Planners fail to understand alternative investments
Financial planners have not been interested in alternative investments since they do not pay commissions - but have disguised this by claiming alternative investments do not offer liquidity within a client portfolio.
However, the need to have a portfolio that is totally liquid “is a widespread industry furphy that allows planners to churn product”, according to BlueSky Alternative Investments managing director Mark Sowerby.
Sowerby readily admits that alternative investments do not offer the daily liquidity demanded by many planners and platforms, but said many planners did not understand the investments. He added planners were not aligning the needs of clients with the provision of advice and application of products, but said they cannot claim ignorance.
“When alternatives first appeared about 15 years ago they could be excused for not knowing about them, but not anymore. The information is out there and has been for some time,” Sowerby said.
The Australian market for alternative investments was unsophisticated, according to Sowerby, with institutions investing about 15 per cent of portfolios into the asset class while self-managed super funds invested about 1 per cent.
“Australia has become an insular and conservative market in recent years, with a reluctance to pay for expertise and a willingness to overlook returns to focus solely on investment fees,” Sowerby said.
“Fee-for-service will change this attitude, and that has been a great structural change which for alternative investment managers has been a slow burn.”
The shift to fee-for-service and the need to find other sources of investment return would boost the stocks of alternative investments, according to Sowerby, who points to the Future Fund as a template.
“Alternative investments will occupy 20 to 30 per cent of portfolios in the next 10 to 15 years, with a number of major product providers already looking at how to offer products and considering which managers to use,” he said.
“They also offer a point of differentiation for planners who often compete on price, and when you look at alternatives’ performance, as evidenced in the Future Fund, you can see they are useful, but you do have to do the work to understand and advise on them.
“However, planners who are interested in alternative investments cannot see this as a 'part time’ job. They need to be either in or out. A 20 per cent allocation will require 50 per cent of their time in coming to terms with how they work and the benefits for clients, but they will generate 50 per cent of returns,” Sowerby said.
“The time spent on managing alternative investments will decrease as the investments are long-term - but the pay-off is a multi-year event.”
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