Complexity Checks Alternative Investment Growth

The complexity of alternative investments prevents many financial advisers from advocating their addition to client portfolios, despite the diversity and volatility advantages alternatives can confer.

So reports a new survey by Natixis Global Asset Management’s Durable Portfolio Construction Research Center, which sought to gather adviser insights on retirement savings, asset allocation strategies and the challenges posed by a rapidly aging client base.

According to the survey, called the 2013 Natixis Survey of U.S. Financial Advisors, only one in four (25%) advisers reported using alternatives such as hedge funds, private equity and commodities in client accounts on a regular basis. Among those not utilizing alternatives, 44% reported feeling alternative products are too difficult to explain to clients to warrant regular use.

Also telling is the 74% of advisers who said they would support a requirement that sales materials for alternative strategies be “written in plain English.”

Underscoring the need for better understanding of alternatives, 69% reported they are seeking ways to replace traditional diversification and portfolio construction techniques with new approaches in order to achieve results—a significant increase from last year’s survey, in which 46% said the same. 

Looking beyond alternatives, the survey found more than half (56%) of advisers said it’s difficult to build portfolios that can simultaneously reduce risk and enhance returns. A similar number (53%) reported difficulty balancing drawdowns for retirees with the need to keep their portfolios growing.

On the participant side, less than half (47%) of advisers believe their clients know how much they need to save for an effective retirement.

Researchers called that a positive indicator, considering the 28% observed in 2012, but also warned that future retirees are generally underestimating the threat of uncovered or unexpected healthcare costs that can arise later in life.   

Another challenge identified by advisers in the survey is that an aging client base is taking away from time to prospect new business. In fact, advisers reported spending twice as much time on routine client service tasks as they do on developing new business—with 77% of existing clients now age 46 or older and 35% over age 67.

More on the survey’s findings and methodology available here.