Show V/O:
This is Alternative Allocations by Franklin Templeton, a monthly podcast where we share practical, relatable advice and discuss new investment ideas with leaders in the field. Please subscribe on Apple, Spotify, or wherever you get your podcast to make sure you don't miss an episode. Here is your host, Tony Davidow.
Tony:
Welcome to the latest episode of the Alternative Allocation podcast series. I'm thrilled to be joined today by my good friend, Christine Gaze. Welcome Christine.
Christine:
Thanks for having me, Tony. I'm excited to see you in person.
Tony:
And this is a really exciting time. We're at the Investments & Wealth Institute National Conference celebrating 40 years of IWI. I actually joined what was then the IMCA organization in 1995 and got my CIMA in 1996. As an industry, we've evolved a lot, but I think IWI's been at the forefront kind of leading a lot of that evolution. You're now the Chair of the Investments of Wealth Institute. Maybe it'd be worth talking a little bit about how you see the world evolving, and then we'll talk a little bit about your specific background.
Christine:
As you mentioned, IWI is marking its 40th year anniversary and it really started with professional investment management and the CIMA certification was really the certification that those that were offering institutional consulting got to really signify their education in this arena.
And as you know, over the years, more and more retail financial advisors, those serving high net worth clients were interested un getting the CIMA because they wanted to have a more disciplined approach to investment management and portfolio construction. So the CIMA grew pretty significantly in the first 20 years of IWI's history.
But IWI did something interesting. I think it was the ‘07/’08 timeframe. It was fortuitous in that it developed the Certified Private Wealth Advisor (CPWA) designation in recognition that more advisors were offering wealth planning, and that required some discipline as well. And the financial planning or the CFP, which I hold as well, is a really good starter designation, but it’s foundational knowledge and for those serving high net worth and ultra high net worth clients, the CPWA was like CFP 301, if you will. And so it really armed and equipped advisors who were delving deeper into comprehensive wealth management. And then a few years later we purchased the RMA, Retirement Management Advisor designation. And that really is disciplined around, there are so many advisors that really focus their practice, as you know, around accumulation, sort of managing and growing assets. But with the vast majority of Baby Boomers having hit 65 and are on this other side of the hill, advisors need a professional way of thinking about how to distribute assets and how to inform and guide clients making distribution decisions.
Tony:
So as I think about it, I think IWI has always been a little bit at the forefront kind of anticipating where the business is evolving and making sure that they can provide the training. Conferences like this provide networking, peer-to-peer exchange, the Monitor, which I was fortunate enough to serve as the Chair of many years, provides a lot of thought leadership and white papers and academic research on it. So IWI has kind of been at the forefront. And when we look back 40 years, I remember those early days.
It was largely wirehouse advisors. And as you mentioned, we were primarily focused on learning lessons from institutions that we could apply to individual investors. But now I'm not going to hold you to the numbers, but now there's thousands and thousands of advisors with diverse sets of skills and practices, but yet they all come together to coalesce at a conference like this because the commonality is this community.
Christine:
Well there are nearly, I want to say 14,000 certificants, so CPWAs, CIMAs, and RMAs. And I think one of the common threads that unites the members and certificants of IWI is that they're lifelong learners. And there's a pretty even distribution now between independent advisors and wirehouse advisors and you know, there's always been a strong asset management contingent.
In fact, I mean, I think back to when I got my CIMA in 2005, I got my CIMA because I was running professional development at Alliance Bernstein. We were developing some world-class training. We used to sequester wholesalers that we hired. We were hiring the best wholesalers from this asset manager in that. We would sequester them in New York for seven weeks and train them on the capital markets and our products and our mission.
And then we had a whole host of wholesalers out in the field who hadn't had the benefit of that sequestering and that training. And so I really looked to IWI and the CIMA, and that was really what my Wharton experience was about, was really evaluating that program for our wholesalers.
And I think if you look across the sea of wholesalers and asset management professionals today, the CIMA is really something that distinguishes the people that are still in the business. As you know, the numbers have dwindled significantly. So if you were going to go toe to toe with a corner office advisor, regardless of whether they're at a private bank or a wirehouse or whatnot, you really need to know your stuff and you need to support them on asset allocation and portfolio construction and risk management, not just chasing a hot dot.
Tony:
It's a perfect segue. When I was at Morgan Stanley and I ran sales and training, that was one of the things I insisted upon. I said, if you want to meet our best advisors, you need to speak the language. You need to be more sophisticated. As an organization, I think we've come a long way.
Of course, the purpose of this podcast is to focus on alternative investments, which I think we see a lot of the similar sort of challenges. Alternatives by their very nature seem more complex and sometimes confusing to the advisor. And we’re always trying to, on the podcast series, to make sure we can break it down in a bite-sized piece so the average advisor listens to it and they can take away a couple thoughts that they can apply in their practice.
