Schorsch REIT board member recommends 30% alts exposure for retirees

Bob Froehlich says the industry needs to catch up with the pressing demands of a yield-starved world

Aug 27, 2014 @ 11:10 am

By Trevor Hunnicutt

+ Zoom

The retail financial advice industry is late to the alternatives game. Instead of asking the crucial question “how to implement alternatives,” advisers are asking whether to do so in the first place.

That's the view of Robert J. Froehlich. The longtime investment strategist recommends individuals age 65 move from a 60-40 portfolio of 60% fixed income, 40% equities to a “40-30-30” portfolio, including 40% exposure to stocks, 30% bonds and 30% alternatives.

“I would have a whopping 30% in alternatives,” said Mr. Froehlich, speaking Tuesday on an InvestmentNews webcast. “This is a new age of investing. I think in this low-interest-rate environment, done the right way, you can keep your risk level the same or even tweak it down a bit.”

The views are consistent with Mr. Froehlich's career trajectory. The strategist, formerly at firms including Deutsche Bank AG's U.S. money management business, is now a board member overseeing three American Realty Capital real estate investment trusts and is a trustee of the AR Capital Real Estate Income Fund (ARIAX), a “liquid alt” mutual fund.

The products are part of a growing empire of businesses controlled by Nicholas S. Schorsch running tooth to tail from “alternative” investments, including the largest U.S. nontraded REIT business by money raised last year, to one of the nation's largest army of brokers, who sell those securities.

Some advisers have questioned the set of alternative products now existing as too expensive and unproven to deploy across the board. Nontraded REITs, in particular, have drawn attention from regulators and analysts, who have asked questions about those products' attendant fees, transparency and tradability.

“There is some connection between the transparency and the fee level,” said Mr. Froehlich on the webcast. “There isn't an investment vehicle out there that isn't under pressure to lower fees.”

But the relatively illiquid nature of some alternative products is actually a good brake for investors. As investors flee negative performance they can making timing errors that erode returns, according to Mr. Froehlich, who, according to a biography, holds a doctorate in public policy and is often called “Dr. Bob.”

“Sometimes illiquidity can be the single greatest thing that happens to an individual investor,” he said.

He said investors' lack of exposure to the spectrum of alternative products that exist is one of the two biggest “disconnects” that investors have, along with fairly weak exposure to the growth potential in markets outside the U.S.

“It's a good step,” Mr. Froehlich said of the growth of liquid alternatives. “I think it's 10 years too late. This is what we should've been doing 10 years ago as an industry.”

“The idea of having a significant allocation to alternatives is a great one,” said Jason Kiss, a San Francisco-based adviser at Aspiriant, who listened to the webcast. “Many people forget in our industry — we talk a lot about fees, and a high fee shouldn't stop you from investing in a structure if it appears that the structure is going to make up for that high fee.”

Among the challenges facing financial planners who work with retirement savers are the increased life expectancy of those clients, the potential for rising inflation as the global economy recovers from recession and the relatively low yields on investments like bonds, which have driven some investors to take on increased risk to amplify returns.

“It's an arms race that's about to start,” Mr. Froehlich said of a vicious cycle that would lead to increased interest rates. “We probably have a year left to prepare portfolios.”

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