The Financial Planners are Turning to Alternative Investments and Life Insurance is on their List

Alternative InvestmentsWe've been hammering the alternative investments point pretty hard lately, and this is because the financial services industry is abuzz about what to do with its tarnished image for cuddling up with the main stream stock market for so long and and now being accountable for it's general lack of reliability to the average investor.

So, what are money managers and general financial planners (the certified kind) doing to restore faith and peace of mind among their clientèle?  The answer is quite interesting.

The Shift To Alternatives

Curian Capital performed a recent survey among its investment advisors to see what their game plan is moving forward given the stock market decline and lack of a booming recovery.  The survey also collected data on how these advisors viewed the economy, and what they saw as the biggest current threats to the economy and its recovery.

Interestingly, there was an almost perfect spread among advisors on their outlook.  One third was optimistic, one third was neutral, and one third was pessimistic.  When asked what they saw as major threats, the overwhelming top two answers were Government spending and Market Volatility (in that order).  Now, why investment advisors view market volatility as a threat to the economy is a bit of a mystery (or an editorial on how sick they are of having to deal with those phone calls).

When asked what these advisors were planning to do to deal with market volatility their top two answers were switch their focus to Tactical Asset Allocations (which is just a fancy way of saying, use more re-balancing) and use Alternative Investments.

What is the Demand

The survey asked advisors what investment features their clients were demanding; top two answers were more conservative investments and guaranteed income.   Rounding out the top five were tactical investments, alternative investments, and income investments respectively.

Now, Here's where it Gets Interesting

When asked what products they say themselves using more of in 2012 to meet these diversification needs a la alternative investments, top three answers were: Variable Annuities, Separately Managed Accounts, and Life Insurance.

Now, Curian is a Registered Investment Advisor owned by Jackson National Life–a well known name in the variable annuity business–so it's not all together surprising that Investment Advisor Representatives for the RIA are well tuned into Variable Annuities.

It's also not hugely surprising that these guys would be looking towards SMA's, which for the less sophisticated among us are pre-packaged investment bundles sort of like Mutual Funds–only the actual investments contained therein maintain their identity and the investor's performance is based on how exactly those purchased securities perform individual rather than in aggregate, because SMA's are the sort of thing fancy pants investment advisors love to suggest.

Life insurance on the other hand is a bit less intuitive.  Jackson itself isn't very well known for its cash value life insurance products.  It is a company with a wrap account friendly Variable Universal Life product, but that product is nothing more mechanically than mutual funds wrapped inside a life insurance contract (the typical depiction of VUL).  If these advisors are truly looking towards life insurance as a means to combat market volatility a la alternative investments, fixed products are most likely their source of interest.

Alt Investments, what's the Hold Up?

When asked what concerns these advisors had concerning alternative investments the number one answer was their reputation for lack of liquidity.  I've stated before that the huge leg up cash value life insurance has here, is the market neutral design alternative investors are looking for without the illiquidity they'd rather do without.

Somewhat amusing is the fact that 18% had enough courage to do what more likely were unwilling to admit, which is they didn't feel they were adequately educated enough to make recommendations outside of the traditional products they use (i.e. stocks, bonds, mutual funds, and CD's).

And that brings Us to our Next Point

I've long told people the “advisors” who hate on life insurance are either poorly educated or new company kids who have a proprietary product to hawk (can't let that cash value life crap get in the way of my meeting this month's quota).

Those who are experienced, and more independently minded are very open to the concept.  We recently had a conversation over on the insurance agent's forum about cash value life insurance.  There were a few agents who wanted to fight over whether or not someone could reasonably save money with cash value life insurance.  One agent remarked that it's a wonder average consumers could understand the product if so many agents had such a poor understanding of it.

And this is where I turn Cynical

I've never had an intelligent conversation with an anti-cash value life insurance person.  I really wished someone could stand up and give me a real run for my money on the subject, but to date no one has taken on the task successfully (a good number had tried).  And I'll admit there was a time that my understanding of the topic was way weaker than it is today (it's been one of those things that I've come to adore more and more as I became even more well versed on the topic).

Could it be what I've thought all along?  That Buy Term and Invest the Difference is merely a marketing gimmick created by someone who realized he could sell insurance by comparing term rates to whole life rates and make a killing off ignorance.

Is it possible that agents who espouse the idea are more playing the role of contrarian merely for the sake of being the contrarian because they want you to buy from them instead?  It's easy to go with the flow.

One of the first questions I asked when I got into the industry (and embarrassingly admit that I thought I was going to be an investment guru) was “how am I going to do my investment research?”  There was no answer, and there never is.

“Advisors” rarely possess the skill and knowledge to understand the totality of what they recommend.  It's a sad truth I have to deal with every day.  The truth is the cost of admission is frighteningly low in the financial services industry.  You can take the licensing tests (pretty much) until you pass, and from that point on you are armed and dangerous.

It Doesn't Solve every Problem, but it does Solve Several

I don't want to give people the impression that I think life insurance is the answer to everything.  It's not.  It is however, a well used strategy for hedging and overall financial health excellence.  The detractors aren't saving you from catastrophe by suggesting against it nearly as much as they are likely driving you down the road to ruin stemming from their own greed or ignorance.

We have more than enough evidence that it works, and there are numerous well respected advisors who implement its use with their clients.  And in a world where alternative investments are gaining more and more interest, its certainly on the forefront of a lot of minds.


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