alternative investments in their product and service offerings.
Non-traded REITs, in particular, have proven adept at delivering alternative sources of retirement income, as have hedge
funds and private equity.
But due diligence in the form of a comprehensive and
transparent “look under the hood,” as well as a greater advisor
awareness of new products and trends, is essential to achieving
optimal client outcomes.
Retirement Income from Real Estate
The potential to produce income, along with typically lower
correlations with the broader stock market, are just two
advantages REITs offer. As an asset class, they’ve outperformed gold, oil, the S&P 500, bonds and the EAFE index
on an annualized basis for the
20 years ending Dec. 31, 2018,
as cited by Financialadvisoriq.
com in August.
A non-traded REIT typically has lower volatility and
correlation due to its absence
from an exchange, and new
entrants to the REIT space
are offering more institutionally priced products to advisors. Additionally, investors no longer need $1 million or even
$100,000 to get in, which is a product evolution for managers,
and now a matter of building awareness with advisors.
Advisors with a retirement income focus are currently looking for yield and a somewhat stable net asset value (NAV). As a
result, they’re closely watching the REIT’s “life cycle,” where
a non-traded REIT performs well enough, and gathers enough
assets, to warrant a listed version. At that point, many advisors
will sell and reinvest in another non-traded REIT to ensure
consistent yield, and the life cycle repeats itself, a trend that is
expected to continue.
One area of concern with alternative investments in general is
their lack of transparency, traditionally an Achilles’ heel to greater utilization. It’s something that product innovation, and many
managers themselves, are addressing, specifically related to fees.
Research firms dedicated to transparency and education are
helping advisors lift the hood by analyzing most non-traded
REIT’s strategy product types, where they reside in the life cycle,
the type of real estate in which they’re invested (residential property versus commercial property), and how are they categorized.
Recent real estate innovation related to REITs is the advent of
Opportunity Zones, economically distressed communities that
encourage new investment through favorable tax incentives
(such as the reduction or even elimination of capital gains tax).
Created by the Tax Cuts and Jobs Act in late 2017, both the
community and investment must meet certain qualifications;
for example, investor capital must be committed for five-,
seven- or 10-years to receive full or partial tax benefits.
In the vein of win-win, assets can be pooled in Opportunity
Zone funds. Investors with a financial windfall or recent
liquidity event can reinvest the proceeds within 180 days to
mitigate federal taxes, while encouraging job creation and economic growth in the communities in which they invest.
One criticism is their complexity specifically related to the
Internal Revenue Service and the limited guidance provided so
far. A second set of proposed regulations — meant to assist in
defining terms and clarification of certain operational procedures within the zones themselves — was released in May, with
advisors, accountants and tax specialists still digesting its intent.
But with more than $2 trillion in gains yet to be realized,
according to Washington, D.C.-based think tank Economic
Innovation Group, interest
in their potential impact and
ability to attract assets is rapidly increasing.
Hedge Fund Help
Once open only to institutions, hedge funds (and hedging strategies) are now more
accessible to the investing public. One reason is that — like
other areas of the advisor industry — they’re increasingly
subject to fee compression, and the 2% and 20% management/
performance fee structure is no longer the norm.
Creativity in how they charge is increasingly seen as well,
with some instituting lower management fees but higher performance fees if the manager high-water marks are exceeded.
Traditionally offered in a limited partnership format, hedging strategies now are available as managed accounts, customized portfolio solutions and liquid alternatives to offer
investors different options in how they’re accessed. Regardless
of how advisors are looking to invest in alternative investments, there are platforms that exist to help customize the
experience with reporting and manager due diligence tools
while providing access across a suite of different products.
Hedge funds’ role in retirement income, specifically, is
dependent on several factors, including capital preservation through increased diversification and reduced volatility,
as well as periodic payments, which serve as an alternative
source of current income and tax efficiency.
Private Equity’s Public Appeal
A major trend in private equity means more opportunity,
simply because more companies are now private. According
to Bloomberg.com, there were 50% fewer public companies
listed on U.S. stock exchanges in 2017 than 1997.
And while private equity is getting a lot of attention — both
A non-traded REIT typically has
lower volatility and correlation
due to its absence from an
exchange, and new entrants to
the REIT space are offering more
institutionally priced products.