Should Small Firms Fear Alternative Investments? — Financial Planning

Original Article

ORLANDO, Fla. – It’s not all stocks and bonds anymore.

“We’ve seen increased focus and emphasis from RIAs and other investors on incorporating [alternatives] into investment allocations,” said Lisa Lewin, vice president for Pershing Prime Services at the firm’s Insite conference.

While some small RIAs incorporate alternative investments into client portfolios, these strategies are often left to the wirehouse advisers and big firms.

“We see higher utilization of alts in larger firms that are professionally managed,” said Frank Bub, director of Pershing Advisor Solutions. “In our experience, that can run close to 50% in that segment. If you get down into the smaller advisory firms, they may be simpler in their structure and the number gets down to around 10%.”

One former Merrill Lynch adviser, who recently co-founded the RIA firm Omnia Family Wealth, based in Aventura, Fla., utilizes alternative investments and believes that these strategies will have to be looked differently by small firms.

“The alt space, to me, is anything that doesn’t correlate with stocks and bonds,” said Steven Wagner. When building portfolios, it’s key to find sources of returns that are not dependent on the same factors, he says.
When it comes to getting into the alternative investment space, he said he would encourage small firms to do their due diligence and a significant amount of research.

“You can make a lot of mistakes,” says Wagner. “People who invest in non-traditional asset classes just for the sake of investing in it very often end up with investments that have higher fee structures and less liquidity.”
In the end he fears that they won’t “accomplish what they wanted to accomplish.”


“I think a lot of people use the alt space in the wrong light,” said Wagner. “They think they have to have an allocation to alternatives and so they make an allocation that way.”

However, he said that this could trip up advisers and RIAs that are new to utilizing the alternative investment space.

“It’s got to be objective based. It’s got to be based on what you’re trying to accomplish and risks you’re trying to offset.”

Additionally, Wagner believes that the space is changing so much that even veterans of the industry could fall victim to using alternative investments in the wrong light if they don’t look into what they have been advising clients on because many aspects of those investments could have changed.

“Even people who are in the business for a long time and have allocated to alts will start to reassess the kind of managers they are giving money to and the types of strategies they are using.”

“We’re all in a business where we charge fees, whether it’s the management of assets or the guidance that we give,” said Wagner. “Fees are always an issue in the absence of value.”

Therefore, he said he has no problem paying the fee of a money manager that has “unique and interesting strategies.” While advisers may be against paying a premium for alternative investments, Wagner argues that there is an upside, as long as it’s worth the investment.

Pointing out that clients ask themselves similar questions when hiring an adviser, Wagner posed the hypothetical question to the audience, “What am I getting for my money? That’s always the evaluation you should make.”

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