Why advisors must dispel alternative investment myths

There are two glaring misconceptions when it comes to alternative investments. Firstly, that people think they’ll be inundated with juicy returns, and secondly that they are only for the ultra-high net worth.

Brendan White, investment strategist at Janiczek Wealth Management, he said it’s important to dispel these myths in order to see the sector thrive.

“Whenever folks hear alternative investment, they think growth potential,” he says. “They think juicy returns - things that are going to shoot the moon. I attribute that to the last 10-15 years of really great private equity, venture capital returns even in the real estate world. And so, when you pose the question: ‘How does alternative investments sound?’ They think this is going to be a great return generator.”

However, alternative investments are not monolithic; they include both growth drivers and more defensive assets.

“Defensive or diversification could be managed futures, could be market neutral, some hedge fund strategies in there that don’t necessarily shoot the moon but are uncorrelated to your traditional stock, bond portfolio,” White adds. It’s this variety that allows investors to benefit from diversification, reducing risk by adding assets that do not follow the same patterns as conventional market investments.

As for the second myth, White says that while, historically, ultra-high-net-worth individuals were the ones more interested in alternative investments, times are changing.

“There has been a move to democratize alternative investments,” he said. “We're seeing that through smaller minimums, fund to funds, interval funds, and even in the publicly traded space through liquid alternatives. It’s no longer just for the pensions or the endowments of the world. It’s broadly disseminated to the high-net worth space and even retail.”

Janiczek Wealth Management takes an educational approach to guide clients through the complexities of alternative investments.

“Investing is an art and a science, and we have to educate them first,” adds White. “We have to be cognizant that this is a newer investment for most folks - so we have to educate them. [Looking at] the growth and diversification [we question whether] this is the role that this serves in [their] portfolio - does that align with [their] risk tolerance? Does that align with [their] liquidity?”

This attention to changing client expectations is something that sits at the heart of Janiczek Wealth Management’s strategy. For White, this all begins with building trust.

“The first thing we need to do is get them to trust us, get their buy-in not only to us as a firm, as their advisor, but also trust in the recommendations that we're providing them," he tells IN.

A common scenario White encounters involves advising clients who have experienced substantial growth in a particular stock but now face significant risk due to lack of diversification. Here, a typical conversation revolves around managing risk by the careful unwinding of the position they’re in.

“It's really the art and science of it all,” he said. “A recent ongoing example is clients coming to us with 50% of their net worth in one single position. It's done very, very well and now they're at the point of ‘I love this company, I've seen it grow - what do we do with it?’. We have the conversation of here's the tax plan, what is your tax appetite? [It’s about] trying to get them to realize that not many individual stocks will be able to beat the index, let alone beat a bond return over a 10-15 year period.”

The challenge often lies not just in the financial mechanics but in aligning the investment strategy with personal goals and life plans. White uses comprehensive planning to help clients visualize the potential risks and rewards,

“Here's the numbers, and here's your family and your goals. Can this balance sheet, this portfolio, do everything you want for this other piece here? Or is the portfolio risking early retirement or their kids’ education? They go: ‘Oh, wow. We're way risky relative to our goals and even our current lifestyle.’”

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