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Chuck Jaffe Archives | Email alerts
Nov. 3, 2011, 12:01 a.m. EDT
By Chuck Jaffe, MarketWatch
BOSTON (MarketWatch) "” Somewhere between tee and green, the doctor in David Brady's foursome told the group that his broker had said he "needed a fracking play" in his portfolio, and that he had spread some money across a few different fracking stocks.
So Brady, who runs Brady Investment Counsel in the Chicago area, asked the doc if he knows what fracking is.
After an incoherent sentence and a moment of silence, "it was pretty embarrassing for both of us," Brady recalled. "The problem wasn't just that the doctor didn't know it, but that the broker "” the person who was managing all of his money "” hadn't explained it well enough for him to know. He was trusting them completely, and the silence was awkward I think because everyone realized how vulnerable that actually makes an investor."
Do I believe most brokers could explain why an investor needs exposure to "hydraulic fracturing" "” which is often confused with drilling but technically comes after drilling to break apart rock, release gas and "complete" the process of capturing the natural resources?
No fracking way.
Is it possible ordinary investors are being talked into trouble? You better fracking believe it.
That's not a knock on fracking itself, but rather on the class of investments pure-play fracking stocks belong to "” the realm of "alternative" investments.
A study released last week by American Century Investments indicated that a growing number of financial advisers are using alternative investment strategies. Four out of five study participants currently use "alts" with clients; that grows to nine out of 10 when it comes to brokers from the big investment firms, such as Brady's doctor friend.
Overall, advisers are using alternative strategies with about one-third of their client base, but those with "extensive" experience with alternatives use them with roughly half of their clientele.
More important, however, is that 55% of the advisers surveyed expect to use even more of these investments. In fact, their usage is looking so mainstream that it's hardly "alternative" at all.
Technically, an alternative investment doesn't have to be obscure and esoteric. Say "alternative," and most people think of hedge funds, commodities or funds with hedge-like strategies, effectively the things rich folks used to do that the ordinary investor didn't have access to until recently.
Other common asset classes "” including gold and precious metals, "natural resources", real estate and real estate investment trusts, currencies, private-equity directly into companies and more "” typically fall under the alt umbrella too.
While the advisers still prefer using traditional mutual funds and ETFs for their alternative exposure "” and there's not that much in your typical gold or precious-metals fund that would leave a buyer confused "” more than 40% said that regardless of the tools they use, the biggest challenge associated with alternative investments is that it's "difficult to explain features, benefits and risks to clients."
Even when they explain it "successfully," the client might not get it. After all, the doctor's broker succeeded in getting him to go for the fracking plays, even if he had no real clue of what he was doing.
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Chuck Jaffe is a senior columnist for MarketWatch. Through syndication in newspapers, his "Your Funds" column is the most widely read feature on mutual fund... Expand
Chuck Jaffe is a senior columnist for MarketWatch. Through syndication in newspapers, his "Your Funds" column is the most widely read feature on mutual fund investing in America. He also writes a general-interest personal finance column and the Stupid Investment of the Week column. Chuck does two weekly podcasts for MarketWatch, and frequently makes guest appearances on television, and on radio shows across the country. He is the author of three personal-finance books. His latest, "Getting Started in Hiring Financial Advisors," was published in the spring of 2010 by John Wiley & Sons. Collapse
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