The workforces for custodian, broker-dealer and asset manager firms during the past 15 months were geographically scattered. But there were strong bonds of connective tissue on multiple key themes during this time period.
Foremost among these themes? A heightened focus on increased investing in the private markets, versus the historic emphasis on publicly traded equities and fixed income vehicles only.
WSR Reader Survey: The Decline of 60 / 40?
According to our latest WSR survey of registered readers, the following key factors are the biggest reasons why there are increased doubts among financial advisors as to how effective the traditional 60 / 40 portfolio (comprised of 60% equities and 40% bonds) can continue to be:
- Unprecedentedly low interest rates make the hunt for yield across traditional fixed-income extremely challenging.
- Ongoing severe market volatility raises the urgency and demand for enhanced risk mitigation with assets that are inversely correlated to both traditional equities and fixed income
- Perceived opportunities for more outsized investment returns with private deals and actively managed vehicles, including private equity, private real estate, venture capital and hedge funds
- Potentially greater longevity risk, with surging numbers of Baby Boomers going earlier than anticipated into retirement (often due to pandemic-related job loss) while life expectancy rates, excluding the temporary statistical impact of the pandemic, continuing to rise
But despite this context, independent financial advisors with businesses encompassing between $100 million to $1.0 billion in client assets have historically treaded cautiously when it comes to aligning their clients with alternative investments. Why?
Partly, because of the increased operational and administrative complexities involved with alternative assets. Partly, due to the relative lack of sophisticated product due diligence resources for alts for financial advisors with businesses below $1 billion in assets. It’s easy for such advisors to quickly feel in over their heads with alternative investments.
Enter Kelly Park Capital
That’s where Kelly Park Capital comes in, with a mission for demystifying alternative assets investing for independent financial advisors.
With headquarters in both New York City and South Florida, Kelly Park Capital emphasizes its role as a fiduciary that is fully focused on B2B customers – Independent wealth management firms, including RIAs, as well as family offices. The firm’s sweet spot? Wealth management businesses that have between $200 million to $1.5 billion in client assets.
Co-Founded by Dean Rubino, CEO of Kelly Park Capital, and Sean Westley, President, the firm is turning heads in the industry with its equal parts focus on streamlining operational complexities, developing highly customized solutions and incredibly rigorous due diligence and manager selection.
WSR caught up with Rubino this week to discuss the retail alternatives landscape today, what financial advisors and their clients increasingly need, and what the future for the intersection of wealth management and retail alts could look like.
WSR: What makes KPC unique relative to the rest of the retail alt space?
Kelly Park Capital brings unique and compelling investment access to wealth advisors and family offices without the logistical pain-points typically inherent with GP/LP investments.
From an investment perspective that means getting away from the mega-funds and really working hard to find 15- 20 of the most compelling investments. We define this as capacity constrained, low net, sector experts with a history of alpha generation and strong risk management.
From a service perspective that means a high touch, relationship-driven approach supported by intuitive technology and a structure that delivers operational ease.
Finally on the allocation side, we deliver the ability to customize a portfolio based on each investor’s unique needs. This is an essential tool to the advisor of tomorrow.
WSR: A sizable segment of independent financial advisors with client assets between $100 million and $1 billion tend to be more cautious about alternative investments, with a continued bias for the traditional 60 / 40 portfolio approach. Why do firms of this size tend to be more reluctant to engage with alts?
Much of this is because the investment acumen and resources of most firms is rightly focused on where the assets are, which comes down to stocks and bonds.
But recent FAANG stock and rate uncertainty and the risk of deteriorating credit quality has advisors looking for alternative sources of yield, current income, return, and capital preservation.
Alternative investments deliver all of these, but in a historically opaque and logistically challenging format inaccessible to less well-resourced firms.
Another historical barrier for many wealth advisors is the liquidity issue generally associated with alts. To have 80% or more of a client’s assets with daily liquidity and now discuss an 8-12 year lock up isn’t very logical or realistic.
For financial advisors serving clients with liquidity needs – or who are just getting comfortable with alts investing – we offer the majority of our Hedge Fund portfolio with quarterly liquidity, with some notice.
WSR: Would you agree that engaging with alternative investments typically involves significantly greater operational and administrative complexity for financial advisors who want to offer such investments? If so, what are the most frequent headaches?
Historically, yes. First, there are pre-investment pain points such as subscription documents that are complex, one-size-fits-all, and time-consuming endeavors.
There’s also the need for multiple K1’s, which complicate tax returns, to say nothing of high investment minimums and daunting AML-KYC processes that lack consistency from one investment to another.
And nearly all investment options are “off statement,” making invoicing difficult and IRA funding all but impossible.
There are also multiple post-investment challenges, involving reporting, custodian coordination, education, and communication.
WSR: How does your firm solve for these challenges, and how is your approach different from the largest and most well-known retail alts platforms today?
We launched Kelly Park Capital to specifically address all of the logistical, operational and administrative challenges we’ve discussed here – While providing customizable, differentiated and attractive investment options.
Relative to other offerings, we are not a technology focused offering, we are not a transaction-focused broker-dealer and we will never resemble a large wirehouse platform. Our focus is on building trust and developing long term relationships.
Towards this end, we deliver a unique and compelling, efficiently priced, customizable alternative investment portfolio – or individual investments – with flexible minimums, a single K1 as well as simplified electronic on-boarding, which is on-statement and IRA eligible.
It’s crucial to address both the operational and investment needs of wealth advisors to be truly effective as a B2B alternatives platform.
WSR: What would you say to financial advisors with client assets between $100 million and $1 billion who are skeptical about alts, especially in terms of why and how alts could enhance their ability to drive better outcomes for clients?
Broadly speaking, there are as many hedge funds as there are stocks listed on major exchanges. Stocks have riskier “high fliers” and more stable and secure blue-chips as well as “safe harbor” companies, like certain utilities providers.
Similarly, there are conservative hedge funds, riskier hedge funds, current income yielding hedge funds, and contrarian hedge funds.
Ignoring this alternative asset class is akin to ignoring stocks. Sure, there are differences, but the stock-hedge fund analogy goes a long way in demystifying and framing an intelligent asset allocation process, which should include alternatives.
Alternatives have the additional advantage of flexible structures, allowing them to better anticipate and react to market changes and take advantage of opportunity pockets that less nimble structures cannot.
James Miller, Contributing Editor & Research Analyst, Wealth Solutions Report, contributed to the development of this article. He can be reached at ContributingEd@wealthsolutionsreport.com