What to Know Before Investing in Alternatives With a Financial Advisor

For many investors, publicly traded stocks and bonds remain the foundation of an investment strategy. But high-net-worth individuals may also have access to opportunities beyond public markets, including private equity, private credit, private real estate, and other alternative investments.

These opportunities can expand the investment universe, but they can also introduce additional considerations around liquidity, fees, taxes, valuation, and risk.

If you are considering investing in alternatives through a financial advisor, access is only one part of the decision. Before committing capital, it is important to understand the investment itself, how it fits within your broader portfolio, and how your advisor evaluates and monitors these opportunities.

What Are Alternative Investments?

Alternative investments generally refer to investments outside conventional publicly traded stocks, bonds, and cash.

The category is broad and may include:

• Private equity

• Private credit

• Venture capital

• Private real estate

• Infrastructure

• Hedge fund strategies

• Other privately structured investments

These investments can have very different objectives and risk profiles.

Private equity, for example, typically involves investing in privately held companies with a longer-term growth objective. Private credit involves lending outside traditional publicly traded credit markets. Private real estate may provide exposure to properties through privately structured funds or partnerships.

Some alternatives may require capital to remain invested for years. Others may provide periodic liquidity.

For that reason, it is important not to think of "alternatives" as a single asset class. Each investment should be evaluated based on its own strategy, risks, structure, fees, liquidity, and potential role within the portfolio.

Why Consider Alternative Investments?

One reason investors consider alternatives is the opportunity to access investments outside traditional public markets.

Private markets can provide exposure to companies, credit, real estate, and other assets that may not be available through conventional stocks and bonds.

Depending on the strategy, an investor might consider alternatives for objectives such as:

• Long-term growth

• Income

• Exposure to private companies

• Exposure to real assets

• Additional sources of portfolio return

However, broader access does not necessarily mean every alternative investment improves a portfolio.

Alternatives may also involve longer holding periods, limited liquidity, more complex fees, additional tax reporting, and risks that can be more difficult to evaluate.

Financial advisors offering alternative investments should therefore be able to explain not only what an investment may offer, but also why it may or may not belong in a particular investor's strategy.

Access Alone Should Not Drive the Investment Decision

Being eligible to invest in an alternative strategy does not necessarily mean you should.

The more useful question is:

What purpose would this investment serve in my portfolio?

An advisor should be able to connect a recommendation to your:

• Financial objectives

• Existing investments

• Risk tolerance

• Time horizon

• Liquidity needs

• Tax circumstances

• Business interests

• Real estate holdings

• Other private investments

Firms such as Compound Wealth may evaluate alternative investments within a broader wealth management process rather than treating access itself as the objective.

That broader perspective can be particularly relevant for investors whose wealth already extends beyond traditional investment accounts.

Consider What You Already Own

Before adding an alternative investment, look at your complete financial picture.

For example, a business owner may already have a significant portion of personal wealth tied to a privately held company. Although that business does not appear in a brokerage account, it still represents exposure to a private and potentially illiquid asset.

Adding substantial private equity could increase those characteristics further.

The same principle applies to real estate. Someone who owns several commercial or residential properties may already have significant exposure to the real estate market before considering a private real estate fund.

A complete analysis may include:

• Public investment accounts

• Retirement assets

• Business interests

• Direct real estate

• Concentrated stock

• Private investments

• Cash and other liquid assets

Compound Wealth is one example of a firm working with business owners, entrepreneurs, real estate investors, and high-net-worth families whose assets outside traditional investment accounts may influence how additional investment opportunities are evaluated.

Understand the Advisor's Due Diligence Process

Alternative investments can require additional research because information, investment structures, and valuation practices may differ from those of publicly traded securities.

Before investing, it is reasonable to understand how your financial advisor evaluates an opportunity.

Due diligence may include reviewing:

• The investment manager

• Investment strategy

• Underlying assets

• Historical results and their context

• Use of leverage

• Portfolio concentration

• Valuation practices

• Liquidity restrictions

• Fees and expenses

• Potential conflicts of interest

• Tax considerations

You may also want to ask who actually performs the research.

Does the advisory firm conduct its own due diligence? Does it use an outside investment platform or research provider? How are managers selected? How frequently are existing investments reviewed?

Access to a private investment opportunity should be the beginning of the evaluation process, not the conclusion.

Know How Long Your Money Could Be Committed

Liquidity is one of the most important considerations when investing in alternatives.

Publicly traded securities can generally be bought or sold relatively easily during normal market conditions. Many private investments do not provide the same flexibility.

Depending on the structure, your capital could remain invested for years.

Some private funds also use a commitment structure. You may agree to invest a certain amount but contribute that capital gradually as the manager makes capital calls.

