Practical Perspectives, a Boston-based consulting and research firm, released this week its annual study on advisors’ liquid alt use, “Financial Advisors and Liquid Alternatives 2015 – Insights and Opportunities.”
The report finds that, for nearly 3 in 4 advisors, liquid alternatives represent just 10 percent or less of the total assets they currently manage.
“While virtually all advisors now have some assets invested in liquid alternatives, only a limited number of advisors have fully integrated liquid alternatives into their practices,” said Howard Schneider, president of Practical Perspectives and author of the report, in a statement. “A large number of advisors that use liquid alternatives have minimal assets invested or use these solutions for only a portion of their client base.”
More specifically, according to the report, roughly 1 in 4 advisors using liquid alternatives have less than $5 million invested in liquid alt vehicles, and the large majority of liquid alternative assets are held by the roughly 1 in 5 advisors who have at least $100 million in these solutions.
However, the report shows that more and more advisors are holding more of their assets in liquid alts.
According to Practical Perspectives, the advisors with more than $100 million in assets in liquid alternatives represent 19 percent of advisors today, compared with 12 percent in 2014. And advisors with $25 million to $100 million in liquid alternatives represent 36 percent of advisors, up from 24 percent in 2014.
Consequently, advisors who have $5 million to $25 million in liquid alternatives represent 19 percent of advisors, compared with 29 percent in 2014. And advisors with less than $5 million in liquid alternatives represent 26 percent of advisors, compared with 35 percent in 2014.
“Liquid alternatives are increasingly important to advisors in serving retail investors. This growth has been spurred by the evolving capital markets environment and the expanded availability of these strategies in mutual fund, ETF and VA vehicles,” Schneider said in a statement.
Advisors themselves anticipate continued growth in their use of liquid alternatives during the next 12 months, the report finds.
“[T]he increase is expected to be modest,” the report states. “Given the heightened focus and use of liquid alternatives in recent years, future growth may be less dramatic although still notable.”
According to the report, 52 percent of advisors expect to increase their use of liquid alternatives in the next year, which is a decline from the 65 percent of advisors that anticipated growth in the 2014 report.
Advisors expect to mutual funds or ETFs to be the primary vehicles for any increase in the use of liquid alternatives, the report says.
“Roughly 4 in 10 expect growing use of liquid alternatives through mutual funds and ETFs,” the report states. “In contrast, only 1 in 4 advisors expect to expand use of liquid alternatives through variable annuity subaccounts.”
The liquid alt strategy used by the greatest number of advisors currently is real estate — followed by strategic income, commodities/natural resources and multi-strategy.
It is likely that these strategies will remain the widely used strategies during the next 12 months, the report says.
Interestingly, the report finds that use of each of the different liquid alternative strategies varies across channels.
“Real estate is the most significantly used strategy at present, especially among RIAs and Independent advisors,” according to the report. “Strategic income is also widely used, with roughly 6 in 10 advisors in each channel presently invested in this approach.”
Across all channels, bear market is the least-used strategy, with less than 1 in 10 advisors currently invested in this approach.
This Practical Perspectives report is based on more than 525 online surveys conducted in February 2015 with financial advisors and representatives, as well as interviews with advisors and industry executives. Those surveyed include full service brokers, independent brokers, financial planners, RIAs and bank/insurance representatives.