Thought Leadership

The Need for Tiered Advisor Education With Alternative Investments

May 16, 2024
Author: Kristin Hall

Alternative investments are growing in popularity among financial advisors and retail investors as new products and easier ways of accessing them come into play. Alternative investments are known to be more complex and require additional knowledge and tools of assessment outside of the standard ways of thinking in the public markets. For that reason, advisor and client education is deemed most important by asset managers in this space.

I had the opportunity to attend the 2024 MMI Alternative Investment Forum last week and was struck by the need for a new level of advisor education about alternative investments. Today, much time is spent with advisors and their clients just teaching them how to purchase these investments. Additional education is needed on conducting due diligence, understanding underlying costs and fee structures as well as learning how to handle illiquidity in a client’s portfolio. As more alternative investment products become available to affluent investors, the need for appropriate education is even more imperative.

Case in point: the aspects that influence or hinder purchase of alternative investments are diverse and depend on advisors’ level of experience with these investments. Our latest Cogent Syndicated report, Trends in Alternative Investments, digs into advisor and investor interest in alternatives, types used, barriers and accelerants to entry, and how advisors are accessing these products.

Top Concerns for Investing in Alternatives

Advisors who are not currently using alternatives cite limited interest from clients, lack of liquidity and lack of transparency (higher need for due diligence) as their top reasons for not using alternatives with their clients. Meanwhile, advisors who have less than 10% of their assets invested in these products have found ways to discuss and explain them to their clients but are now facing a slew of other concerns such as fees, high minimums and operational burdens, and tax consequences. In comparison, when looking at advisors with 10% or more of their AUM invested in alternatives, we see that while liquidity is still a concern, their focus on fees, due diligence and client interest is significantly lower than that of their lighter user counterparts.

Top Reasons to Invest in Alternatives

For advisors who aren’t currently using alternatives with their clients, top reasons to invest are client goal alignment, liquidity and transparency. While client goal alignment and liquidity are reasons to continue investing for advisors who already use alternative investments, increasing diversification and alpha as well as managing downside risk come into play. Among advisors who allocate a greater percentage of their AUM in alternatives (and by proxy, have a greater comfort level with these investments), the concern around client goal alignment is less prominent as advisors gain a better understanding of and comfort level with the variety of uses of alternatives.

The Need for Tiered Education

The most notable difference between advisors who use and don’t use alternatives is that the top three accelerants to entry among advisors who don’t use alternatives are the same top reasons they choose not to invest in alternatives. This suggests that the first level of advisor education on alternatives should focus on the basics: What alternatives are, how to conduct due diligence, what role alternatives should play in clients’ portfolios, and how to plan for liquidity needs.

While these same concerns don’t completely disappear among advisors with some experience investing in alternatives, there is a need for intermediate-level education for advisors who we’d consider “light users” (1%–9% of AUM is invested in alternatives). For light users to feel comfortable increasing their use of alternatives, they need guidance on how to assess underlying costs and fees, how to conduct deeper due diligence, how to further the client discussion around minimums for entry and ways of using for tax consequences as well as how to minimize and handle the operational burdens that come from using alternatives.

“Heavy users” (10%+ of AUM in alternatives) still require some continuing education on managing liquidity needs, assessing fees and gaining a greater level of sophistication on managing for performance gains and downside risk. The alternative investments arena is dynamic and continuing education on current themes and trends would help to keep all involved up to date.

As the market and the economic environment continue to change, alternative investments may offer potential solutions for increased diversification, income and continued growth. Cogent Syndicated’s Trends in Alternative Investments report, published in April 2024, measures the use of and interest in alternative investments among advisors and affluent investors. This report trends advisors back to a previous report published by Javelin Strategy & Research and provides new insight geared specifically at understanding those who qualify to invest in alternatives per the SEC definition. The report also tracks key brand metrics such as unaided consideration, awareness and familiarity along with favorability among the leading alternative investments providers.

To learn more about the full report and how your firm can leverage our data to build your business and your brand, click below.


Kristin Hall
Product Manager, Cogent Syndicated

Kristin recently joined Cogent Syndicated as a Product Manager for Advisor and Investor Insights On Demand products. She has over ten years of experience in the investment industry spanning roles from investment analysis, retirement planning and marketing research. Before joining Cogent Syndicated, Kristin was an Insights Analyst managing a variety of quantitative research projects for Escalent’s primary research clients. Kristin holds an MBA in International Business from Thunderbird School of Global Management and a bachelor’s degree from California Lutheran University.  She is also a cellist and performs with a local symphony in Southern California.