The Role of Financial Advisors in Building an Alternative Investment Strategy
While traditional assets like stocks and bonds are essential to most investment portfolios, sometimes they may not be enough to meet all your financial goals. Alternative investments can help you here. These include assets such as cryptocurrencies, real estate, hedge funds, private equity, infrastructure, venture capital, annuity plans, and more. They offer the potential for higher returns, portfolio diversification, and inflation protection, but they can also be complex and volatile. That is why consulting a financial advisor can be helpful when exploring these options.
This article will discuss how a financial advisor can help you build and implement the best investment strategies for alternative investments that align with your goals and risk appetite.
How can financial advisors help you build an alternative investment strategy?
1. They can help you understand the various alternative investments available in the market
The first and most important step in investing, especially in alternative assets, is understanding the product. While alternative investments are not particularly new and have existed for decades, they may still be unfamiliar territory for many people. Unlike traditional investments such as stocks and bonds, alternative assets can be riskier, less liquid, and harder to evaluate. A financial advisor can help you by first explaining the various categories of alternative investments available in the market.
They can educate you, so you understand not only what the options are but also how they work, what risks they involve, and whether they suit your financial goals and risk tolerance.
Some popular alternative investment options include commodities, real estate, infrastructure, hedge funds, cryptocurrencies, art and collectibles, private equity, peer-to-peer lending, and more. When building an alternative investment strategy, you must first understand these products. For instance, real estate includes property ownership, such as residential, commercial, farmland, etc. It also includes investments through Real Estate Investment Trusts (REITs). Commodities include goods like natural gas, oil, gold, silver, etc. Cryptocurrencies include digital assets such as Bitcoin and Ethereum. Hedge funds pool investments using a range of strategies to generate returns for investors. Private equity includes venture capital, which involves investing in startups or buyouts, which refers to acquiring mature businesses. Alternative investments also include tangible assets like art and collectibles. Some common examples include rare wines, fine art, rare coins, vintage cars, autographed baseballs, and others.
Each of these alternative asset classes differs in terms of what they offer. They also come with their own risk profiles, return potential, and liquidity profiles. For example, private equity and real estate investments are typically long-term and can be hard to liquidate in case of emergencies. Commodities, cryptocurrencies, or collectibles, on the other hand, maybe short to medium-term. They can also be used as long-term investments. A financial advisor helps you understand these factors, so you can make informed decisions.
2. They can help you get started and pick suitable alternative investments
Once you have understood the basics of alternative investments, the next step is to start investing. A financial advisor’s role becomes even more valuable here. It is one thing to know what real estate, private equity, or commodities are and quite another to know how to evaluate their relevance in today’s market, where to invest, and when to make your move.
Investment opportunities can change with shifts in supply and demand, changes in interest rates, and global events. A financial advisor can guide you in understanding how different alternative investments are currently performing and offer insights that help you make informed decisions.
Take the U.S. housing market, for example. Right now, the U.S. is experiencing a significant housing deficit, estimated between 2 and 3 million homes. This presents an opportunity for real estate investors. In simple terms, there is way more demand than supply, which makes real estate development a profitable venture. Moreover, the real estate landscape offers long-term potential, with passive income opportunities, as well as capital appreciation. It can also be passed down to future generations as an estate planning tool. If you are considering real estate as part of your alternative strategy, this could be an opportune time to enter the market, and a financial advisor can show you the best routes to do so, such as through direct property ownership or via REITs and real estate funds.
Private equity is an alternative asset class that can be suitable in the current economic climate. Following years of low interest rates, the country is now in a high-rate environment with inflation. These conditions are forcing investors to focus on companies that can grow profits even under pressure. Private equity buyout funds may offer attractive opportunities during this time. These funds typically invest in companies by acquiring a stake in them. The ultimate goal is to sell them at a higher value in the future. A financial advisor can help you assess which funds are suitable and align with your risk tolerance and financial goals.
Ultimately, knowing about these investment options is only the first step. A financial advisor can help you enter these markets. They can guide you on the minimum investment amount that applies to such investments and help you understand the liquidity and risks of each of these options.
3. They can help you invest as per your goals
Alternative assets carry higher risks than traditional options. They are also a lot less liquid compared to others. Moreover, they are more suitable for people who can keep a long-term horizon. It is essential to figure out the right amount of exposure you can allot to alternative instruments to ensure they match your risk appetite and goals. A financial advisor can help determine how much of your investment portfolio should be allocated to alternative assets based on your age, investment horizon, liquidity needs, and financial goals. For example, it may not be the best investment strategy for retirees to invest in relatively illiquid assets like private equity. These require a long investment horizon and also carry a lot of risk, which may not be ideal for retired investors. However, a younger individual with a higher risk tolerance and a longer time frame might be better suited for these opportunities.