I'd love to maybe get you to delve into a little bit about, you have a practice, you happen to be the Chair of IWI, but you also have a business on your own. And you have a unique lens in looking into what's happening across the industry. Maybe talk a little bit about your firm and then specifically what are some of the challenges you see across the industry as advisors are evolving and trying to focus on their value proposition and how they continue to evolve the value they provide to clients?
Christine:
So I run a company called Purpose Consulting Group. We develop practice management and education that engages and advances advisors. So I work with broker dealers, I work with boutique firms, and some asset managers, and we develop content. So some of it is thought leadership content, and some of it is comprehensive training programs.
One of the biggest focuses we've had in the last five years, I think speaks to something broader that's happening in the industry. We have a program that we've developed called Planning With Purpose. It's a 14-week training program that really helps advisors who have a lot of financial planning knowledge, but haven't found a way to institutionalize that in their business. They haven't found a way to consistently deliver that financial planning advice to clients. So that really sort of helps them get over that hump, and that's a broader trend that we're seeing in the industry. More clients are demanding financial planning and wealth planning.
More advisors are offering that. Many have what I call sort of an advice gap. There's a lot that they know, but they struggle to put it into action. At the same time, the bar in the industry has raised. So high net worth clients have more complex needs, they're demanding more comprehensive wealth planning.
So that creates more stress or pressure for advisors and advisory teams to continue to acquire specialty knowledge and advice. So for example, some of the most prominent gaps, tax planning, estate planning, charitable planning advice. So, I don't want to call them esoteric, but they're not every client needs or struggles with that kind of advice. So those are areas advisors are moving.
So at the same time, if you look at the growth of mega teams, so mega teams have over $500 million in assets. If you look at, according to Cerulli, I think they account for 15% of advisory practices, but they manage two thirds of client assets. So these mega teams that have comprehensive teams of dedicated professionals are able to drill into different specialties, are really equipped to attract high net worth clients. And the interesting thing about that, is they've got a really terrific, well-built out wealth planning practice, but they also typically have CFAs and CIMAs who are dedicated professionals focused on managing the assets of that firm. So it's almost like you've got this bifurcation of disciplines that's occurring in a lot of these mega teams, and that ensures that you get just more professional and disciplined investment management.
Tony:
And again, we've seen research studies, and you and I have talked about it in the past. I would argue that high net worth and ultra high net worth families demand access to alternatives. And in fact, often that's what they're choosing. Do you have a deep and dedicated lineup? Because a lot of the nuts and bolts, everyone has your traditional SMAs, mutual funds, ETFs.
As you point out, a lot of these teams are developing these core and satellite sort of capabilities, but alternative investments, I would argue, is a way of an advisor really distinguishing their practice for an advisor. And maybe it's one member of the team, not the whole team, but one member of that team who can really go deep and understand private markets in particular, where there's a lot of interest.
That sets them apart, allows them to compete more effectively to the person sitting next to them or somebody who thinks that they can do it on their own. Because in the private markets in particular, it's not something you can do on your own. You need somebody who can guide you through that process.
Christine:
Absolutely. I think that from what I've seen in the press and from the research that I've read, high net worth clients are demanding access to alternatives. And I think that puts advisors in a difficult position, advisors that don't have these capabilities built out, they don't have institutionalized investment management processes within.
I think that it's important that advisors have a perspective on alternatives, a point of view and a strategy, not something they're figuring out when the client shows up in the lobby demanding alternatives. I'm curious what you've seen in that regard, because I feel like you can't have a strategy with regard to Alts and the place that it plays in your high net worth clients' portfolios, in my view, unless you've done a fair amount of work and education to develop that point of view. What are you seeing in the field?
Tony:
It's a great question and comment because I think the reality is, I think a lot of advisors have kind of woken up to the reality that it's not a nice to have. It's something they really, absolutely need to own. They need to be conversationally proficient. They need to understand the role that the various types of alternatives play in client portfolios. They need to be able to talk to clients in terms that they understand.
You and I were talking a little bit before we got on the podcast and you were asking me specifically about what are some of the challenges and the pushback, and I think part of it is the advisor needs to be comfortable having that next level discussion. You and I have spent our whole careers working with advisors, and we know that if the advisor is uncomfortable that a client may ask him or her something that they're not prepared for, they're likely not going to have that discussion. So I think as much as we can, and certainly at the Franklin Templeton Institute, we produce a ton of materials, which are really designed to not only help the advisor, but to help the advisor have that next level discussion.
How do we communicate the merits of these strategies to individual clients? How do we describe the various structural trade-offs between an evergreen fund versus a drawdown fund? How do we make sure that they understand the impact that it has when we start to add these to client portfolios? So we are definitely thinking of that next level conversation.
