Advisers Need Education About Alternatives

A lack of education may be impeding adviser usage of traditional alternatives.

According to “The FRC Encyclopedia of ’40 Act Alternatives”—a study published on October 16 by the Financial Research Corp. (FRC), a division of Strategic Insight—only 22% of advisers use traditional alternatives with any regularity, and more than 55% use them rarely or not at all.

These advisers have high-net-worth clients; the majority of respondents said at least 5% of their clients are qualified investors. This hints that it is a lack of education that may be preventing advisers from using traditional alternatives, study authors said. Moreover, ’40 Act funds offer a variety of strategies that are suitable for clients who do not qualify as high-net-worth. The fact that advisers are not using these ’40 Act funds suggests that adviser knowledge, rather than client assets, prevents advisers from recommending these new products, Rob Martorana, study author and senior analyst at FRC, told PLANADVISER.

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The study suggests a lack of familiarity is preventing advisers from adopting alternatives, although there is no clear pattern to their usage or neglect. For example, gold and precious metals were more popular than managed futures (27% use gold and metals “frequently” or “always,” versus 17% who use commodities/managed futures), despite evidence to suggest the diversification benefits of managed futures.

“It seems that both clients and advisers are sticking to the tried and true, regardless of evidence that new products may offer superior diversification,” Martorana said.

Thirty-five percent of advisers said they “frequently” or “always” use real estate investment trusts (REITs), and 34% said they use any type of exchange-traded fund (ETF) or mutual fund that uses alternative strategies (a liquid alternative). Only 9% of respondents reported frequently or always using hedge funds, private equity and other traditional alternatives.

The implication from these results, the study authors said, is that advisers prefer familiar products such as REITs, which are easy to explain to clients. Thus, fund selection by advisers seems to be driven by familiarity rather than risk/return potential, Martorana said.

When respondents were asked how interested they would be to learn more about traditional and liquid alternatives, 35% said they were “extremely” or “very” interested, while 47% were “moderately” or “slightly” interested, and 18% were not interested at all.

Martorana said he is surprised by the lack of interest from advisers in learning about alternatives. “If you really believe that volatility management [is a challenge], then alternatives are a good solution,” he said, adding that advisers can present alternatives as a way to help clients manage volatility and reach their retirement goals. “Our surveys show that the top priorities of clients are income and reduced volatility. Liquid alternatives can help stabilize portfolios, which is especially important for retirees. Once advisers realize the benefits, they become more interested.”

Until advisers learn more about the benefits of liquid alternatives, it is easy for them to focus on the challenges, study authors said. Respondents cited several challenges to using alternatives, with client familiarity being the top objection (54% reported this was “very challenging” or “extremely challenging”). Other top challenges included complexity (47%), client risk tolerance (47%) and fees (46%).

Challenges can be overcome with education—advisers must familiarize clients with product benefits, showing how liquid alternatives can be used to reduce risk and provide diversification, study authors said. “Slow and steady can be good for education on alternatives,” Martorana said. “If you’re not comfortable with alternatives, start slowly and get educated.”

If an adviser can show clients how alternatives can help, they will learn to overcome objections, he said.  “And when advisers realize that alternatives can help them win new business, they start making time for education,” he added.

For the study, FRC polled 419 financial advisers across the U.S. in June 2012. Contact Kathy Marshall at kathy.marshall@frcnet.com for information about how to purchase the study. 

Tech Integration Remains Elusive

 

Linking technology to business needs is essential for true integration, yet many advisers still struggle with identifying a fully integrated solution.  

 

 

Advisers face increasing pressure to meet the evolving demands of their clients, and many understand that integrated technologies could help ease some of the pressure, according to a white paper from SEI.

“Winning Advantage: The Financial Advisor Playbook for Achieving True Integration” explains how to implement an integrated technology approach. It defines true integration, examines the need for integrated technology and provides a guide to help advisers achieve the highest levels of integration by matching technology needs and process reinvention with their firm’s business goals.

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True technology integration is a system that allows all of an adviser’s technologies to communicate with each other and perform necessary tasks within a single application, whether they are related to investments, client service, or administration and operations, according to the paper. Included is a step-by-step playbook that outlines a measured and strategic approach to help advisers adopt the right solution to fit specific business needs.

Selecting the best technology solution begins with the adviser evaluating the firm’s operational and business processes to ensure they align with client needs. Advisers must then create a plan to implement a unified system that integrates all of their technology and software tools. A unified system can provide advisers numerous benefits—including increased efficiency, revenue growth, and, most importantly, increased face time with clients and prospects.

“Advisers often confuse compatibility with integration, largely because of how the technologies are marketed,” said Kevin Crowe, solutions unit leader for the SEI Advisor Network. “Just because the CRM [customer relationship management] software and the portfolio management tool are compatible with one another does not mean they are a single, integrated system. Only when a truly unified system is implemented will an adviser realize the many business benefits that come from the increased efficiency. This paper helps advisers not only understand what integration is, but how to achieve it.”

The white paper, published by the SEI Advisor Network, provides insights on the implications of technology integration for clients, tips for choosing the right solutions, and details on the resulting business benefits and impacts. A copy can be requested at www.seic.com/integration.

The SEI Advisor Network provides ongoing practice management solutions to its independent advisers.

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