When hiring a financial advisor, firms help their clients by getting an understanding of what they want, their length of investing experience, risk tolerance, etc.  The basic model of advice typically encompasses a portfolio of stocks, bonds, mutual funds and low-cost ETFs which are a great tool for most investors looking to diversify among a few different industries all in one go.  By using a basket of stocks, portfolio volatility is generally mitigated, and long-term investing goals generally tend to follow the trends of the broad markets. 

Though we have and do build portfolios like this for clients on occasion with our planning counterparts, our main focus is in the alternative investments space.

It’s a nice play on the word ‘alternative’. Our expertise in “alternative” investments allows us to be able to provide a complementary approach to investing to help clients aim for their long-term retirement, tax and estate planning goals, objectives, and aspirations. 

This is what we live for and what gets us up in the morning. The off-the-beaten-path, intensely reviewed opportunities many accredited investors will look to include in their investment portfolios.

Thankfully, we had the opportunity to provide something just like this to a recent client – ultimately, welcoming them to the Aloha Ohana. 

 Let’s dive into the details –

 Current State

As we got to know the client better and built a strong relationship, we learned more about their current financial situation.  This included where the majority of their retirement savings were held, what they were invested in, an overview of other assets they owned, and if they had any outstanding debt or liabilities.  Doing so allowed us to develop a clearer understanding of the client’s total net worth (total assets minus total liabilities).  In this particular case, the client was not “accredited” via SEC standards, which is important for us to know as it restricts what investments we can show/offer the client.

This client’s current retirement “nest egg” was very heavily allocated into a bond fund, which he pointed out to us and indicated he wanted to find another place to invest.  Digging deeper, we found the bond fund had returned an average of ~5% over the past 5 years.  And even its historical best years did not raise any eyebrows.  Of course, most bond funds are designed to provide liquidity with a certain level of safety and diversification.  That way, when you get to those retirement years you hope that nest egg produces a return to support the remainder of your life.  There is always a place for a discussion around bond funds and whether it is in a client’s best interest, but the client has a general distrust in the overall stock/bond market and even government-backed securities, so they thought turning to alternatives (private equity, private credit, etc.) might be a more viable option to achieving their goals.

Future State

Finding out the client’s goals is always a good place to start.  This client wanted more spending money – to play more golf and to be able to travel to Hawaii more frequently.  Simply put, they wanted to be freer than what their current portfolio afforded them.  The objective seemed quite simple; provide more income.  However, given this client’s age (they were taking social security and required minimum distributions, yet still active and healthy), it was not advisable to transfer more equity into stocks or options or some other venture fund just to achieve this.  The objective became a little more clear; to provide more potential income by investing in a longer-term fund.

 The timeline for all of this to take place was also important.  Most of these “alternative” strategies are by nature illiquid investments.  Unlike the stock market where you can buy today and sell tomorrow, these private funds often do not have a secondary market and/or they do have a minimum holding period (typically 3-5 years).  Buying today and selling tomorrow is a luxury, and an ejection seat if investor trepidation kicks in.  That is why the returns in that bond fund were what they were; increased diversification through multiple bonds & liquidity = historical potential for lesser return.  In this case, the client had 3-5 good, active years ahead of them and did not need immediate liquidity (keeping in mind, of course, that no one ever knows the future).  So, the opposite is also true.  Illiquidity = potential for higher returns with increased risk.

Recommendations & Process

The next thing we did is present some investment options as alternatives to the client’s bond fund.  We presented three different types of private credit and private equity funds, and advised the client they consider diversifying into two of them.  That is our job; present options and give professional advice.  The decision always belongs to the investor, and this case was no different.  Through our multiple discussions, we all agreed, and we reallocated a portion of his retirement savings into two real estate-oriented mortgage investments.

The Aloha State

Looking at the client’s portfolio now compared to what it looked like prior to working with us, we achieved a portfolio that targeted what the investor was looking for.  The possibility for increased income through reallocation into private offerings for targeted hold periods between 3-5 years.  Most importantly, the client was comfortable with the increased level of risk.  They’re off to Hawaii, stepping off the plane into that fresh sea breeze and smell of plumeria, and sinking puts one birdie at a time.

Conclusion

We often find that a deeper look into a client’s traditionally structured financial portfolio (regardless of age) reveals some incredible opportunities to restructure / reallocate / revamp into the world of alternatives and private offerings.  Doing so has the potential to increase income and/or growth into their overall portfolio, giving them the opportunity to mentally unwind.  That’s how we feel like we’re sharing the Aloha.