The parking garage at our Memphis office holds a fairly well-kept secret: a large collection of exotic sports cars owned by a commodities broker who buys and sells these cars on the side.  His inventory turns over on a fairly regular basis, so I wander down every few months or so to see what’s new.  This morning I counted four Porsches, two Lamborghinis, four Ferraris, a Ford GT40, and, my favorite, an Aston Martin V12 Vantage S covered with flat black paint – a beautiful car, even if it’s peculiarly suited for some kind of Cote d’Azur zombie apocalypse.  More strange than the Aston Martin, though, is a car which has been in this fellow’s inventory for some time, and which I can’t quite figure out: a Nissan Murano convertible.

Like all large and successful multi-national automakers, Nissan tries hard to be all things to all people.  They make practical four doors like the Sentra and the Altima, flashier SUVs like the Rogue, and ridiculously fast sports cars like the GT-R.  They even make cars for people who need a minivan but can’t quite see themselves in one: the Murano.  There’s something for everyone. A few years ago, someone at Nissan decided to go after the customer who wanted a two-door minivan built on an SUV’s frame with a ragtop.  The result was kind of a mildly off-road parade car that would be easy to find in the Kroger parking lot: the Murano CrossCabriolet (I’m not making that name up).  Surely there was a customer for such a car, even if Jalopnik’s blogger Doug DeMuro pointed out it looked like an “angry clothing iron.”

What sort of customer was Nissan after?  Was the CrossCabriolet a focus group effort, a committee design, or a bet among Nissan executives that their customers were so loyal they would even buy a jacked-up convertible minivan?  We’ll probably never know, but it begs a question that we don’t hear enough RIAs asking themselves: what makes our best customer?

The conventional wisdom we’ve gathered from talking with a wide variety of investment management firms over the years is that high net worth relationships make the best clients for RIAs.  Relationships with individuals are supposed to be stickier than, say, institutional relationships where investment committees drop managers the moment their three-year performance lags the index.  If an individual relationship is between $2 million and $10 million (big enough to be fully profitable but not so big as to demand fee concessions or the involvement of a family office consultant), all the better.  From talking with clients over the years, we wonder if everyone’s chasing the same client, which maybe explains why so many wealth management firm websites and marketing materials look identical to each other.

Is it that simple?  For all of their positives, HNW clients have businesses that collapse, get divorced, or die unexpectedly.  They can be hard to educate and even more difficult to predict.  Younger clients can make for longer relationships, but they are also more likely to change managers for no particular reason.  Older clients are more loyal, but their assets tend to be spent to finance their retirements.

Institutional clients get a bad rap for being cheap, needy, impatient, and disloyal.  Some of this may be deserved, but institutional investors raise the game by insisting on sophisticated client service, top investment performance, and reasonable fees.  They can make a manager better in ways individual clients cannot.  They help build scale quickly.  And institutional relationships can persist for generations, as long as the RIA is still providing a relevant service.

So what is the best customer for an RIA?  One of our more sophisticated clients answers the question this way.  They are an active value manager that invest across the equity cap spectrum for institutional clients, high net worth clients, WRAP accounts for wirehouses, and mutual fund clients.  Different clients have different decision timelines, so the mix enables them to reduce the variability in the amount of AUM they manage.  They tell the same story about how they approach asset management to each group and have, over time, developed a client base that understands what they do, such that their clients don’t get nervous when market trends don’t favor their style.  And they have developed their asset management techniques into a teachable and replicable practice which can be handed down to future generations of portfolio managers, so the relationships can outlast the founding generation.  It is a huge competitive advantage that has served this RIA well.

The lesson, we think, is that the best client is an educated client who understands the value their investment manager brings such that they will gladly pay for the service as long as it is available.