The 2023 Trends in Investing Survey

In the "Journal of Financial Planning" feature titled "The 2023 Trends in Investing Survey" Aaron Hodari, CFP®, CIMA, Chief Investment Officer and Senior Advisor and Managing Director at Schechter, provides valuable insights on the advantages of private debt and alternative investments. From the article we highlighted key quotes from Hodari, shedding light on the benefits and considerations of venturing into these investment avenues. 

“Historically, private debt has very low volatility and very high cash yields. On top of that, most of the private debt market is floating rate. So in a year like last year, when we got rising interest rates really hurting bonds, private debt—in absolute terms—had positive performance.” 

Private Debt: A Stabilizing Investment Option, Hodari emphasizes the historical stability of private debt, with its low volatility and high cash yields. He highlights that during periods of rising interest rates, private debt has demonstrated positive performance, making it an attractive alternative to traditional bond investments. 

“For an adviser who wants to get into alternatives, it’s hard to imagine your first alternative will be the typical eight- to 12-year private equity locked-up fund that you’re not going to know how it’s performing for four to five years. The interval fund structure allows advisers to dip their toes into the market in a much more flexible way.” 

Flexibility through Interval Funds: Hodari recognizes the challenges faced by advisers when entering the alternative investment space. He suggests that interval funds, with their shorter lock-up periods and increased transparency, provide a more accessible entry point for advisers to incorporate alternative investments into their clients' portfolios. 

“Innovation happens, but not everyone knows this innovation is happening. It takes a while for the information to get in their hands, to understand the innovation that’s happened in the landscape.” 

The Evolving Landscape of Alternative Investments: Hodari highlights the importance of staying informed about emerging innovations in the alternative investment landscape. He acknowledges that while innovation occurs, it may take time for financial professionals to become aware of and understand these new opportunities fully. 

“When we talk to a client, we never get that push back. The reason is before we make a recommendation of an investment, we’ve already set the stage through financial planning for what does our portfolio need to do over time? What are our cash flow needs?” 

Aligning Investments with Financial Planning: Hodari emphasizes the significance of integrating investment recommendations with clients' financial plans. By thoroughly assessing clients' long-term objectives and cash flow requirements, potential push back can be minimized, as the investment strategy is tailored to their specific needs. 

“Even in retirement, when a typical client is taking 4 percent of a portfolio per year, if you have 20 percent of the portfolio locked up, that is not going to impact that ability to take withdrawals. While you need to be mindful of [liquidity] and plan around it based on the client’s situation, if you’re being judicious in the usage of illiquidity, that is not a challenge from a portfolio manager perspective.” 

Balancing Liquidity and Portfolio Management: Hodari addresses concerns regarding illiquid investments and their impact on clients' ability to withdraw funds. He explains that prudent allocation of illiquid investments, such as private equity, can still allow for portfolio liquidity while potentially enhancing long-term returns. 

“Performance is reported net of fees and expenses, so when you’re comparing options for a client, the net return that the client keeps, that’s ultimately what should matter.” 

Net Performance as the Key Metric: Hodari highlights the importance of considering net returns when evaluating investment options. By focusing on performance after deducting fees and expenses, financial professionals can provide clients with a more accurate understanding of the actual returns they can expect. 

“Managers will sometimes accept a lower fee in order to grow their business. It’s not always a limited market size and opportunity, so depending on the strategy it can be a very large pot if they build the right structure and product, and they don’t need to capture every fee on a small amount of dollars.” 

Growth Opportunities for Managers and Investors: Hodari discusses how managers may be willing to accept lower fees to attract investors and expand their businesses. He highlights the potential for substantial growth in alternative investment strategies, emphasizing that managers can benefit from building the right investment structures and products. 

“By and large, in real estate, private equity, and private debt, the returns are there and the data’s there to show it.” 

Evidence of Returns in Alternative Investments: Hodari affirms the existence of favorable returns in alternative investment asset classes such as real estate, private equity, and private debt. He emphasizes that data supports the potential for attractive performance in these alternative investment options. 

“When you look at a capital market expectation study from any economist, it includes alternative investment asset classes well beyond stocks and bonds. If you’re trying to build a diversified portfolio and capture return in multiple market environments, lower correlation with the stock market, and increase the chances for success, diversifying your exposures across more asset classes that have a positive expected return is, in my opinion, the only way to really properly build a portfolio to meet that client’s plan.” 

The Role of Alternative Investments in Diversification: Hodari emphasizes the significance of alternative investments in constructing well-diversified portfolios. He suggests that expanding exposure to asset classes with positive expected returns and lower correlation to the stock market can enhance the chances of achieving clients' long-term financial goals. 

“I think advisers, by and large, get nervous about doing something different but, in our experience, we have not had push back. Clients embrace it, and we’ve seen growth in our business because of it. Just like in any asset class, you need to be diversified. Not every investment is going to work out, and we’ve used alternatives that have had poor performance and alternatives that have had great performance.” 

Embracing Change and Emphasizing Diversification: Hodari encourages financial advisers to overcome their apprehensions about exploring alternative investments. He shares his positive experience of clients embracing alternative investments, leading to business growth. Hodari emphasizes the importance of diversification and acknowledges that not every investment will deliver outstanding performance.