Advisers Should Educate Clients About Alternatives

A heightened interest in alternative investments among advisers and clients calls for education about those investments' role in portfolios, a source at Russell Investments told PLANADVISER.  

Institutional investors are making significant allocations to alternatives—on average 22% of total assets, according to Russell Investments’ 2012 Global Survey on Alternative Investing. In addition, up to one-third of respondents are expecting to increase their allocations to alternatives over the next one to three years. Market uncertainty, high volatility and low return expectations all contribute to this increase, said Mike Smith, consulting director for Russell’s U.S. adviser-sold business.

The survey participants are experienced alternative investment professionals, representing institutional assets in 2012 exceeding $1.1 trillion. Advisers and their clients may not represent billion-dollar portfolios but may find the survey information useful, Smith said.

Alternatives can be used as portfolio diversifiers, he said. “And hopefully through this diversification, you’re bringing in a smoother and more predictable return pattern for the overall portfolio,” he added.

Despite interest in alternatives, barriers remain. Liquidity, transparency and restricted access are common implementation concerns, Smith said. For individual investors, investment minimums have put quality alternative products out of reach, but these barriers are now being addressed or removed altogether. New fund vehicles offer daily liquidity and greater transparency, and the challenge now is evaluating the investment and maintaining the quality in a liquid product.

Survey respondents said education is the key to increasing demand for alternatives. Smith said advisers must ensure clients have an understanding of the role alternatives should play (i.e., diversification, return driver or both) and what can be expected from adding them to a portfolio.

Market volatility can cause people to abandon their overall investment strategy, so alternatives can smooth this problem and help clients maintain long-term investment goals, Smith said. “We think it’s a great opportunity for investors, and we do believe these types of investments can be very beneficial over the long run,” he added.

Advisers should set the expectation that alternatives will not return 20% a year, for example. They should also educate clients on quality versus non-quality alternative investments.

The survey has been conducted since the 1990s, and Smith said education about alternatives has remained important to the respondents. “When you start talking alternatives, there is a learning curve attached to that,” Smith said.

Russell’s global survey report can be downloaded here: