The only caveat is that shares usually can’t be sold for five years after the initial investment unless the client takes a penalty. But Hubler describes private preferred stock to clients as if it were a slightly riskier CD with a better yield that is backed by the value of a public company.
Hubler is also using institutional real estate to generate yield for his clients.
“In lieu of owning a private REIT, we’ve been using a Delaware statutory trust structure,” he said. “The way that works,, they own a partial piece of real estate when they’re buying into fractional ownership. The Delaware trust allows our clients to own it like real estate, not like a security, which confers the same tax benefits as it would to a landlord: appreciation, depreciation and amortization of expenses. When it gets sold, because it is real estate, the investor can exchange out of one trust to another and not pay taxes on the capital gains, just as if they were selling it in a 1031 exchange.”
Hubler and Creative Capital are also generating yield for retirees using private bonds issued by public companies.
This helps clients discount their retirement dollars. In today’s inflationary environment and with taxes likely to go up for most retirement clients in the future, Hubler figures that for every retirement dollar a client thinks they need today, they will need to take $1.20 to $1.32 to cover that expense.
“Portfolios need to be able to stretch more because of taxes and inflation,” he said. “Were seeing an uptick in people realizing that their future tax rates will not be as good in retirement as they were once promised, so they’re converting into Roths. The problem is that they’re closing the loopholes for backdoor conversions, so there need to be some investment solutions in play as well.”
Hubler has a set of rules to avoid taking too much risk in alternatives.
The first is to only consider sponsors with a long track record and a history of surviving—or better yet, thriving—through difficult periods.
“The older the strategy, the more likely it is that it holds up over the long term,” he said.
The second is to only consider products registered with the SEC and vetted by a broker-dealer.