Luma Insights:

Q&A with Luma’s Director of Investment Solutions, Brady Beals

As Luma’s Director of Investment Solutions, you’ve had many conversations with advisors looking to incorporate alternatives such as structured notes into their client’s portfolio and asset allocation models. What are some questions you’re getting and how do you suggest advisors approach the use of alts in portfolio construction?

We get a lot of questions related to incorporating structured notes into portfolios. Typically, these revolve around optimal execution and due diligence:

  • How do I ensure I’m getting the best terms possible for certain types of notes?
  • How do I manage notes after I allocate them into the portfolio?
  • How do I participate in notes?
  • How do I make sure there’s “no catch” or that I’m not missing something?

These questions really speak to the benefits of structured notes as a product set relative to other alternatives, as well as the technology that Luma provides. Structured notes are alternatives, but they’re alternatives utilizing traditional fixed income & equity asset classes where the advisor can dictate terms with counterparties in competition with each other (as opposed to many traditional alternatives that may have high entry fees, infrequent pricing, cannot be customized or have a limited or exclusive supply).

Structured notes as a product set utilize well-known investments to construct a customized return profile and augment traditional risk-return tradeoffs. Luma provides the solution to questions around execution & post-trade management, through our auction tool which provides on-demand analysis and ensures that issuers are competing to provide the best terms possible and a robust post-trade engine that provides event notifications, performance & risk reporting.

We also provide insights into how other firms are using the product via our Luma Network. Essentially, advisors who opt into this network can gain access to products other advisors are creating to incorporate into their own portfolio strategy. This also provides information to advisors looking to gain a deeper understanding of how other advisors are incorporating structures notes into their allocation strategy.

For advisors looking to get started with structured notes, what are some of the customization benefits and features that you may not see in other types of alternative investments?

There are two points to answer that question. First, structured notes are unique in the ability to inject convictions specific to a firm’s outlook, risk tolerance, and ultimately, goals into a specific investment. Additionally, with structured notes, the barriers to entry for customizing a product are quite low relative to other alternatives.

Secondly, the customization and diversification of the types of risk introduced in one investment. For example, when you consider the various types of risks inherent in an investment (interest rate, equity, credit reinvestment risk, etc.), structured notes are unique in enabling you to determine the amount of each type of risk. Let’s say that you’re willing to take on more equity risk compared to a traditional fixed income investment, but want to lower your interest rate and credit risk while maintaining the same, or even increased, payout potential. That’s one of the main benefits of structured notes – being able to introduce the right amount of risk into the product, which again, can match your investment convictions and current market conditions.

Luma has experienced tremendous growth in terms of partner investment, product, and global expansions. Can you tease what’s coming next?

Absolutely. Through our existing partnerships with Nasdaq, Morningstar, and several others, we’ve been able to take advantage of the immense amount of data and analysis Luma has for alternatives and embed them into traditional portfolio management tools. I see this concept accelerating, where we can maximize the benefit of the data and analytics the platform has to transform structures notes, annuities, and other Capital Markets alternatives into a core component of clients’ portfolios.

Further, by utilizing the functionality and the features that we’ve built on the platform, I could see further expansions into other product sets we call “Capital Markets Alternatives”, or Cap-Alts for short. That essentially means any product where the payout is defined and potentially determined by the investor or advisor. This is where Luma excels and fits organically into what we are already providing with structured note and annuity solutions.