I would like to respond to Stephen Harris's Opinion of the Week, “Focus on Performance as the Key Wealth Management Differentiation” published on 2 July 2007. What he says wealth managers should offer is exactly the same as the offering of very many fund managers around the world and they will all have very convincing statistics to show their performance in the best possible light - that's fine; it's their job. But how is the client to know which one to choose?

I would like to respond to Stephen Harris's Opinion of the Week, “Focus on Performance as the Key Wealth Management Differentiation” published on 2 July 2007.

I think the point he misses is that there is a difference between being a fund manager and a private investment office. Let's assume for a moment that he is right about clients mostly wanting, or needing, "solid, predictable low volatility returns, year in, year out as a way to diversify from your business or other risks [they] take in [their lives]." I will come back to that.

What he says wealth managers should offer is exactly the same as the offering of very many fund managers around the world and they will all have very convincing statistics to show their performance in the best possible light - that's fine; it's their job. But how is the client to know which one to choose? He is confusing fund management with the advisory role of a private investment office; but he is in good company - the industry thrives by dressing up fund management as advice.

Families hire a private investment office not because they need another fund manager offering them the Philosopher's Stone - many are fed up with that. Many want to hire a firm to firstly give them truly independent advice on how to construct a portfolio of assets so as to have a high chance of meeting their aspirations for the money, and secondly to use their resources to compare all the competing claims from fund managers and select truly talented managers in asset classes where talent counts - and fire them if they don't perform.

They also hire a private investment office to use their buying power to negotiate wholesale rather than retail fee rates and, last but not least, to implement everything efficiently and report back in a timely, accurate and independent way.

After all, this is how many billionaire families choose to run their fortunes when they set up a family office - why should merely very rich people not do the same?

Of course he is absolutely right that ultimately performance is the most important thing. But a private investment office will monitor the performance of the portfolio against a high level benchmark set at the beginning with the client at the end of the risk profiling and asset allocation process.

Typically this will be an "inflation plus" or "cash plus" benchmark over a rolling three to five year period. The question really is "has my private investment office added value net of the fees I pay them?"

Some clients tend to go "performance shopping" and hire whoever is prepared to predict the highest return within a given volatility target.

Stephen Harris’s approach seems to encourage this. A private investment office would surely explain the likelihood of actually achieving the returns and back away if the potential client is asking for something unrealistic.

Coming back to his assumption about what clients want - I am not so sure he is right. Amazing differences emerge when one begins to dig in deeper into clients' aspirations for their wealth. Also I think there is another factor and that is the rise of hedge funds.

With traditional asset classes - equities, bonds & cash - it was much harder to deliver consistent satisfactory returns "year in year out" because the equities were the big driver of return and they will always be volatile. Then hedge funds came along and took out much of the pain of volatility without losing much return.

One hopes that this will continue but the cynic would say that once the hedge fund industry has become mature the returns will get harder to find at the same level of risk. How long will clients really be happy with their safe portfolios if they are getting merely bond-like returns? If they really don't mind low returns why not just buy index-linked bonds anyway and head for the beach?"