Why Financial Advisors Should Treat Alternative Investments Like Traditional Investments

Henry Yoshida is not a fan of referring to alternative investments as alternatives.

He understands that this is how they are classified by industry and consumers. But for the co-founder and CEO of Rocket Dollar, investments in things like real estate, private equity, and even digital assets are far from marginal. Instead, he believes they are essential components of a well-diversified portfolio.

He adds that those investments that don’t fit neatly into the definition of what’s considered “traditional” can be key for advisors to get to know their clients as individuals rather than as a series of numbers that need to be followed.

“It’s a big asset class, but it’s personal to people and what they believe in. I think the way advisors should kind of position this is a really good opportunity to get to know your clients in a slightly different dimension,” Yoshida said. , a CFP who runs a fintech platform that allows investors to set up self-directed IRAs and 401(k)s solo.

“When I started my career, all the questions we asked potential clients were about numbers. How much do you have here? What are your goals? In how many years and how many days are you going to retire? How old are your children? How many do you have?” He continued. “These are all questions you can answer with a number. And now I think you understand better the psychology of people and what matters to them. What do you want to do with your money and what do you fundamentally believe in? »

Yoshida shared his perspective and advice on alternative investments earlier this month during Financial Planning’s INVEST Wealthtech Annual Conference At New York.

Financial planning Heritage Editor Lynnley Browning and Sloane Ortel, founder of Invest Vegan joined Yoshida to explain the importance of alternatives, their place in portfolios, and how advisors should approach the topic with clients who show heightened interest.

Browning echoed Yoshida’s sentiments on naming convention, saying the word “alternative” is a misnomer that conjures up feelings of something that lives on the periphery and isn’t part of the mainstream investing landscape.

“But the alts market is actually about $10 trillion in assets spread across hedge funds, private equity, various private investments…and most, but not all, of the investors are institutional,” Browning said. “Much of this trickles down to retail investors via pension funds, most of the big ones of which have around 25% of their assets in alternatives. Meanwhile, you look at crypto, which is a roughly $1 trillion market, and it’s almost framed as a mainstream retail investment.

“There’s this tension between alternatives as fringe versus mainstream, and crypto as mainstream versus super alternative.”

Ortel, who founded New York-based socially responsible investing startup Invest Vegan after nearly a decade with the CFA Institutesaid retail investors today want alternative assets in their portfolios because of the state of the world.

As things continue to go back and forth between progress and tragedy, there is a desire to invest in assets that alleviate the world’s problems instead of accumulating them. A sense of urgency sets in when incidents like mass shootings leaving the nation in shock and morally conscious investors hoping they don’t invest in anything that propels such events forward.

“A lot of investors – especially young investors – come into the market with a different perspective. They’ve seen the giant recession. They’ve seen a lot of the worst people they know become rich in cryptocurrencies. They’ve seen all kinds of things that challenge the way we’re taught,” Ortel said. “Think about what people are really looking for. People who are morally aligned and have doubts or uncertainties about holding some of these things… they get nervous looking at what these things have because I’m sure it’s going to be a who’s who of some of the worst failings ethics. And they are looking for an alternative to that.

Ortel added that with this new perspective from investors, there is a need to disrupt the way things are done in the industry.

“The old methodology that we have, like the S&P index committee. Guys in bow ties meeting in Midtown and deciding what’s in it. It’s not necessarily the same values ​​or morally aligned that is going to resonate with this next generation of investors,” Ortel said. “So I think it’s a very simple question: how do you create a portfolio for a client that will allow them to take advantage capitalization?And you need to build them a portfolio that they can understand and make sense of, not just an arbitrary list of 700 stocks that are sort of retabulated and rearranged with little apparent meaning.

In discussing why investors need alternatives in their retirement portfolios, Yoshida leveraged his time working with retirement accounts at Merrill Lynch and as co-founder of the robot. -Advisor Honest Dollar, which Goldman Sachs bought in 2016.

“I think about how the investment world has evolved since I started my career… when I was at Merrill Lynch in 2000, an alternative investment was a publicly registered 40 Act fund that invested, I think ( it was) actions in Vietnam or China. It was an alternative, but these were publicly traded investments,” he said. “Now you define it as crypto, real estate, private equity and venture capital. So I just think investors today need to have some exposure to what we think of as alternative asset classes in their portfolios, otherwise it’s going to be difficult for them to properly capture a portfolio that encompasses everyone in the world. investment available.

Taking crypto as an example, Yoshida said, while some investors may not fully understand bitcoin, they do understand that it is recognized by the most established financial entities in the world.

He noted that just a week before her appearance at INVEST 2022, Fidelity CEO Abigail Johnson traveled to Austin, Texas to deliver a keynote speech at a crypto conference.

“Fidelity coming to town and talking about it might indicate that, hey, it’s kind of common, and a particular customer might see it and think they should own some of it. And you have another (customer) who might say they are basically against it for power consumption reasons. Or because it’s not based on a tangible business model that I can assess the value of, but they love real estate,” he said. “And then someone else might say, ‘Hey, if big bad Fidelity is spending hundreds of millions or billions of dollars and he’s stealing his CEO with a net worth of $23 billion to talk of crypto, so maybe that’s an asset class I should go for.

“And to be fair, when I started, I remember talking to people at Amazon.com. No one really understood Amazon.com when (it) dropped to $6 a share. But now, it’s probably one of the most systemically important companies in the United States.

Regarding the demand for services provided by organizations like Invest Vegan as interest in alternatives grows, Ortel said she sees a demand for “what we’ll friendly call non-bull*** * ESG”, and she is working to meet this demand.

“We constantly talk to the people who manage the equity portfolios. And what I’m just doing is taking these ownership strategies that some of the biggest owners of granola assets are putting in place and adding a level of retail scrutiny to them so that individual customers can actually understand what is going on and how it relates to their choices,” Ortel said. . “So I don’t think Invest Vegan will necessarily take on BlackRock. But I think the basic practices, the things we actually do, and the product we offer are already very mainstream in some ways.