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The investing landscape has undergone a significant transformation with the emergence of new challenges, including inflation and stock market volatility. Traditional investment strategies like the 60/40 portfolio may be vulnerable in the face of these shifts. Just as tried-and-true strategies fade in relevance, new ones rise to the surface. Once the exclusive domain of large institutional investors, alternative assets are now accessible to a broader range of investors. These investments provide numerous benefits including diversification, steady cash flows, innovative alternative funds, and direct investment opportunities. In this article, we explore the potential of alternative assets to navigate the changing investment climate. Plus, you’ll discover how self-directed IRAs (SDIRAs) can empower your clients to mobilize their retirement funds to capitalize on emerging prospects.
Embracing Alternative Assets
For top advisors, alternative assets may offer the potential for higher returns compared to the stock market. Most assets on public stock exchanges have already been heavily analyzed and scrutinized by top investment managers. By contrast, some investment opportunities in real estate and private equity may have only been viewed by a handful of investors. This may significantly increase your odds of finding a true diamond in the rough. Additionally, incorporating alternative assets may also enhance your value proposition to prospective clients. By expanding your expertise and offering a broader range of investment options, you can differentiate your skill set in a competitive market.
5 Alternative Asset Classes to Explore
1. Private Equity
While private equity often brings more risk than publicly traded assets, this asset class offers tremendous potential for sky-high returns and long-term capital appreciation. By investing in companies in their early stages or undergoing transformational phases, your clients can access a unique avenue for growth and diversification. If you have expertise in high-growth sectors like technology, healthcare, and renewable energy, you may be able to offer your clients an edge.
2. Private Credit
In a high-interest rate and high-volatility environment, private credit offers many opportunities. Firstly, private credit investments can provide attractive yield potential that outperforms traditional fixed-income investments. By lending directly to borrowers, your clients can take advantage of rising interest rates and generate substantial income from their investments. Second, private credit offers access to counter-cyclical opportunities. These assets historically perform well when the economy cools. In particular, asset-based lending strategies often exhibit reduced sensitivity to broader economic cycles. Rather than relying on the performance of a single borrower, asset-based lending collects revenue through a pool of cash flow-generating assets. Small and medium-sized businesses frequently utilize asset-based lending to address their immediate cash flow needs. If cash flow dries up in times of high volatility, lucrative opportunities may arise for your clients.
3. Hedge Funds
One of the most potent advantages of hedge funds is the opportunity for increased returns. With various investment styles available, your clients will have the ability to customize their investment strategies based on their specific goals and risk tolerance. Moreover, hedge funds provide access to some of the world's most talented investment managers, who can apply their expertise to generate potentially higher returns. However, it's important to consider the potential disadvantages of hedge funds. Many utilize concentrated investment strategies, exposing them to potentially significant losses. Additionally, hedge funds tend to have less liquidity compared to standard mutual funds. They often require a longer-term commitment, as funds are typically locked up for extended periods.
4. Real Estate
One key reason to consider real estate is its potential to generate consistent income and long-term appreciation. Rental properties, commercial buildings, and real estate investment trusts (REITs) can provide a steady stream of rental income, which can be especially valuable for clients seeking passive income streams or stable cash flow in retirement. Real estate investments have historically shown resilience and acted as a hedge against inflation. Real estate values tend to rise over time, keeping pace with or outperforming inflation rates. This can help protect the purchasing power of clients' portfolios and provide valuable long-term growth.
Additionally, real estate values have a low correlation with traditional financial assets like stocks and bonds. Adding a property or two to your client’s portfolio may help reduce volatility and improve risk-adjusted returns. Further, real estate investments can provide tax advantages, such as depreciation deductions and the ability to defer capital gains taxes through 1031 exchanges. Of course, real estate is not without its downsides. Their illiquid nature and the potential for ongoing property management lead many clients to steer clear of this asset class. As an advisor, you must conduct thorough due diligence, assess the risk-reward profile of specific real estate opportunities, and ensure that real estate investments align with your clients' investment goals, risk tolerance, and time horizon.
5. Infrastructure
Infrastructure assets typically provide long-term, stable cash flows and can offer a hedge against inflation due to their essential nature and potential for regulated or contracted revenues. Infrastructure investments can offer your clients a balance between income and growth potential while focusing on long-term stability. While you communicate the benefits, help your clients understand the specific risks associated with infrastructure investments. These include regulatory changes, project execution, and environmental considerations, among others.
Stand Out In A Competitive Market
Adding alternative asset expertise to your arsenal could be just the edge you need. The ability to navigate investments in alternative assets is a valuable skill set that can set advisors apart in today's dynamic market. By staying ahead of the curve and offering insights into a wide range of asset classes, you can strengthen client relationships and increase retention. Your clients will appreciate the option to diversify their portfolios and spread risk. By venturing beyond traditional investments, your clients will be able to access unique risk-return profiles and potentially enhance long-term growth.
Integrating Alternative Assets Into Your Repertoire
While alternative assets present compelling opportunities, you might face challenges integrating them into client portfolios. Client education becomes paramount, as you will need to help clients understand the nuances and benefits of different alternative investments. Thorough research and due diligence are necessary to evaluate and select suitable alternative investments. Additionally, you should address concerns surrounding illiquidity and high minimum investment requirements associated with certain alternative assets.
The Role of Self-Directed IRAs
Most IRA providers only allow investment in stocks, bonds, and mutual funds. A self-directed IRA (SDIRA) can empower your clients to invest in any asset that the IRS allows, including real estate, private equity, and infrastructure. With an SDIRA, advisors gain access to a larger pool of client funds that can be allocated toward alternative investments. Indeed, average retirement savings dwarf average personal savings at every age. Additionally, SDIRAs are tailor-made to support long-term investing strategies. The IRS rules penalize investors for early distribution. This extended investment horizon aligns well with the illiquid assets available with an SDIRA. These investments often require time to mature, appreciate in value, or generate income, encouraging investors to take a patient approach toward capitalizing on long-term growth.
Build Your Alternative Asset Education to Fuel Client Growth
The combination of alternative assets and SDIRAs presents a significant opportunity for financial advisors and their clients. If you’re able to properly communicate the potential upside of an SDIRA, you may be able to diversify portfolios, boost returns, and set yourself apart from the competition. The first step is to help your clients better understand alternative investments.
Download our guide, The Future of Investing: 7 Alternative Asset Trends to Watch. By fortifying your knowledge, you can navigate the shifting investing climate and unlock new possibilities for your clients’ portfolios.
