By Michael Nessim and Douglas Blake, Kingswood U.S.
Interest in alternative investing is higher than ever, with advisors being asked more and more to include non-correlated assets in their clients’ portfolios. After years of low yields, followed by extreme market volatility, it’s no surprise that more investors would look beyond typical asset classes to find solutions to help them reach their financial goals. Total assets under management in alternatives are expected to reach $17.2 trillion in 2025, according to Preqin.
Ultra-high-net-worth investors or those with net worth of at least $30 million have had access to these products for years and currently invest half of their portfolios in alternatives. Following the Harvard and Yale endowment models, these sophisticated investors have taken advantage of solutions built to protect assets, while growing value in both good and bad markets.
High-net-worth investors or those with a net worth of at least $1 million had 26% of their assets allocated to alternative investments, according to a 2020 survey from KKR. Retail investors have only about 5% of their portfolios in alternative investments, according to the Chartered Alternative Investment Analyst Association.
But the landscape is changing.
Alts are going mainstream
In the past, the laborious processes required to participate in alternative assets discouraged both advisors and investors from considering them. However, investors down the wealth spectrum want more than the standardized investment options and advisors want to offer their clients differentiated strategies, whether it’s products to mitigate risk, produce income or add alpha. This dynamic and the current investment environment are driving alternatives toward the mainstream.
Financial institutions devised ways to incorporate alts into institutional portfolios, and with growing demand, product sponsors started creating assets like REITs to give individuals easier access to non-traditional asset classes.
Driven by this burgeoning demand, many providers in the alt space have developed innovative products involving real estate, commodities, structured investments in private placements, pre-IPOs, crypto, NFTS, hedge funds and private equity.
Mainstream might not be for everyone
But alternatives are not for everyone. Two of the major drawbacks to a number of alternatives remain a lack of liquidity and transparency. Individual investors need to know what they are buying and need to trust that their advisors are doing the right thing by recommending these products.
With thousands of alt investments in the marketplace, advisors must understand these products to determine which ones they are comfortable presenting to clients. It’s a daunting task that most individual advisors would not feel qualified tackling on their own. The extensive due diligence and intricate integration involved with these products has historically discouraged broker-dealers and RIAs from carrying many of them on their approved products lists.
Today, that is starting to change, with the proliferation of tech-enabled alternatives platforms created by firms to give their advisors and clients access to these investments.
Alternatives platforms are not all the same
While alts are becoming easier to use in client portfolios, advisors need to be aware that alternatives platforms are not all the same. The best of these platforms use technology to reduce the burden on compliance and operations professionals, as well as advisers and investors. Alts platforms need to make transacting business easier, with seamless workflows that avoid not-in-good-order (NIGO) rejections that delay investing and create negative client experiences.
A robust alts platform should leverage third-party partners to provide access to details and due diligence on the universe of programs. It should also have educational modules for advisors to document that they are up to speed on the products.
But an alternative platform is only as good as the products on it. Firms need to have a team of experts conducting due diligence and research before approving a product.They need to look at operations, strategy and track records to have confidence that the products will do what they say they will.
And while many of these products can be complex, they need to be simple enough that firms, advisors and clients can understand their liquidity, risk and upside/downside potential. This deep-dive research rules out a lot of candidates, and that’s a good thing. Firms get to decide who is invited on their platform and that should be an exclusive list.
Find a firm with an alts program right for your business
The search for increased yield and meaningful diversification in recent years exposed the critical need for alternative investment vehicles.
However, the complexity of the regulatory requirements, subscriptions and due diligence responsibilities have hampered the adoption of alts by wealth management professionals. Advisors who believe that alternative investments need to be a meaningful part of their clients’ investment strategies going forward, should look to affiliate with a firm that has built an alternatives platform focused on transparent and straight-through processing, that is supported by the expertise of seasoned research professionals.
Michael Nessim, Chief Executive Officer and Managing Partner, and Douglas Blake, Managing Director, Investment Solutions, of Kingswood U.S., a network of wealth management firms that offers a proprietary automated alternative investment platform