By Lei Farrand, CFP®, Managing Director, Kingbird Investment Management
In the last two years, registered investment advisors (RIAs) have been challenged with uncertainty and volatility while trying to protect principal and achieve returns for clients. More and more, RIAs are strategically partnering with – or allocating to – select sophisticated family office investment platforms to provide clients with more options for preserving and growing their generational wealth. By integrating family office strategies into their practices, RIAs can offer clients diversification and downside protection.
RIAs are recognizing that family offices are often institutionally rigorous like traditional investment managers but distinct in other ways that may better meet the needs of both UHNW and HNW clients. Family office platforms can be particularly suited to managing risk within a growing alternative asset class in demand for these client bases: private real estate investment.
The advantage of private real estate investments
As an uncorrelated asset class, real estate can play various roles in a portfolio, from generating durable income, capital appreciation and preserving principal, to serving as a hedge against inflation and market volatility. Private real estate investments offer an opportunity for RIAs to stabilize portfolios amidst uncertainty and market volatility – and a family office model may provide a compelling blueprint for success. The agile, yet disciplined, approach of family offices has been particularly effective for private real estate investments during the current cycle, as the Federal Reserve has raised, and recently reduced, interest rates.
Rather than focusing primarily on REITs, for example, a family office may strategically and tactically blend allocations to public funds, private funds, and direct investments. Through a thoughtfully selected family office partner, an RIA can access institutional-quality private real estate investments and active asset management without compromising transparency, alignment, and institutional rigor. A family office platform can often offer expertise in underwriting and structuring the often dynamic – and tax sensitive – elements of a thoughtful real estate allocation from public and private REITs, Delaware statutory trusts (DSTs) or qualified Opportunity Zone (QOZ) funds to direct investments – and simultaneously identify additional ways to provide downside protection in an allocation.
As part of a fourth-generational family office, we at Kingbird Investment Management have seen first-hand how intentionally structured RIA-family office partnerships can add value to all stakeholders and, most important, deliver strong risk-adjusted returns for investors. Our firm, for example, has developed its research and total return driven investment policy and portfolio construction approach over multiple market cycles and across operating businesses and asset classes.
The timing is right for family office partnerships
Partnering with a family office platform may be especially advantageous today, because the wealth management industry is on the brink of a critical talent shortage. McKinsey estimates that the wealth management industry will face a shortage of around 100,000 advisors by 2034, potentially impacting RIAs ability to provide their HNW clients with the multi-cycle expert investment guidance only professional investors and advisers can provide. In our view, robo-advising or crowdfunding platforms won’t adequately fill the gap here because they cannot fully consider unique qualitative risk management considerations inherent in private real estate.
Forging new relationships with experienced family office platforms may serve as a meaningful way for RIAs to leverage in-place professional investment teams to serve their own clients as they integrate alternatives into their comprehensive wealth management approach. Family office assets under management are growing, and are projected to grow from $3.1 trillion today to $5.4 trillion within the next six years, according to Deloitte’s “Defining the Family Office Landscape, 2024“ report.
However, only some family offices are growing with a robust fiduciary structure, institutional perspective and strategies that persist through market cycles. Family office platforms can provide a unique level of risk management balancing downside risk mitigation and upside potential simultaneously if structured with an agile investment mandate. In turn, family office platforms benefit by working with like-minded fiduciaries who demand the same transparency and alignment from their partners as they do for their own accounts.
Partnering with a family office platform offers the ability for RIAs to provide their clients with a comprehensive, yet distinctly curated, wealth management approach. The more sophisticated family office platforms operate with a research-driven investment strategy encompassing active asset management, incentives across joint-venture partnerships and diversification across the capital structure and risk spectrum.
The structural advantage
Select family office platforms are shaping the future of private wealth. Some embraced private markets early on as a larger proportion of their portfolios than many other investors, often adopting an endowment-like model and hiring teams to execute strategies that prioritize wealth preservation while simultaneously generating compelling risk-adjusted returns.
Traditional investment managers or sponsors are often constrained by fund mandates, rigid structures, misaligned incentives, or short-term capital return pressures. In contrast, with the appropriate planning and liquidity mechanisms in place, family offices can construct their private investment portfolios to retain flexibility. Allocating capital dynamically in the small-to-middle market, using institutional research and relative risk/return metrics, some family office platforms have acquired the sophistication to provide asymmetric return and downside protection.
A new model for private real estate investment: what RIAs should know
In our experience, investing prudently in a highly selective, geographically diversified portfolio of properties, across the capital structure and risk spectrum, can enhance overall portfolio performance and provide downside protection. In the current multifamily housing market, for example, challenging debt conditions and minimal transaction volume has created a window of opportunity in which to capture equity-like returns with debt-like risk in an asset class with durable, long-term fundamentals.
By integrating a strategy of diversification across multiple aspects of a client’s real estate allocation, RIAs can provide targeted risk management and asymmetric return potential. Unlike publicly traded real estate funds, private real estate funds allow an RIA to strategically maintain a laddering strategy to invest thematically and tactically through market cycles.
Lastly, such partnerships, whether discretionary or non-discretionary, can significantly augment an RIA’s access to institutional-quality, vetted opportunities. RIAs and their clients benefit from a family office’s significant investment of time and capital to build both an in-house institutionally experienced team and an extensive network of trusted and vetted joint venture operating partners. Stepping into an “in-place platform” enables RIAs to offer uniquely tailored exposure to certain geographies, risk profiles, or asset types to meet individual client goals under a fiduciary standard.
How RIAs can partner with family offices and shape the future of alternative asset allocation
Partnering with family office platforms structured as fiduciaries can help RIAs strengthen their portfolios and deliver better outcomes for their clients. In Kingbird’s experience, family office platforms that invest in private real estate from a total return perspective are the ones best able to achieve their goals of wealth preservation, durable income and capital growth. RIAs can follow suit to bring stability to their portfolios and reduce risk in challenging and volatile times.
Now is the time for RIAs to review their alternative asset strategies and consider how the right strategic alliances—such as partnering with a family office platform—can provide accretive opportunities to manage risk and deliver compelling risk-adjusted returns in a complex investment landscape. Those who adapt will be able to better offer their clients the stability, growth and downside protection that cycle-resilient private real estate investments can provide.
Disclosures: Advisory services are offered through Kingbird Investment Management (“Kingbird”), an SEC Exempt Reporting Adviser. Information within this may have been provided by third-parties and, while Kingbird believes this information to be accurate, Kingbird has not independently verified such information. Reference to the Securities and Exchange Commission (“SEC”) does not imply that the SEC has endorsed or approved the qualifications of the Firm or its respective representatives to provide any advisory services described here or that the Firm has attained a level of skill or training. Any targets herein reflect analysis regarding potential outcomes, are presented solely for informational purposes and are not guarantees of future performance. Investments in securities are not FDIC insured, are not bank guaranteed and may lose value. Many factors, including unpredictable economic conditions, may cause actual results to vary materially from these targets and there are no assurances that the results will be obtained. Investing in securities involves risks, and there is always the potential of losing money when you invest in securities. Past performance does not guarantee future results, and the likelihood of investment outcomes are hypothetical in nature. Nothing in this article constitutes an offer, solicitation of an offer, or advice to buy or sell securities in jurisdictions where Kingbird is not registered.