There is no such thing as "one-stop investment shopping" any longer, the writer of this article argues.
The CEO and founder of a US-based real estate business that harnesses technology talks about the management of alternative assets. In this guest article for our publication, David Wieland, founder and CEO of Realized, a real estate wealthtech firm providing investment property wealth management for investors, examines the sector. We have published articles from Weiland before. He is a member of this news service’s editorial board. The usual editorial disclaimers apply to the views of guest writers. Email firstname.lastname@example.org if you wish to respond.
According to recent editorials in both The New York Times and Fortune, $30 to $72 trillion in wealth is set to transfer from aging Baby Boomers to adult children in the next few decades. If it happens, it will be the largest transfer of generational wealth in history. Much of that wealth will be managed with advanced technology and mobile capabilities that Gen X and Millennials are comfortable using and will expect their advisors to use as well.
Two-thirds of beneficiaries replace their parents’ financial planners once they assume ownership of their parent’s assets, according to recent market intelligence from Cerulli Associates. Often, adult children are looking for younger, more tech-savvy advisors with a wider breadth of investment experience that goes beyond stocks and bonds. They are seeking advisors who are comfortable with the technology requisite to understanding and tracking the performance of alternative assets.
Yet traditional advisors often express misgivings about entering the alternative asset management space, namely due to four factors:
-- Concerns about the risk profile of alternative
assets, including lack of regulatory oversight;
-- The illiquidity of many alternative assets;
-- Comfort with a decades-long robust stock market that hasn’t required moving into new asset spaces; and
-- Their own inexperience in managing alternative assets.
Meanwhile, younger advisors hungry for clients are acquiring large books of business in alternative asset classes. They are benefiting from a unique alignment of investor appetite for these types of investments and increasing ease of investor access to them.
If you are not proficient in managing alternative investments such as real estate, private equity funds, or digital assets like bitcoin, you are not future-proofing your business. According to the Federal Reserve Board’s 2016 Survey of Consumer Finances, investors aged 55 and older hold more than $7 trillion in real estate assets alone, and their appetite for alternative assets is growing.
Here are a few reasons why it could prove beneficial for traditional financial planners to start managing non-traditional assets in their book of business.
The real risk: not offering alternative asset
Despite perceived risk by experienced advisors when it comes to alternative asset investment, there are actually greater dangers in not giving clients exposure to these options in their portfolios or not helping them manage the alternative assets they may already have.
-- Forfeiting firm growth and profits by failing to provide
exposure to alternative asset markets;
-- Loss of clients, particularly younger ones managing new generational wealth that may already have some alternative asset exposure, particularly in real estate; and
-- Appropriation of your book of business by younger advisors with a wider breadth of investment knowledge and more tech savviness.
If you don’t have expertise in alternative investments, you won’t have sufficient investment options for your current clientele and their heirs. This is particularly true if you don’t manage products in their existing portfolio or ones that they may want to add in the future, whether that’s real estate or bitcoin.
Portfolio diversification: alternative assets are
Investing in alternative assets may provide critical safeguards in your clients’ portfolios as well. With today’s market volatility, alternative investments may offer greater income and diversification, particularly in inflationary environments. Because most alternative asset classes are not correlated to the stock market, they provide critical portfolio diversification for those investors who can hold the investments for their full lifecycle. Many high net worth investors maintain nearly 10 per cent of their portfolio in alternative assets, according to recent research from Cerulli Associates.
However, determining what percentage of a client’s portfolio should be in alternative investments requires understanding their personal wealth goals. Key questions to consider include:
-- How long is your client’s investment horizon?
Three to five years? Seven to 10?
-- What level of access to those investments does your client need?
-- Does your client need the investment to generate income?
-- Is your client looking to grow wealth to leave to children or grandchildren with as few tax implications as possible?
Since some alternative investments are illiquid, they are not for everyone. But, at the same time, they may offer a safe harbor from taxes, which is often critical for adult children in receipt of generational wealth from parents. Real estate holdings, for example, can often be transitioned to beneficiaries on a stepped-up basis, thus providing significant tax and wealth preservation benefits. Alternative assets can also provide the stability of ongoing passive income, which may be important to investors in retirement or planning to retire soon.
Technology has made alternative assets more accessible to the average investor than ever before while simultaneously providing the data analytics necessary to track the historical performance of alternative assets, provide real-time performance data, and offer transparency on fee structures. Increasingly, alternative investment access and management is becoming more akin to what investors experience with more traditional investment vehicles such as stocks and bonds.
Technology has helped knock down those barriers that kept the investor community from gaining access to alternative investments in the past.
Getting on board: find the right partner
You don’t need to be an expert in alternative asset management to bring them into your firm as an offering for your clients. In fact, given the complexity of many alternative asset markets, it’s wise to find a subject matter expert with whom you or your firm can partner. Together, you can help your clients build more diversified portfolios that meet their wealth and income goals.
Work with someone who has deep expertise in the investment classes that will best serve your clients and who can provide real solutions for investing in those assets, whether that’s gaining real estate exposure through a Delaware Statutory Trust or gaining access to debt securities through hedge funds.
The fastest-growing advisory firms are those that stick to what they know while also forming strategic partnerships with advisors or advisory firms with other areas of expertise. Given the wide array of investment offerings out there today, there is no such thing as one-stop investment shopping any more. That’s why it’s critical that your firm offers access to as many investing options as possible.
Full disclosure. The information provided here is not investment, tax or financial advice. You should consult with a licensed professional for advice concerning your specific situation.