Investing in alternative assets has become a core strategy for family offices and financial advisors who want to diversify their portfolios beyond traditional stocks and bonds.
Family offices and financial advisors face unique challenges, from generating proven returns for their clients to managing complex considerations like ESG compliance and philanthropy.
We have created this guide as a comprehensive reference, offering you high-level strategies and insights into the tactical use of alternative assets to meet these objectives.
In this article, you will learn:
- The strategic benefits of incorporating alternative assets into your investment portfolio.
- How to select and implement alternative asset strategies effectively.
- Managing risks and aligning investments with your clients ethical and philanthropic values.
This guide will equip you with the knowledge to develop an alternative asset diversification strategy confidently, ensuring your investment approach aligns with your goals and responsibilities.
Understanding Alternative Assets
Investing in alternative assets has become a core strategy for family offices and financial advisors to diversify their clients’ portfolios beyond traditional stocks and bonds.
Unlike conventional investments, alternative assets offer unique opportunities and challenges, making them an essential component of a strong, multi-generational investment strategy.
Alternative assets including real estate, hedge funds, private equity, small business financing notes, collectibles and commodities, among others, play a growing role in modern investment portfolios.
The alternative assets industry is expected to nearly double its AUM, reaching $23.21 trillion by 2026 from an estimated $13.32 trillion at the end of 2021.
The growth in alternative assets AUM is attributed to factors such as strong historic performance, as well as increased investor interest in higher returning investments despite potential interest rate increases.
Why Should I Include Alternative Assets in my Clients Portfolios?
Alternative assets can provide not only the potential for higher returns but also diversification benefits that can reduce overall portfolio risk.
Especially in times of inflation or market volatility, these assets can offer a hedge, helping to protect and grow your clients’ wealth.
Several types of alternative assets bring unusual potential benefits to an overall strategy, like the fun and enjoyment that can be experienced from investing in collectibles, art, or rare books.
Similarly, alternatives like venture capital, private equity, and small business financing notes may help to meet your clients philanthropic goals because they allow various levels of involvement with, connection to, and support of new or local businesses.
This guide will equip you with the knowledge to confidently execute on the right alternative asset strategies for your clients, ensuring that your approach not only meets but exceeds your goals and responsibilities.
By understanding these foundational elements, you’ll be better positioned to select and implement the most effective alternative asset strategies for your clients’ portfolios, justify your fees, and build strong relationships with your clients long into the future.
Strategic Approaches to Alternative Asset Investing
For family offices and financial advisors, selecting the right alternative asset strategies is not just about diversification; it’s about creating value and meeting the complex objectives of their clients.
The tactical implementation of these strategies requires a deep understanding of both the opportunities and the intricacies involved.
- Diversification through Direct Investments: Direct investments in real estate, private companies, or commodities can offer significant control and potential for high returns.
However, they demand thorough due diligence and a hands-on approach to management. This can be seriously time consuming and labor intensive.
But, done well, fitting these investments to your clients’ specific interests and values, especially regarding ESG considerations, can enhance the alignment between their financial goals and ethical standards.
- 2. Funds and Co-investments: Investing in funds, whether they be hedge funds, private equity, or real estate investment trusts (REITs), allows for exposure to a broader array of assets with a single investment.
Co-investing with other investors or family offices can also provide access to larger deals with potentially lower fees and better terms.
This approach requires a keen understanding of the fund’s strategy, management team, and fee structure to ensure alignment with your clients’ objectives. A high level of trust is required between all parties who are participating in the deals.
Again, this can be time consuming and labor intensive to put into place and to maintain over the long term.
- 3. Portfolio Construction and Risk Management: An effective alternative investment strategy involves more than just selecting the right assets; it’s about constructing a portfolio that balances risk and reward according to your clients’ risk tolerance and investment horizon.
Using quantitative models and scenario analysis can help you to understand the possible impacts of different investments on the overall portfolio performance.
- Due Diligence and Partner Selection: The success of alternative investments often hinges on the quality of the asset partners or platforms and the thoroughness of the due diligence process.
Evaluating a partner’s track record, investment philosophy, and operational infrastructure are critical steps in selecting partners who can deliver on their promises.
For example, at Supervest, a multistep due diligence, underwriting, process review, and portfolio analysis process must be completed and passed before any new funders are accepted. This is a rigorous and exacting process which means many funders are rejected.
It also ensures that prospective funders meet the operating standards and performance thresholds maintained at Supervest, which is a core part of the reason that we have successfully made all payments on time and in full to our investors since the inception of our note products.
Performing your own thorough due diligence on any investment opportunities that you are considering for your client is a huge component of the value that you offer them.
