The term financial advisor typically conjures up a vivid image in investor’s minds: a suited stockbroker, happy and eager to sell advice, insurance and a variety of other products. This image is changing, however, thanks to a new wave of advisors in the financial planning industry. Erin Scannell, an advisor with Johnson, Scannell and Associates in Bellevue, Wash., is one of them.
Scannell said he credits a great deal of his firm’s success to their openness to using alternative investments. “I like using alternative investments because statistically [they’ve] been shown to do two things: lower risk in a portfolio, and increase the average return in a portfolio,” he said.
REITs are diverse and can insulate against market flux
Alternative investments, historically portrayed as risky and volatile, are increasing in popularity in the slow but gradual wake of historical market fluctuations. The prospect of making better money when the usual institutional suspects may otherwise fail gives the alternative sector an easy appeal for the right investor. But not every investor is a match, Scannell said. “[Alternative investments] don’t work for everybody because of minimum investment purchase reasons and accredited investor restrictions, but they work for a lot more people than people think...even investors with less can get exposure to alternatives. A lot of minimums are in the $10,000 to $20,000 range,” he said.
Alternative investments are becoming major players in the investment mainstream, thanks to the development of new products and the opportunity they afford investors to branch out of traditional investments that are otherwise more likely to be subject to societal and media influence.
Real estate investment trusts (REITs) are a personal favorite of Scannell’s, he said. Private REITs are more diverse than many other investments and provide insulation to market events that would make any other investment volatile, he said. “When the stock market is going up and down and the mutual funds and index funds are going up and down and are responding to news or political events, real estate seems to be really insulated...a lot of the REITS we’ve used have never gone down in value.”
Because the range of available alternatives today is so great, it is becoming increasingly difficult for investors to take charge of their own portfolios with the confidence alternative investments often require—and to go it alone. Often the prospect of due diligence alone can be intimidating for would-be investors. Besides private real estate, Scannell said he has helped clients invest in commodities such as precious metals, and natural resources including oil, corn and grain. “I like natural resources a lot. I love global water...companies that are taking advantage of technology to improve the potability of water,” he said.
China and India combined are home to 37 percent of the world's population, according to a 2007 report by the United Nations, and the world's population is becoming more urban than ever. As more people move from agricultural farming areas into cities, water shortages stand to be a massive issue. “When you start to look at the long term demographics of that and the impact of that, these companies should do quite well. So, I like global water a lot, and I like emerging equities a lot,” Scannell said.
While Scannell said he has seen personal success in commodities, he’s not always quick to suggest them to his clients. “With commodities I’ll tend to invest in as diverse a position as the account value will allow for....Those are going to be for people who have a higher appetite for risk,” he said.
Commodities and new technology like water treatment are worth considering
Scannell’s personal investment choices have lent themselves well to his practice for a number of reasons. His experience with alternative investments has given him a broad education, he said, “I would think, though, that it’s the chicken and egg thing—what came first was educating myself with clients. I have five designations in asset management, estate planning and tax planning, and that’s where I've learned about a lot of the alternative investments.” Additionally, he said his experience investing in REITs has allowed him a level of credibility with his clients that other advisors do not have.
One concern Scannell said he has regarding alternative investments is the lack of information and credible resources available to investors who are trying to do research. He said he believes, however, that the returns far outweigh the burden of research. “I use alternative investments because historically in national prominent portfolios, they’ve returned pretty well. It does take a little more time and money to research them, but the results speak for themselves.”
Scannell said he suggests that alternative investments, once fairly obscure to ordinary investors, may continue to be immune to the volatility that many institutional investments have suffered as a result of their growing popularity with financial advisors. “The abundance of [information] available to investors nowadays is positive because [it has] forced financial advisors to get out of their comfort zone of recommending typical, ordinary investments like index funds and mutual funds. I think if financial advisors don't start offering more alternative investments, they’ll be at, to a degree, a disadvantage over time.”
Alternative investments may be changing the shape of how ordinary investors look at their portfolios in years to come, especially if they working with experienced advisors, such as Scannell, who are revolutionizing the traditional advisor-client relationship. Investors positioned to work with advisors would be well advised to seek out advisors with personal alternative investment experience. Just as the market for alternatives is changing for the better, so might the market for investors.
Erin Scannell is a financial advisor with Johnson, Scannell and Associates in Bellevue, Wash. He manages more than $400 million in assets for Seattle families and was recently featured in Seattle magazine and the Puget Sound Business Journal as one of the top 25 investment advisors in the Seattle area.