Live from FRA: The ‘L’ Word

“Alternatives” have become the hot dot in the retail advisory industry. But FRA panelists caution that liquidity is key when evaluating the options.

Over the last couple of years, ‘alternatives’ has become the buzz word in the industry, especially with the rise of so-called ‘alternative strategies’ in the retail space. But at the Financial Research Associates’ Advisor & Broker-Dealer’s Forum on Retail Alternative Investments yesterday, the debate around alternatives centered around the ‘L’ word: liquidity.

Panelists were on both sides of the debate. But all agreed that liquidity is a key consideration when deciding whether to invest in alternatives through retail mutual funds and ETFs, or hedge funds, REITs, and other non-retail products.

During one of the panel sessions, four advisors said they only use liquid vehicles to get access to alternatives.

“To us, liquidity is the mother’s milk,” said Thomas Meyer, CEO of Meyer Capital Group, a fee-only planning firm in Marlton, N.J.

Meyer said that some of his high-net-worth clients got burned in 2008 in more illiquid investments; many of them come to him solely to manage the alternatives sleeve of their portfolios.

“You’re leaving a lot on the table on the 40-Act (mutual fund); there’s no question about it. But some of our high-net-worth investors, they don’t care.”

Some people argue that liquidity can be more expensive, and underperform less liquid investments.

Kevin Mahn, president and chief investment officer at Hennion & Walsh Asset Management, said he sticks to mutual funds and ETFs because clients want to have access to their money. Since 2008, the retail investor has become anti-illiquid, he said.

“Our clients don’t need their money - until they need their money. So liquidity is a high premium,” said Mahn.

Thomas Balcom, founder of 1650 Wealth Management, said clients have asked how long it would take to get all their money out if they ever asked for it. While that likely won’t ever happen, being in more liquid vehicles helps clients sleep better at night.

Chris Mills, executive vice president of RIA Kovack Advisors, said his firm has shied away from anything with a lock-up period, but more for compliance and liability reasons. There have been a lot of lawsuits and losses related to investments with lock-ups, and his firm doesn’t want to take on that risk. In fact, many broker/dealers have been burned by such alternatives, including private placements and non-traded REITs.

And Mills believes you can get the same correlation mix, the same diversification, similar performance, and even lower volatility by accessing alternatives through these liquid, retail vehicles.

“If I can show over time that my performance is going to be relatively the same, I’m going liquid,” Mills said.

But of course, there’s no silver bullet, and Meyer said there are some retail products that advisors should watch out for. He’s trying to go after lower correlated investments, not negatively correlated, because that’s hard to do.

“This whole absolute return thing about, ‘Oh, you’re never going to lose money.’ That’s ridiculous,” Meyer said. “You’re there to limit risk, not eliminate risk.”

That said, some of speakers at the conference argued the other side of the liquidity debate, saying that the less liquid, non-retail products hold a lot of benefits.

Kevin Hogan, president and CEO of Investment Program Association, said the lack of liquidity of products like non-traded REITs are often represented as a flaw or burden. “It’s not the structural flaw in the product design. It is the product design.”

The life cycle of such products as non-traded REITs is longer than the average investment—around six years, Hogan said. Not being readily tradable makes the product more stable over that time frame, he added.

Daniel Oschin, managing director, KBR Capital Partners, said non-traded REITs take four or five years just to overcome costs, then they spend the next two to five years creating the value. On the way, they’re generating strong, dependable income.

That’s exactly what Timothy MicKey, managing director, Monument Wealth Management in Alexandria, Va., likes about non-traded REITs. According to MicKey these pay higher than public REITs, so he’s willing to sacrifice liquidity to get more of the benefits.

“I like the fact that it is a lock up,” MicKey said. “A lot of people don’t. A lot of people in this room this morning: it was anti-lock-up.”

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