By Cyril Tuohy
Financial advisors are by far the most popular channel for high net worth (HNW) investors to learn about alternative investments. The more HNW clients talk to their advisors, the more they are comfortable with these alternative investments, a new survey finds.
The findings of the MainStay Investments survey confirm what advisors have always known: that it’s important to talk and to get thoughts out into the open, no matter how far-fetched or wacky they may sound.
For the moment, investors have a positive view of alternative investments, and with the recent overall performance of the market – a 30 percent return for the Standard & Poor's 500 index last year – that’s to be expected.
The survey found that 67 percent of HNW investors reported using alternative investments, and these investors agree that alternative investments will become more important and mainstream over the next five years.
Over the next five years, 26 percent of these investors see their exposure to alternative investments increasing, and 66 percent see their exposure staying about the same, the survey found. Without a doubt, the role of investment advisors regarding these investments will grow.
A total of 60 percent of HNW investors surveyed said financial advisors provide the most common way for them to generate alternative investment ideas.
Financial advisors as a top source of ideas were followed by Internet-based research (41 percent); research papers and reports (35 percent); financial services companies (30 percent); newspapers and magazines (29 percent); friends, families and coworkers (26 percent); TV (14 percent); social media (4 percent) and other sources (1 percent), the survey found.
Alternative investments refer to investments other than stocks, bonds or cash. Alternatives include commodities, private equity, hedge funds and futures contracts, but these investments often are more opaque than traditional investments.
As a result, advisors play a critical role in bridging the information gap for investors and in explaining how alternative investments work, the survey found.
The survey was conducted online from Oct. 24 to Nov. 11 among 806 HNW investors by Harris Interactive. Respondents were U.S. residents between 40 and 65 years of age, with a least $1 million in investable assets.
MainStay Investments commissioned the survey. MainStay, the mutual fund distribution arm of New York Life Investment Management, manages $98.8 billion in assets across retail mutual funds and variable annuities.
HNW investors who work with an advisor are most interested in learning about the potential risks of those investments (73 percent), getting descriptions about how such investments work (71 percent), finding out who is managing the investment (54 percent), charting how such investments affect returns (46 percent), and obtaining referrals to a website (12 percent), the survey also found.
With interest rates low, many investors and advisors have been drawn to alternative assets as a way to increase the yield of investment portfolios as more Americans retire and need to find ways to live of the income from those portfolios.
“With expectations of rising rates, investors need to be prepared,” Rich Miller, managing director of MainStay Investments, said in an interview with USA Today. “But the degree to which these alternatives are held did come as a bit of a surprise.”
As many as 60 percent of HNW investors view protecting principal as a key role for alternatives, the survey also found. The survey also found that 50 percent of respondents said they were looking to alternative investments as a diversification strategy.
Talking about alternative investments is the surest way to get HNW investors to pull the trigger and say “yes” to such investments.
Among investors who work with advisors, 49 percent who had conversations with an advisor about the choices available within alternative investments were more likely to invest in these investments, the survey found.
Only 3 percent of investors who did not have conversations with their advisors about these investments were likely to invest in that product class.
The greatest concerns about alternative investments for HNW investors with alternative investments in their portfolio is that they are risky, too illiquid, cost too much, absorb too much of a tax hit and are too complex.
The most popular way for HNW investors to access alternative investments is through mutual funds, exchange traded funds, managed funds, commodities and hedge funds, the survey also found.
Cyril Tuohy is a writer based in Pennsylvania. He has covered the financial services industry for more than 15 years. Cyril may be reached at firstname.lastname@example.org.
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