Your net worth also plays a role in deciding which alternatives are suitable for you. For instance, suitable alternative investments for high-net-worth individuals can include private equity and hedge funds. These vehicles usually require high minimum investments and may involve complex strategies that are not appropriate or even available for the average investor. High-net-worth clients can also opt for real estate, cryptocurrencies, commodities, and collectibles. While some of these options may be suitable for investors from relatively lower-income groups, they still need to be more mindful and cautious.
A financial advisor can help you evaluate these assets and others based on how well they fit with your overall plan. For example, investing in cryptocurrencies might appeal to younger investors looking for growth and willing to tolerate volatility even if they do not fall into a high-net-worth bracket, while real estate could appeal to a retiree seeking passive income. A good financial advisor can help you understand how these assets behave and how they contribute to your overall portfolio.
4. They can help you diversify your portfolio
Diversification is key when it comes to investing. Apart from your stocks and bonds, you also need to diversify your alternative investment portfolio to ensure it stays aligned with your goals while also reducing risk. Alternative investments are not all the same. A financial advisor can help you understand how these different assets fit into your portfolio.
For instance, venture capital can offer the potential for high returns. However, it also comes with higher risk, longer holding periods, and lower liquidity. These investments are typically best suited for high-net-worth individuals who have a high-risk tolerance and are looking for a long-term investment strategy. If you fall into this category, a financial advisor can help you evaluate whether venture capital aligns with your overall goals and risk profile.
If you do invest in these options, you would also need to add some stable assets to your portfolio to lower the risk brought by venture capital. Assets like real estate can contribute to portfolio diversification. They can help create a hedge against inflation. Real estate has the potential to generate regular income through rental yields while appreciating in value over time. You can also consider infrastructure investments, like renewable energy projects, water treatment plants, stadiums, etc. These, too, may offer steady returns and lower volatility. A financial advisor can help you study all of these options. They may also suggest looking into commodities such as gold, oil, or agricultural products for inflation protection. Commodities are not correlated to stocks and bonds, which makes them suitable during inflationary periods.
Collectibles, such as fine art, vintage wine, rare coins, or luxury watches, can further diversify your portfolio. These tangible assets not only offer diversification but may also hold sentimental value and can be part of your estate planning. While the market for collectibles can be illiquid, and it may be more challenging to sell them, they offer the potential for long-term appreciation and have a low correlation with the stock market. This makes them attractive to certain investors.
The key takeaway here is that alternative investments offer different strengths, ranging from growth, inflation protection, and even estate planning. But they also carry varying levels of risk, liquidity, and complexity. A financial advisor can help you build a balanced mix of alternative assets that complement your broader investment portfolio. They can assess your financial goals, timeline, and risk appetite to ensure that your diversification strategy is truly aligned with your long-term objectives.
5. They can teach you how to invest in alternative investments
Unlike shares that are traded on public exchanges, many alternative investments are accessed through private markets. A financial advisor can teach you how to invest in them properly. Most alternative investments are offered directly by issuers or through private investment vehicles such as venture capital funds, hedge funds, private equity funds, real estate funds, and private credit funds. These are not listed on public markets, and they do not trade on formal exchanges. Instead, they are transacted privately and may have specific entry requirements.
Many private funds require a minimum investment of $100,000 or more, with some elite funds demanding upwards of $10 million. This makes them inaccessible to the average investor. Moreover, these funds are often limited to qualified or accredited investors. Because of this exclusivity and complexity, it is critical to have guidance from a financial advisor. Advisors can help you understand the structure of each fund or asset class, evaluate the risks and returns associated with them, follow the documentation and due diligence process, and more. They can also help you understand the illiquidity of these investments and understand how they can be liquidated when the time comes.
Navigating alternative investments with professional guidance
Alternative assets can be a part of the best retirement investment strategy. They can also support goals like wealth creation, estate planning, and long-term portfolio growth. However, these investments are not suitable for everyone. And even when they are, they demand careful research, a clear understanding of the asset class, thoughtful diversification, and strategic risk management. That is why working with a financial advisor is essential. Advisors can educate you about the options suitable for you, align investments with your personal goals, and help you create a diversified portfolio.
Consider our free advisor match tool that can match you with 2 to 3 experienced financial advisors who specialize in alternative investments and can guide you on how to build an alternative investment strategy.
