I have heard the argument many times – ‘You can’t build a high-net-worth wealth management practice without alternative investments’ or ‘how can you build a high net worth practice when the clients start asking about alternative investments or private companies?’

The narrative is that to attract sophisticated clients to a sophisticated wealth management practice, you need sophisticated solutions, like alternative investments.

When I hear this, I chuckle to myself and ask: ‘ok…is this for me to help clients, or for me to help market myself?’ 

This is Part I of a series for Canadians who are being pitched new and exciting types of investments by their advisor – and want to know what these are, how they work, and are they worth the hype.

Who are alternative investments REALLY for?

There’s an industry line you hear ‘when there’s volatility, there is money in motion’.  It’s a trope that when investors feel jittery about the markets and are agitated by whatever is going on, they’re more likely to look into something different.

It gives our body a shot of dopamine.

Alts are the shiny object du-jour.

These strategies used to be available to pensions, endowments, and the very wealthy – those who could both pay high minimums, would be able to lock away their capital for longer periods, and are ok with the potential for their investment going to zero because they have tons more money elsewhere.

Various types have become more and more available to everyday investors over last 25 years creating a narrative that ‘the 60/40 portfolio is dead’ – it hasn’t died – though the marketers of alts continue to use it to tell advisors that we need a sleeve of alternative investments to ‘show clients a little more’.

“These are sophisticated strategies that only sophisticated investors used to be able to invest in.  You’re don’t want unsophisticated investments, right?” You can see their draw from a marketing standpoint.

Institutions big and small have launched new funds and marketed to advisors like myself as a new tool to use with all clients – even being called ‘the democratization of alts’.  Go finance industry!

As one firm put it: “Investing in alternatives is no loner an alternative.  It’s a necessity.”

Alts come in various shapes and sizes which – the general theme of the pitches comes down to some sort of risk/reward benefit to the client’s investments.

It is important to consider the original user of alternative investments. A pension fund works based on broad populations and a specific mandate. They can get a pretty good guess as to how much money they will need to pay out each year, the average age of its plan members, projected deaths etc... At broad populations, making their monthly payouts are relatively straight forward.

Pension plans aren't dealing with real people per se. There is no line item in for the pension manager that member # 16295 is planning on giving an inheritance early or had large unexpected expenses. That was never their job.

Real people have things they can plan for, and the unexpected.

One thing that I’d like to explore is the question of ‘how do alternative investments fit into an individual client’s implementation plan?’

If the 60/40 portfolio is dead, and we NEED alts, how do they fit in when we’re bringing a client’s plan to life?

·If a couple is saving money for a bigger house in five years – do alts make sense?

·If you are saving money for a child’s education – do alts make sense?

·If you’re saving for retirement – do alts make sense?

·If you have too much money that you could possibly spend – do alts make sense?

The latter being the base case of the high-net-worth investor who these funds were marketed to initially.

I'll include a breakdown of different types, based on:

·What are they?

·How do they work?

·Does the sizzle and the steak match up?

·What are the risks?

·And how would they fit into a client’s portfolio when implementing their plan?

If the 60/40 portfolio really is dead, alternative investments must make sense both on their own right and they make sense for investors within their plans.

In this series, I am going to break these different types of alts down, so you can be better informed on your investment journey, and answer the question – are alts a better fit for the clients and their goals, or they just for my marketing efforts?