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Investing in Alternatives Brings a Boost in Assets

Stephen Wedel, an LPL adviser and founding partner of Four Seasons Wealth Management in St. Louis, is gathering a lot of assets by investing his clients' money in alternatives, including non-traded real estate investment trusts, oil-and-gas limited partnerships, managed futures and private equity.

In the past 10 years that the 28-year industry veteran has been offering alternative investments to his clients, he's doubled his assets to $250 million.

Wedel's clients typically have anywhere from 10% to 35% of their portfolios in alternative investments, depending on their needs, age and risk profile, with an average holding of 20%. Wedel said he's a fan of alternatives because they typically aren't correlated with stocks and bonds and they can provide an income stream that advisers can turn on and off, depending on whether a client needs them. Additionally, alternatives often have tax advantages that can appeal to wealthier clients.

Wedel prefers to invest directly in alternatives, rather than gain access to underlying investments via mutual funds or exchange-traded funds. He does this by pooling clients' assets, effectively turning himself into an institutional investor, for whom cost of entry is not a problem. About $50 million of Wedel's total assets are in alternatives, which he says are easy to get into -- just ask a broker-dealer.

Wedel's gateway alternative asset was the non-traded REIT, which, while not particularly liquid with a holding period of three to 10 years, also isn't prone to volatile swings like its publicly traded cousins. He was drawn to the asset class because many of his clients were starting to transition from accumulation to distribution, and he didn't like having to sell stocks at whatever the current market value was to write his clients' retirement income checks. "It was a roller coaster of volatility," Wedel said. "But when I started adding alternatives, I wasn't selling shares anymore, I was distributing from those assets' production."

Here is a breakdown of Wedel's four favorite alternative asset classes:

Non-traded REITs typically have an entry level of as low as $2,500, they pay out monthly (some quarterly) and the Internal Revenue Service allows investors to claim back for depreciation to the physical buildings that the REIT is invested in, so there's a tax benefit as well as an income component.

Oil-and-gas limited partnerships have several important advantages, not least that because of the government's verve for domestic oil production, investment in these alternatives brings with it an 85% tax deduction. "If a client is selling a business or has significant income, that's a significant tax benefit," Wedel said. "Plus, they're a steady stream of income -- historically, they last anywhere between 20 and 30 years."Most of these programs are easy to get into, with minimums as low as $10,000 to $20,000, he said.

Managed futures "are wonderful," Wedel said. Most investors (and their advisers) are too spooked by volatility fears to invest directly in commodities, but Wedel pointed out that his clients' money is with experienced and disciplined managers who diversify across many categories and that the investments give his clients global exposure. "It allows a typical retail investor to invest in oil, gold, currencies and so on without having the tremendous knowledge it takes to do so," the LPL adviser said. "These managers have a long track record, they provide monthly liquidity and the minimums are fairly small: $10,000 to $20,000."

Private equity greatly diversifies a client's portfolio while creating a monthly income stream from the interest business borrowers pay on their loans, Wedel said. "I'm focusing right now on debt," he said. "The firms I use pool my clients' money together and acquire senior secured debt, so it's a significant safety play, less risk than owning equities."

Wedel reckoned that clients who need an income stream of 5% or 6% to support their standard of living can see that required withdrawal drop to as little as 1% or 2% thanks to alternatives' income-generating features (of the four products Wedel invests in, only managed futures don't generate income). "Often I can lower withdrawals in an area that concerns clients the most: stocks and bonds," he said. While many alternative investments aren't liquid, with an average holding of 20% per client, they still have 80% of their assets in highly liquid stocks and bonds, so few worry about not having access to emergency capital.

Another plus: Unlike an annuity, clients get to choose if and when they want to take an income stream or whether they just want to reinvest it.

"You can turn it on and off like a light switch," Wedel said, whether that stream comes from a REIT or from an oil-and-gas limited partnership or from a private-equity investment. Wedel’s clients typically invest in three or more each and he recommends safe bets such as grocery stores and pharmacies as well as hospitals and other medical centers.

Wedel said his clients are "ecstatic" with his alternative advice.

"I've never had so many personal introductions to new clients," he said. "My clients are talking to other people about alternatives and those people are coming to me, and that's what's led to my doubling my assets in the past decade."


Howard Stock writes for Bank Investment Consultant.