Updated Monday, July 28, 2014 as of 4:34 PM ET
Questioning Advisors on Alternatives
Tuesday, July 22, 2014
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Do advisors know enough about alternatives to recommend them to clients?

Wall Street Journal investing columnist Jason Zweig recently wrote a cautionary piece about advisors and alternatives.

Citing a survey by Natixis Global Asset Management, he pointed to some alarming numbers. Only 31% of advisors said they feel they understand alternative investments “very well,” with 53% of advisors saying alternatives are “often too complex to explain.” And yet, 89% of advisors put at least some of their clients’ money in these alternative investments. 

This “might seem like the blind leading the wined and dined,” Zweig concludes. Determining whether an alternative is accomplishing its goal is difficult, Zweig notes, but he suggests that consumers ask advisors what benchmarks they will use to evaluate each investment that is recommended. This has two key benefits for consumers:

  • It will tease out how well the advisor understands the alternative investments being recommended.
  • It will make sure that the advisor doesn’t change the benchmark later.

Regarding his advice to consumers, he says the key benefit of identifying the right benchmark is that is helps make sure that the advisor really knows the role of the investment in the clients’ portfolios. It’s important to know under what circumstances the investment will do well or poorly, he says.

To be sure, Zweig agrees that it’s very difficult to come up with a benchmark. For example, according to Morningstar, the 361 Managed Futures Strategies Fund (AMFQX) earned 2.61% in 2013. That bested the category average of a -0.95% return, but well underperformed the 32.39% total return of the S&P 500.  Should a client in this fund be happy with this return?

Benchmarking alternatives is anything but simple but, as Zweig clearly points out, it’s also critical. In future pieces I’ll suggest some benchmarks to use.

Allan S. Roth, a Financial Planning contributing writer, is founder of the planning firm Wealth Logic in Colorado Springs, Colo. He also writes for CBS MoneyWatch.com and has taught investing at three universities.

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