A new report from CAIA provides tips to financial advisors about how they should approach integrating alternative investments into clients’ portfolios.
According to Aaron Filbeck, managing director of CAIA and head of UniFi by CAIA, there is now broad interest in the wealth management industry in adopting alternatives. However, getting to the “implementation phase” still presents a challenge for many advisors.
“That could be figuring out how to access different alternatives through different fund vehicles and the different technology platforms that are available. But even more importantly, how do you actually fit this into a portfolio that’s diversified across public, private, traditional and alternative investments?” he said.
The report “Crossing the Threshold: Mapping a Journey Towards Alternative Investments in Wealth Management” was conceived as a practical guide to help advisors make better decisions. It considers clients’ needs and the advisors’ expertise in the subject, the advisory firm’s operations and the ability to provide access to top-quality managers. “It’s less about whether to integrate alternatives or not integrate alternatives,” said Filbeck. “For us, it’s more about going in fully informed.”
For example, one of the report’s authors, Fran Kinniry, principal and head of investment advisory research at Vanguard Advisor Research Center, notes that implentation should start with client needs first, then move to the types of investments on offer and the advisors’ resources that can be brought to bear on due diligence, workflow and reporting.
Kinniry wrote that while assessing whether an allocation is right for a client, the advisor ought to consider the client’s investment objectives, risk tolerance, liquidity needs, investment timeline, tax situation and estate planning goals.
The advisor should then evaluate the specific alternative investment product on its risk-return profile, how much liquidity it provides, who the asset managers are, how much they charge in fees and how the investment's return profile could impact the total portfolio. He noted that some alternatives may offer greater diversification and low correlation compared to traditional asset classes but bring with them their own elevated levels of risk.
Finally, advisors should take into account their own capacity and competency to offer alternatives, according to Kinniry. They need to be able to evaluate and recommend appropriate products for their clients and adequately explain why they made those recommendations. In addition, there will usually be increased cost and time demands when introducing new alternative options to clients, and advisors need to be sure their margins can comfortably survive those extra expenses, 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 CAIA’s website.
