What Clients Want: Trends in Alternative Investments for Advisors
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If you're an advisor in an investment firm looking to diversify and help grow your clients' wealth using alternative investments, you're not alone. According to a survey by Wealth Management, nearly 60% of advisors are looking to advance their institutional investments by driving more of their institutional funds into non-traditional alternative investment vehicles like REITs, venture capital, hedge funds, and farmland. As clients become more interested in hedging against inflation and expanding into asset classes that can help produce wealth opportunities over time, understanding the trend toward alternative assets can promote individual portfolio advancement and enhance client satisfaction for family offices and larger firms.
While it's important to note that alternative investments come with unique risks such as longer lock-up periods and less liquidity, advisors who perform due diligence and consider risk management can help their clients decide if alternative investments are right for their portfolios.
How rapidly is interest in alternative investments growing?
Clients are becoming more aware that alternative investments can be good complements to traditional investment strategies. Alternative investments are a steadily growing field likely to continue to gain more traction.
A 2023 Wealth Management survey garnered feedback from U.S. advisors in institutional investment firms about client interest in alternative assets.
Advisors whose clients have already invested in alternative assets report that they expect those investments to continue to grow. Of those clients invested in alternatives, an estimated mean of 13% of their portfolio is allocated to alternative assets. Three years from now, advisors expect an estimated mean of 18% of their typical client’s portfolio will be invested in alternatives.
Source: Wealth Management | Alternative Investments 2023 Benchmarking Study
Interest in alternative assets like private equity, real estate investment and farmland have increased gradually over time, especially as markets have shifted. By no means is this an exclusive field that has only some clients interested. Because alternative assets may provide steady income potential, these asset classes will likely continue to gain more interest from firms and clients alike.
Why are more clients becoming more interested in alternative investments?
Clients are becoming increasingly interested in alternative investments and shifting away from traditional assets as the only components in their portfolios for several reasons.
According to J. P. Morgan, the stock market losses of 2022 propelled many investors toward seeking better diversity in their portfolios. Enter alternative investments. Because alternatives tend to have low correlations with traditional asset classes like stocks and bonds, they can give clients better outcomes and more confidence in their assets. Alternative investments like real estate and commodities can also be excellent hedges against inflation. While traditional assets are not as predictable during periods of inflation, historically alternative investments have the tendency to stand the test of time. Farmland has a long history of low volatility with positive returns even in times of economic turmoil.*
Beyond this, clients want access to differentiated assets that may not be available to public markets. By creating unique access to alternative assets, institutional investors remain relevant and provide important connections to asset classes that align with their long-term focus.
What are advisors saying about alternative investments?
Advisors spend years developing a comprehensive investment strategy that aligns with their institution's goals. They consider risk tolerance, return objectives, asset allocation targets, and long-term investment plans that can best advance their clients' wealth. That means as advisors shift their institutional plans for investing in alternative assets, they are considering what is suitable for individual clients and their institution as a whole when it comes to current national and global financial strategy.
While different institutions have different goals and all client portfolios are different, 71% percent of advisors who responded to the Wealth Management survey said they consider alternative assets to be good investments for their clients. Nearly as many survey respondents said that they would achieve an increase in alternative investments by reducing allocations to bonds and equities in client portfolios.
The institutional decision to move toward alternative asset classes is already in motion. While advisors see this as a trend that will grow in the next several years, firms are already choosing alternative investments as investment vehicles.
Advisors see this shift toward alternative assets as beneficial to both client portfolios and client satisfaction. Respondents to the Wealth Management survey most commonly reported that offering advice on alternative investments has benefitted their businesses in the area of client satisfaction (62%) followed by client retention (56%) and AUM growth (46%). Simply having a conversation with your clients about alternative investments shows that you are willing to explore strategies outside of the traditional portfolio. Which may improve their satisfaction in working with your firm.
What alternative investments are best for my clients?
Alternative investments range from private equity to fund of funds to real estate vehicles, but the way that advisors choose to invest their clients' wealth correlates heavily with their clients' needs and their firm's values. Survey respondents were most likely to currently use liquid alternatives (70%), followed by illiquid alternatives (51%) and limited liquidity alternatives (47%).
