Is Your Financial Advisor Using Alternative Investments?

If you’ve ever looked at how large university endowments, pension funds, sovereign wealth funds, or family offices invest, you may have noticed that many allocate a significant portion of their portfolios to alternative investments.

These investments often include:

• Private equity
• Private credit
• Commercial real estate
• Infrastructure
• Hedge fund strategies
• Other private market investments

In some cases, these institutions invest billions of dollars and employ entire teams dedicated to researching, selecting, and monitoring alternative investments as part of a broader diversification strategy.

By comparison, many individual investors work with portfolios that consist primarily of publicly traded stocks, bonds, mutual funds, and ETFs.

So why the difference?

One reason is access. Historically, many alternative investments were available only to accredited investors: individuals with a net worth exceeding $1 million (excluding their primary residence) or income above certain regulatory thresholds. 

As a result, many investors simply did not have access to the same opportunities that institutions and ultra-high-net-worth families have utilized for decades.

Another reason is complexity. Alternative investments often involve different risk profiles, liquidity restrictions, investment structures, and due diligence requirements than traditional investments. While publicly traded securities can typically be bought or sold daily, some alternative investments may require capital to remain invested for several years.

That doesn’t necessarily make alternatives better or worse than traditional investments. They simply serve a different purpose within a portfolio and may not be appropriate for every investor.

As a fee-only financial advisor in Burlington, VT, we help you evaluate both the potential benefits and limitations of alternative investments within the context of your broader financial plan. Factors such as your goals, risk tolerance, time horizon, cash flow needs, and overall portfolio construction all play a role in determining whether alternatives deserve consideration.

Which raises an important question: if institutions have used alternative investments for decades as part of their diversification strategy, should they play a role in your portfolio as well?

The answer depends on your individual circumstances, but it’s a conversation that more investors are having as access to alternative investments continues to expand.

Why Should You Consider Using Alternative Investments? 

For most investors, the primary reason to consider alternative investments is not necessarily to pursue higher returns. Instead, it is often about diversification and reducing reliance on traditional stock and bond markets. 

Many traditional portfolios are heavily dependent on public market performance. When stocks experience significant volatility, investors may see large swings in portfolio values because many publicly traded investments tend to move in the same direction during periods of market stress. 

Alternative investments can offer returns that may not be as closely tied to the daily movements of the stock market. This characteristic is often described as having a lower correlation, or, in some cases, being relatively uncorrelated with traditional investments.

Think of your portfolio like a team. If every player performs the exact same role, the team becomes vulnerable when that role is challenged. A more diversified team includes players with different strengths that can contribute in different environments.

The same concept applies to investing. 

For example, imagine two investors each have a $1 million portfolio.

• Investor A owns only stocks and bonds. If public stock markets experience a significant downturn, Investor A’s portfolio may rise and fall largely in line with market sentiment. 
• Investor B owns stocks and bonds but also allocates a portion of the portfolio to private credit, infrastructure investments, and private real estate. Investor B’s alternative investments, however, may be driven by different factors. Private credit may continue generating interest income. Infrastructure assets may continue collecting revenue from utilities, transportation, or energy projects. Real estate investments may continue generating rental income.

This doesn’t mean alternative investments are immune to losses or market risks. They are not. However, because their performance may be influenced by factors beyond daily stock market movements, they can potentially provide another source of diversification within a broader portfolio.

That said, diversification alone is not a reason to invest in alternatives. Every investment involves trade-offs. Alternative investments often have lower liquidity, more complex structures, longer holding periods, and different risk considerations than traditional investments.

The question is not whether alternative investments are good or bad. The better question is whether they serve a purpose within your overall financial plan. For some investors, they may provide valuable diversification. For others, traditional investments may already meet their needs.

The goal is not to own alternatives simply because institutions do. The goal is to determine whether they complement your objectives, risk tolerance, income needs, and long-term investment strategy.

This is where the services of an independent financial advisory firm in Burlington, VT can assist with this analysis. 

Why Aren’t More Financial Advisors Using Alternatives?

Many alternative investments require extensive due diligence. Unlike a publicly traded ETF that can be evaluated relatively quickly, private investments often require a detailed analysis of:

• Management teams
• Underlying holdings
• Liquidity terms
• Valuation methodologies
• Fee structures
• Risk exposures

Not every advisory firm has the resources, expertise, or compliance guidelines to conduct this level of research.

Another reason why alternative investments are not as popular as traditional stock and bond investments is liquidity and flexibility. You can generally buy or sell publicly traded investments relatively easily.

