Common Misconceptions About Alternative Investments
A Due Diligence Checklist for RIAs and Broker-Dealers
Alternative investments are becoming a more common component in diversified portfolios. However, persistent misconceptions can create hesitation for both advisors and investors. Use this checklist to clarify key points and guide informed conversations.
Misconception 1: “Alternative investments are too risky.”
Reality:
Risk levels vary widely across alternative strategies. Some—like core real estate or senior corporate credit—may carry lower volatility than public equities. Risk depends on the asset type, structure, and manager approach.
Evaluate each investment individually. Consider underlying assets, liquidity terms, leverage, and the role it plays in the broader portfolio.
Misconception 2: “Alternative investments are only for institutional investors.”
Reality:
While some strategies are limited to qualified purchasers or investors, there are many options available for high-net-worth individuals and their advisors—often in fund formats designed with compliance and transparency in mind.
Confirm eligibility criteria, offering structure, and investor protections.
Misconception 3: “They’re too illiquid to be practical.”
Reality:
While some alternatives have limited liquidity, others—like interval funds, corporate credit funds, or syndicated loan funds—offer periodic liquidity while providing access to less correlated assets.
Match liquidity features with client needs and time horizon. Illiquidity can also support return potential and strategy discipline.
Misconception 4: “Alternatives are too complex to explain to clients.”
Reality:
Many alternative strategies are based on familiar concepts: income-producing real estate, loans to companies, or tangible assets. The key is clear education and thoughtful positioning.
Use simplified materials and analogies. Focus on the why—portfolio role, income potential, and diversification benefits.
Misconception 5: “Alternative investments always perform better than traditional ones.”
Reality:
There are no guaranteed outcomes. Alternatives may reduce correlation and improve diversification, but they are not immune to market forces or economic cycles.
Emphasize alternatives as a complement, not a replacement. Evaluate performance in the context of risk, volatility, and client goals.
Misconception 6: “Fees are too high to justify the investment.”
Reality:
Fee structures reflect the specialized management and operational requirements of alternative assets. In some cases, fees align incentives and may be tied to performance.
Compare net-of-fee returns, structure, and manager transparency. Assess whether the strategy delivers value in context.
Misconception 7: “They’re not regulated or transparent.”
Reality:
Many alternative offerings operate under regulatory frameworks, including SEC and FINRA rules. Others are offered via private placements, which still require compliance with disclosure and suitability standards.
Review offering documents carefully. Ensure the strategy is administered by a credible manager with clear governance.
Final Thought:
Alternative investments are not one-size-fits-all. They require careful due diligence, but they can offer valuable tools for income generation, diversification, and downside protection.
This material is neither an offer to sell nor a solicitation of an offer to purchase any security, which can be made only by the applicable offering document. Neither the Securities and Exchange Commission nor any state securities regulator has passed on or endorsed the merits of our offerings. Any representation to the contrary is unlawful. Investments involve a high degree of risk, and there can be no assurance that the investment objectives of our programs will be attained. Securities are not FDIC-insured, nor bank guaranteed, and may lose value. Consult the offering documents for suitability standards in your state. Securities offered through S2K Financial LLC, member of FINRA/SIPC.