With regard to illiquid alternative products, respondents are most likely to currently use private equity (57%), followed by physical residential real estate (48%), private debt (47%), and hedge funds (46%). This includes historically stable asset classes like farmland, which are intrinsically resilient and can potentially be excellent long-term investments for clients who are interested in alternative assets with a long holding period and trend toward steady returns over time. U.S. farmland has consistently shown an annual average return of 11% for investors since 1990.*
AcreTrader, an online farmland investing platform, specializes in working with family offices and investment firms, helping you educate your clients about this multi-trillion dollar market and alternative investments that provide access to it. At nearly 130 fully-funded investment opportunities through their platform, the company has helped clients invest in more than 45,000 acres of U.S. farmland and even some Australian acres.
How can advisors get ahead of the curve?
As an advisor, you're always looking to understand the markets better so you can set your clients ahead of the pack.
Most advisors feel they have the best handle on publicly-traded REITs (56% “very”or “extremely knowledgeable”), followed at a distance by physical real estate (38%) and private equity (36%). They are least knowledgeable about tender-offer funds (67% “not at all” or “not very knowledgeable”).
When asked to identify the biggest obstacle to moving forward on alternatives, respondents were most likely to select closing the knowledge gap (30%), followed closely by sourcing opportunities (24%). Developing your understanding of lesser known alternative asset classes can help you get your firm and your clients ahead.
Advisors can continue to advance their understanding of alternative asset classes by working with partners who are informed, transparent, and direct. With a platform like AcreTrader that performs careful due diligence on farmland as an alternative investment, you can rely on our firm to help you make choices about an asset class that can diversify your clients' portfolios and develop the kind of stability and client satisfaction that increases trust in your services. AcreTrader is just a call or email away and can offer one-on-one information and assistance to help you get started with farmland investing.
As always, it's important for advisors to pay attention to fees, track record, transparency/reporting, risks, and liquidity when advising clients on alternative investments and making decisions for client portfolios. Reaching out to alternative investment platforms can help you gather specific information you need quickly – and lets you see what level of client service they can provide.
How do I connect alternative assets into my practice (and client’s portfolios)?
While the infrastructure connecting a client’s alternative investments to an advisor’s back-office system is still in the early innings, companies such as AltExchange have emerged to solve two key advisor dilemmas: 1) keeping assets under management/advisement and 2) holistic performance reporting. These recently established FinTech firms provide a digital bridge for transparent investment reporting and automating the flow of investment data. By making client's alternative investment data accessible via advisors’ own back-office management systems, advisors can keep assets under one's purview and maintain billing.
What opportunities are there for me to connect with clients about alternative investments?
When it comes to client research about portfolio expansion, advisors reported that most clients (59%) are finding out about alternative investment opportunities through their own research. By growing your own understanding of alternatives, you can readily be a source of information to help clients make decisions that are right for them.
First, it's important that advisors know what their clients want when it comes to the investment of their wealth. Portfolio diversification emerged as the most important consideration to clients when investing in alternative assets (79% indicating “critical” or “very important”), followed by non-correlation to other asset types (66%), asset value growth (62%) and wealth preservation (61%).
Respondents reported that they were most interested in investing in alternatives via fund investments (80%), followed by direct investments (57%). The typical respondent reports investors seek an estimated mean 10% annual rate of return from alternative investments. These statistics can be helpful for advisors in gauging client interests when proposing changes to client portfolios.
Advisors know that alternative investments are a rising trend in client portfolios that's not going away. As clients become more invested in diversifying their portfolios and hedging against inflation, it's important for advisors to shape their institutional investments around stable asset classes that may build the wealth of their individual clients and their firms.
Moving toward alternative investments is a trend that's here to stay, and advisors should continue to educate themselves on how these investments can benefit both their individual clients and their firms.
For more information about AcreTrader's advisory channel and how farmland investing can benefit your clients, request an introduction with our advisory team.
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