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Alts Democratized: A Practical Guide to Alternative Mutual Funds and ETFs for Financial Advisors, + Website by Robert J. Martorana, Jessica Lynn Rabe

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Chapter 15Portfolio Construction

Synopsis

This chapter offers a practical look at asset allocation and the potential roles of liquid alternatives. We focus heavily on how portfolio construction has evolved in the shadow of the financial crisis, toward solutions that are more tactical, customized, transparent, and cost-effective. A combination of exchange-traded funds (ETFs) and liquid alternatives helps address these needs, and the authors describe the Micro-Endowment Model as a tool that may help the portfolio construction process. The chapter closes with a dozen questions that may help advisors as they evaluate the role of liquid alts in their own practices.

Holistic and Goals-Based

Traditional portfolio construction begins with an evaluation of risk tolerance, and classifies clients as aggressive, moderate, conservative, or somewhere in between with regard to risk. This is part of the client's suitability assessment, and has its roots in regulatory and compliance requirements. This process should not be limited, however, to labeling people and putting each of their accounts into a so-called risk bucket.

Consequently, many advisors now focus on a goals-based approach, and emphasize how to meet more holistic goals such as lifetime income or multigenerational wealth. These goals require a comprehensive approach, and include an assessment of a client's income, assets, liabilities, trust and estate needs, and a host of other issues. So while risk tolerance is a good place to ...

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