Most clients are familiar with the financial advisor essentials: stocks and bonds. But through the years, there’s been a buzz around a new opportunity: alternative investments. These assets don’t fit the traditional mold: think private equity, hedge funds, real estate, commodities, and collectibles—the unconventional bunch. But why are clients interested in this portfolio opportunity?
What are Alternative Investments?
Alternative investments, also known as alternative assets or alternative investment funds, are investments in any asset class, excluding capital stocks, bonds, and cash. Alternative investments may offer the potential for higher returns than traditional investments, but they also carry higher risks. Some common examples of alternative investments include:
- Private equity: Investments in companies not publicly traded to help them grow and generate subsequent returns.
- Hedge funds: Actively managed investment funds are the masters of strategy, employing various techniques to aim for higher returns than traditional investments.
- Real estate: Investments in physical properties, whether a cozy apartment building, a bustling commercial complex, or a sprawling farm.
But keep in mind, alternative investments have a few quirks that set them apart from their traditional counterparts:
- Illiquidity: These assets can be sticky, meaning turning them back into cash takes time.
- Higher risk: Alternative investments often carry more risk than traditional investments, so setting expectations with your client is paramount.
- Diversification potential: Alternative assets can add variety to your investment portfolio, potentially reducing overall risk.
- Different regulation: The regulatory process may look different for alternative investments over traditional investments. Careful study of these regulations will set you up for success.
- Unique legal and tax considerations: To navigate these exceptions, it’s essential to understand the state and nationwide considerations for these investments.
Why Consider Alternative Investments?
Traditional investments, like stocks and bonds, are like the reliable workhorses of your client’s portfolio. They’re steady and dependable, keeping your client on track toward their goal. An alternative investment then diversifies your client’s portfolio while working to reduce the impact of market volatility and setting your client up for success—no matter the uncertainty ahead.
Things to Consider Before Diving In
Before your clients jump headfirst into alternative investments, take a moment to assess their situation to provide the best recommendation. Are they comfortable with a bit more risk? Do they have a long-term investment outlook? If so, they might be ready to give it a shot.
But remember, even the most experienced adventurers need a good guide. By working with a broker-dealer specializing in alternative investments, you can ensure you’re bringing the best opportunities to the table.
Expanding Your Client’s Investment Horizons
Alternative investments offer a unique opportunity to diversify your client’s portfolio and enhance their returns. However, they’re not a quick fix or a get-rich-quick scheme. They require careful consideration, thorough research, and a healthy dose of risk tolerance.
If you’re a financial advisor with clients looking to expand their horizons, alternative investments could be the perfect addition to your arsenal. Want to learn more? Reach out to the team at Concorde to see how we help our financial advisors expand their business.