Discerning good opportunities from bad shields your clients from labor, stress, and loss. It also protects their capital and grows their wealth long into the future, providing safety for generations to come.
Aligning Alternative Investments with ESG and Philanthropic Goals
Family offices and financial advisors are increasingly tasked with aligning their investment strategies not just with financial objectives, but also with ethical, social, and governance (ESG) standards and philanthropic goals.
Alternative investments present unique opportunities to fulfill these dual objectives, offering a pathway to generate substantial potential returns while contributing positively to society and the environment.
Integrating ESG Criteria
The integration of ESG criteria into the investment process involves more than screening out harmful industries; it’s about proactively seeking out companies and projects that contribute to a sustainable and equitable world.
This helps your clients to feel great about their contributions and supports them in meeting deeply meaningful philanthropic goals.
Making use of ESG metrics and impact assessments can help ensure that your investments align with your clients’ values and the broader objectives of societal good.
Impact Investing
Beyond ESG integration, impact investing seeks to generate positive, measurable social and environmental impact alongside a financial return.
This approach often involves investing in projects or companies that directly address global challenges like climate change, health care, education, and financial inclusion.
For family offices and financial advisors, impact investing offers a way to meet their clients’ philanthropic goals while maintaining the potential for competitive returns.
As an added bonus, impact investing can also bring several tax advantages including the ability to offset capital gains taxes through impact investing.
Relatedly, impact investing can provide the opportunity to claim a charitable deduction, allowing investors to deduct the full amount of their donation to qualifying organizations from their taxes.
Balancing Philanthropy and Investment Returns
One of the primary challenges in aligning investments with philanthropic goals is balancing the desire for social impact with the need for financial returns.
Structuring investments to achieve both objectives requires a thoughtful approach, including the use of blended finance structures, where philanthropic funds are used to de-risk investments, attracting additional private capital to sectors that deliver both financial returns and social benefits.
This section of the guide provided you with strategies for aligning alternative investments with ESG and philanthropic goals, emphasizing the importance of investments that not only perform financially but also contribute positively to society and the environment.
By carefully selecting and managing these investments, you can help your clients achieve a greater sense of fulfillment and purpose in their investment activities, ensuring that their wealth creates lasting positive impacts.
Risk Management and Due Diligence in Alternative Asset Investing
For family offices and financial advisors, understanding and mitigating the risks associated with alternative asset investments is paramount to preserving capital and achieving consistent returns.
This section outlines the critical steps and considerations in managing risk and conducting due diligence effectively.
Comprehensive Risk Assessment
Every alternative investment carries its unique set of risks, from market volatility and liquidity risks to regulatory and geopolitical challenges.
Conducting a comprehensive risk assessment involves not only identifying these risks but also understanding their potential impact on investment performance.
Using tools that we mentioned before like scenario analysis and stress testing can help anticipate how different conditions might affect the investment.
Operational Due Diligence
Beyond financial analysis, operational due diligence is another foundational step to take in evaluating the infrastructure, processes, and governance of the investment, fund manager, or partner.
This includes assessing the manager’s operational integrity, investment process, and compliance practices.
Operational due diligence ensures that any partner you choose has the necessary systems in place to protect your clients assets and adhere to your agreed upon investment strategies.
Manager Track Record and Philosophy
The success of alternative investments often hinges on the skill and experience of the manager or partner.
Evaluating a manager’s track record, investment philosophy, and performance in various market conditions can provide valuable insights into their ability to deliver returns.
At Supervest, for example, we have achieved 100% success in both of our note products since their inception – fulfilling all payouts to investors on time and in full.
Ask any partners or managers you are considering difficult and direct questions about their past performance.
Engaging in thorough conversations and reviewing historical performance data are essential steps in this process.
Legal and Tax Considerations
Alternative investments can also entail complex legal and tax implications.
Understanding these aspects is vital to ensuring that investments are structured optimally and in compliance with all relevant laws and regulations.
Our note products, for example, use the 1099-INT tax document.
Ongoing Monitoring and Review
Risk management and due diligence are not one-time tasks but ongoing processes.
Continuously monitoring investments, reviewing manager performance, and staying informed about market and regulatory developments are important for adapting strategies and mitigating risks over time.
How Do I Talk to My Clients About Alternative Asset Investments?
In close collaboration with the family offices and financial advisors that we partner with, we have created this outline structure for your future conversations with clients around the topics we have covered in this article so far.
Your aim in this conversation is to understand your client’s financial goals, risk tolerance, values, and investment preferences in depth.
Understanding your client means that your advice is more likely to align with their objectives.
It means you can offer them the best experience and service, which increases the likelihood of them staying with you long into the future throughout generations of wealth transfer.
Understanding Client Goals and Time Horizon
- “What are your primary financial goals for the next 5-10 years? What about the next 30?”
