Educating Clients About New Types of Investments They May Already Own

Morningstar surveyed U.S. investors on nine “trendy” asset classes and found they had large knowledge gaps.


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For the intrepid investor, there is no shortage of diversified investment opportunities.

Interest in cryptocurrencies, structured products, direct indexing, and other “trendy” assets has grown in recent years, but a new report by Morningstar suggests that advisors may need to provide more guidance around these asset classes.

“New investing trends can excite industry experts and individual investors alike,” wrote Morningstar. “However, trendy assets are not always a good fit for an investor’s portfolio, and the desire to own them can be influenced by behavioral biases.”

The company highlighted nine assets that have gained the interest of investors and investment professionals alike: business development companies (BDCs), commodities, cryptocurrency, private credit, private equity, REITs, semi-liquid interval funds, separately managed accounts via direct indexing, and structured products.

Morningstar surveyed 948 preretirement investors in the U.S. about what they knew about the nine asset classes, whether they owned the asset, and whether they were planning on increasing or decreasing their allocations.

Morningstar found that more than half of the investors surveyed had never heard of BDCs, direct indexing, semi-liquid interval funds, and structured products. But nearly 80 percent of investors said they could either provide the definition of crypto or identify the definition if given a list, and almost 50 percent owned the asset. Additionally, more than half of those surveyed knew of commodities, with about 30 percent owning the asset type. Participants also had a high knowledge of private equity and REITs, with ownership of both hovering between 20 percent and 30 percent.

However, for seven of the nine asset classes, fewer than half of the investors surveyed felt confident they could either provide the definition or pick out the definition from a list, according to Morningstar.

That suggests an educational gap for advisors to fill.

In total, cryptocurrency, commodities, private equity, and REITs had the highest ownership levels.

Morningstar found a 0.5 correlation between ownership and knowledge. (In statistics, 1 means a perfect correlation.)

“People seem to own what they believe they are knowledgeable about, or if we were to look in the other direction, people believe they know more about what they own,” wrote Morningstar.

According to the company, this can be dangerous, particularly with crypto, if investors are equating the ability to recall knowledge about an asset class with a deeper understanding of the asset class.

Morningstar found that those with less financial literacy were more likely to own these nine assets. “This finding is concerning because it suggests that those with a lower understanding of financial matters are drawn to these riskier assets,” wrote Morningstar.

On the flip side, investors with advisors were also more likely to own these assets. However, recent research suggests that investors with advisors might not be turning to them for investment help.

FTSE Russell, a subsidiary of the London Stock Exchange Group and a global provider of benchmarks, found that about 45 percent of investors with advisors had never even discussed index funds with their advisor, despite wanting to know more. And only 31 percent of investors with an advisor consulted their advisor while preparing for a recession, according to previous research by Morningstar.

While most investors plan on maintaining current asset allocations, Morningstar found that those who did want to change allocations most often cited returns, confidence, macroeconomics, and timing as the reasons.

“In looking at these common motivations, a general picture begins to emerge: Investors’ trade decisions often seem to be prompted by short-term thinking that is overly focused on the present market performance,” wrote Morningstar.

Investors with advisors were less likely to cite macroeconomic reasons for changing allocations. This could be because advisors are not as affected by macroeconomic news, wrote Morningstar, and “points to the potential importance of financial advisors assisting investors with these trendy assets. As with more traditional investments, an advisor’s job often entails the behavioral coaching investors need to put on blinders to the news and focus on their long-term financial plans.”

In addition to being behavioral coaches, Morningstar said, advisors need to help fill in the knowledge gaps with these assets, and that starts with learning about the assets themselves.

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