Recommending Alternative Investments

Transcription

1 Recommending Alternative Investments

2 Content Introduction 3 The Power of Alternative Investments 4 Types of Alternative Investments 5 Alternative Investments Benefits 7 The Risk Spectrum & Determining Your Client s Comfort Zone 9 Alternative, but Still Conventional 11 Incorporating Alternative Investments into Your Wealth Management Offerings 12 Triad Advisors and Alternative Investments 14

3 The vast majority of individual investors limit themselves to only a handful of conventional investment categories. Stocks, bonds, mutual funds, ETFs, cash and other traditional investment vehicles form their entire world of investing. Few investors are confident enough or work with a professional who is knowledgeable enough to stray outside these traditional investment strategies. Today a growing number of investors, especially those with higher net-worths, are seeking greater diversification and broader opportunities. This has become especially critical since the overall market has moved in lock step despite the asset type. These select investors are seeking guidance and advice about the type of investments that may go beyond their current experience and comfort levels. This article will explore the opportunities that alternative investments present and details on how the prepared advisor can help their clients attain higher diversification while providing greater opportunities for growth. 3

4 The Power of Alternative Investments Since 2008, the conventional methods for achieving portfolio diversification through a mix of stocks and bonds have been largely unworkable. While stocks have performed extraordinarily well, the bond market has been sluggish at best. That makes it very difficult to find balance between the two. So where can you turn? How can you build a truly diverse portfolio in today s market providing opportunities for growth, income and stability? The answer may be found outside of traditional investments in stocks and bonds. It s time to consider the Alternatives. Alternative investments are not necessarily unusual or unduly risky options. They can include non-traded REITs, oil & gas investing, business development companies (BDCs), equipment leasing, managed futures, hedge funds, and private equity. These are investment opportunities that are not typically available to retail investors and are most often directed at institutions and high net-worth investors. Alternative investments can offer your clients more options for diversification. In addition, alternative investments offer advisors ways to form closer client relationships and increase clients perception of their advisors expertise and advice. 4

5 Types of Alternative Investments There are many types of alternative investments. Here are a few of the most popular: Real Estate Investment Trusts REITs are companies that own and typically operate income-producing real estate. Using a pool of money raised from investors, a REIT can purchase multiple properties. A REIT has a management team responsible for overseeing day-to-day operations and ensuring that the corporation is profitable. A public REIT may be a company with its stock listed on a national exchange like the NYSE or NASDAQ. Non-traded REIT shares are not publically traded on a national exchange. That means they do not experience the volatility of stocks, as the shares are not liquid and do not price on a daily basis. REITs are required to pass a minimum of 90% of their taxable income back to their investors. Business Development Companies (BDCs) Business Development Companies are a type of closed-end investment company. They are similar to venture capital (VC) or private equity funds (PE). BDCs typically invest in small and mid-size business debt or equity using a pool of money it raises from investors. There are both publicly traded and non-traded forms of BDCs. They are often considered for those who are looking for income-producing investments. Similar to REITs, BDCs are not typically taxed at the corporate level. Consequently, this may offer investors higher dividend yields relative to other investments. 5

6 Oil & Gas Programs Oil & Gas programs offer a direct investment in energy exploration through limited partnerships. This type of investment is ideal for investors who wish to benefit directly from the business of oil and gas production. Private Equity (PE) Private Equity is a group of investors who pool funds to invest in other companies. Institutional or high net-worth investors typically form these funds. PE firms can participate and benefit from taking a private company public or developing new technologies and business practices. Managed Futures Managed Futures is a strategy where professional money managers and commodity trading advisors actively manage a portfolio of commodities. These managers will actively trade, using stocks and derivatives, across selected markets to attempt to reduce risk and capitalize on opportunities. Hedge Funds While the term Hedge Fund is often heard in the news many do not fully understand their function and potential benefits. Hedge Funds are privately organized investment vehicles that use their less regulated nature to generate distinct investment opportunities. Some of the strategies used by Hedge Funds are long/short equity, merger arbitrage, convertible arbitrage and distressed credit, as well as other unique approaches. 6

