As markets become more challenging, advisors seeking to insulate client portfolios from market volatility are borrowing a page from the playbook of institutional investors, by increasingly turning to alternative investments. Defined as any investment outside of stocks, bonds and cash, alternatives are generally uncorrelated to the general market and are well-known for their potential to enhance portfolio diversification. But what you may not know is that alternatives can potentially differentiate your advisory practice from others–which could be key to retaining existing clients and acquiring new ones.
It's no surprise that advisors are increasingly using alternative investment products to enhance returns and mitigate risks. In fact, more than half (55%) of advisors estimate they will increase their use of alternatives by up to 25%, while 13% believe they will boost their use of alternatives by more than 75% (see Practice Edge January, 2008). However, many investors are not familiar with these investment products. According to a recent Rydex survey of individual mutual fund and ETF investors, 75% of investors don't know what alternative investments are and less than one percent consider themselves very knowledgeable about alternatives. What's more, 40% of investors don't feel that enough information on alternative investments is available to them. And the number one reason investors don't invest in alternatives is that they don't know enough about them.
But they want to know more. Half of investors surveyed (50%) indicate a desire to receive more information about alternative investments via an investment advisor. When presented with a description of alternative investments, 60% of investors said they would consider investing in alternatives if their advisor recommended it.
So what does this mean to you? Opportunity. You have the opportunity to educate your clients on these investment options and their potential benefits. By sharing this information, you're allowing clients to better understand your investment approach and become more aligned with your practice.
Education is just as important with prospective clients. Given the potential benefits of alternative investments (greater diversification, reduction of overall portfolio risk and more consistent returns over time), it makes sense that nearly half (45%) of investors surveyed would be more interested to work with a financial professional who offers them than one who doesn't.
A good starting point for talking about alternatives may be clarifying your clients' expectations for their portfolios. The Rydex investor survey* revealed that 64% of individual investors expect returns of 5%-10% for the next year, with 24% expecting portfolio returns of 11%-15%, 4% expecting returns of 16%-20% and 7% expecting returns of 20% or more in 2008. Keeping in mind that, according to the survey, total return maximization is a top goal for 59% of investors, raising the subject of alternatives may be a nice lead-in to a discussion on which investments could help in reaching that goal.
The time is now as investors become increasingly sophisticated about investing and more interested in diversified products for their portfolio. Take the time to understand your clients' knowledge level of alternative investments and their expectations of the market. Check with them often to see if these expectations have changed.
As you gain a clearer understanding of their expectations, you'll be able to better explain how alternatives could play a role in meeting them. You should promote your alternatives expertise by the way you position and market your firm. Use your web site to highlight your use of alternatives, or focus an article in your firm's newsletter on alternative investments.
Your efforts to educate existing and potential clients on how investing in alternatives may benefit their portfolios will not go unrewarded. And in the end you'll have smarter, more satisfied clients. Can your business afford not to put the word out?
