Alternative assets: Navigating nontraditional investments in today's economic climate

For some clients, investing in stocks and bonds just doesn't cut it anymore. Instead, the allure of certain nontraditional assets is too strong, such as artwork, expensive alcohol and precious metals. Even the investments that toe the line, like hedge funds and venture capital projects, are exciting to many clients today.

For financial advisors, however, the term "alternative asset" may bring about a mixed bag of emotions. Prior to the Great Recession, going the nontraditional route was considered the riskier option. Since that time, some alternative assets showed the ability to withstand precipitous drops in value, making them sound investments for specific clients.

The question then becomes: "How can I help clients navigate the world of nontraditional investments?" The answer begins with overcoming the complexities associated with alternative assets.

Growth possible for alternative assets
In an article for Wealth Management, Reggie Karas, senior vice president and managing director of Alternative Solutions Group, explained that nontraditional investments are gaining popularity among everyday individual investors, as well as high-net-worth and institutional investors.

This is because there are opportunities for growth in this type of assets. In addition to alternative assets from years past, new options are available, such as alternative-strategy mutual funds and exchange-traded funds, Karas noted. These balance the more liquid traditional investments with the less liquid alternative investments.

At the moment, many clients are worried about the performance of their alternative assets, while many more might not understand the details behind this type of investment strategy. Financial advisors must work closely with their clients to improve their education on alternatives, including the role played by technology. New platforms and portals are appearing that make it easier to overcome key challenges, such as the lack of knowledge and limited access to alternative assets.

Should financial advisors work with clients to improve their knowledge on this subject, there is room for growth in alternative assets.

More advisors turn to alternative investments
As the sentiment surrounding alternative investments shifts, more financial advisors are open to the idea of bolstering a client's portfolio with these assets.

As reported by Forbes, a recent RIA Database survey of roughly 1,000 advisors found that more professionals are using alternatives as a way to mitigate risk and diversify a portfolio. While most advisors prefer more liquid alternatives, 43 percent polled believe that their clients' alternative investments will increase between the summer of 2014 and the same time in 2015. 

At the moment, stocks remain at the top of the investment food chain. However, the RIA Database survey noted that alternatives remain a key part of any strategy - 78 percent of the advisors surveyed feel that alts are a vital component of asset allocation, Forbes reported. At the time of the research, 33 percent of the advisors in question dedicated 10 percent or more of their clients' assets to alternatives.

Alternatives no longer 'feared' investment
Overall, alternative assets are becoming a more viable investment strategy in today's economic climate.

So far, we know that:

• Clients need to improve their education on alternative investments
• Technology has made it easier to invest in alternatives
• Advisors are more open to the idea of alternatives

All in all, these are signs that alts are no longer the "feared" investment they once were. In a special for CNBC.com, Sarah O'Brien wrote that a key reason for this change is the idea that alternative assets can be used for risk management purposes.

Alts make for sturdier portfolio
For clients, advisors can sell the concept that a portfolio diversified via alts will be able to withstand market fluctuations and other economic shifts better than a portfolio comprised of only stocks and bonds.

For example, O'Brien explained that the drop in value experienced during and after the Great Recession crippled some clients' portfolios.

"Advisors realized they needed to mitigate that kind of drop," Nadia Papagiannis, director of alternative fund research at independent research firm Morningstar, told O'Brien. "They became more aware of risk in [client] portfolios."

Even with the relationship of alternatives and risk management, advisors need to be careful moving forward. Once again, education is imperative - both for professionals and their clients. Infamous alternative strategies have backfired in the past, including Bernie Madoff's hedge fund scandal, and these have dominated the headlines. This can cloud the actual value of alternative assets, and advisors must educate themselves on the true pros and cons so they can best help clients.

Work with clients to expand into alternatives
The decision to turn to alternative assets needs to be a joint one between the financial advisor and his or her client. It can't be a rushed or uninformed choice - it must make sense for the client's financial situation, portfolio and overall strategy.

In a separate special for CNBC.com, Ron Carson wrote that financial advisors should kick off this conversation by covering a few important topics, including:

• Clients' individual goals
• Clients' risk tolerance
• Potential rate of return

Not every client will want to use alternatives in their portfolios. Carson explained that addressing their individual goals first can shed some light on whether or not this strategy is right for them. Now is also the perfect time to talk about risk tolerance. Alternatives are more of a gamble than stocks and bonds, and a client must be willing to deal with the reduced liquidity and the possibility of a longer wait before a return on investment. 

Most importantly, investors have to understand that alternatives don't have to dominate a portfolio. They can instead be a complimentary aspect of it, existing as a way to diversify and mitigate risk. Few people are going to have the desire and tolerance for an alt-heavy investment strategy - most people will instead fall in the middle - and this is perfectly acceptable.

As the value in traditional stock and bond investments fluctuates, financial advisors can see the importance of alternative assets for clients. Following a discussion on whether or not this strategy is right for the investor, advisors can begin to explore the many alternative assets that are available today.

To learn more on this topic, register for our Cannon Trust I course or learn more about our other offerings at www.cannonfinancial.com.

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Sources/Resources:
http://wealthmanagement.com/viewpoints/new-opportunities-alternative-asset-marketplace
http://www.forbes.com/sites/juliecooling/2014/07/11/advisors-increase-reliance-on-alternative-investments-in-asset-allocation/
http://www.cnbc.com/id/101221638#.
http://www.cnbc.com/id/101055140

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