If any of your clients have delved into alternative investments lately, they probably didn’t hear about them from you. Perhaps they sought them out as a way to diversify traditional vehicles. Hopefully they are using alternative investments to balance risk, although it’s also likely that they are seeking an opportunity for larger than usual returns.
 What they should know is that alternative investing is actually not that common among the affluent, with 61% feeling that it’s important to keep their investments within the bounds of the traditional stock exchanges. A recent Spectrem Group Perspective™, Alternative Investments: Are they a priority for Affluent portfolios?, supports this sentiment, indicating that alternative investments, those outside the established vehicles of stocks, bonds and mutual funds, are not well understood by the affluent.
Another reason for this lack of understanding may be that only a third of investors reported that their advisors had spoken to them about these choices. Perhaps, if you are avoiding speaking to your clients about these alternatives, there is a good reason; you may not feel that your client fits the risk profile to invest in alternatives, you may not be compensated when they invest in them as opposed to your institution-approved investment offerings or you may not feel you know enough yourself to adequately guide your client.
The key to using alternative investments to your client’s advantage is educating yourself, and then them on the opportunities and risks associated with those vehicles. Though greater wealth generally coincides with greater understanding and interest in these products overall, half of wealthy investors have no understanding of Structured Products and Private Placements, while Private Equity and REITs received the most interest from the affluent. This may stem from the fact that the affluent have more exposure to equity and real estate investing than other vehicles, due to their exposure to venture capital as a source of funding for business purchases, and real estate being an age-old and perennial favorite in 75% of affluent portfolios.
Today’s affluent investor is more educated,self-directed and technologically savvy than ever and this may give them a false sense of security and eagerness to dive in where they should only dip a toe. Addressing these alternatives with clients before they ask is crucial to stopping your client from adding too much risk to their portfolio and moving the funds out from your management.
If your client decides to enter into an alternative investment, they should feel comfortable sharing their plan with you. It will be impossible to counter the added risk in their overall portfolio if you know nothing about the investment. Establishing a dialogue on alternative investments is one way to try and insure you are part of their decision. Even if your clients do not make these investments through you or your financial institution, they should be informed of the danger of the potential change in risk that could warrant a rebalancing of their investment portfolio. Armed with information and working in partnership with your client to control risk, knowledgeable choices can be made that will satisfy your advisee’s wishes and keep the funds under your careful management where they belong.
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High Net Worth Advisor Insights Newsletter April 2008
