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 tom.burroughes@wealthbriefing.com
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
opportunities
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.
These include:
— 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
key
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.