7 Alternative Investment Benefits There are several significant benefits that come from investing in alternative instruments. Well-informed advisors should be able to provide these benefits, along with any risks, to their clients. Diversification One of the most attractive attributes of alternative investments is the true diversification opportunity that they offer. While stocks and bonds offer very little real diversification, alternative investments provide the possibility, although never the guarantee, that investors might widen their window of returns and step somewhat outside of daily market fluctuations. Many alternative investments have the potential to add significant stability to an investment portfolio. While they are not without risk, these alternative approaches can soften the rollercoaster of conventional stock and bond portfolios. Opportunity Conventional investing only provides limited true opportunities for individual investors. Stocks and bonds can and do fluctuate based upon the whims of the marketplace. Alternative investments, on the other hand, allow investors to directly participate in the actual performance of companies, commodities, and business activities. The opportunities that alternative investments offer are not a guarantee of success, returns, or profits. What alternative investments do provide can include an expanded range of investment types and opportunities. These varied investments allow investors to more finely select the degree of risk they desire and opportunities for returns more closely tuned to their particular needs. It should not be overlooked that many alternative investments appeal to more conservative investors. Alternative investments can provide opportunities for investors who wish to reduce risk and accept more limited or defined returns, or depending on the type of investment, gain potential tax benefits. 7

8 Lower Correlation to Equity and Fixed Income Many alternative investments are not required to be valued on a daily basis like stocks and bonds. This means they can have a lower correlation to the movement of equities and fixed income securities. While not completely divorced from market forces, alternative investments can offer investors greater perceived stability within their portfolios. However, this does not imply that alternative investments are risk-free. Including alternative investments in a portfolio can reduce the swings that create perceived gains and losses that come from stocks and bonds. Closer Client Relationships/Increased Perceptions of Financial Expertise What makes you stand out from other financial advisors? Alternative investments can offer advisors a way of significantly increasing their client connections, especially high net-worth investors. Your ability to discuss these options with your clients can dramatically increase their perception of your credibility and expertise, especially if you can advise them with in-depth, current, and precise information. You can better secure these relationships by offering your clients financial opportunities that they do not receive from other advisors. 8

9 The Risk Spectrum & Determining Your Client s Comfort Zone Determining a client s needs and risk tolerance is one of the primary keys in any advisor relationship. When considering alternative investments, this topic a client s appetite for and comfort with risk becomes the foundation for all resulting discussions and decisions. High net-worth clients are typically more experienced and sophisticated with their investments. They are likely to have a longer history of investing and exposure to investment types than the typical investor. This experience can lead to greater tolerance for risk and loss and a long-term vision for their investment goals. Regardless of their previous experience, the place to start with any discussion of alternative investments is to create a clear picture of the investor s relative comfort with risk and their desires for reward and returns. It s clear that all investment types are not equal in risk and reward. It s also clear that investors who are not familiar with the workings of alternate investments will need more information on how they function, how to measure their performance, and what to expect in the mix of other investments. Alternative investments should not be considered as having less risk than conventional investments like stocks and bonds or be presented as a risk-free alternative to conventional investing. Each investment type will have its own specific risk and goals for returns that may or may not be achieved. Your role as an advisor will be to provide your clients with detailed information about the potential risks associated with each investment. Triad Advisors offers detailed information about investment vehicles and their potential risks so its advisors can disclose potential risks clearly to their clients. 9

10 Hedge The relative funds risks private of equity hedge risk and depends private on equity underlying funds will strategy. depend upon their underlying strategies. Futures Options Oil & Gas Precious Metals Growth Stocks Small Co. Stocks Growth Mutual Funds BDCs Non-Traded REITS RISK High Rate Corporate Bonds Muni & Zero Coupon Bonds U.S. Treasury Bonds Balanced Mutual Funds Savings Account Money Markets CDs U.S. Treasury Bills Fixed Annuities Risk Spectrum and Investment Type Placement An excellent place to start is to create a risk spectrum with individual clients and map out income-producing vehicles along with growth instruments. A visual illustration of these investments can make discussions about client decision-making easier. Even within each category, not all investments carry the same degree of risk or produce the same reward. By building a chart and developing a closer understanding with the client, you can lay the foundations you ll need to discuss specific investments and expected results. 10

