June 16, 2017

Advisors’ Perspectives: What are the Cons to Alternatives?

June 16, 2017 | by Beth Glavosek | Blue Vault

We’ve been looking at the pros and cons of nontraded REITs and other alternative investments from advisors’ viewpoints.

We heard from several independent Broker Dealer (IBD) sales and marketing executives that alternative investments are showing a lot of promise right now because of their ability to provide income-seekers with potentially higher yields, diversification that’s noncorrelated to the stock market, and an institutional style of investing.

However, we also heard from some IBD representatives about a few of the potential drawbacks to alternative investments.

Disclosure of inherent risks

As with any investment sector – whether it’s stocks, bonds, or others – there are risks to be weighed. Advisors should explain the risks of alternative investments as carefully as they would for anything else. One IBD representative says that this requires due diligence on the part of the advisors, many of whom are pressed for time and may not have a complete understanding of the products themselves. “Alternatives are not as mainstream as they could or should be, so education is critical. Care should especially be taken when it comes to working with elderly clients,” he says. “They need to understand what they’re buying.”

“Fatigue” around illiquidity

Both advisors and investors alike may become impatient when waiting for an investment program to complete its life cycle and either list, liquidate, or sell assets to another buyer. This process could take seven years or more. One IBD representative noted that there could even be disappointment in performance at the conclusion of the programs. Even though a ‘capital pop’ of appreciation is hoped for, it may not happen. “The ‘illiquidity premium’ seems to be missing from the returns realized in some of these products,” he notes.

Regulations and tightening concentration limits

Regulatory scrutiny and uncertainty have made some advisors reluctant to offer the products in their current forms. It still feels risky or unknown. Others are hampered by limits to the amounts that their clients can place into alternative investments. “Investors want to own more shares, but state imposed limitations prevent them from doing so,” says one spokesperson.

If you’re an advisor, what is your opinion? Are you bullish on alternative investments, or do you remain skeptical? We’d love to hear from you and feature your opinions, experiences, and success stories in future blog posts.

Please Note: Responses and/or opinions are confidential and will NOT be published without prior consent.