Alternative investments are becoming more popular with investors as traditional markets become increasingly volatile. For financial advisors, understanding how alternative investments work is key for providing sound advice to your clients.
This guide will help you understand alternative investments and their implications on financial advising so that you can make educated decisions when helping your clients plan their finances. By learning all you need to know about alternative investing, you’ll be able to offer an even greater level of service while potentially opening up new areas of opportunity for yourself and your clients alike.
Illiquid vs. liquid alternative investments
Liquid alternative investments: Liquid alternative investments are alternative asset classes that can be quickly bought and sold on the open market. Examples of liquid alternative investments include, real estate investment trusts (REITs), exchange-traded funds (ETFs) for alternative investment classes, and cryptocurrencies.
Liquid alternative investments offer financial advisors the opportunity to diversify their clients’ portfolios by investing in assets with different risk profiles. However, their liquid nature allows investors to easily sell the investment, which can be risky during times of high emotions.
Illiquid alternative investments: Illiquid alternative investments are alternative asset classes that cannot be quickly bought and sold on the open market. These alternative investments provide access to non-traditional asset classes, such as real estate, private equity funds, venture capital funds, hedge funds, managed futures accounts, and structured products.
Unlike liquid alternative investments which can be traded quickly in the open market, illiquid alternatives cannot be easily sold. Additionally, some investments such as private equity have long-term minimums, locking investors in for periods up to 10 years for that investment. This combats the risks that can come with selling due to emotion or fear.
Illiquid alternative investments can offer financial advisors and their clients the potential for greater returns over traditional long-term investment options like stocks and bonds. However, due to their higher risk profile they can also come with a heightened level of complexity.
Top alternative investments for accredited investors
For your clients who classify as accredited investors, certain alternative investments may provide higher returns than traditional long-term investment options. Here are some of the top alternative investment options available to accredited investors:
- Hedge Funds
- Private Equity Funds
- Venture Capital Funds
- Structured Products
- Managed Futures Accounts
- Non–Traditional Bond Strategies
How to manage a breadth of alternative investment portfolios
While many of your clients are likely already investing in alternatives and it’s a massive area of opportunity, some advisors hesitate to offer them as part of their services. Most concerns surrounding alternatives have to do with the lack of transparency and reporting, due diligence concerns, and time-intensive labor it takes to manage alternatives, especially for a variety of portfolios.
In fact, up until now, the only way advisors have been managing alternative investments is manually through messy, outdated spreadsheets. But with new technology, managing alternative investments can be incredibly simple.
AltExchange eliminates common pain points of managing complex alternative investments including fragmentation, unstructured data, scattered documents, limited performance visibility, and more. If you’re an advisor, investor, or asset manager looking for a full-solution management and reporting solution for alternative investments, please get in touch.