Now that alternative investments have gone mainstream, LPL financial advisor Erik Johnson says his clients are increasingly inquiring about how to invest in them. But he finds that the proliferation of alternative investments poses challenges.
“One of the challenges is education and categorizing where the different alternatives fall so that we can be sure to use them appropriately,” said Johnson, a financial planner at Johnson Advisory in Kernersville, N.C. “Alternatives are defined so broadly that If you’re not in traditional investments then you’re considered to be in alternatives, which includes a wide range of products.”
To better educate himself and stay abreast of new alternative products, Johnson last week attended LPL Financial’s three-day alternative investment conference at the Westin New York At Times Square Hotel. LPL Financial President and Chief Operating Officer Robert Moore and alternative investment gurus from the likes of The Carlyle Group and The Blackstone Group were guest speakers.
“I attended the conference because I am always looking to know more about the options we have available and to know how the products work and to differentiate between companies that offer alternative investment products,” Johnson said.
The conference was a pilot program that may be expanded to educate advisors nationwide about alternative investments.
“We've noticed that our FAs gravitate towards income producing alternative investment vehicles such as BDCs (business development companies) and other products for their diversification qualities, such as alternative strategy mutual funds,” said Robert Pettman, senior vice president of LPL’s annuities and alternative investments.
LPL offers alternative products from companies such as Alkeon Capital Management, SkyBridge Capital, Steben & Co., Cole Real Estate Investments, NorthStar Realty Securities and Franklin Square Capital Partners.
“Our advisors are looking to understand how to optimize allocation across various alternative strategies based on the needs of their clients, and so they are seeking guidance for implementation,” said Pettman, who spoke at the conference.
LPL’s research department offers advisors alternative investment recommendations based on investment objectives such as growth, growth with income and income with moderate growth.
“Recommended allocations are not an interactive tool but merely a guide,” Pettman said. “They cover the broad category such as managed futures, REITs and MLPs. But we don’t make recommendations at the product level, although we do for alternative strategy mutual funds."
Finra’s 2012 suitability rules provide advisors with even more incentive to learn about alternative investments.
“Understanding risk exposure is where the financial advisor’s focus needs to be,” said Dev Modi, an attorney with Lyon, Glassman, Leites & Modi LLC in Florham Park, N.J. “Using back office resources, such as research, is one of the benefits of being aligned with a broker-dealer because there’s only so many hours in a day that allow advisors to research, attract new clients, manage their existing clients and make investments.”
Under FINRA’s suitability rule, customer information requirements were expanded and now apply to more transactions. It requires a broker-dealer or their associated persons to have a reasonable basis to believe a recommended transaction is suitable for the customer based on information obtained through reasonable diligence to understand a customer’s investment profile.
“We start with the products that LPL has approved for our platform,” said Erik Johnson, the LPL advisor. “These recommendations benefit my business because LPL does the ground work as far as looking deeply into all the companies that are out there in the retail space. As a small business, it’s valuable that the offerings are pre-screened for financial, compliance and legal issues.”