Capital Markets Insights

3 Reasons Financial Advisors Should Consider Alternative Investments

Wealth Management is rapidly transforming as securities deregulation, disintermediation, investor demographics, technology, and accessibility to new investment products drive fundamental changes to the industry.  As these changes accelerate, financial advisors have to deliver strategies that justify fees and provide a differentiated service for their clients otherwise, they risk losing business to low-cost, self-administered brokerage accounts, robo advisors, and the growing number of ETF options.

To do this, financial advisors are turning to alternative investments–property, private equity, infrastructure and hedge funds– which have historically outperformed traditional investments as the answer to bring a value-add service to their client portfolios. Therefore, we have outlined the top three reasons financial advisors should consider alternative investments for their client portfolios.

1. Institutional Grade Opportunities

The shift of capital from defined-benefit pension funds into the hands of individual investors is attracting more prominent institutional money managers, offering a bigger selection of alternative products specifically for retail investors.

Firms such as Blackstone and Cantor Fitzgerald have marketed alternative investment products to retail investors, such as:

Rodin Global Property Trust, from Cantor Fitzgerald, is a nontraded REIT focused on single-tenant net-leased commercial properties in the United States, United Kingdom and other European countries.

Blackstone’s Real Estate Income Trust is also a non-traded REIT with its perpetual-life fund. It was launched in 2017 specifically to target individual investors. As of July 2023, the 5-year return was 12.3%.

2. Fee Justification

Alternative investments can be complex and carry additional risks, and most retail investors will not be willing or able to navigate the alternatives landscape on their own. Retail investors need a trusted financial advisor to guide them to the best investments based on their suitability.

Being able to source quality alternative investment opportunities and educate clients on how these investments can fit into their portfolios provides an opportunity to strengthen the relationship, access these deals and provide a differentiated service.

3. Diversification

Alternatives provide diversification from public markets, where the main competition offering low-cost options is thriving, such as Vanguard Robo Advisors, WealthFront, Betterment, and Acorns.

Investing in alternative assets can be a great way to further diversify a portfolio and potentially achieve higher returns. Providing access to these proven products with institutional track records is a great way to grow client relationships.

Over 130 million retail investors used stock trading apps in 2021, a 49% increase since 2020, and up from 35.6 million users in 2017. This rise and adoption of investment apps is set to continue, so providing advice and access to alternative investments could be a great way for financial advisors to demonstrate value to acquire and retain clients.