- “Is there a specific financial milestone or event you’re planning for with this investment?”
Assessing Risk Tolerance and Investment Experience
- “How do you feel about risk in your investments? Are you comfortable with short-term fluctuations for the potential of higher long-term returns?”
- “Can you tell me about your past experiences with investments, particularly with alternative assets?”
Aligning Investments with Ethical and Philanthropic Values
- “How important are ethical considerations, like environmental, social, and governance factors, in your investment decisions?”
- “Are there specific causes or impact areas you’re passionate about that you’d like your investments to contribute towards?”
Discussing Investment Preferences and Diversification
- “Do you have a preference for any specific types of alternative assets, like real estate, small business finance, or collectibles?”
- “How do you feel about diversifying your portfolio with alternative assets to potentially enhance returns and reduce risk?”
Exploring ESG and Impact Investing
- “Have you considered how your investments can reflect your social and environmental values through ESG or impact investing strategies?”
- “Would you be interested in investments that not only provide a financial return but also have a positive impact on society or the environment?”
Understanding Comfort with Complexity and Fees
- “Alternative investments can be more complex and have different fee structures compared to traditional investments. How do you feel about this?”
- “Are you comfortable with the potential for higher fees in exchange for access to unique investment opportunities and strategies?”
Gauging Interest in Active Involvement
- “Some alternative investments may offer opportunities for more active involvement or direct investment decisions. Is this something that interests you?”
Fee Structures and Transparency in Alternative Asset Investing
For family offices and financial advisors, understanding the fee structures and ensuring transparency in alternative asset investing is important for maintaining trust and achieving alignment with client expectations.
Alternative investments often involve more complex and varied fee arrangements than traditional investments, making understanding and communication of these fees vital for both advisors and their clients.
We have covered in depth here the risks around misleading API offers that some alternative asset offersings can try to entice investors with.
Understanding Fee Structures
Alternative investments like private equity funds, hedge funds, and real estate investment trusts (REITs) typically have unique fee structures.
These can include management fees based on assets under management (AUM), performance fees based on the fund’s profitability, and other costs related to administration, due diligence, and operations.
Advisors need to make sure clients are fully aware of how these fees work and how they can impact overall investment returns.
Questions to Clarify with Managers or Partners:
- “Can you provide a detailed breakdown of all fees associated with this investment?”
- “How are performance fees calculated, and what benchmarks are used to measure success?”
- “Are there any additional costs or expenses that we should be aware of?”
At Supervest, we charge no fees on our products.
Both our 10% 12 month note and our 12% 24 month note are completely fee free.
We make sure your capital works as hard as possible for you, and that you keep every dollar of the achieved target return.
This is unique in the market and we are proud of it.
Ensuring Transparency and Alignment
Transparency is key to building and maintaining trust with clients.
You should always strive to give clear, concise information about fee structures and how they compare to industry standards.
This includes discussing the potential for conflicts of interest and how they are managed to ensure the client’s best interests are always the priority.
Negotiating Fees
Given the substantial investments family offices and accredited investors often make, there may be room to negotiate more favorable fee arrangements.
Advisors can leverage the size of the investment or long-term relationships with fund managers to discuss reduced fees or more aligned fee structures.
Ongoing Fee Monitoring
Fee structures and the value they provide should be reviewed regularly as part of the overall performance evaluation of the investment.
Changes in the investment landscape or the specific circumstances of the client may warrant a reassessment of fees to ensure they remain in line with the client’s best interests and long term relationship building.
Conclusion
Throughout this guide we’ve explored strategies for alternative asset investing, tailored to the needs of family offices and financial advisors.
From understanding the strategic importance of alternative assets in diversifying investment portfolios to the detail of fee structures and the role of relationship management, we’ve covered the essential elements that underpin successful alternative investment strategies.
- We highlighted the strategic benefits of incorporating alternative assets, emphasizing diversification, potential higher returns, and risk mitigation.
- We delved into tactical strategies for selecting and managing these investments, focusing on due diligence, risk management, and alignment with ethical and philanthropic goals.
- We underscored the importance of transparency, communication, and relationship building, ensuring that investments are not only profitable but also align with clients’ broader objectives and values.
As you look to implement these insights into the investment strategies you use on behalf of your clients, you might want to consider exploring deeper into specific asset classes or innovative investment vehicles.
What Next?
If you’d like to learn more you can read our article on overall family office investing strategy here.
With Supervest, investors can access a range of investment options that prioritize stability, high returns, and a hassle-free experience.
Over $7 million has been entrusted to us by investors who are looking to diversify their portfolios and meet their growth goals.
Create your free investor account here to get a no-obligation backstage tour of our platform.
