Advisers Face Obstacles to Incorporating Alternative Investments

Proper evaluation poses a significant obstacle to the adoption of alternative products, according to a series of recent Fidelity studies that found only 26% of financial advisers currently have exposure to alternative investments, compared with 86% of institutional investors.

The firm found that as alternative investment strategies evolve rapidly, advisers are seeking additional resources to evaluate these opportunities effectively before recommending alts to their clients. More than 54% of advisers highlighted investment manager research as their main reason for initiating or expanding their usage of alternative investments, Fidelity found in 2021.

Advisers identified due diligence on underlying strategies and managers as obstacles when investing in alternative investments, specifically noting challenges with alternatives that offer intermittent liquidity (53%) and are illiquid (55%). In a separate 2023 study, more than half of advisers said they had difficulty communicating the investment strategy to clients when engaging in alternative investments.

With that in mind, Fidelity announced the expansion of its research offerings to include research notes on third-party registered alternative investment strategies. Available through Wealthscape, Fidelity’s platform for advisers, the alternative investment research portal enables advisers to review research on various private credit, private real assets and private equity funds.

“Alternative investments are becoming more widely accessible, but many advisors lack the resources to determine how to incorporate them in their portfolios,” said Darby Nielson, CIO of Fidelity’s institutional group, in a statement. “Fidelity is committed to providing advisers with the tools and resources they need to make informed decisions and excel in the alts space, helping investors reach their financial goals.”

When it comes to what allocations advisers should consider for alternatives, Nielson said in a video on Fidelity’s website that it should be personalized.

“The first thing I would say is: It depends on the investor,” Nielson said. “It depends on the investor’s time horizon, liquidity needs and eligibility for different alternative structures.”

Such personalization requires advisers understand the nuances of available options, underscoring the need for additional research.

Separate research from CAIS-Mercer, meanwhile, in the latest edition of its annual alternative investment survey, found some hurdles ahead for alts investing, but indicated financial advisers are extremely likely to boost client portfolio exposure to alternative investments.

In the survey of 260 financial advisers, 85% said they expected to increase allocations to alternative asset classes in 2024, as measured by CAIS Capital LLC, a firm that connects advisers to alternative asset managers, and consultancy Mercer, a Marsh McLennan company. Of that group of advisers, 62% already allocate between 6 and 25% of their clients’ portfolios to alternatives, according to the study.

The Fidelity studies referenced include “Fidelity Study of Allocations to Alternative Investments by Institutions and Financial Advisors” from June 2023; “Alternative Investment Survey” from April 2021; and “Alternative Investment Survey” from October 2023.