In Part 1 of “Wealth Managers: How should you be talking about Alternatives with your clients”, we looked at why it’s important for wealth managers to start including Alternatives within the conversation even if they aren’t managing the assets under their remit.
In this concluding part, we’d like to take that one step further, and walk through a client use case of how a wealth manager could approach a private client who has held away fractionalized Alternatives.
Introducing Julie
Let’s imagine you have a client called Julie, a Millennial, who recently inherited $2m. She invested $1m with you in a balanced portfolio but was also interested in purchasing some Real Estate and diversifying across multiple types of Alternative assets. Your firm only deals with traditional Alternatives which have high minimums so Julie wouldn’t have been able to sufficiently diversify within Alternatives. As such, Julie went ahead and allocated another $1m to an apartment in Florida and various platforms offering fractionalized ownership of various types of Alternatives.
Now she has come to you wanting to talk about her investments with your firm. They haven’t done great but have at least outperformed her benchmark. You point out that most of that loss has come from Fixed Income but Julie wanted that as she needed the income too.
However, Julie then asks if you can look at her held away alternatives which she records in an Excel spreadsheet:
Now you don’t have any information on what the individual investments are, and it would be hard to give advice on assets your firm doesn’t hold. However, you are a wealth manager and your expertise is portfolio management. So, you can fire up a shadow portfolio of Julie’s held away alternatives and combine that with your investments to show her what her total wealth looks like:
1. You can compare her total asset allocations to how a family office would invest and show she may be over allocating to Fixed Income and Real Estate but under allocating to Equities.
2. You can show Julie that her potential over allocation to Real Estate did contribute the greatest amount to her overall P&L which helped pull the overall portfolio performance.
3. Given that Julie wanted her allocation in Fixed Income for income generating reasons, but that asset class had dragged her performance with the portfolio she held with you, it is worth highlighting that Real Estate was also income generating. This could make Julie think about reallocating more to equities in your portfolio and increasing her own real estate allocations in her held away portfolio.
4. Finally, you can reassure Julie that by looking at her overall risk on her total wealth, she has reduced the volatility of her portfolio and minimized drawdowns.
Even though you are not holding or advising on Julie’s held away alternatives, giving her professional tools that allow her to see how her total wealth looks keeps Julie engaged and helps build trust in the long term.
As we’ve seen, alternatives are becoming key for investors. Although wealth firms may not be considering changing their current business model, they do have an opportunity to engage with their clients on their overall portfolio performance and risk. This should drive higher client engagement, build trust and potentially lead to higher AUM.
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