US financial advisors value the use of alternative assets in client portfolios but worry there is a dearth of quality product available.

A survey of 163 financial advisors at a recent conference in Chicago has found that alternative investments are important for clients’ portfolios but there aren’t enough quality products to encourage larger allocations.

According to the survey, commissioned by investment firm Artivest and conducted at a recent Morningstar conference in the city, 54 per cent of advisors said offering alternatives is important to retaining and attracting high net worth investors in particular. Yet lack of access to quality funds was the number one reason (26 per cent) why advisors believe their adoption of alternatives is lower than that of institutions.

Advisors also cited higher retail client fees (22 per cent), the length of time to identify and select managers (17 per cent) and account paperwork/administration being too cumbersome (10 per cent) as other top reasons for lack of adoption.

Although there has been some erosion of fees after years of indifferent returns in sectors such as hedge funds, alternatives (hedge funds, private equity, commodities, real estate and infrastructure) typically charge higher fees than among traditional areas such as stocks and bonds. 

Also, certain pockets of the alternatives space are less liquid than, say, the listed equity market – a fact that sometimes can come as a shock to investors trying to pull out money in a hurry, as happened in 2008. There have been developments, for example, in and around listed vehicles, although issues may arise when shares of such a fund trade at a large discount to its underlying value.

Despite some hurdles, 73 per cent of advisors surveyed said alternative investments should make up more than 5 per cent of a client’s overall investment portfolio. Among this percentage, 43 per cent of advisors consider the ideal allocation to alternatives to be between 15-25 per cent, which is much higher than the current level of allocations to alternatives that have been reported in the industry (around 5 per cent). Those advisors who believe alternatives help attract HNW clients are three times as likely to want to allocate 15 per cent or more of their clients’ portfolio to alternatives.

“We have seen an increase in demand for alternative investments from high-net-worth investors, and this survey confirms that advisors recognize the value of incorporating alternative investors in a client portfolio,” said James Waldinger, founder and chief executive of Artivest.