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Alternative Investments Diversify Portfolios but Some Advisors Still Wary, BNY Mellon's Pershing Study Finds

Pershing white paper finds enthusiasm for alternatives, but some barriers to broader adoption persist

The majority of advisors intend to continue recommending alternative investments over the next year, yet believe the asset class has underperformed since the economic crisis, according to a new survey from Pershing LLC, a BNY Mellon company. The study, Help or Hype: Advisor Perceptions of Alternative Investments, which was released today at Pershing's INSITE™ 2015 conference, is based on a recent survey of 1,200 advisors conducted by Pershing in conjunction with Beacon Strategies LLC, along with interviews with advisors, broker-dealer firms, registered investment advisors (RIAs) and alternative investment managers.

"Alternative investments continue to interest all investors, from ultra-high-net-worth and high-net-worth investors to the mass affluent," said Justin Fay, vice president of investment solutions at Pershing. "Though some lingering skepticism exists about alternatives, largely due to recent lukewarm performance, we are seeing strong flows into this asset category. The findings of our study suggest that most advisors are optimistic about the ability of alternatives to deliver diversification benefits over time."

According to the survey, most advisors' primary goal in using alternative investments is to reduce volatility and diversify their client portfolios. Advisors who were surveyed indicated that 73 percent of their clients have at least one type of alternative investment in their portfolios.

The survey also found that:

  • 70 percent of advisors plan to maintain their current alternative investment allocation recommendation for clients over the next twelve months
  • However, almost half of advisors surveyed feel that alternative investments have underperformed since 2008
  • More than half of advisors (55 percent) surveyed believe that clients should allocate 6 to 15 percent of their portfolios to alternative investments
  • 56 percent of respondents see value in allocating illiquid alternatives to investor portfolios
  • The principal drivers of product selection are the experience of the alternative investment manager and diversification options
  • The majority of advisors who do not currently recommend alternative investments to clients cited product expense, along with disagreement over the viability and basic premise of alternative investments

Broker-dealers and large RIAs who took part in the survey identified operational issues as an area of concern with regard to alternative investments–specifically with regard to processing, pricing/time to settlement, tax reporting and regulation.

"The findings of the study indicate that communication, product understanding and improvements to operational processes will be critical to mitigating these challenges," said Fay. "In response to the need for more education and training in the use of alternatives among advisors, Pershing launched the Alternative Investment Center last year. Through the center we provide advisors educational resources, research and solutions to position advisors to serve the needs of their clients seeking alternative strategies. Additionally, we recently introduced Online Order Entry to Entry to improve transparency and address the inefficiencies of manually placing orders."

Pershing LLC and Beacon Strategies conducted the alternatives survey over the course of two months in the winter and spring of 2015. Simultaneously, expansive interviews with financial advisors, RIAs and broker-dealer firms and alternative investment fund managers addressed both quantitative and qualitative aspects of the underlying research.