According to a survey of financial advisors, recommendations of alternative investments increased from 25% in 2020 to 55% in 2024. For this article, let’s agree that a financial advisor is anyone who gets paid in some way for giving financial advice. So this can include stock brokers and RIA and everyone in-between.
There are many advisors who still turn their noses up at any alternative investment. 24% of survey respondents had not recommended a non-traded alternative product in the prior year.
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What is driving the recommendation of alternative investments?
In decreasing order of the results:
- 87% Diversification – This is not surprising, in my 20+ years in the alternative investment space, the biggest reason is the non-correlation to the stock market. In the textbooks bonds go up when stocks go down, which hasn’t happened in real life and in financial stressful moments in the market, the correlation breaks even more. When investing in alternative investments, you tend to give up liquidity and receive performance not tied to the stock market.
- 64% Growth – Most alternative investments have some strategy that creates value to a future buyer. This can be done several different ways. Recently there have been multiple situations using some form of “aggregation strategy”. That is when you build (out of smaller pieces) something larger, more efficient and better cash flowing than how the parts were separately. Then you sell the improved portfolio to an organization who has the money to buy, but not the time to do the “grunt work” to improve the pieces. This strategy is seen in real estate, private equity, oil/gas projects, and almost everywhere there could be an aggregation strategy to build a valuable “bigger thing” that a large corporation wants to own.
- 60% Income – When interest rates were below 1%, there was a large demand for high income alternative investments since the fixed income was not paying much. Today, however, with cash interest rates hovering around 4-5% (for riskless FDIC cash) the alternative investments for income, need to pay a much higher rate adjusted for risk. Having income from a private investment that is not affected by interest rates is valuable in a portfolio when there is interest rate risk.
- 42% Prior alternative investment experience – Once an investor, or financial advisor, uses an alternative investment and has a pleasant experience they (not surprisingly) tend to use alternative strategies again in the future. Knowledge and understanding of how it plays into the bigger picture of your financial security is crucial in establishing a comfortable and profitable experience.
- 7% Ease of business – This was higher on the survey than expected. In my professional opinion the ease of use for an alternative is not a criteria of a good or bad alternative investment. In my experience, some of the better performing alternative investments were small deals and were not open for very long and putting clients into this time of alternative is not “easier” but was the right choice for the investor.
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Top Product Attributes
- Outstanding total returns
- Highly easy to explain and understand
- Strong NAV (statement value) growth
- Notable potential tax efficiency
- Consistent income distribution
Alternative investments are becoming much easier for accredited investors to access due to new options like interval funds, business development companies (BDCs), non-traded REITs, and tender offer funds. These types of investments typically come with lower minimums and don’t require capital calls, which means investors can diversify their portfolios with alternatives without the usual high entry barriers.Bottom line, good advisors use good alternative investment strategies for their clients when they want a strategy that performs well and is easy to explain to clients.
Top Alternative investment asset classes based on the survey. Lucky for Forbes.com readers there are articles on these categories.
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Is This An Option For Me?
Based on this survey of financial advisors, public interest in alternative investments, especially with all the recent market volatility. Accredited investors turn to alternatives like private equity, real estate, and hedge funds to help spread out risk and make their portfolios more stable. However, it’s important to remember that not all alternative investments are the same. The best ones are those that have been carefully researched, are well-managed, and fit the investor’s goals and comfort with risk.
Along with the level of risk the investor is comfortable with, their knowledge of alternatives and how they operate is a huge asset in deciding which is best for the investor’s financial goals. Taking the time to understand the basics and framework of how each alternative you are considering operates will and investor the insights needed to help their financial advisor choose the best options for their unique situation and expectations.
When alternative investments are chosen carefully and well managed, they can be a strong addition to a diversified portfolio. They can offer benefits that traditional stocks and bonds don’t, such as higher potential returns, different kinds of assets, and less connection to the usual market swings. Because of these benefits, many accredited investors still see alternative investments as a good choice for handling market uncertainty and possibly getting better results in the long run.
Securities are offered through Arkadios Capital. Member FINRA/SIPC. Advisory services are offered through Creative Capital Wealth Management Group. Creative Capital Wealth Management Group and Arkadios are not affiliated through any ownership.
This material was created for educational and informational purposes only and is not intended as tax, legal or investment advice.