Why Are More RIAs Looking to Alternatives?
July 19, 2018 | Beth Glavosek | Blue Vault
Registered Investment Advisor (RIA) advisers have historically shied away from alternative investments because of the fees associated with them and a lack of access to alternatives on their investment platforms.
However, with adjustments in fee structures that make alternatives more permissible for RIAs, the tides are turning. Statistics show that adoption of alternative investments by RIA advisers is trending upward and showing no signs of slowing down. According to Investment News, a survey of 250 RIAs with at least $500 million in assets under management conducted late last year showed that advisers planned to tap alternatives to help hedge the markets in 2018. In fact, 45% of advisers said that they would increase allocations to alternatives, and 48% said that they would at least maintain current allocations.
Factors such as low interest rates, low yields from traditional instruments such as bonds, and stock market jitters have led advisers to seek new ways of generating returns. In a recent interview with Financial Times, Brendan Lake, president and chief executive at PPB Advisors, said, “Interest in alternatives is up in part because many RIAs and their clients see listed equity as highly priced. Others fear an equity market downturn and are seeking protection in products with a lower correlation to stock indices.”
Some advisers believe that adding alternatives to a portfolio allows clients to be less dependent on “good” performance from stocks and bonds, in light of the fairly recent memory of stock market conditions just 10 years ago. With the potential to have better downside protection during market downturns, alternative investments can either replace equities as a means of generating capital appreciation, or they can replace bonds’ ability to deliver steady distributions and a return of principal. In addition to market defensiveness, many believe that historical data have shown that more diverse portfolios have performed better over the past 25 years than less diverse ones.1
In any case, it will be interesting to see if projections play out, and more retail investors have exposure to alternatives this time next year, thanks to greater adviser access and endorsement of these investments.
1Deborah Mason, “Advisors turn to alternative investments for clients,” CNBC, October 11, 2017.
I have been in the financial services industry for 20 years and our firm provides an education platform that gets clients to “think differently” about their financial picture. For many years we have communicated to clients the need to diversify their portfolios using alternative asset classes and more specifically, private non-traded investments. Due diligence on these types of financial vehicles is essential and when I learned about Blue Vault in 2010, our firm immediately began using their material as a tool to build confidence in the minds of our advisors on which alternatives to recommend to clients. I am impressed with the way Blue Vault continues to add value to their subscribers and I view their publication as a tremendous resource in today’s complex world.