Overcoming the education gap on alternatives

Half of financial professionals surveyed cite explaining the role of illiquidity within client portfolios as the most difficult client education topic.

As traditional equity and fixed-income markets become increasingly volatile, financial professionals need to find ways to differentiate themselves from their peers to continue to attract, consolidate and retain client assets. The reality is the classic 60/40 portfolio split isn’t going to win a financial practice new business or help attract a higher caliber of client, especially in such a competitive market.

So how can financial professionals differentiate their practice and scale their client base?

Alternative investments have seen a surge in popularity in recent years as market turbulence has pushed investors outside of the public markets in search of yield. This increased demand has also spurred a significant expansion of alternative investment products available to a wider pool of investors.

Financial professionals are recognizing the importance of offering alternative investments as well, as they seek to diversify client portfolios and achieve specific objectives such as volatility mitigation and greater income potential. Eighty-one percent of financial professionals surveyed in a recent study conducted by Cerulli Associates, in partnership with Invesco and the Investment & Wealth Institute, agreed that offering an expanded shelf of alternatives would help them differentiate their practice. Additionally, 67% agreed that this would help them attract high-net-worth clients, and 66% said it would help them consolidate and retain assets under management.

Despite this widespread recognition of the benefits offering alternatives to clients can provide for a financial practice, half of the respondents reported allocating 5% or less of their portfolios to alternatives for their clients.

BARRIERS TO ALTERNATIVE ADOPTION

More than half (56%) of those surveyed said lack of liquidity was a challenge when it comes to investing in alternatives, while 44% found that educating clients on the investment characteristics and value proposition of alternative investments was also a barrier.

Relatedly, half (49%) said that explaining the role of illiquidity within client portfolios was the most difficult client education topic.

What’s clear from these findings is that there is an appetite from financial professionals to offer more alternatives to their clients, but there remains a significant educational gap that’s preventing them from truly incorporating them into their financial practices, particularly around the investments’ features and structures, and how they impact a client’s overall portfolio.

Financial professionals are looking to better understand these products for themselves, so they in turn can help their clients get comfortable exploring alternative investments opportunities.

CLOSING THE EDUCATIONAL GAP

Overcoming the educational gap is the key to helping financial professionals feel more confident allocating to alternatives.

Resources exist and tackling the educational burden requires a dedicated effort from both financial professionals and product specialists. More than half (54%) of respondents said they are most comfortable receiving educational materials on alternatives from product specialists/wholesalers. And nearly half said that specific educational materials on liquidity and general education on discussing alternatives with clients were what they need most (48% and 47% respectively).

What this suggests is that a solutions-based approach to education on alternative investing would have a significant impact on financial professionals’ understanding of alternatives and how they can present them to clients.

Tailored educational solutions targeting the primary concerns and pain points of both financial practices and their clients is essential to closing the educational gap. There’s an abundance of information out there about alternatives, but financial professionals need curated materials targeting their and their clients’ key concerns.

This is as much an exercise in translating the industry-speak and jargon into plain language and making the content easier to digest, given that alternatives are, by nature, complex vehicles. While they have been a mainstay for institutional and sophisticated investors for many years, they are still new to many financial practices.

Overcoming the learning curve requires a collaborative approach from all parties. Financial professionals need to be asking their clients what their main questions and concerns around alternatives are and tailoring their conversations to address them. Likewise, wholesalers and distributors need to be able to recognize where financial professionals are missing resources and adapting their approach to address those areas.

MEETING CLIENT NEEDS

Offering an expanded selection of alternatives products is a powerful way for financial practices to meaningfully scale their business and bring on higher-net-worth clientele. As the past few years have shown, there is a clear demand for a wider range of alternative investments, and the financial professionals who are able to meet that need through robust, solutions-based education will be in the best position to grow and differentiate themselves against their peers.

John McDonough is head of Americas distribution at Invesco.