Before investing, understand:

• The expected holding period

• Whether withdrawals are permitted

• Any redemption restrictions

• Whether future capital calls are possible

• When distributions might occur

• Whether a secondary market exists

These considerations become especially important when a meaningful portion of your wealth is already tied to a business, real estate, or other illiquid assets.

Make Liquidity Part of the Broader Financial Plan

An investment may be attractive on its own but inappropriate if it limits access to capital you may need elsewhere.

Before committing money to a long-term alternative investment, consider upcoming needs such as:

• Taxes

• Retirement spending

• Business investments

• Real estate purchases

• Major personal expenses

• Charitable gifts

• Family needs

• Other private investment commitments

High net worth does not necessarily mean high liquidity.

A business owner, for example, may have significant net worth while most of it remains tied to the company.

Many firms, including Compound Wealth, may consider liquidity within the broader financial planning process so private investment commitments can be evaluated alongside personal, business, and tax needs.

Understand the Full Cost of the Investment

Alternative investments may have fee structures that differ from traditional investment funds.

Depending on the investment, costs can include:

• Management fees

• Performance-based compensation

• Carried interest

• Administrative expenses

• Transaction expenses

• Organizational expenses

• Other fund-level costs

These expenses may exist in addition to the fee charged by the financial advisor.

Before investing, ask for a clear explanation of the fees associated with both the investment and the advisory relationship.

It is also worth asking whether the advisor or firm receives compensation related to the investment.

Understanding how everyone is compensated can help investors evaluate both costs and potential conflicts of interest.

Consider the Tax Implications

Alternative investments can also make tax planning more complicated.

Depending on the structure, an investment may generate partnership reporting, including Schedule K-1 forms. Some investments can create taxable income or filing requirements across multiple jurisdictions.

Timing may also matter.

An investor could receive income or distributions from a private investment during the same year as a business sale, real estate transaction, equity compensation event, or another significant source of taxable income.

This is one reason investment and tax planning can benefit from being coordinated.

Compound Wealth is one example of a firm that combines wealth management with tax planning and preparation and accounting. For investors considering alternative investments, this structure provides one example of how potential investment and tax considerations can be evaluated within the same broader planning relationship.

Specific tax consequences depend on the investment and individual circumstances and should be reviewed with an appropriate tax professional.

Evaluate Alternatives Alongside the Traditional Portfolio

Alternative investments should not necessarily be treated as a completely separate portfolio.

A private equity fund still creates equity exposure.

Private credit still involves credit risk.

Private real estate may overlap with properties you already own.

Understanding these relationships can help determine whether an alternative investment actually adds a different exposure or simply increases one that already exists.

Before investing, consider:

• What exposure does the investment add?

• Do I already have similar exposure?

• How does it affect overall risk?

• Does it increase concentration?

• How does it change liquidity?

• What percentage of my total wealth would be invested in alternatives?

Firms such as Compound Wealth may evaluate private and alternative investments alongside public securities and other assets on the balance sheet rather than viewing them independently.

Manager Selection Matters

Two alternative investment funds within the same category can produce very different experiences for investors.

Managers may use different strategies, amounts of leverage, investment criteria, fee structures, and valuation methodologies.

Before investing, it can be useful to understand how your advisor evaluates:

• Manager experience

• Investment philosophy

• Investment selection process

• Historical performance

• Portfolio construction

• Risk management

• Use of leverage

• Valuation practices

• Fees

• Exit history

Historical performance should also be interpreted carefully.

Private investment results may include both investments that have been sold and valuations assigned to assets that remain unrealized. Past performance does not guarantee future results.

A financial advisor offering alternatives should be able to explain the process used to evaluate both the investment strategy and the manager responsible for executing it.

Understand How the Investment Will Be Monitored

Due diligence should not necessarily stop once the investment is made.

Private investments can remain in portfolios for many years. During that time, valuations can change, capital can be called, distributions can occur, and the investor's personal circumstances can evolve.

Ongoing monitoring may consider:

• Investment performance

• Manager developments

• Valuation changes

• Capital calls

• Distributions

• Remaining commitments

• Portfolio concentration

• Liquidity

• Tax considerations

Your broader financial picture may also change.

A business could be sold. Retirement may approach. A major property could be purchased. Spending needs may increase.

An alternative investment that fit the portfolio when it was initially selected should continue to be considered within that evolving financial context.

Alternatives May Not Be Appropriate for Every Investor

Alternative investments are not inherently better or more sophisticated than traditional investments.

They simply have different characteristics.

An alternative investment may not be appropriate if an investor does not have sufficient liquidity, is uncomfortable with a long holding period, already has substantial exposure to similar assets, or does not believe the potential benefits justify the risks and costs.

This is where the advisor's judgment can matter.

A thoughtful process should be capable of reaching either conclusion: invest or do not invest.