And I think the more that we can have discussions like we did here at the IWI conference or published materials that have appeared in the Monitor over the years, I'd like to think we're preparing them and conditioning them. And I'd like to think that we are past that intellectual discussion. I think most advisors, and especially the advisors who are here understand the intellectual merits of it. It's the behavioral issue. How do I commit capital that I know is going to be tied up for an extended period of time? It's the conversational sort of impediments of, how do I describe it in a way that a client understands it. So it's a journey that we're on. We always think of this as a journey, and it's part of the reason I wrote the book.
Christine:
I think you make a really good point with regard to client education, and I've found in my career, I've interviewed over 2,000 advisors on best practices in one arena or the other. And the very best advisors in my view, they do a lot of training and education. They prepare their clients to be good clients and to make good decisions, and you have to do that when the sun is shining so that they act how they should when it starts to rain.
I think that's especially important with something like alternatives that are just, they're not traditional and they don't act in the same way as the rest of the portfolio. It requires a prepared client to hold and own that and be a good steward.
Tony:
I think it's such a good point. I was speaking earlier today and we're talking about what are the biggest impediments for advisors, and clearly one of the biggest challenges is this notion of tying up capital for an extended period of time.
Private markets, by their very nature are illiquid, and I always say we need to have those discussions in advance. We can't have it after they're in, and then all of a sudden, oh, by the way, these are locked up for 7- to 10-year investments.
It's not necessarily inherently bad or good, it's just a feature that you need to understand. And if we could determine in advance with a client when we go through the discovery process. What is the right amount of capital that you're comfortable tying up for an extended period of time and bucket that and treat that differently.
But to your point, make sure the client knows before they invest in it. This is my 10-year hold investment and I'm going to be patient, and if I get antsy about parts of the market, I can be a little bit more tactical with my traditional investments. We've taken a negative and turned it into actually a positive attributes that addresses this behavioral element of individual investors. And ideally, we're trying to teach them to be long-term investors.
Christine:
I think that's a really great point. I think I'm a big fan of bucketing and a variety of conversations with clients. If you think about it, when people had pensions, that was a bucket unto itself, and you got one statement once a year. It told you the value at that time, and so you didn't wring your hands daily about what the value of your pension was doing. It's kind of going back to the beginning in some regards. I feel like pensions have had private investments a lot longer than the average high net worth client, right?
Tony:
They have, and we obviously now looking at the research that institutions and family offices have allocated for decades and decades and in pretty significant fashion.
So if we look at the industry, the wealth management channel, the industry average is somewhere between five to 6%, which is a very low allocation. Directionally, it should probably be closer to 10, 15, 20, depending on each client and their thresholds. But the reality is we're not going to get there in one fell swoop.
It's going to be a process. Which leads me to my question about IWI, which is, if IWI is the tip of the spear in trying to anticipate where it's going. Clearly over the last couple years everyone's talking about private markets. Again, whether they're all allocating to it or not, they're all talking about they want to learn more. What's IWI doing as far as training, preparing materials, making it more of a core discussion as opposed to a fringe discussion?
Christine:
Well, Tony, I mean, you've been at the forefront of bringing Alts knowledge and education to IWI through your former role as the editor of the Monitor for many years. But I know that you contributed to the private markets course that is available on the Advisor Academy through the Investments & Wealth Institute, and you could probably speak more than. I think that is a 10-hour course, if I'm not mistaken. So not for the faint of heart. But I think a really to the point that we talked about a few minutes ago, you can't develop a strategic allocation and a philosophy that you can sell or use to educate high net worth clients on in my mind until you know what the heck you're talking about. And so a 10-hour course is probably a good start for those who feel a little out of their depth with this conversation.
I would imagine at the end of a course like that, you could sit down and look at your portfolio, your asset allocation and your portfolio strategies and develop a more methodical and informed approach. We always have articles in the Monitor on alternatives, and there's usually an issue that's dedicated to portfolio construction and alternatives.
I know that we had a focus series last summer, and I think those are available on the academy for replay that was specifically focused on Alts. So, and alts are always, I mean, you're here doing a book signing and a number of speaking engagements. There's a couple of other, I know we've got keynote speaker tomorrow morning.
Tony:
And again, I think one of the things we have recognized, this is a journey, so your comment about who the members of IWI are, they are lifelong learners.
I often think of them as they're just intellectually curious, and if you're intellectually curious, you constantly want to reinvent yourself, reinvest in yourself, and really understand where the industry's evolving. Alternative Allocations I think is a big part of that. It's part of the reason we created the podcast series and all the materials are really designed to help advisors think through some of those challenges, so they're prepared to have that next level discussion.
Christine, as always, it's great to have you on the podcast. We hope to have you back in the not too distant future and I'm really curious to see what the next 40 years look like for IWI.
Christine:
Me too. Tony. I don't know how many of them I'll actually see, but I'm excited as well. Thanks so much for having me. It's been a fun conversation.
Tony:
Thank you.
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