The ensuing tight rope walk by the fund manager can be harrowing. The manager must balance how to keep the portfolio in a strong position for ongoing investors, versus selling off portfolio positions to accommodate the redemption requests. In essence, avoiding a fire sale while still providing liquidity. From those perspectives, the decision to limit withdrawals can be justified. From a public relations and business development perspective, there is the potential for harm.
So yes, the struggle is real. What is the best way to harvest alternative asset exposure for clients without the negative headlines that may potentially harm the wealth advisor’s relationships?
For many wealth advisors, a customized fund-of-fund model is a more controllable alternative, especially to the closed-end funds that have been in the news recently. When creating a custom fund structure such as this, the wealth advisors have the final say as to which investments are included and how it is constructed. If a client will be requesting liquidity, the wealth advisor has the latitude to make sure the investments meet those requests.
In such a structure, wealth advisors have control of the process from beginning to end, and without the necessity of dealing with commission-focused broker-dealers. Customized fund-of-funds allow wealth advisors to focus solely on what is best for their clients. From choosing the right mangers and deals, to legal design and structure, customized fund-of-funds put power back in the hands of wealth advisors and their clients.
Regular communication with the client, however, is the most important step to the best experience. As a fiduciary, the ultimate questions you must answer are:
“Will this help my client reach their goals?”
“Will there be enough liquidity for any forthcoming redemption requests?”
“Given their current portfolio, is this a suitable investment for my client?”
Without the answers to these questions, many wealth advisors would likely be allocating to their clients’ portfolios blindly.
Frank A. Burke, CFA, CAIA, is chief investment officer of PPB Capital Partners. Anton W. Golding is associate, fund manager analyst at PPB Capital Partners.