If the past several years are any inclination, advisors are done kicking the tires on alts and are hitting the road.
An annual survey from the Financial Planning Association and the Journal of Financial Planning found an acceleration in financial advisors’ use of alternative investments, including private equity funds, managed futures, non-traded REITs and hedge fund-like strategies.
In fact, more than half of advisors allocation recommendations include funds that invest in various “alternative” strategies, while 20% are making direct investments.
In the past four years, the use of some alternative strategies has risen dramatically, according to the survey. The use of private equity funds has doubled among advisors: 23% of respondents currently use or recommend private equity to clients, compared with 12.3% in 2019. Likewise, allocations to structured products (not always considered “alternative” by some investors) also doubled, from 10.9% to 20.9%, since 2019.
More traditional investments, including mutual funds, stocks and cash, fell between 2019 and 2023, and FPA President James Lee wasn’t surprised that advisors were curious about other types of investments.
Nevertheless, he noted that it is still a “relatively small” percentage of advisors that have actually implemented or incorporated alts into their portfolios. He also pointed out that 48% of respondents found the “lack of liquidity” in alts to be concerning, while 41% were concerned about fees and expenses.
“I think because of what was happening in markets, advisors were looking for alternatives that provided a hedge against traditional asset classes,” Lee said. “Advisors are able to access alternative asset classes easier than they have in previous years.”
The survey also pointed to the near total victory of exchange-traded funds over mutual funds as the investment wrapper of choice for advisors; According to the survey, 90% of advisors use ETFs, up two percentage points from four years ago. Nearly half of advisors expect to further allocate portfolios to ETFs in the next year. Use of mutual funds fell six percentage points to 64% over the same time frame, Another 8.9% expect to decrease their use in the next year.
More than seven out of 10 advisors also had “some level of confidence” that a traditional 60/40 portfolio can continue to get similar returns to its historical performance. The sentiment contrasts with MyVest CEO Anton Honikman, who declared the 60/40 model “dead and obsolete” during a panel at last week’s Wealth Management EDGE Conference.
Respondents expect to increase using or recommending PE funds, structured products and hedge funds, among other classes in the next 12 months, and also plan to use more non-traded real estate investment trusts; the amount of respondents currently using non-traded REITs also jumped from 13.2 to 16.8% between 2019 and 2023.
However, the use of individually-traded REITs went down in the same period from 20.3 to 16.8%, and only 3.1% expect to recommend them in the next 12 months, a decrease from 4.2% in 2019.
Though recommendations in environmental, social and governance funds rose from 25.5 to 34.6% between 2019 and 2023, the percentage of respondents expecting to recommend them for the next year fell by almost five points to 14.7% in that time frame; adding to the tilt away from ESG, the number of advisors expecting to make fewer recommendations to the strategies in the coming year rose from 0.3% to 4.7%.
Lee suggested one reason behind the change around ESG may be higher regulatory scrutiny and ESG’s growing role in the country’s heated political rhetoric.
The researchers spoke with 191 financial planners between Feb. 14 and April 7 of this year for the survey, with 60% reporting they were fee-only, and 52% reporting they primarily worked as an “independent IAR/RIA.” 79% reported they held CFP certification, and 47% of respondents had been in the industry for 21 years or more.
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