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.

In an October 2017 report to President Donald Trump on core principles for regulating the U.S. financial system, the Treasury Department made several recommendations that could to potentially make alternatives accessible to an even larger pool of sophisticated investors.

“The ‘accredited investor’ definition could be broadened to include any investor who is advised on the merits of making a Regulation D investment by a fiduciary, such as an SEC- or state-registered investment adviser,” as well as to include financial professionals “who are considered qualified to recommend Regulation D investments to others,” the report suggests.

Treasury also made some recommendations regarding the private equity markets including “expanding the range of eligible investors, empowering due diligence efforts, and modifying the rules for private funds investing in private offerings.”

Among the other good news for advisors is that many of their clients are already interested in alternatives. According to a survey by Natixis Global Asset Management of 8,300 investors from 26 countries, only 40% say they invest in alternatives, although 10% also indicated they just don’t know if they have any alternatives in their portfolios.

In its reports on the survey, Natixis notes that although 70% of respondents indicated they are willing to invest in other asset classes than stocks and bonds, almost as many — two-thirds — believe investing in alternatives means taking on more risk than other asset classes, although that is not universally true. The report points out that many alternative strategies “are designed to provide noncorrelated returns and minimize volatility and may ultimately … help reduce overall portfolio risk.”

Although you might have to give your clients some education on the subject, when it comes to diversification if you’re not considering alternatives, you may not be doing all you can to help your clients achieve their goals.