Advisors have traditionally relied on portfolio diversification to manage risk, which in most instances has helped dampen the impact of market declines. Yet in the Great Recession, virtually all traditional assets classes experienced substantial declines. That meant that even diversified portfolios consisting of traditional asset classes experienced considerable declines.

With that in mind, it makes sense for advisors to revisit the merits of including alternative assets in clients’ portfolios. The endeavor, like many financial undertakings, isn’t a no brainer. However, many clients don’t understand the asset class and are therefore likely to be reluctant to embrace it. Plus, not all alternative investments achieve their goals.

Yet, the potential to add diversification to clients' portfolios makes evaluating the products appealing, despite the challenges the asset class may present. For example, even defining alternative investments can be tricky as the asset class consists of a wide range of investment strategies. Some products use long and short positions along with puts and calls. Other strategies invest in private equity, currencies, real estate, or commodities. Either way, the most appealing products will generally have a low correlation to equities. That way, they can help improve portfolio diversification.

Convincing clients to embrace alternatives, furthermore, can challenging. Indeed, a recent study by San Francisco-based custodian Pensco found that 71% of respondents say they would increase their allocations to alternative investments if they had a better understanding of the asset class, which underscores the need for advisors to educate their clients on the topic.

When doing so, advisors should strive to provide simple explanations and consider leveraging their relationships with fund wholesalers. Advisors should also have illustrations available that can show how using alternative investments can help mute the impact of market declines. It is also important to start clients with small allocations to alternatives.

Advisors wishing to impress their clients may be tempted to provide complex explanations on the inner workings of alternative investments. Yet, doing so is likely to overwhelm clients, thereby making it harder to get approval for using the products. The goal should be to provide a simple explanation that is free of jargon.

For example, rather than say that a fund uses derivatives when discussing call options, simply say that a fund enters into agreements that allows it to buy a security at an established price. Explain that the agreement can be profitable if the value of the security climbs above the price established by the agreement. Other simplified explanations should be used for other topics, such as puts and futures.

Advisors may also find that investment company wholesalers can help with educating clients on alternative investments. Indeed, many investment shops have been rushing to develop alternative investments, with the number of funds having increased 15% since 2010, according to Cerulli Associates. In the process, many firms have rolled out literature and web resources to help investors understand how the products work.

Pitching the performance of the products may also be challenging as many alternative investments are designed to dampen the impact of market declines rather than outperform benchmarks. For investors who are used to evaluating funds based on performance relative to benchmarks, therefore, the products may look unappealing.

Advisors should therefore be prepared to instead illustrate how alternative investments may help dampen overall portfolio volatility during market declines. Comparing the performance of model portfolios that include alternative investments to portfolios with just traditional products may go a long way in getting clients to embrace the new asset class.

It’s also important to recommend that clients initially consider a small allocation, such as 5% or 10% of portfolio assets, to alternatives. Simply put, it may be easier for clients to dip their toes in the water than to jump in the deep end when it comes to becoming comfortable with a new asset class.