LAS VEGAS - Financial advisors are far from a consensus when it comes to the value of alternative investing.
While some advisors embrace the sector, others view it with skepticism and distrust. Joseph Hollen of Reno, Nev., based Hollen Financial Planning Ltd. is one such advisor.
"I don't recommend alternatives for any of my clients," he tells me at the NAPFA conference in Las Vegas over coffee. "Fees are often too high. Private equity firms have a strong sales pitch," he says. In addition, the highly illiquid nature of alternatives make the asset class far from desirable. "Life events happen. Your clients need to buy a house, send their kids to college -- it's dangerous to have money locked up for so long, especially within the 30-50 age range when such events are most prevalent."
Hollen, who, before becoming a financial planner, worked as an emergency physician for about two decades, says he chose to pursue his career as an advisor to clear up the massive confusion around finances and investments that are "aggressively" pitched to the general public.
"The public can be easily swayed by promises of stellar returns. Private equity firms won't tell you the total fees that clients will have to pay until as late as possible," he says.
Not all advisors, however, have such a skeptical view of alternative investments. Giles Almond of Charlotte, N.C.-based Matrix Wealth Advisors embraces the asset class with nearly all of his 160 clients. "We're a big believer in asset allocation and extensive use of alternative assets to be diversified well beyond stocks, bonds and cash," he says. "Four years ago, we put together an alternative investment fund for our clients, pooling money from 54 of them into a $10 million fund, which we use to allocate to real estate, managed futures, timber, high-yield debt, equipment leasing, and private equity."
Responding to criticisms of a lack of liquidity with alternative investments, he notes that with each of his clients, he aims to set aside enough liquid assets for possible events in a client's life.
"Alternative investments are more complex -- they require more due diligence," he says. "You can't just pull a Morningstar report and say you're done. Investing in alternatives on behalf of clients requires more travel and checking references of fund managers. A lot of advisors can't do that."
Almond acknowledges that clients are wary of fees for alternative investments. To combat skepticism over being "duped," he notes that fees for his clients are standard across all investments: 0.69% on average annually for the entirety of client portfolios. "We toyed with the idea of increasing the fees for alternatives, and we probably should for the extra work it takes, but it's just not worth losing trust," he says.
Advisors who champion alternative investments for their clients point to a need for sources of return that are not market dependent, diversifying sources of risk. Hollen, however, shakes his head to that.
"Equities is what clients run from due to their volatility. It's better for advisors to embrace volatility and accept 'market returns,' which are plenty good at funding most people's goals. There's no need to reach for alternative areas and I question their very diversification," Hollen concludes, adding that advisors must be very careful of imitating large endowments, such as Harvard and Yale universities, which are often celebrated for their use of alternatives. While such endowments will get the best private equity managers for free, advisors will get left with the "leftover" managers, he adds.
For now, general skepticism among advisors over the long-term value of alternatives for their clients remain. Only time will tell whether the sector is truly wise for clients, a marketing gimmick, or on par with more traditional (and safer) investments, NAPFA attendees say.
- Low Interest Rates Could Ding Retirement Plans, EBRI Warns
- Hiring an Advisor? Woo the Spouse
- New Emerging Markets Math: Debt Versus Equities