Talking with clients about alternatives can be challenging, but low yields in the fixed-income space and upticks in volatility have increased the importance of these conversations. In such an environment, advisors need to make sure they’re informed not only about what alternatives are – but why they matter.
Talking together? Or talking past each other?
Advisory practices in the United States have offered their clients alternative investments for much of the past decade. Yet – when it comes to discussing alternatives – there is evidence that advisors and investors are talking past each other.
Advisors have taken the time to learn about alternatives – and over four of five (83%) report that they have spoken to clients about them.1 However, advisors report that only one in three of their clients understand alternatives. Interestingly, the majority of individual investors (54%) say they have never discussed alternatives with their advisor. Moreover – according to the 2015 Natixis Global Survey of Individual Investors – clients have misconceptions about alternatives: they’re riskier than other investments (73%); they have higher fees (67%); they’re not accessible by individual investors (52%). These disconnects between advisors and their clients suggest that it may be time to change the conversation.
Financial professionals like to talk about the “what” of alternatives and how alternatives work is also a popular topic. Being able to explain how alternatives are invested and the risks associated with them is a critical part of the alternatives conversation between advisors and clients. Nevertheless – despite their technical mastery – advisors may be missing the most important part of the alternatives discussion: why clients may need to own them in the first place.
The real need for alternatives
There is no question that the topic of alternatives can present communications challenges.
Yet, when investors are asked where they want help in their portfolio – they point to what alternatives have the potential to provide. For example, a large majority of investors (83%) want strategies that offer a balance of risk and return. More than three in four individual investors (78%) want strategies that offer better portfolio diversification and strategies that help insulate them from volatility (76%). This should be the starting point for any discussion about alternatives.
Open to advice
When it comes to alternatives, clients trust their advisors; three in four say if their advisor recommends alternatives, they would consider them for their portfolios. For this reason, it is all the more crucial that advisors be able to explain to their clients why alternatives might fit into their overall asset allocation.
Changing the conversation starters
Conversations about alternatives should encompass the thing clients' care more about – risk, volatility and diversification. The following points present some rationale for the possibility of introducing new, non-correlated asset classes to a portfolio:
- The S&P 500® has generated impressive returns for the past six years, but can it continue on this trajectory for years to come?
- How can clients diversify their portfolios in order to be better prepared for any potential market correction?
- Bonds have traditionally provided a ballast in many portfolios, but yields have been very low. Where can investors turn for potential new sources of return?
- Interest rates have been declining for decades – what can clients do to help account for any future rate increases?
1 Natixis Global Asset Management, Global Survey of Financial Advisors conducted by CoreData Research, September 2014. Survey included 1,800 financial advisors in 10 countries.
2 Natixis Global Asset Management, Global Survey of Individual Investors conducted by CoreData Research, February 2015. Survey included 7,000 investors from 17 countries.
Alternative investments involve unique risks that may be different than those associated with traditional investments, including illiquidity and the potential for amplified losses or gains. Investors should fully understand the risks associated with any investment prior to investing.
This material is provided for informational purposes only and should not be construed as investment advice. The views and opinions expressed above may change based on market and other conditions. There can be no assurance that developments will transpire as forecasted.
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