Financial Opinion and Insights

The Difference Between Individual and Institutional Investors

Jim Lorenzen, CFP®

Jim Lorenzen, CFP®

Many investment entities (banks, money managers, consultants, etc.) make the mistake of treating all investors alike.  But, corporate investors are far different from individual investors.  While a pool of money make look the same, there’s a huge difference when it comes to focus.  Here are six notable differences:

  1. Most individual investors will, at some point in time, discontinue adding additional cash to the portfolio.  An institution (pension plan, foundation, etc.) can usually count on continuing cash contributions in the future, which can provide a cushion against inflation or market reversals.  Retired individuals don’t normally have that luxury and can’t count on additional inflows to help protect against the loss of their purchasing power.
  2. Individual investors do not benefit from the tax-exempt status that qualified plans and most foundations and endowments enjoy.  The individual investor must deal with capital gains and income taxes that must ultimately be paid.  It’s important, therefore, that individual investors have access to advisors and money managers experienced in working with taxable portfolios.
  3. Individual investors buy – or `should be’ buying – services, not products.  The advisory relationship is generally more important to individuals than to most institutions.  Relative performance is not as critical as absolute performance.
  4. Individual investors are less likely than their corporate peers – even when corporate portfolio size is comparable – to hire professional advisors or consultants.  Most individual investors prefer to make their own investment decisions, utilizing outside advisors only when a significant life event occurs (sale of a business, retirement, etc) or turn to the brokerage community for Wall Street ideas.
  5. Individual investors pay more for the same investment services as institutional investors of comparable size.  This can often be due to `bundling’ of fees, which seldom provide a sufficient level of transparency. 
  6. Unless the family wealth is tied to trusts or private foundations, the individual investor is not encumbered with regulatory oversight; which is often why `prudent practices’ seldom enters into the individual investor’s process who believes `It’s my money and I’ll do with it as I please.”

Individual investors and institutions do differ – in their needs and in their practices.  Most individuals would not allow anyone they know to manage their life savings with the process they themselves use, which is why licensing qualifications, practice standards, and a regulatory environment exists for those who provide those services professionally.


Jim Lorenzen is a CERTIFIED FINANCIAL PLANNER™  and in his 20th year of private practice as Founding Principal of The Independent Financial Group, a fee-only registered investment advisor with clients located in New York, Florida, and California.   IFG does not sell products, earn commissions, or accept any third-party compensation or incentives of any description.  Nothing contained herein should be regarded as tax or legal advice and the reader is urged to seek competent counsel to address those issues.   The above represents the author’s opinion and should not be regarded as investment advice which is provided only to IFG clients upon completion of a formal financial and investment plan.   For questions or comments, you can reach Jim at 805.265.5416 or through the IFG website, http://www.indfin.com.