There’s nothing quite like a bear market for stocks, coupled with spiking inflation and the threat of a recession, to steer financial advisers off the beaten path of plain vanilla stocks and bonds.
“We’ve had a number of clients ask about increasing their allocation to alternatives in this environment,” said Jeffrey Nauta, principal at Henrickson Nauta Wealth Advisors.
“Every single alternative asset class we've allocated to is positive this year, which naturally catches clients' attention,” Nauta added. “That said, we're fighting against the normal human nature to chase performance.”
Portfolio diversification is standard advice for any long-term investor, but the financial and economic backdrop of 2022 has underscored the benefits of diversification beyond just traditional allocations.
As the Federal Reserve hustles to try and catch up to inflation, which is hovering at a 40-year high, the impact of rising interest rates has put a beating on the standard workhorse model of 60% stocks and 40% bonds.
The 60/40 portfolio's 14% decline so far this quarter makes even the financial crisis of 2008 look good by comparison.
“We have started exploring uncorrelated assets such as commodities and managed futures,” said Kevin Lum, founder of Foundry Financial, who described managed futures as “one of the most interesting spaces” in this market.
“The selling point for us is hedge fund-like exposure with low fees that makes it a much viable option for slotting into our model portfolios,” Lum added.
The feedback from financial advisers is in line with the latest findings from the CAIS alternative investments platform.
The results of a survey of financial professionals conducted last month at the Morningstar conference show that 81% of respondents believe all retail investors should have access to alternative investments.
More than a third of survey participants (33.6%) believe that the traditional mix of stocks and bonds is no longer effective for investing, while a further 42% assert that the 60/40 portfolio is not as effective as it used to be.
Among the respondents who identified themselves as investment or financial advisers, 84% say they are recommending that clients who meet accredited investor requirements should allocate to alternatives.
“If you’re just in a 60/40 portfolio it’s really scary right now,” said Abby Salameh, CAIS managing director.
“In this kind of market volatility, alternatives hedge against both the bond and equity markets,” she added. “In markets like today, where else can you go to generate some returns?”
Keith Singer, president of Singer Wealth, said reducing volatility has been a key selling point when it comes to alternatives.
“Our firm has been allocating about 30% to alternatives,” he said. “The ones we have been using — private equity, private credit, private real estate and private preferred stocks — are all up this year.”
Of course, there are potential pitfalls to consider, which is part of the reason CAIS has an educational component on its platform that's used by more than 3,500 advisory firms.
“What was really validating to me, it was that close to 70% of those surveyed said education was one of the biggest barriers to investing in alternatives,” Salameh said. “We need to do a better job of leading with learning, because I’ve seen firsthand how alternatives can blow up.”
The risk associated with alternative strategies, particularly the unregistered versions that are still limited to wealthy investors, is what has Wheeler Pulliam tapping the brakes when it comes to alternatives.
“You have to be extremely careful when looking at alternative investments and the client has to fit the right profile,” said Pulliam, managing partner at Xponify Financial.
“Unfortunately, alternative investments are not for the average American investor, and even if they do make sense, you have to be careful simply jumping in when the market is unfavorable,” he added. “For example, lots of people misunderstand hedge funds. If you look at them historically, they tend to not fully capture the entirety of a market upturn, and they are overexposed on market downturns.”
While the CAIS platform mostly traffics in alternatives that can only be purchased by institutions and wealthy individuals, the survey also asked about potentially revising those investor restrictions.
The results show almost three-quarters of respondents believe the Securities and Exchange Commission’s definition of accredited investor should be updated.
Among those who say the restrictions should be changed, 43.6% said the definition is too strict and 41.4% believe the income threshold for individuals should be lowered, while 11.5% believe the definition of an accredited investor is too lax.
Relationships are key to our business but advisors are often slow to engage in specific activities designed to foster them.
Whichever path you go down, act now while you're still in control.
Pro-bitcoin professionals, however, say the cryptocurrency has ushered in change.
“LPL has evolved significantly over the last decade and still wants to scale up,” says one industry executive.
Survey findings from the Nationwide Retirement Institute offers pearls of planning wisdom from 60- to 65-year-olds, as well as insights into concerns.
Streamline your outreach with Aidentified's AI-driven solutions
This season’s market volatility: Positioning for rate relief, income growth and the AI rebound
