More and more individual investors, orienting themselves in today’s complex financial landscape, are turning to their financial advisors for new alternatives.
The resumption of the pandemic, the changing attitudes of investors and the instability of the market have contributed to the transformation that is taking place in the alternative investment space. Once a sacred area of institutional clients, a growing legion of individual investors now want to explore how alternative investment classes can service their own portfolios.
The result: a new era is unfolding in the worlds of alternative investment and wealth management as more financial advisors seek to invent new, unrelated opportunities for their clients and encourage new partnerships with asset managers in the alt space.
Consider the following:
- In just 15 years, violas have grown from 6% to 12% – or $ 13.4 trillion – of the global investment market in 2018 and are expected to account for up to 24% of the global market by 2025, according to Chartered Alternative Investment Association of Analysts.
- Across the wealth management landscape, thousands of financial advisers have already invested more than $ 12 billion in alternatives between a range of private equity instruments, private loans, hedge funds and real estate asset classes. And advisors plan to increase their exposure to alternative assets to 11.8% in two years, compared to their current distribution of 10.5%, according to Cerulli / Blue Vault Partners.
Yet this growth trend may be just beginning. We are potentially only in the first inning. Maybe we’re even in the dugout, still waiting to go out on the field. Looking ahead, the above figures suggest that trillions of dollars will be reallocated from traditional assets (stocks, bonds, ETFs) to alternatives:
Five Factors Feeding the Rise of Alternative Investment in Wealth Management: A Study
What can this mean for individual investors and their advisors? How can advisors and asset managers better coordinate to take advantage of the opportunities at alts, both safely and effectively?
Last month, CAIS surveyed more than 300 advisors and other industry professionals attending the Morningstar 2022 conference, gathering their insights on several topics related to alternatives. Here’s what we’ve learned – and I think there are five key factors that signal the growth of alternatives in wealth management.
- Changing the attitudes and appetites of investors – Market volatility. Inflation. Increase in interest rates. The growing lack of confidence in the ability of public markets to offer strong returns. All of this has contributed to one of the lowest annual results of the 60/40 stock and bond portfolio in 20 years and has raised investors’ concerns about the traditional 60/40 portfolio strategy. More than a third of Morningstar respondents said the 60/40 portfolio was no longer effective for investment, while an additional 42% said the 60/40 strategy was not as effective as it had been before. In this context, more advisers are exploring whether alternative investments can serve as both an effective option and an opportunity to increase returns.
- Greater access for individual investors – Among respondents to the Morningstar Conference survey identified as financial advisors, 84% reported recommending an alternative distribution to clients who meet the requirements of accredited investors. It is clear that ongoing efforts to democratize alternative investments – making them available to a wider range of investors – must be key to the growth of this segment.
- Questions about what an accredited investor does – The growing interest in alternatives among individual investors is combined with an industry-wide consideration of the definition of “accredited investor” – a long-standing threshold for access to an alternative asset class. In fact, 75% of respondents believe that the SEC’s definition of an accredited investor needs to be updated. Among these respondents, 44% said the definition was too strict, while 41% suggested lowering the income threshold for individuals. Only 11.5% think the definition is too weak. In the current market climate, investors who do not meet the threshold for access to alternatives have fewer opportunities to seek to diversify risk and supplement revenue.
- Increased availability of user-friendly tools and technologies – More than 33% of our respondents report that high levels of administration and documentation – and concerns about due diligence and compliance processes – have historically made investing in alternative asset classes challenging. The pandemic has served as a catalyst for many in the wealth and asset management industries to adopt new technologies that could potentially address these sore points. Fintech platforms seek to bring efficiency to a fragmented community of independent wealth managers who may otherwise lack the infrastructure of intermediaries as they seek new investment opportunities outside of stocks and bonds.
- Custom alternative strategies and products – Research also shows that independent wealth managers are significantly less allocated to alternatives than intermediaries, which narrows the range of solutions they can offer to clients and reduces their competitiveness. As in the past alternatives were not usually readily available to a wider range of investors, there was not necessarily a need to offer specialized alternative investment strategies and products tailored to individual investors. Now, with growing interest and access, there is a rapidly expanding range of asset and platform managers offering a strong product market suitable for wealth management and alternative investment.
- Easy access to better education and data for deep diving – Finally, as wealth managers and their customers become more interested in violas, knowledge can become an increasingly valuable form of currency to serve existing customers and attract new ones. Easy access to education focused on alternatives can be important in helping advisors and their clients benefit from alternative investments. Counselors are really hungry for more knowledge – almost 70% of Morningstar respondents cite “lack of education” as a current barrier to investing in alternatives. Although this gap in knowledge is an obstacle, it is encouraging to see that this community is aware of the urgent need to know more. We see that more and more companies are devoting resources to training their financial advisors on specialized products, specific strategies and the potential benefits associated with alternative investments in general. This is very good news for everyone.
Better access, better education, new opportunities
At a time of subdued expectations for more traditional assets, alternative investments now provide a potential opportunity for individual investors who want to hedge against increased volatility and generate strong returns. Looking ahead, providing advisors with the right combination of resources, platforms, solutions, connectivity and education they need can be the key to meeting demand, delivering results, and unlock the full potential of this dynamic asset class.
Advisors can potentially contribute to better results for their clients when they are better aware of the benefits of including alternative investments in their portfolios. All this leads to greater fluency, increased conversations with customers, increased loyalty, a variety of investment opportunities and ultimately the opportunity to offer customers something they expect more than ever: fresh alternatives.
Matt Brown is the founder and CEO of CAIS