These things have proliferated over the last couple of years. I don’t think they are harmful by any means, but we don’t find them particularly valuable.

Model marketplaces lie somewhere between a Turnkey Asset Management Program (TAMP) and managing assets entirely in house. Regardless of which route you take, certain elements need to be completed. You need a strategy, you need to implement and you need to monitor. Model marketplaces help address that first step of establishing a portfolio strategy without delegating latter steps as you would with a TAMP. Instead of building a model yourself, you select a model from the marketplace.

Nothing wrong with that, per se’. From a big picture perspective, it strikes me as a decent addition to the landscape. But, with good systems and people to support sound processes, we haven’t found any of the steps to be difficult. Moreover, of all the steps in the process, developing a strategy might be the easiest.  

‘Alternative’ Investments

Our clients are not endowment funds at major universities. Their goals, temperament and resources have little, if any, resemblance to such funds. 

Low correlation does not, of itself, present a diversification benefit. You can get low correlation from a mattress or a jar buried in the back yard too. There needs to be a sound economic underpinning to the investment in order to expect a return. In many cases, what you get instead of diversification is de-worsification—higher costs, greater dependency on management’s crystal ball, less transparency, lower tax efficiency and control, and often, limited or no access to the funds.

I can make the case that many clients need stocks to have a reasonable chance they will reach their financial goals. I can further argue many clients need the stability of high-quality fixed income products to have a reasonable chance they will reach their financial goals. I’ve yet to meet a client that needs a hedge fund, managed futures programs or other alternative product to reach their goals. I do not believe that any client will fail financially because they omitted alts from their portfolio. The drag on results that a significant majority of alts have delivered, however, can put strain on a household’s finances.

The better approach is the one good financial planners take instead of trying to squeeze a little more out of a portfolio. They make decisions in context of the client’s total financial situation and work with clients to focus on factors they can control like spending, tax management and behavioral coaching.

Dan Moisand, CFP, has been featured as one of America’s top independent financial advisors by Financial Planning, Financial Advisor, Investment Advisor, Investment News, Journal of Financial Planning, Accounting Today, Research, Wealth Manager and Worth magazines. He practices in Melbourne, Fla. You can reach him at [email protected].

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