11 Alternative, But Still Conventional Alternative investments aren t necessarily exotic or unique vehicles. They do, however, typically have significant capital barriers of entry that often makes them better suited to higher net-worth clients. The investments labeled as alternative are largely conventional investments, but they fall outside stocks, bonds, and the bulk of funds. Hedge funds and private equity can require significant capital to participate in but are not typically considered unusual investments. As an advisor, you are required to explore and educate yourself about alternative investments and to develop your own level of comfort in providing advice and recommendations. At Triad Advisors, our expertise and experience is available to support and guide our advisors, to help grow their understanding of these investment types, and to develop the know-how that will allow them to better serve their high net-worth clients. Investing in alternative investments requires more planning, education, and sophistication than traditional investment vehicles. Advisors who assist investors in developing their understanding of these investment types can create long-lasting and rewarding client relationships. 11

12 Incorporating Alternative Investments into Your Wealth Management Offerings Adding alternative investments to your practice can open the doors to significant new business and an expansion of your relationships with select current clients. Some advisors are reluctant to consider these types of investments because of the significant learning curve and required expertise. As in any fluid market, there is a lot to learn and a great deal of information to digest. Where do you start? Develop an expertise in Alternative Investments The first step is to acquire a personal understanding of alternative investments. This may include formal training and continuing education, personal study, and advice or assistance from other advisors and experienced broker/dealers. This is a role that Triad Advisors fills for our advisors. Inform select clients about Alternative Investments Marketing alternative investments is an important step in the growth of a firm. This may take the form of personal conversations with select clients, more formal marketing efforts to an entire client base, or while prospecting for new clients. Promoting new skills and offerings can create an opening to significant and lasting new business. 12

13 Stay informed and supported Working with alternative investments, as with all other investment types, will require advisors to stay informed and educated. Advisors will require access to current research, developments of new potential investment types, and the compliance aspects of these specific vehicles. Accomplishing these three steps can be a daunting task, especially if an advisor attempts them alone. But partnered with a trusted resource like Triad Advisors, advisors can grow confidently in their ability to advise and support their clients. 13

14 Triad Advisors and Alternative Investments Alternative investments can be an excellent way to engage more closely with high net-worth clients while differentiating your practice from others in the marketplace. But confidently advising these clients requires a high degree of understanding and support. Advisors working with Triad Advisors can offer their clients a variety of alternative investments along with a well-balanced look at risk and reward, backed by solid research and support. Alternative investments are a core part of a wealth management practice. In fact, if your current practice does not include alternative investments and special services for high net-worth clients, you are potentially at risk of losing these clients or diminishing your role as their sole financial advisor. Triad Advisors provides a wide range of wealth management services including investment advising, banking services, capital markets expertise, insurance, trust & estate planning, and alternative investments. That s why Triad gives considerable focus to this investment category and provides its advisors with useful tools and resources to assist their growth in these areas. 14

15 As part of the Ladenburg Thalmann enterprise, Triad Advisors provides all of their advisors access to Ladenburg Thalmann s expert, institutional-quality research, which includes coverage of income-focused equities like BDCs, closed-end funds, MLPs and traded REITs. Ladenburg Thalmann was established in 1876 and joined the New York Stock Exchange in It is one of the world s oldest and most influential financial institutions. Ladenburg Thalmann provides Triad s clients and partners with value-added insights enabling their decision-making process, informing their strategies, and allowing them to address critical market issues. We invite you to contact Triad Advisors to learn more about wealth management and alternative investment strategies. Please call our Business Development team today at We welcome and appreciate the opportunity to earn your trust and help you grow Your Business, Your Way. 15