20/05/2024 Feature Articles 4 minutes to read Back to all News & Insights
Author Denis Orrock
Chief Strategy Officer, Praemium

In the dynamic landscape of high-net-worth (HNW) investing, a notable trend has emerged: the growing integration of alternative investments into portfolios. Praemium’s recent research with CoreData into how investors and advisers are using alternatives, sheds light on the profound implications of this shift, revealing a correlation between alternative investments, heightened engagement, and strengthened adviser-client relationships.

Over the last few years HNW investors have been the drivers of a significant increase in the allocation to alternative investments, with over 17% embracing the asset class. And with the world’s wealthiest investors increasingly aligning their portfolio allocation with that of endowment strategies, it’s a trend projected to continue.

The allure of alternative investments lies in their diverse range of opportunities beyond conventional assets like stocks and bonds. Assets such as private equity, hedge funds, real estate, and commodities offer unique risk-return profiles, serving as effective diversifiers against market volatility and offering the potential for attractive risk-adjusted returns.

What the research highlights is that this is more than just a diversification strategy and flags a compelling connection: HNW individuals who incorporate alternative investments into their portfolios tend to maintain more robust relationships with their financial advisers. Over half (56%) of HNW investors embracing alternative investments have ongoing relationships with their advisers, a significant increase compared to their counterparts (36%) who eschew alternative assets.

Moreover, HNW investors embracing alternative investments exhibit a remarkable level of engagement in their investment activities. A striking 62% express high levels of engagement with their portfolios, in contrast to the 37% reported among investors sticking solely to traditional asset classes. This heightened adviser-client connectivity underscores the importance of alternative investments in fostering long-term partnerships focused on wealth management.

Delving into alternative investments requires a deeper understanding of market dynamics and complex investment strategies. HNW individuals exploring these avenues exhibit a better grasp of investment concepts, as evidenced by the research, where 79% of HNWs using alternatives cited a good understanding of risk and return of different investments compared to 56% of HNW investors who don’t use alternatives. This increased investment literacy empowers investors to make informed decisions and actively shape their investment strategies, driving their heightened engagement with investment activities. By engaging HNWs in conversations about alternative investment opportunities, advisers can also foster a sense of collaboration leading to more fruitful and satisfying relationships.

While a significant portion of advisers (62%) recommended alternative investments to their clients in the last year, they are highly selective on who they recommend to. With 64% of investors seeking out their own methods for investing in alternatives, there appears to be a disconnect between the level of interest HNW investors have in these investments and the frequency with which advisers engage their clients on the topic.

While advisers are rightly careful to ensure that recommendations are appropriate, it’s crucial to recognise the growing client interest in alternatives. Proactively starting conversations about these investments can prevent clients from seeking opportunities independently, potentially bypassing professional advice and risking suboptimal investment choices.

The potential for higher returns and effective risk diversification makes alternative investments an attractive option for many HNW investors. However, the complexity of these investments necessitates a collaborative approach between advisers and clients. Advisers who take the initiative to discuss and educate clients about alternatives have a unique opportunity to deepen client relationships through enhanced engagement and education. By embracing discussions on alternative investments, advisers can unlock greater collaboration, empower clients to make informed decisions, and ultimately secure more robust and long-term adviser-client relationships. Seizing this opportunity is not just about staying relevant in a rapidly changing financial environment; but also providing sophisticated, comprehensive advice that truly meets the evolving needs of high-net-worth investors.

For a copy of the research visit www.praemium.com/alternatives