Almost half of advisors say they are looking for new ways to diversify client portfolios, and more than a third doubt that a traditional 60/40 portfolio of stocks and bonds can provide the kinds of returns they are used to, according to the 2017 Trends in Investing Survey, conducted by the Financial Planning Association, the Journal of Financial Planning, and sponsored by Longboard Asset Management.
Yet at the same time, only a fraction of advisors (8%) indicate that they plan to recommend adding alternatives to client portfolios, so where that diversification could possibly come from is quite perplexing.
Only 4% of advisors are planning to add more private equity funds, and only half that amount is interested in adding exposure to hedge funds or nontraded REITs. In fact, according to this survey the majority of advisors (73%) are currently allocating no more than 10% of client portfolios to alternative investments, and only 7% are allocating more than 20% to alts.
While it’s understandable that many advisors don’t want to jump out of the equity bull market too soon, the importance of a well-diversified portfolio should never be ignored. Alternative investments provide diversification that can give investors a risk/return profile considerably different from that provided by equities, bonds or cash.
In the past, many advisors stayed away from alternatives because many vehicles such as hedge funds and private equity were restricted to more sophisticated investors, and often had minimum investments as high as $1 million.
But that is not always the case. The alternative investments universe now includes a wide range of asset classes and investment strategies, and many of them are available in funds with much lower minimum investments. There are even a number of multi-strategy alternative investment mutual funds that are available with minimum investments more attainable for retail investors.