Editor's note: Originally published on December 20, 2014
by Chris Turner
This is one of the biggest questions that haunt many advisers. Should they risk introducing their clients to alternative investing? However, before they can even begin relaying the option to their clients they need to know how to talk about alternative investments to their clients as well as which clients they should be recommending these options to.
When advisers talk about alternative investments, they usually use language that is too difficult for the clients to understand. When communicating something as sensitive as investing in alternative vehicles, it should be explained as simply as possible to the client without using any references that they can quote back to you later if the investment doesn’t go according to plan.
The discussion with the client should revolve around and include only those topics and information that will help them understand how alternative investments are beneficial for them. Avoid giving them too much information as well, as it will only overwhelm them. However, make sure they understand what they are getting into by explaining the risk as well as the liquidity issues involved in making an alternative investment.
Although advisers shouldn’t provide too many details to the client, this doesn’t mean they shouldn’t carry out their own homework related to the alternative options that they are advising. By sticking to the most basic of the reasons why clients should invest in alternative options, clients are most likely to agree to the suggestions being provided by the adviser. Once again, avoid going into actual case references as much as possible because clients tend to cling to these numbers.
They will already start planning how they will use the money they will make from the alternative investments. In case that this does not happen and if they do not get the returns that were quoted by the adviser in the most favorable of situations, they will likely be perturbed. A good point to start your discussion is with the profits endowment funds make by investing in alternative options, as well as the fact that a large portion of their portfolio comprises of alternative options. This shows the success that professional investors have had in alternative investment which will also help strengthen the resolve of clients and convince them to invest in these options.
One of the most common questions many clients put forward to advisers is why should they consider investing in nontraditional investment options instead of the more traditional ones. At these times, it is essential to show and discuss the performance of the alternative investments during the ups and downs of the market and discuss how these investment options help stabilize the market.
Why an adviser should offer alternative options to their clients is another question that needs to be pondered. There is no arguing that by making a profile of the traditional investment options, good returns can be made while minimizing risk. However, offering these investment options allows for a different category of clients who will bring with them bigger accounts with larger investments. This is due to the variety as well as the tax benefits that are provided by alternative investments. Experienced clients who understand the potential in these investments would be looking for advisers who are willing to help with these investments.
Usually, these options are advised to those clients who are considerably well-off and, as a result, will be able to stomach the risk involved and be able to bear the loss in the worst-case scenario. However, rich clients who do not deal well with the unpredictability of the market should not be given this option because the ups and downs these options go through are not for the weak of heart.
In the end, it will suffice to say that like every investment option, alternative investment options have their own risks and benefits. However, before advising an alternative investment option to a client, every adviser should study the option thoroughly to make sure it is worth investing in. These types of alternative options not only provide unmatched tax benefits but a properly executed alternative investment can result in handsome profits for the client. However advisers who do not have prior expertise should not attempt an investment without taking advice from an experienced broker or adviser.