Hello to alternatives in retirement accounts

Hello to alternatives in retirement accounts
Even with the recent recoveries in the stock and bond markets, the classic 60/40 split may be a thing of the past, and some argue alternatives are the future.
JUN 06, 2022

So long, 60/40. Say hello to alternatives in your clients’ retirement accounts.

Even with the recent bounce in stocks from bear market levels and the drop in yields resulting from bond market buying, the drum continues to beat for the end of the standard portfolio split of 60% stocks and 40% bonds. Of course, the question that most often arises in the wake of these calls is what will replace the formerly tried and true — or at least classic back-of-the-envelope — asset allocation.

Milind Mehere, CEO of Yieldstreet, a service that provides access to private markets for both accredited and unaccredited investors, suggests a 20% allocation to alternative assets, with most of that slice coming out of the fixed-income portion of an investor’s portfolio.  

As to why he suggests shifting the largest chunk from bonds to alternatives instead of stealing it from the stock allocation, Mehere said investors should take a hint from Wall Street’s so-called “smart money”.

“In the past 20 years, asset owners have allocated more than 50% of their assets to private markets, which explains the AUM growth of asset managers such as Blackstone, Apollo and KKR. The question is why?  We think it’s because private markets generated higher returns, while public market allocations became more passive, and because they decreased the risk of concentration as plenty of investors crowded tech stocks,” Mehere said.

Mehere’s Yieldstreet service offers access to alternatives — including via individual retirement accounts — for alternatives including real estate, private equity and private credit, digital assets and blue-chip art through fractionalized shares in diversified collectible portfolios.

Alto IRA founder Eric Satz is also down on the 60/40 model and a major proponent of upping the allocation to alternatives in retirement accounts at the expense of traditional equity mutual funds.

In Satz’s view, most mutual funds consist of a small subset of the same profitable stocks, and piling on additional mutual funds doesn't offer much, if any, portfolio diversification.

“When I talked about the 60/40 model being a thing of the past, people used to be surprised. But over the past few years, more and more industry experts have come to share this assessment. To understand why, we have to look at the public markets over the past 25 years. In the mid-90s, there were around 8,000 publicly traded companies. Today, that number is about half,” says Satz.

Satz also points out that companies are waiting longer to go public, robbing retail investors of the opportunity to invest in “up-and-comers with the potential for outsized returns”.

As to how advisers should break the news to clients that it’s time to throw out the old 60/40 split and ring in the alternatives, Nic Millikan, managing director at CAIS, said he would start by saying that allocations that worked in the past may not work in the future.

“Ultimately those allocations may turn out to have been riskier than adjusting a portfolio to contain assets where performance is not correlated to the movement of markets,” Millikan said.

Latest News

Morgan Stanley advisor with $1B pedigree joins upstate New York RIA
Morgan Stanley advisor with $1B pedigree joins upstate New York RIA

Two wirehouse veterans choose advisor-owned model as independents target ultra-high-net-worth clients beyond portfolio management.

Why advisors must close the retirement longevity gap now
Why advisors must close the retirement longevity gap now

Guardian's Nancy DeRusso tells InvestmentNews how advisors can help close the 'longevity gap'.

Private credit becoming 'big piece' of annuities, T. Rowe exec says
Private credit becoming 'big piece' of annuities, T. Rowe exec says

Goldman Sachs retirement survey finds 83% want guaranteed income, while the annuities providing that income increasingly hold private credit.

Zocks debuts Claude plugin with seven skills for financial advisors
Zocks debuts Claude plugin with seven skills for financial advisors

The AI meeting assistant's Advisor Intelligence plugin turns client conversation data into annual reviews, tax scans and attrition alerts.

Stifel settles massive $30 million complaint involving star broker’s sale of structured products
Stifel settles massive $30 million complaint involving star broker’s sale of structured products

Chuck Roberts and Stifel have been facing scrutiny due to sales of structured products and structured notes.

SPONSORED In the Age of AI, Trust Becomes the Advisor's Greatest Asset

As AI makes financial information more accessible than ever, Lana Hock explains why human judgment, trust, and empathy remain the qualities clients value most in a financial advisor

SPONSORED Direct indexing webinar targets tax-loss harvesting amid market swings

Northern Trust’s Ken Lassner shows advisors how to convert volatility into after-tax portfolio gains