As traditional equity and fixed income markets become increasingly volatile, financial professionals must find ways to differentiate themselves from their peers in order to continue to attract, consolidate and retain client assets. The reality is the classic 60/40 portfolio split will not win a financial practice new business or help attract a higher caliber of client, especially in such a competitive market.
So how can financial professionals differentiate their practice and scale their client base?
Alternative investments have seen a surge in popularity in recent years as market turbulence has driven investors out of the public markets in search of yield. This increased demand has also spurred a significant expansion of alternative investment products available to a wider array of investors.
Financial professionals recognize the importance of offering alternative investments as well, as they seek to diversify client portfolios and achieve specific goals such as mitigation of volatility and greater income potential. Eighty-one percent of financial professionals surveyed in a recent study conducted by Cerulli Associates, in partnership with Invesco and the Investment & Wealth Institute, agreed that offering an expanded shelf of alternatives would help them differentiate their practice. Additionally, 67% agreed that this will help them attract high-net-worth clients, and 66% said it will help them consolidate and retain assets under management.
Despite this widespread recognition of the benefits that offer alternatives to clients can provide a financial practice, half of the respondents reported allocating 5% or less of their portfolios to alternatives for their clients.
BARRIERS TO ALTERNATIVE ADOPTION
More than half (56%) of those surveyed said lack of liquidity was a challenge when it came to investing in alternatives, while 44% found that educating clients about the investment features and value proposition of alternative investments was also a barrier.
Relatedly, half (49%) said that explaining the role of illiquidity within client portfolios was the most challenging client education topic.
What is clear from these findings is that there is an appetite from financial professionals to offer more alternatives to their clients, but there remains a significant educational gap that prevents them from truly incorporating them into their financial practices, especially around the characteristics and structures of the investments , and how they affect a client’s overall portfolio.
Financial professionals seek to better understand these products for themselves, so they in turn can help their clients feel comfortable exploring alternative investment opportunities.
CLOSURE OF THE EDUCATIONAL GAP
Overcoming the education gap is the key to helping financial professionals feel more confident allocating to alternatives.
Resources exist and addressing the educational burden requires a dedicated effort from both financial professionals and product specialists. More than half (54%) of respondents said they are most comfortable receiving educational materials about alternatives from product specialists/wholesalers. And nearly half said that specific educational materials about liquidity and general education about discussing alternatives with clients are what they need most (48% and 47%, respectively).
What this suggests is that a solutions-based approach to alternative investment education would have a significant impact on financial professionals’ understanding of alternatives and how they can present them to clients.
Tailored education solutions targeting the key concerns and pain points of both financial practices and their clients are essential to closing the education gap. There is an abundance of information out there about alternatives, but financial professionals need careful materials targeting their primary concerns and their clients.
This is as much an exercise in translating the industry speak and jargon into plain language and making the content easier to digest, because alternatives are, by nature, complex vehicles. Although they have been a mainstay for institutional and sophisticated investors for many years, they are still new to many financial practices.
Overcoming the learning curve requires a collaborative approach from all parties. Financial professionals should ask their clients what their main questions and concerns are about alternatives and tailor their conversations to address them. Likewise, wholesalers and distributors must be able to recognize where financial professionals lack resources and adapt their approach to address those areas.
MEETING CUSTOMER NEEDS
Offering an expanded selection of alternative products is a powerful way for financial practices to significantly scale their business and bring in a higher value clientele. As recent years have shown, there is a clear demand for a wider range of alternative investments, and the financial professionals who are able to meet that need with robust, solutions-based education will be in the best position to grow and differentiate themselves. against his peers.
John McDonough is head of Americas distribution at Invesco.