Millionaire Investors' Favorite Alternative Investment

High-net-worth investors who work with financial advisors are more knowledgeable about alternative investments, but one in particular dominates their portfolios, according to a new survey.

The Morgan Stanley Wealth Management Investor Pulse Poll of households with a million dollars or more in financial assets found that investors own or intend to purchase physical assets as an alternative investment. More than half (57%) of those who received advice from a financial advisor said they were knowledgeable about alternative asset classes compared to just 30% of those who have not received professional advice.

“This finding underscores the important role financial advisors play in providing information and education about the potential use of alternative asset classes by suitable investors in an appropriately diversified investment plan,” said Andy Saperstein, Head of Investment Products and Services for Morgan Stanley Wealth Management.

More than three-quarters (77%) of millionaire investors own real estate as an alternative investment and 35% say they own Real Estate Investment Trusts (REITs), according to the survey. After these two classes, millionaire investors say they own collectibles (34%), precious metals (28%), private equity (27%), real assets (oil, gas, mining, 17%), private real estate funds (16%), hedge funds (16%), and venture capital (13%).

Despite heavily owning a lot of real estate and REITs, they remain the top alternative investments that surveyed investors expect to buy in 2014. However, when asked to recall an alternative investment unaided, hedge funds are recalled most easily. Meanwhile, 23% said they could not recall an alternative without prompting.

The survey included responses from roughly 300 investors between the ages of 25 and 75 and was a subset of a larger survey of 1,000 investors with $100,000 or more in investable household financial assets.

While real estate investments top the list of alternatives, Morgan Stanley reminds that they are subject to special risks, such as interest rate and property value fluctuations, and general and economic conditions.

Investors should remember that alternative investments are speculative and have a high degree of risk, which could lead to an investor losing all or a substantial amount of his or her investment. Furthermore, alternative investments are suitable for long-term investors.