Anything not a stock, bond, or cash investment is generally considered an alternative investment. Examples of common alternative investments include hedge funds, real estate investment trusts (REITs), private placement funds, closed-end 40 Act funds, and Reg A companies seeking capital.
Like a traditional stock or bond investment, alternatives have their pros and their cons. Disadvantages include the potential for high initial fees, less liquidity, and a longer investment horizon. But alternatives also can have distinct advantages over the traditional investment market, such as lower correlation to the broader markets, tax benefits, or protection against inflation. For the right investor or financial advisor, alternative investments can be a useful tool to diversify a portfolio.
When looking to outsource due diligence, you want to be sure you are getting a complete, unbiased picture of the investment or sponsoring organization. Good questions to ask are: How does the due diligence provider work with the sponsor? What other information sources do they use? What types of experts do they employ and what are their specific areas of expertise? Finally, what time frame can you expect to see information in? A report showing a well-rounded picture of an investment has much less value if the information is out-of-date. FactRight delivers up-to-date information that can be used to guide decision-making today.
This concern is very valid. Third party due diligence is often paid for directly by product sponsors, and the users of the report (the financial service professionals who work with alternatives) receive the information for free. Regulatory agencies have historically accepted seller-funded diligence as long as it remains impartial. We believe, however, that this method may come under increased scrutiny by regulators as the financial services industry more widely adopts fiduciary standards and principals.
How does FactRight remain impartial? By scrutinizing every piece of information available. Our financial and legal experts dissect the sponsor or offering, looking specifically for gaps in information or questionable interpretations. We also bring in data from other market-relevant sources to create a holistic, unsentimental picture of the sponsor/offering.
Once factual review is complete, the sponsor is allowed to verify the accuracy of the data from an abridged draft report—one without any discussion of risks, strengths, or conclusions or recommendations. Suggestions on this material are only considered if the sponsor can provide significant supporting evidence. When the report is finalized—including our overall findings—it is published on our Report Center, to which the sponsor does not have access.
For financial services firms that are interested in requesting their own sponsor-free due diligence reviews and platform recommendations, we offer our custom FR Risk Management service.
No one can keep their eye on everything all the time. FactRight’s team of financial and legal experts are always watching and reviewing the constantly changing environment of alternative investments so that you don’t have to.
At FactRight, we specialize in understanding and explaining the complex world of alternative investments. We determine where an investment is strong or risky and explain how fluctuations in regulations or the market will affect those investments. This is all we do and we do it well. Partnering with FactRight allows you to focus on the specific needs of your business and the individualized needs of your clients.
Recent Blogs from FactRight
The Importance of Ongoing Due Diligence for RIAs
by firstname.lastname@example.org (Scott Smith) on June 22, 2017 at 7:47 pm
It is more important than ever that advisors engage in ongoing due diligence on the alternative investments they recommend to clients. Changes happen quickly and factors that may not affect the equity markets can greatly affect some alternatives.&nbs […]
Technology Driven Crowd-Capital Formation: From Crowdfunding to Regulation A+
by email@example.com (FactRight) on June 20, 2017 at 8:30 pm
Why Risk Mitigation is Key to an Effective Investment Strategy
by firstname.lastname@example.org (Scott Smith) on June 13, 2017 at 10:14 pm
Risk and its relation to the client's life should always be considered when making investment recommendations. As we’ve noted in past blog posts, risk management is something that shouldn’t be an afterthought to an investment strategy. Address risk up front when defining a client’s goals and objectives. It’s crucial to integrate a risk analysis into the portfolio-planning stage, not after the fact.&nbs […]
Alternative Investment Due Diligence: Beyond the Numbers
by email@example.com (Scott Smith) on June 8, 2017 at 10:11 pm
Checking out “just the numbers,” isn’t an option for financial advisors recommending alternative investments to clients. If advisors don’t go beyond the numbers in due diligence investigations, they could be doing a catastrophic disservice to their clients and themselves. […]
Top 7 Alternative Investment Due Diligence Considerations
by firstname.lastname@example.org (Scott Smith) on June 7, 2017 at 5:10 pm
Advisors recommending alternative investments to higher-wealth clients are thinking outside the box about how to generate higher returns. While some alternatives certainly can, and do generate better returns than are available in the equity markets, they are not without risk or other limitations. A prudent advisor should leverage third-party due diligence resources before determining whether the investment is a good match for an individual client.&nbs […]
Understanding and Improving Your Risk Management Process
by email@example.com (Scott Smith) on June 6, 2017 at 10:24 pm
Risk management shouldn’t be an afterthought in portfolio management. While talking about it with clients and formalizing a strategy isn’t as exciting as exploring growth potential, it’s one of those necessary conversations that advisors and clients need to have. Having a clear understanding of a client’s risk tolerance and how to manage it will make your relationship stronger and keep your sterling reputation intact.&nbs […]
The Corporate Ethical Culture: Its Place in a Due Diligence Review
by firstname.lastname@example.org (Scott Smith) on May 23, 2017 at 10:03 pm
Most advisors agree that an issuer’s or investment sponsor’s ethics are becoming more and more important to investors. Surveys show that among younger investors, especially Millennials, whether a company operates in an ethical and socially-conscious environment and makes ethics an across-the-board priority is a highly important factor in their investment decisions. […]
Preferred Shares 101: Key Features and Benefits
by email@example.com (Chari Graham) on May 18, 2017 at 8:14 pm
Preferred shares are shares in a company that are given priority over common shares. They provide a higher level of ownership in the company and company assets than common shares, giving them an intermediary position between bonds and common stock. If a corporation were to face bankruptcy or liquidation, distributions would be paid to preferred shareholders before they would be paid to common shareholders. […]
How Financial Advisors Can Stand Out in a Congested Marketplace
by firstname.lastname@example.org (Scott Smith) on May 16, 2017 at 8:14 pm
Many advisors have difficulty differentiatingtheir practices and themselves from other advisors. How do you convince investors that you are the best advisor to handle their assets? In the current competitive climate, identifying your key features and benefits is vital to building a solid client portfolio. Here are some practical and objective ways to help you stand out from everyone else. […]
How RIAs Can Take Advantage of Digital Trends
by email@example.com (Scott Smith) on May 12, 2017 at 3:34 pm
Today’s investors are savvier and not shy about demanding what they want. They seek transparency, easy account access and transacting ability, higher yields and lower fees. One significant reason is the access to nearly unlimited information that has come with the proliferation of the internet. More than ever before, investors have information at their fingertips. They come to their advisors more informed — and sometimes more misinformed — than ever before.&nbs […]