Professional Adviser: Democratizing finance: Alternatives and the role of financial advisers

Technology, changes in regulation, and sophistication in the types of advice and portfolios available to investors are driving the democratization of alternative investments. J. Womack explores the issues for advisers...

The singular use of the traditional 60/40 portfolio as the workhorse of the advice industry has steadily eroded in recent years. The disappointing performance of equity and fixed-income investments over the last year has added to this decline.

The 60/40 portfolio strategy, once a mainstay of experienced investors, fell by 16% last year as traditional diversification benefits broke down, creating a pervasive sense of caution among investors.

This unprecedented market uncertainty has helped to pave the way for the alternatives revolution.

As we continue to face fraught macroeconomic conditions, alternatives can be an ideal diversifier to combat increased equity, volatility, and rising interest rates. Alternatives appeal to many investors actively looking for improved drawdown control, broader diversification, and enhanced returns.

But that doesn't mean this market is bereft of nuance and complexity. As we move towards the democratization of alternatives, financial advisers have an important role to play. They can add value by raising awareness of this asset class and helping investors access alternatives to navigate current market conditions and future uncertainty.

Making alternatives accessible

Investing in alternatives has largely been reserved for institutional and high-net-worth investors due to high eligibility requirements. Much of that is now changing. Technology, changes in regulation, and sophistication in the types of advice and portfolios available to investors are driving the democratization of alternative investments.

As technological advancements have increased access and opportunities for retail investors, a financial adviser's role has become even more important. With so many products and services to choose from, retail investors may not understand if their portfolios are tailored and constructed to meet their financial goals. The paradox of choice is increasing the need for financial advice that helps investors choose from the myriad of available investment options.

The role of the adviser

Advisers have a huge opportunity to demonstrate the value of professional advice by helping their clients understand the role that alternatives can play as part of a diversified portfolio. And it's critical to adopt a goals-based approach to ensure that they tailor each portfolio to their clients' needs, taking into account the liquidity dynamics alternatives demonstrate that traditional assets don't. Replacing traditional adviser-driven wealth management with co-planning and ongoing client-adviser engagement—supported by technology—places the client at the conversation's center with the adviser serving as coach.

Education, education, education

The array of alternative investments is vast. And even though access has increased significantly, there is still a lack of understanding and awareness of this asset class among both advisors and investors. As such, education around alternatives will be vital to ensure that clients actually receive the benefits of increased diversification and enhanced returns.

One way advisers can stay ahead of the competition is through outsourcing. Increased adoption of outsourcing across middle- and back-office functions and processes has become an imperative as funds expand into private markets. By working with tech providers, advisers can stay on top of the changing alternatives landscape, increase operational efficiency, and free up their time to do what they do best: provide holistic advice to their clients, keeping them focused on their goals through ongoing coaching.

The road ahead

It's clear that the appetite for alternatives is here to stay as the migration down market continues. This democratization of alternatives represents a way to help increase availability of investment options in private markets for a broader investment population, where there has always been, and continues to be, appetite.

As technology advances and more asset managers look to alternatives for growth, retail investors will enjoy wider access to a greater array of asset classes and strategies. With so many available investment options, advisers must not only help their clients understand the risks and rewards, but also guide and support them in constructing portfolios that reflect their goals, appetite for risk, and liquidity needs.

The article first appeared in Professional Adviser.

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The following information can be sourced to Reuters:

• The 60/40 portfolio strategy, once a mainstay of experienced investors, fell by 16% last year.

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