Stephen Wedel, an LPL advisor 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 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 between 10% to 35% of their portfolios in alternative investments, depending on their needs, age and risk profile, with an average holding of 20%. Wedel says he’s a fan of alternatives because they typically aren’t correlated with stocks and bonds and they can provide an income stream advisors can turn on and off, depending on whether a client needs them. Additionally, alternatives often have tax advantages that can appeal to wealthier clients.
The advisor 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 your broker-dealer.
Wedel’s gateway alternative asset was the non-traded REIT, which, while with a holding period of three- to 10 years isn’t particularly liquid, it also isn’t prone to volatile swings like its publicly traded cousins. The advisor was drawn to the asset class because many of his clients were starting to transition from accumulation to distribution, and Wedel didn’t like having to sell stocks at whatever the current market value was in order to write his clients’ retirement-income checks. “It was a rollercoaster of volatility,” he says. “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 as low as $2,500, they pay out monthly (some are quarterly) and the Internal Revenue Service allows investors to claim back for depreciation to the physical buildings the REIT is invested in, so there’s a tax benefit as well as an income component.
Oil-and-gas limited partnerships have several key advantages, not least that due to 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 says. “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 says.
Managed futures “are wonderful,” Wedel says. Most investors (and their advisors) are too spooked by volatility fears to invest directly in commodities, but Wedel points 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,” he says. “These managers have a long track record, they’re 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 says. “I’m focusing right now on debt, “ he says. “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 reckons that clients who need and 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 says. 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 says, whether that stream comes from a REIT—and Wedel’s clients typically invest in three or more each, and he recommends safe bets including retail “essentials” such as grocery stores and pharmacies as well as hospitals and other medial centers—or from an oil and gas limited partnership or from a private equity investment.
As far as Wedel is concerned, his use of alternatives is merely an extension of the Modern Portfolio Theory tenets he cut his professional teeth on—now with more diversification across asset classes as well as sectors. Best of all, he says his clients are “ecstatic” with his alternative advice. “I’ve never had so many personal introductions to new clients,” he says. “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.”
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