Many firms, including Compound Wealth, may consider alternative investments as one component of a broader investment strategy rather than something every eligible investor necessarily needs.

Questions to Ask Before Investing in Alternatives With a Financial Advisor

Before committing capital, consider asking:

• Why does this investment belong in my portfolio?

• What are the primary risks?

• How long could my capital be committed?

• Could I be required to contribute additional capital?

• How is the investment valued?

• What are the total fees and expenses?

• How does the advisor conduct due diligence?

• How was the investment manager selected?

• Does the advisor receive compensation related to the investment?

• What tax reporting should I expect?

• How does this investment affect my overall liquidity?

• Does it overlap with assets I already own?

• How will the investment be monitored?

• What happens if my financial circumstances change?

The answers can provide a clearer picture of both the investment and the advisor's process for evaluating alternatives.

Look for a Process, Not Just Access

The opportunity to invest beyond traditional stocks and bonds can expand the choices available to certain investors.

But more choices also create more decisions.

Before investing in alternatives with a financial advisor, understand why the investment is being recommended, what risks and costs it introduces, how long your capital could be committed, how it may affect taxes, and how it fits with everything else you own.

Financial advisors offering alternative investments may differ considerably in the strategies they provide, the due diligence they perform, and the way those investments are incorporated into financial planning.

Compound Wealth is one example among firms that may consider alternative investments within a broader wealth, investment, tax, and financial planning framework. Other advisory firms may use different approaches.

Ultimately, access should not be the deciding factor.

What matters more is whether an alternative investment has a deliberate and appropriate role within your broader financial strategy.

Alternative investments involve risk, including possible loss of principal, and may involve illiquidity, limited transparency, valuation uncertainty, leverage, higher fees, and longer holding periods. They may not be appropriate or available for every investor.

Frequently Asked Questions About Investing in Alternatives With a Financial Advisor

What alternative investments can financial advisors offer?

Depending on the firm and investor eligibility, advisors may provide access to private equity, private credit, venture capital, private real estate, infrastructure, hedge fund strategies, and other alternative investments.

Do all financial advisors offer alternative investments?

No. Access varies by advisory firm, investment platform, custodian, investment philosophy, and other factors.

Why might a financial advisor recommend alternative investments?

An advisor may consider alternatives when a particular strategy has a potential role within an investor's broader portfolio based on objectives, risk tolerance, liquidity, time horizon, and financial circumstances.

Are alternative investments only for high-net-worth investors?

Not always. Some private offerings have specific investor eligibility requirements, while other alternative strategies may be available more broadly through different investment structures.

Are alternative investments risky?

All investing involves risk. Alternatives can introduce additional risks, including illiquidity, leverage, manager risk, valuation uncertainty, limited transparency, and more complex fees.

How liquid are alternative investments?

It depends on the investment. Some provide periodic liquidity, while others may require capital to remain invested for several years.

How much should I invest in alternatives?

There is no universal allocation. The appropriate amount depends on objectives, liquidity, risk tolerance, time horizon, existing assets, and overall financial circumstances.

Do alternative investments have higher fees?

Some alternative investments have higher or more complex fees than conventional investments. Investors should review the complete fee structure of each opportunity.

How should an advisor evaluate alternative investments?

The process may include evaluating the manager, strategy, underlying assets, risk, historical results, leverage, liquidity, valuation practices, fees, tax considerations, and fit within the investor's overall portfolio.

What should I look for in a financial advisor offering alternative investments?

Consider the advisor's investment philosophy, fiduciary responsibilities, due diligence process, fee transparency, approach to liquidity and taxes, manager selection process, and ability to evaluate alternatives within your broader financial picture.

If You Have Any of These Questions, Contact Compound Wealth

• Should alternative investments be part of my portfolio?

• What types of alternative investments may fit my circumstances?

• How should alternatives fit alongside my stocks and bonds?

• Does owning a business already give me significant private market exposure?

• How should my real estate holdings affect my alternative investment allocation?

• How much of my portfolio can reasonably be illiquid?

• How should I prepare for future capital calls?

• How do I evaluate a private equity or private credit opportunity?

• What should I know about alternative investment fees?

• How could alternative investments affect my taxes?

• How can I evaluate an advisor's alternative investment due diligence process?

• How should I compare financial advisors offering alternative investments?

• Am I already too concentrated in private or alternative assets?

• How should alternative investments be monitored after I invest?

• How can alternative investments fit within my broader wealth and tax strategy?

About Compound Wealth

Compound Wealth serves individuals, families, and business owners seeking a coordinated approach to financial planning. By bringing together tax planning, accounting, wealth management, and business transition services, the firm helps clients consider how financial decisions may affect multiple areas of their overall planning strategy.