Alternative investments continue to grow in popularity among investors, advisors, and registered representatives alike and there are certainly reasons why investment professionals would want to include them in their client portfolio allocations, but they also come with risks. Investment professionals should be aware of the positives and potential pitfalls of alternative investments prior to discussions with their clients and should also discuss with their compliance to determine availability as not all broker-dealers or Registered Investment Advisors provide access to these investments. Of course, I would not be writing this piece if my broker-dealer, Aurora Securities, Inc. was not familiar with these investments and did not allow them.
With that being said, let us look at some of the pros and cons to alternative investments. This is by no means an exhaustive list and investment professionals should conduct their own additional due diligence on any investment before making any decisions to purchase for clients. Education is key when it comes to potentially using these investment vehicles for clients.
Pros of alternative investments:
Alternative investments are typically considered non-correlating to the stock market which brings the added benefit of diversification to a client’s overall portfolio. Non-correlation to the market helps at times of market volatility. Alternative investments continue to grow and become more widely available to investors of all types via investment instruments such as ETFs where in the past, alternatives were more exclusive to institutions, large pensions and foundations, and the ultra-high net worth individuals. Just as any investment, rates of returns for alternative investments are not guaranteed but these investments do have the potential for returns to be higher than those of more traditional investments. Additionally, alternative investments can offer tax benefits not available to other traditional investments. For example, deferring capital gains by exchanging one investment property for another, known as a 1031 exchange. Of course, there are IRS rules with limits on vacation properties and other rules that advisors should seek out with a tax professional to fully understand.
Potential downsides to alternative investments
As already mentioned, alternative investments are more complex investment vehicles than traditional market securities. Naturally, the more complex, the higher the fees associated with ownership. Alternative investments can carry higher risk and more volatility than typical stock market investments such as stocks, bonds and mutual funds. These investments are heavily invested in illiquid investments which makes them more difficult to exit or liquidate and depending on the asset, can be harder to price. Just like any other investment, the potential for higher return comes a higher risk which can make alternatives difficult for some investors and advisors to stomach.
Secure Asset Management, LLC and Aurora Securities, Inc. understand the importance of alternative investments as a part of a client’s overall portfolio diversification. Aurora Securities recently joined the Altigo platform—an electronic order entry and subscription processing platform for alternative investments. By using this platform, representatives with Aurora can access firm-approved offerings in a single online portal as well as initiate home office and custodial paperwork for one or more offerings for a client, increasing your productivity as a rep.
If you are an investment professional looking for more from your broker-dealer around alternative investments, let’s begin a discussion on how we can support your business.
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