Market pullback, recession threat send more financial advisers to alternatives

With the markets broadly pulling back in response to the Federal Reserve’s increasingly aggressive efforts to curtail inflation, financial advisers are suddenly paying more attention to alternative investments.

“We believe the past 10 years [of financial market performance] are not indicative of what the next 10 years will look like,” said Devin Iafelice, vice president of private markets at First Trust Portfolios.

“Right now, the alternatives space is front and center for everyone,” he said. “The traditional 60-40 portfolio is really, really suffering.”

Iafelice was speaking as part of a panel discussion Thursday at the InvestmentNews RIA Lab, a virtual event focused on alternative investments.

“We’ve been a very plain-vanilla shop for a long time, and we are interested in moving more into the alts space,” said Chuck Failla, founder and chief executive of Sovereign Financial Group, who moderated the panel discussion.

Working in favor of advisers like Failla is the trend toward technology and platforms making it easier for investors to gain access to various forms of alternative investments. But with the evolution of access come choices and new challenges for advisers.

For instance, any client conversation that involves alternative investments has to cover fees, liquidity and general access.

“People are looking for something different than the public markets,” said Abby Rosen, partner at Regent Atlantic.

“This space is a tool in a toolkit and it’s not right for every client,” Rosen said. “Some people like liquidity. There’s no one silver bullet, but in this space, we can help put together the mosaic that can help get to that silver bullet.”

Travis Conlan, senior regional director at Hines Securities, said that liquidity, or the lack thereof, will often be a sticking point with some investors.

“Alternatives have gotten a bad name in the past because of illiquidity,” he said. “But these days, we’re seeing broker-dealers, RIAs, everybody using them. When the broad markets are down, it’s a shining star.”

Conlan noted that the University of Michigan's endowment has a 50% allocation to alternative investments.

“The smartest people, at least on paper, have been using alts for a long time,” he said.

Iafelice warned of placing too high a value on liquidity when it comes to alternative investments.

“The first question we need to be asking in the liquid alts space is is this truly an alternative investment,” he said.

Conlan agreed, taking a swipe at traded real estate investment trusts, as opposed to the less liquid nontraded versions. “Is a traded REIT really an alt?” he said. “The answer is no.”

Conlan explained that the upside of liquidity is typically offset by increased price volatility.

On the topic of fees, moderator Failla warned, “We’re very fee-conscious,” and the panelists said investors should expect to pay more for alternatives.

“This is not a race to the bottom as far as fees go,” said Iafelice. “It’s cost versus value, and investors should be concerned with net return. Everything leads back to value. There’s no one cookie cutter you should be trying to hit when it comes to fees.”

Rosen agreed. “It’s not about fee compression; it’s about finding something you don’t have in-house,” she said.