larger retail investors converging into areas such as hedge funds, real estate and private credit.”
Natural progression in the market
And of course, the biggest alternative now present in the market is ESG, which is attracting every investor, regardless of their classification.
Stainsby continued: “Both investment consultants and financial advisers are facing the same pressures from clients to invest their money in a more progressive way, taking account of the wider societal impact, as well as the financial returns it may generate.
“The difference between the largest of institutional investors and the smallest of retail investors remains. But as investment challenges and trends push investors from both sides into new areas of the market, the search for yield encourages them to continue to converge.
“Rather than a blurring of lines, we see this as a natural progression of market challenges driving demand from a wider pool of investors for new and innovative products.”
Specialisms
But what is the role of a financial adviser in all this?
Carillon’s Abbott believes that what advisers bring is an institutional perspective to the retail space, keeping in mind the challenges that individuals face.
“Clearly retail investors have characteristics and timeframes that differ from institutions. While sophisticated asset allocation and manager selection are important parts of achieving financial goals, in many cases they must be coordinated with lower investment levels, lifestyle considerations, taxes, and the finite life of individuals. The best financial advisers can bring this perspective.
“The institutional approach focuses on both risk and return, including selection of individual managers within an overall portfolio.”
Dolfin’s Black believes that specialists are needed now more than ever to keep up with the overlaps happening across different areas of the sector.
“The world of investments is vast and rapidly developing. In this modern era the access to information and the ability to trade across markets makes it a never-ending job to stay on top of what is happening.
“The concept of having an asset allocation for a portfolio is only the start of the investment journey given that this needs to be followed with a decision between active versus passive funds, the use of alternatives, tactical asset allocation decisions.
“From our perspective, the use of specialists both at a product level and an asset class level are needed – as it is not possible to be a specialist at everything.”
