Despite six straight years of equity market gains, alternative investments – both liquid and traditional – continue to be one of the fastest growing asset classes.
Nowhere is that more true than in the wirehouse channel.
According to a Money Management Institute report, Distribution of Alternative Investments Through Wirehouses, wirehouse-associated traditional and liquid alternatives through retail channels increased from $172 billion at the close of 2013 to $205 billion during 2014.
This “came as somewhat of a surprise to some in the industry because it occurred in the sixth consecutive year of positive returns for equities and amid unexpectedly resilient bond markets,” according to the report.
Wirehouse assets in liquid alternative mutual funds and ETFs stood at $102 billion at the close of 2014, an increase of 15% from $88 billion at year-end 2013.
“This was more than twice the industry growth of 7.3%, an indication of the leading role wirehouses have played in fostering the adoption of alternative investments,” according to the report.
The report, which is based on mutual fund and ETF data collected by MMI and Dover Financial Research from the four major wirehouse firms for year-end 2014, evaluates retail alternative investment trends in the wirehouse channel and analyzes the factors driving wirehouse advisors and their clients to embrace alts.
One of those factors is how goals-based wealth management has had a big impact on wirehouse assets in alternatives.
“This surprisingly robust growth — albeit over a relatively small base — is due in large part to advisory solutions sponsor firms and investment managers using alternative investments to achieve specific portfolio outcomes, particularly those that align with goals-based wealth management,” according to the report.
MMI also finds that firms have started using simpler terminology when explaining alternative investments, leading to a better understanding among clients and ultimately more utilization.
“In the past year, advisory solutions sponsor firms have begun to attack the fuzzy product descriptions and classification schemes that made understanding and properly allocating alternatives difficult,” according to the report.
MMI finds that firms have started using more practical explanations to explain the roles alternatives play within portfolios to achieve specific outcomes.
For example, one firm from the report breaks alternatives into “diversifiers,” “equity complements” and “fixed-income complements.” Another firm from the report ranks products from “aggressive” to “conservative” based on the risk/return profile of the fund.
“These approaches take into account the impact of a strategy on an investor’s net exposure and overall portfolio, a process that goes far beyond traditional ‘bucket’ allocations,” according to the report.
The report also finds that managed solutions programs, which are used by advisors to create holistic, outcome-oriented financial solutions for clients, seem to be suited for alternative investments — particularly liquid alternatives.
While liquid alternative products account for 16% of wirehouse mutual fund and ETF flows, according to the report, 70% of those liquid product flows are linked to fee-based programs.
Because these managed solutions programs “enable centralized control of investment risk and compliance oversight” without taking away an advisor’s freedom to add value through portfolio construction and investment selection, the report claims these programs are a good fit for the use of alternative investments.
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