By Milind Mehere
Accredited investors have begun to realize that investing needs to be about much more than stocks and bonds. Thanks to alternative investing platforms, these insights are increasingly actionable—and lucrative. As these platforms drive alternatives from the shadows of hedge funds and private partnerships into the daylight of Main Street investing, the 100 largest alternative investment firms already control $3.6 trillion in assets.
Mass access to high-quality alternative investment products is an admittedly new phenomenon. Greater familiarity is needed before financial advisors and their clients accept the fact that alternatives are not exotic, high-risk options, but very well may be legitimate and appropriate choices for meeting passive-income and return needs in a volatile, low-return environment. As evidenced over the past two decades, the stock market is slow to recover, taking three years to bounce back from the dot-com crash in 2000 and five to rebound from the Great Recession of 2008.
Although public demand for alternatives is growing, the pool of financial advisors familiar enough with alternatives to accurately evaluate them remains relatively small. Some may feel a lack of incentive to even explore alternative investments and, as a result, refrain from recommending them, leaning instead on commission-backed bank products.
I believe advisors risk doing their clients’ portfolios—and their own careers—a disservice by not pursuing viable solutions to clients’ investment needs. With investors and regulators alike focused on holding the industry to a higher fiduciary standard, it’s time to get comfortable with alternative investing. Based on my own transition from a stock/bond investor to an alternatives “evangelist,” I suggest starting by asking these questions.
Will this investment achieve what my client is trying to accomplish?
Your clients value your expertise and ability to create revenue streams. If it will benefit them, you can’t evaluate a product as a bad opportunity because you won’t profit from it as much as you would from a commission-based product. Before the emergence of crowdfunding-style investment platforms, it was hard for investors to reap the benefits of investing in a diversified portfolio of rental real estate. They can now, and you can show them how.
Is the investment generating the cash flow they seek?
Many accredited clients may demand cash-flow-generating investment options beyond dividend stocks and bonds. Providing your clients access to such investments may improve client satisfaction and retention. For example, investing in short-term real estate loans (such as fix-and-flip products) could get the desired cash flow and diversification. Understanding the potential cash flow of each type of project can add significant value for your clients.
Where do they rank in the repayment stack?
It’s easy to invest money, but the key is whether you will get it back—with interest. When clients show interest in alternatives, explain the options in easy-to-understand terms: Think of the investment as your own house. Say you put 20 percent down, and the bank loaned you 80 percent of the purchase price. If a recession in your city forces you to sell, and you get only 70 percent of its total value, the bank will take all of it. Your equity will be wiped out. It’s vital to be aware of where you sit on the repayment stack in case the investment goes south; this video explains this concept.
Wealth management is a “share of wallet” game. If you diversify your solutions, clients will end up with more diversified risk—and that’s the point. To fulfill your role as a fiduciary, clients need you to make smart allocations that safely generate reliable income returns. While alternative investing may reduce commission income in some cases, the trust and credibility you stand to gain are invaluable. In the long term, it will provide you with a competitive edge and increased assets under management.