In the late 1990s, as part of a well‐publicized study, researchers confronted mall shoppers with a selection of jams for purchase. Some shoppers were given a choice of six jam flavors to choose from and others were given a choice of 24. While the larger selection generated greater interest, the limited selection resulted in 10 times greater sales. Thus was born the concept of “paradox of choice,” the idea that a broad array of choices has the potential to overwhelm and paralyze consumers from making purchase decisions. This is especially true for important and complex decisions.
Investment allocations, and certainly alternative investment allocations, are both important and complex decisions. Consequences of these decisions can have a lasting impact on clients and their financial advisors. Today, there are more investment options for individual investors than ever and as traditional portfolio allocation models can no longer be relied upon to generate attractive returns, investors are increasingly turning to financial advisors for guidance. According to a study by the Certified Financial Planner Board, consumer use of financial advisors increased by 42 percent between 2010 and 2015.
In recent years, a number of firms have been established to provide individual investors and their financial advisors access to alternative investments. The majority of these firms concentrate their efforts on building technology that simplifies the subscription process and reporting. They maintain an extensive menu of offerings, many from well‐recognized firms. The choice can be mind-boggling. And it raises a host of questions for financial advisors. How can I research all of these options? Conduct thorough due diligence? Assemble a portfolio that meets the unique goals, liquidity needs and risk tolerance of my individual clients? How can I ensure that I (and subsequently, my clients) fully comprehend the potential benefits and risks of these investments?
In our many years of creating institutional quality alternative investment solutions appropriate for individual investors and smaller institutions, we have come to understand that while some financial advisors appreciate a vast array of alternative investment options, many would prefer to be well‐versed in a limited number of carefully vetted and compelling funds. Lessons learned from establishing and managing successful alternative investment platforms at Oppenheimer, UBS and for the past 10+ years at Central Park Group, have led us to offer a tightly curated array of funds that are selected based on the timeliness of the strategy and quality of the manager, most with successful track records spanning decades. We scan the marketplace for opportunistic investment themes and find the manager that, we believe, is best suited to act on the opportunity.
A focused menu of high quality alternative investments enables in‐depth research and due diligence that is critical to advisors. Equally important is selecting opportunities that complement current and previous funds on the platform and ensuring that both the potential risks and rewards are fully understood by investors and advisors. This facilitates the creation of an alternative investment portfolio and a private equity allocation diversified by vintage years, strategies, industries and geography.
Alternative investments are unfamiliar territory for many advisors. Getting up to speed on the various asset classes, strategies, managers and reporting metrics takes time. Despite the proliferation of offerings, financial advisors and individual investors require an experienced, educated, time‐tested team to guide them as well as a trustworthy and reliable source to help them identify, research and invest in alternatives with confidence.
So, as with jams, less may be more with alternative investments as well.
Daniel Tauber is a partner of Central Park Group.
