Alternative Investment Use Growing, Financial Planner Survey Finds

Alternative investments continued to infiltrate the retail marketplace of products used by financial planners in 2007, and their use is likely to grow even more in 2008, the …

Alternative investments continued to infiltrate the retail marketplace of products used by financial planners in 2007, and their use is likely to grow even more in 2008, the Financial Planning Association (FPA) found in its 2008 member survey.

Nearly 20 percent of survey respondents reported some level of client assets allocated to alternative investments in 2007, with commodities, real estate partnerships and international/global real estate funds used most frequently. The average alternative asset allocation reported by this group was 7 percent, FPA said.

Types of alternative investments most frequently usedPercentage of respondents*
Real estate partnerships54
International/global real estate funds41
Hedge-like mutual funds35
Private equity funds26
Hedge fund-of-funds24
Structured products22
Hedge funds13

*Only asked of respondents who indicated use of alternative investments
Source: Financial Planning Association 2008 survey

Of financial planners who used alternative investments in 2007, 95 percent said they intended to either increase or maintain their level of use of these products in 2008. Among respondents who didn’t use them in 2007, 22 percent indicated that they intended to use alternatives for the first time this year. Among all survey respondents, 47 percent said they intended to increase their use of alternative investments.

“Demand for alternative investment strategies continues to grow as advisers look for new ways to enhance portfolio construction for wealthy clients,” according to the survey report. “Interest in hedge funds, hedge-like mutual funds (for example, long/short funds, short-extension funds, and market neutral funds), commodity-linked vehicles, international real estate funds, private REITs, and the like is growing as financial planners seek new sources of non-correlated returns to bolster the diversification of client portfolios.”

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Generally, financial planners responding to the survey tend to use alternative investments with high-net-worth clients who are willing to assume greater short-term volatility in exchange for the potential of superior long-term returns. Some respondents said they use alternative investments with all clients, while others use them only for accredited investors with at least $1 million to $5 million liquid net worth.

One respondent reported use of alternative investments particularly with clients who have significant amounts of highly appreciated real estate, while another indicated “use with all clients to reduce portfolio correlation and strengthen diversification.”

Planners who use alternative investments tend to be younger than respondents in other categories, but they also tend to have more experience as financial planners, the survey indicated. More than half are under 50, while two-thirds have been advisers for at least 10 years. 76 percent are male—a slightly higher percentage than survey respondents overall (73 percent male).

Client education key to wider adoption

According to the survey report, alternative investment product developers seeking wider acceptance of their products need to provide better explanatory materials to help planners explain their investment vehicles to clients.

“The key for planners is to help their clients be comfortable with investments that are designed to do a different job in their portfolios from straightforward long investments in stocks, bonds, and cash,” the authors wrote. “Asset managers that hope to win adviser loyalty to their alternative products will do well to focus resources on developing investor-friendly materials that focus less on the details of the investment strategy and more on how the strategy can help the client meet their goals.”

About the survey

The survey, How Advisers Choose: A study on adviser selection screen and value assignments for asset managers, custodians, and product usage, was conducted by the FPA Research Center from late November 2007 through early January 2008. Respondents, nearly 450 members of the Financial Planning Association, were geographically dispersed and statistically representative of the association’s membership.

A summary of investment trends based on the survey was published in the Journal of Financial Planning in June. The full survey report will be available for purchase from FPA later this year.


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