How to explain alternative investments to clients

Talking clients through the complexities of alternative investments requires simplicity and a focus on function.
OCT 12, 2014
Advisers who have decided it's time to move clients — or more of them — into alternative investments need to use careful language and context to explain to clients why they should want these investments in their portfolios. "We need to simplify the way we talk about alternatives to clients and move away from Wall Street-speak," Walter Davis, an alternatives investment strategist for Invesco Ltd., said Wednesday at the InvestmentNews Alternative Investments Conference in Chicago. The alternatives conversation with clients should tie the investments directly to how they will help achieve their specific investment objectives, he said. And advisers should avoid providing too many details. Advisers themselves need a fairly in-depth knowledge of the alternatives they are recommending, but they don't need to share it all with clients, Mr. Davis said. Invesco has studied how investors react to adviser-led conversations about alternatives, and most clients are open to the idea of alts when the adviser explains the fundamental reasons to add them to a portfolio, he said. (More: Schorsch REIT board member recommends 30% alts exposure for retirees) Their studies show investors pretty quickly want to understand what the alternative is, and they react more negatively when the adviser talks about a 20% to 30% allocation compared to moving about 5% to 20% of one's portfolio into alternatives, Mr. Davis said. Advisers also need to be careful about comparing the performance of alternatives with benchmarks. "Not all are supposed to be benchmarked versus the S&P 500," said Marc Socol, Jackson National Life Distributors' director of sales for elite access. Instead, point out to clients that alternatives act to smooth market volatility, with lower correlation to traditional portfolios made up of 60% stocks and 40% bonds, and provide stronger risk-adjusted returns, he said. (More: Successful alt strategies could give Pimco a needed boost) Additionally, describing how institutional investors, such as endowments, have had success using alternatives in their portfolios can illustrate to clients the confidence professional investors have in this strategy, Mr. Socol said. Institutional investors typically have nearly a quarter of their portfolios in alternatives, versus about 4% for retail investors, according to a December 2013 report by The Goldman Sachs Group Inc. The biggest objections heard from clients tend to focus on why they should be getting into such investments, Mr. Davis and Mr. Socol said. Answering that should involve showing clients how alternatives perform at different points in the market cycle, not just recent performance, Mr. Davis said.

Latest News

Advisor moves: Missouri-based LPL team decamps to Osaic in full-circle succession
Advisor moves: Missouri-based LPL team decamps to Osaic in full-circle succession

Meanwhile, Cetera has welcomed a family-run practice from Commonwealth, and a Merrill advisor joins an existing UBS team in Connecticut.

Wealth Enhancement extends acquisition streak with Washington state deal
Wealth Enhancement extends acquisition streak with Washington state deal

The Olympia, Washington firm's retirement planning expertise reinforces the consolidator's growth momentum to exceed $160 billion in client assets.

Building AI you can trust in wealth management
Building AI you can trust in wealth management

Beyond content generation and execution, firms that can offer answers around governance, transparency, and supervision are set to pull ahead in the next leg of the AI race.

Advisor moves: Veteran teams with $580M in assets leave Wells Fargo
Advisor moves: Veteran teams with $580M in assets leave Wells Fargo

The experienced advisory teams join Ameriprise and Janney as the race for experienced talent continues.

Medicare Advantage members hit hard by rising costs
Medicare Advantage members hit hard by rising costs

Rising drug and outpatient costs are pushing plan members to demand more financial guidance and most insurers are falling short.

SPONSORED Direct indexing webinar targets tax-loss harvesting amid market swings

Northern Trust’s Ken Lassner shows advisors how to convert volatility into after-tax portfolio gains

SPONSORED Who builds the income when the pension disappears?

Dan Biagini of American Equity says the steady decline of pensions, longer lifespans and a reset in interest rates are rewriting how advisors build retirement income