Clients are more open than ever before to alternative investments, but talking to them about the asset classes and strategies can still be daunting for advisers.
A trio of top financial advisers shared their best tips on talking to clients about alternatives Tuesday at the InvestmentNews Alternative Investments Conference in Chicago.
Seven out of 10 investors would consider alternative investments if their adviser recommended them, up from 35% a year ago and 19% in 2011, a recent Natixis Global Asset Management SA survey found.
“You have to speak English to your clients and not sound like Charlie Brown's teacher,” said Ed Butowsky, managing partner of Chapwood Capital Investment Management LLC.
It's important to focus on how alternatives fit inside a portfolio, he said.
“Any investment by itself is not a great investment,” Mr. Butowsky said. “What matters is how it works in the total package.”
To really strike home the point of how alternatives can affect a portfolio, Mr. Butowsky uses a chart that shows the client's current alternative-free portfolio and how the same portfolio would have behaved historically with an alternative fund, or funds, added to the mix.
“One key is to tell them the probability of loss based on historical data,” he said. “Then, based on how much money they have, show them how much real money is at risk, based on historical data.”
While high-net-worth investors might already be familiar with alternatives, for the mass affluent, it's a whole new concept, said Tom Meyer, chief executive of Meyer
Capital Group.
“This is all new to them,” he said. “We're dealing with people that basically, instead of having a Bible by their bed, they have a copy of John Bogle's book,” Mr. Meyer said, referring to the founder of
The Vanguard Group Inc.
One of the most important priorities for Mr. Meyer's clients is that the alternatives are liquid, which generally means they're offered in a mutual fund.
“Clients appreciate the strategy, but they appreciate that they could push a button and get their money back more,” he said.
Jim Ball, principal at Ball Financial Services Co., tries to stay away from talking to clients about such topics as alpha and beta, and instead focuses on what's going to keep them from panicking and getting out of the markets.
“We need to do whatever it takes to keep them invested,” he said. “Alternatives are designed to put some brackets around a range of outcomes so clients don't get out in 2008 and miss the three years of gains that followed.”
