A new report from CAIA offers advice to financial advisers on how they should approach integrating alternative investments into client portfolios.
According to Aaron Filbeck, CAIA's managing director and head of UniFi from CAIA, there is now widespread interest in the wealth management industry in adopting alternatives. However, getting to the “implementation stage” still presents a challenge for many advisors.
“That could be figuring out how to access different alternatives through different funding vehicles and different technology platforms that are available. But more importantly, how do you fit this into a portfolio that is diversified across public, private, traditional and alternative investments?” he said.
The report Crossing the Threshold: Charting a Journey to Alternative Investments in Wealth Management was conceived as a practical guide to help advisors make better decisions. It considers the needs of clients and the advisors' subject matter expertise, the advisory firm's operations, and the ability to provide access to high-quality managers. “It's less about whether to integrate alternatives or not to integrate alternatives,” Filbeck said. “For us, it's more about going in fully informed.”
For example, one of the report's authors, Fran Kinniry, director and head of investment advisory research at the Vanguard Advisor Research Center, notes that implementation should start with the client's needs first, then move to the types of investments that advisor resources are also provided that can be implemented on due diligence, workflow and reporting.
Kinniry wrote that while evaluating whether an allocation is right for a client, the adviser should consider the client's investment objectives, risk tolerance, liquidity needs, investment timeframe, tax situation and wealth planning goals.
The advisor must then evaluate the specific alternative investment product on its risk-return profile, how much liquidity it offers, who the asset managers are, how much they charge, and how the investment return profile may affect the total portfolio. He noted that some alternatives can offer greater diversification and low correlation compared to traditional asset classes, but bring with them their own high levels of risk.
Finally, advisers should consider their capacity and competence to provide alternatives, according to Kinniry. They must be able to evaluate and recommend suitable products for their customers and adequately explain why they have made those recommendations. In addition, there will typically be increased cost and time requirements when new alternative options are introduced to clients, and advisers must ensure their margins can easily survive those additional costs, Kinniry wrote.
Other executives who contributed to the report include Sandy Kaul, senior vice president and head of industry advisory services at Franklin Templeton, Sylvia Kwan, chief investment officer at Ellevest, and Shannon Saccocia, chief investment officer at NB Private Wealth. They discussed topics ranging from the different types of alternatives available to how to align allocations to alternatives with portfolio goals.
The report is available on the CAIA website.