Wirehouse Brokers Use Alternatives the Most; RIAs the Least

According to the firm’s “2011 Financial Professionals Alternative Investments Study,” which surveyed 300 financial advisers and planners, 80% report they are currently using alternative investments with their clients, while 95% have some level of experience with these strategies. And, among those currently using alternative strategies, 55% plan to increase use in the next year.

“Financial intermediaries clearly recognize the valuable role alternative investments can play in their clients’ portfolios,” said Peter Cieszko, American Century Investments senior vice president of North America. “It’s incumbent on asset management firms to offer an array of options so that financial professionals can devise customized solutions in line with their clients’ long-term goals, time horizon and risk tolerance.”

Among financial professionals participating in the study, almost one third of their clients have alternatives in their portfolios; the average allocation to alternatives in a typical client portfolio was 17%. Intermediaries who indicated “extensive” experience with alternatives reported higher use across their client base (an average of 49% of their clients) with the average allocation of a typical client at 23%.

Current use of alternatives varies by type of financial professional, with wirehouse brokers (90%) reporting the greatest level of use, while registered investment advisers (68 %) report the lowest level of use. Also, 83% of regional brokers and 81% of independent brokers indicate current client use.

Types of Alternatives 

When financial professionals were asked to name the type of alternative investments that are most top of mind, “precious metal commodities” were cited by 75% of respondents, “natural resource commodities” by 67% and “hedge funds” by 65%. Among intermediaries using alternative strategies with clients, “precious metal commodities” ranked first for use at 40%, “natural resource commodities” ranked a close second with 39% and “U.S. REITs” ranked third with 33%. The least-used alternative investments were “bear market” vehicles (3%).

“These ‘top-of-mind’ and ‘use’ statistics might suggest that financial intermediaries are currently gravitating toward more tangible, less esoteric strategies such as commodities,” said Cieszko. “That said, over time we anticipate increased use of all types of alternative strategies as intermediaries gain a better understanding of the different options and their potential benefits when used in a diversified portfolio.”

Risk Management

The study also indicates that financial professionals appear to use alternative strategies to manage risk in their clients’ portfolios rather than achieving out-sized returns. “Low correlation with traditional asset classes” was the trait that topped the list of features chosen as “most attractive” by 41% of respondents. And, “potential for broader diversification” garnered 29%, the second-most attractive feature. “Potential for higher returns” was only cited by 12% of respondents.

“These results really debunk the common misconception that financial intermediaries use alternative strategies to juice the performance of clients‟ portfolios,” Cieszko said. “To the contrary, they are acting as true fiduciaries looking out for the long-term welfare of their clients through effective risk-management techniques.”

The study also indicates that mutual funds are the most popular way for financial intermediaries to provide alternative strategies to clients. Among professionals currently using alternatives in client portfolios, 42% cited mutual funds as the preferred mode of access followed by exchange-traded funds at 28%. Among those selecting mutual funds as a primary mode of access, respondents used words and phrases like “simple/easy, offering diversification and/or having active and/or professional management” when describing the attractive qualities of the vehicle.

The American Century Investments 2011 Financial Professionals Alternative Investments Study included data from surveys of 300 financial professionals employed as financial planners, financial advisers, personal financial consultants, brokers or registered investment advisers (RIAs). Respondents averaged 15.8 years of business experience and participation was contingent on having a book of business equal to, or exceeding, $10 million.

American Century Investments currently has approximately $2.5 billion in assets under management in five alternative investment strategies – Strategic Inflation Opportunities, Global Real Estate, Real Estate, Global Gold and Equity Market Neutral – with others incubating and expected to launch in the near future.