Chocolate Covered Alternatives

Alternative investments are somewhat analogous to Forrest Gump’s proverbial box of chocolates, mostly because “you never know what you’re gonna get” inside. Wrappers certainly matter but the analogy does not end there. It turns out that chocolate was once the province of the aristocrats in Aztec and Spain, where only the wealthy were afforded that savory privilege. The locomotive and mass production changed all of that, and chocolate, just like democratized alternative investments, is now readily available to the masses.

CAIA Association will never be in the business of limiting your intake of chocolate, or alternative investments for that matter, but the derivative commodity (cocoa) of the former, would have been one of the sweetest investments you could have made over the last 12 months! As for (other) alternative investments, it has and always will be more complicated, as you will note in our recently published piece entitled Crossing the Threshold, which is so well sourced and guided by Aaron Filbeck. Accessing alternative investments is the easy part and that genie is not going back in the bottle. How to incorporate them into a long-term and coherent investment plan is truly an ‘adventure of learning,’ and the CAIA wrapper will always be watermarked with transparency and informed consent.

On the subject of wrappers, Luke Collins, a FOC (Friend of CAIA), sent us a recent ACA Foreside primer on two such packaging plays which shows us that product structuring should never be taken for granted. No wonder this same subject gets its due starting on page 15 in Crossing the Threshold where Sandy Kaul weaves this in as an important part of the narrative under the subtitle, Building a New World. This is especially relevant in the backdrop of what has gone on within the financial markets over the last two decades, and the importance of understanding where and how capital formation is happening, along with the growing dominance of the individual investor.

Sandy’s contribution is immediately followed by Fran Kinniry’s on-point observations under the heading, Asking Important Questions, which is allegorical to the premonition of Mrs. Gump: know what is inside before you (or your client!) bite into the merchandise. This is the very essence of due diligence and there will always be limitations and constraints that must be understood and reconciled. The advisor also has the obligation to not only be able to explain this to the client but to equally understand all aspects of her risk tolerance.

Up next in the report is Sylvia Kwan penning A Better Way Forward which is no more complicated than the subtext of aligning the client’s portfolio with their goals. Those goals will often be very client specific and must take in all tangible and intangible parts of the liability side of their balance sheet.

Bringing it home is Shannon Saccocia on Overcoming Obstacles and how to think about getting off zero. Integral to this phase is a never-ending conversation between advisor and client. This is often unchartered territory for the client from understanding all aspects of illiquidity and capital calls, to performance measurement after fees and taxes, and the need for continuous investor education. This final point should never be dismissed nor trivialized and a recent Private Bank Study commissioned by Bank of America hammers this point home. It is unsustainable and unacceptable when only about one half of the survey sample is ‘very satisfied’ with their advisor’s ability to keep them current on topics, trends, and insights, and only 46% are ‘very satisfied’ with the level of communication they receive from their advisor (see Page 33 in the linked report).

Forrest Gump gives us the absolute best close to this narrative: “Momma always had a way of explaining things so I could understand them.” When you are Crossing The Threshold, be like Mrs. Gump… understand the wrapper, be able to evaluate and explain the essential risks and opportunities tucked inside, and know (and communicate!) how they fit your specific client’s long term goals, objectives, and risk tolerance.

Seek education, diversity of both your portfolio and people, and know your risk tolerance. Investing is for the long term.