Back to Portfolio for the Future™

Crossing the Threshold: The Second Wave of Democratization in Wealth Management

By Aaron Filbeck, CAIA, CFA, CFP®, CIPM, FDP, Managing Director, Head of UniFi by CAIA™.

I love action movies. Franchises like Star Wars, Lord of the Rings, Harry Potter, Hunger Games, and Marvel Cinematic Universe (pre-Endgame!) have been my go-to sources for investment analogies for years. Finance can be a dry industry…so let’s liven it up a little!

With that, CAIA’s latest report, Crossing the Threshold: Mapping a Journey Towards Alternative Investments in Wealth Management takes you on an adventure inspired by classic hero narratives found in epic storybook tales! Just as a hero embarks on a transformative journey, wealth management professionals are embarking on their own quest into the realm of alternative investments.

While all of my favorite action stories have their own unique cast of characters, the narrative arc for each follows a similar framework and pattern. A middle school English teacher may have introduced you to “The Hero’s Journey” — a common literary template that sets the pacing and milestones that face the protagonist in many stories. Joseph Campbell further popularized this concept in his book, The Hero with a Thousand Faces, when he took many of the popular stories we know and broke them down into their component parts. There are several ways to do this, but often there are three key components that arise:

  1. The Call to Adventure
  2. Crossing the Threshold
  3. A Return Journey
Crossing Blog 1

Source: CAIA Association, ALTSNY, June 2024

You’ve seen these before…you just don’t know it.           

The call to adventure jolts the protagonist out of their current day-to-day activities or disrupts their everyday flow. As the reader/watcher, we are introduced to the character through (if done right) detailed world-building. Eventually, the metaphorical hand is extended, and the hero is brought along. For fans of Harry Potter, this is when Harry receives his first letter from Hogwarts or, even more so, the famous line from Rubeus Hagrid, “You’re a wizard, Harry!”

The crossing of the threshold raises the stakes when our hero faces the ultimate test— stay where they are or take a leap of faith. The deep breath before the plunge. Either way, they face an important moment where their life is changed forever. It’s at this stage that the hero enters a new world. For fans of The Hunger Games, this is when Katniss Everdeen boldly saves her sister from the Reaping by yelling out, “I volunteer as tribute!” 

Finally, after our hero ventures into the unknown, the return journey begins. The hero faces trials and tribulations, struggles and triumphs, and grows as a person. Even if they return home, they’ll never be the same. There are numerous examples of this, whether it’s Frodo Baggins returning back to Bag End, or Luke Skywalker facing the Emperor and redeeming his father.

Hold onto these thoughts for now…

What do adventure stories have to do with alternatives? 

It’s our view that the wealth management industry is already on its own Hero’s Journey, and we are standing at the threshold, ready to jump into the complex world of alternative investments.

Crossing Blog 2

Source: CAIA Association, ALTSNY, June 2024

It’s probably obvious that the industry has already heard the call to adventure. That call came nearly 15 years ago, post-global financial crisis, when diversification was cool again. The results were mixed, as a proliferation of “liquid alternatives” funds came to market, representing the very first attempt at democratizing hedge fund beta. Whether it was reactionary on the seller side or mismatched expectations on the buyer, the experiment probably failed more than it worked—evidenced on both the fund-level (high correlations, high fees, mixed returns) and the investor-level (the return gap is the widest category according to Morningstar).

This time around, there’s been a more concerted effort to do things right. Inevitably, failures will rise, but we would argue that a lot more time and attention has been paid in terms of front-end expectations, plumbing, and education. And the wave doesn’t seem to be stopping any time soon. If you read any publication, you’ll see another institutionally focused GP building out their private wealth capabilities, another long-only asset manager buying or building their own alts products, or another technology provider trying to better bridge the gap between both of these players. Most importantly, while most advisors probably aren’t saying “I need alts in my portfolio,” they are saying “I need better diversification and other methods to achieve my client’s objectives.”

Yet, for all this effort and focus, allocations for high-net-worth and below are small relative to those of institutional investors. We’ve all seen various iterations of these statistics on average – the smaller the net worth, the smaller the allocation. 

Crossing Blog 3

Source: CAIA Association, Hamilton Lane

One reaction might be to say that this was perhaps a lot of investment for little return. But we believe this line of thinking is short-sighted. Good things take time, and the groundwork is and continues to be laid. In other words, we’ve spent a lot of time “world-building”!

CAIA Association: The Journey’s Guide

What is CAIA Association’s role in all of this? We’re certainly not the hero of the story, that title is reserved for the professionals in this industry trying to serve the client and put them first – the CIO, the financial advisor, the business development professional and, yes, the GP. Anyone who puts the client first is a hero in our book. Instead, we’re the protagonist’s guide in this story, here to shepherd you along the way—encourage the good and discourage the bad. And of course, promote ethics, professionalism, and education. We are the Ben Kenobi of the industry!

And in developing Crossing the Threshold: Mapping a Journey Towards Alternative Investments in Wealth Management, we enlisted the help of four organizations, represented by senior and thoughtful professionals, to help us write the report. Sandy Kaul of Franklin Templeton, Fran Kinniry, CFA of Vanguard, Sylvia Kwan, PhD, CAIA, CFA of Ellevest, and Shannon Saccocia, CFA, CIMA® of NB Private Wealth. Each of them guide you through important parts of the journey, drawing from their extensive experiences and perspectives to outline crucial steps in implementing alternative investments effectively. 

Just as all our favorite adventure heroes embark on transformative journeys, so too can we navigate the world of alternative investments with a sense of adventure and discovery. By recognizing the stages of the Hero’s Journey - the Call to Adventure, Crossing the Threshold, and The Return Journey, we can approach our work with greater clarity and purpose. For me, embracing this narrative framework not only makes the process more engaging but also helps us identify and overcome challenges along the way. So, the next time you’re considering alternatives for your client’s portfolio, remember to channel your inner hero and embark on this quest with confidence and excitement!


About the Author:

Aaron Filbeck, CAIA, CFA, CFP®, CIPM, FDP oversees UniFi by CAIA™, a learning platform dedicated to educating the private wealth management industry on alternative investments. He was previously responsible for leading and implementing CAIA Association's content agenda, thought leadership initiatives, and content development for the CAIA Charter Program.

Aaron Filbeck Headshot

Aaron is a frequent speaker and writer on various topics of alternative investments and his work has been published in CAIA’s educational programs, numerous academic journals, books, and industry publications. Aaron’s industry experience lies in private wealth management, where he oversaw asset allocation, portfolio construction, and manager research efforts for high-net-worth individuals and institutional retirement plans. 

He earned a B.S. with distinction in Finance and a Master of Finance from Penn State University. He holds the Chartered Alternative Investment Analyst (CAIA), Chartered Financial Analyst (CFA), Certificate in Investment Performance Measurement (CIPM), and Financial Data Professional (FDP) designations, and is a CERTIFIED FINANCIAL PLANNER™. He is a Past President of CFA Society Columbus and serves as a board director and Programs Chair for CFA Society Philadelphia. Aaron is an adjunct professor and serves on multiple advisory boards for Penn State University.