Many alternative investments operate differently. Some may limit withdrawals while others may require holding periods measured in years rather than days. If you’re retired or need to access your assets on demand, liquidity can be an important consideration.

It’s also important to understand compliance and regulatory requirements associated with alternative investments. Many opportunities may be available only to accredited investors, as previously mentioned, while others may involve additional disclosures or suitability considerations.

Sophistication is another driving factor. Many advisors build portfolios using traditional asset allocation models. The classic 60/40 portfolio is familiar, straightforward, and easy to explain; however, it can be limiting.

As a result, some advisors choose to avoid alternatives entirely rather than navigate these complexities. Adding alternatives introduces additional layers of education, monitoring, reporting, and due diligence. For some firms, simplicity becomes the preferred path.

How Have Alternatives Become More Accessible? 

Think of it this way: years ago, many alternative investments were like private clubs with very high barriers to entry. Today, some of those doors have become more accessible, allowing a broader range of investors to explore strategies that were once limited primarily to institutional portfolios.

Part of the reason was access. Many alternative investments required substantial minimum investments, long holding periods, and specialized investment knowledge. It was not uncommon for investors to need hundreds of thousands, or even millions, of dollars to participate in certain private investment opportunities. 

Over the past decade, however, the investment marketplace has evolved considerably. 

New fund structures, regulatory changes, and growing investor demand have expanded access to certain alternative strategies. While many alternatives still have investment minimums and eligibility requirements, investors today often have more opportunities to gain exposure to private markets than in the past. 

As access has expanded, more investors are beginning to ask whether alternatives should play a role in their portfolios.

How Does DWV Advisors Approach Alternative Investments?

At DWV Advisors, we believe diversification means more than simply owning stocks and bonds. As a fee-only fiduciary financial advisor in Vermont, we evaluate portfolio construction through the lens of your goals rather than product sales or commissions.

For some clients, traditional public market investments may remain appropriate.

For others, alternative investments may offer additional diversification opportunities that align with their long-term objectives.

This philosophy led us to develop dedicated alternative portfolio models that provide exposure to a broader range of asset classes beyond traditional public markets.

Rather than viewing alternatives as speculative additions, we view them as potential tools that may complement a thoughtfully constructed portfolio when used appropriately.

What Questions Should You Ask Your Financial Advisor About Alternative Investments?

Before considering alternatives, it can be helpful to ask your financial advisor the following questions:

What role would alternatives play in my portfolio?

Alternative investments are typically used to complement traditional stocks and bonds by providing additional sources of diversification, income, and potential return drivers that may behave differently across market cycles.

How liquid are these investments?

Unlike publicly traded stocks and ETFs that can generally be bought or sold daily, many alternative investments have limited liquidity and may require you to hold your investment for several years.

What are the fees?

Alternative investments often involve more complex management structures, which can result in higher fees than traditional investments, making it important to understand both the costs and the value being provided.

How are investments valued?

Because many alternative investments are not traded on public exchanges, valuations are often based on appraisals, financial statements, private transactions, or independent third-party assessments rather than real-time market pricing.

What risks should I understand?

Alternative investments may involve unique risks such as reduced liquidity, limited transparency, valuation uncertainty, leverage, manager risk, and the potential loss of principal.

How might alternatives behave during market downturns?

While alternatives are not immune to losses, some may respond differently than traditional stocks and bonds, potentially helping broaden diversification during periods of market stress.

How do alternative investments fit within my retirement plan?

For some investors, alternative investments may serve as an additional source of income, inflation protection, or diversification within a long-term retirement strategy, depending on their goals, risk tolerance, and liquidity needs.

What are the pros and cons of alternative investments?

Many investors want to understand the tradeoffs between diversification opportunities and the additional complexity that alternatives may introduce.

How much of my portfolio should be invested in alternatives?

There is no universal answer. The appropriate allocation depends on your objectives, risk profile, and financial circumstances.

Can alternative investments reduce portfolio volatility?

Some alternatives have historically exhibited lower correlations to public stocks and bonds, which may help broaden diversification.

At DWV Advisors, our wealth management services in Burlington, VT, are designed to help you evaluate all available investment options, not just the most familiar ones.

Because successful portfolio construction isn’t about chasing performance.

It’s about building a portfolio that aligns with your goals, risk tolerance, income needs, and long-term financial plan.

Ready to discuss if alternative investments are right fort for your financial situation? Let’s connect.