By Steven Brod
For years, recurring and predictable revenues were among the biggest advantages that the fee-based side of the wealth management industry (including Registered Investment Adviser, or RIA, firms) enjoyed relative to other financial advisor business models.
Indeed, a steady bull market in public equities made the RIA fee-based model a no-brainer in terms of offering clients robust year over year returns, while increasing the valuation of their businesses. After all, what potential acquirer of an RIA firm doesn’t love stable and steadily rising annual revenues?
Changing Times
But market and economic circumstances have changed dramatically since 2020, with the bull market for equities across the board no longer a guaranteed part of the big picture…at least in the immediate future.
RIA firms seeking to reinforce the valuation of their businesses while effectively serving clients need to adjust their long-term plans, with an emphasis on the following fundamentals:
- Anticipate client needs for capital preservation
- Deliver a robust and diversified product offering capable of improving portfolio stability
- Partner with the best possible technology platform to streamline the advisor’s execution process for their clients
Alts Platforms and the Future
Under current economic and market circumstances, traditional investment allocations are unlikely to deliver on these necessary ingredients. This is why some of the most successful RIAs have been actively broadening their reach by taking advantage of alternative investment platforms.
By providing clients with a diversified product offering of institutionally managed alternative investment strategies, advisors may be able to increase the performance of their clients’ portfolios, and in turn the stability of the AUM of their advisory business.
Through alternative investments, RIAs can differentiate themselves and therefore attract higher end clients to contribute to the long-term growth of the firm and increase their valuations.
And in today’s environment, a powerful alts platform – versus the financial advisor going it alone in trying to identify and manage alts directly – can make or break an RIA’s success in this segment of the industry.
HNW Clients Flocking to Alts
Why is that? Let’s start with the fact that high-net-worth and ultra-high-net-worth clients are – more than ever – setting their sights on a diverse range of investment products. Alternative investments, including private equity, private credit, and hedge funds, are a popular option for clients with higher average account sizes, and contribute to sustainable firm growth.
Data also shows the higher the net worth of the client, the greater the weighting toward alts. The right alts platform can help advisors differentiate themselves by servicing both UHNW and HNW investors with bespoke portfolios of institutional alternative investment funds.
Reducing Portfolio Volatility
At the same time, there is no greater challenge for a financial advisor than a client experiencing distress about portfolio performance during periods of wild market swings.
Adding professionally managed alternatives with differentiated strategies and lower correlations can help reduce clients’ overall portfolio volatility, which to many advisors, may mean keeping clients happy and stabilizing the volatility of your AUM.
For example, private market funds may also offer clients diversification that can not only be income-generating in nature (private credit) but also offer portfolios long-term alpha generation (private equity).
Outsourcing Access to Alts a “Must Have”
And of course, a crucial factor to maximizing your firm’s valuation is having flexible infrastructure and the ability to scale. RIA firms today are expected to offer many services: financial planning, investor education, and portfolio management, all the while handling back-office administrative and compliance requirements.
As your client base and assets increase, your firm must do so along with it, and this may require asset diversification into alternative investments. The more you’re able to show that your business can evolve and grow with the marketplace, the less risk any potential future buyer will see in acquiring your firm.
Choosing the Best Possible Alts Platform
The best possible alts platform for RIAs serves a range of functions that take the burden of repeatable processes and systems off the shoulders of advisors because the platform acts as an outsourced alternative solution.
Ideally, the alts platform will help manage subscriptions, rebalancing, liquidity, distributions, and account statements, simplifying the process with a turnkey solution. This is a major stepping stone to scalable growth.
Valuations in the wealth management space shattered records in recent years, as the number of high-net-worth and ultra-high-net-worth individuals increases across the globe.
And while higher interest rates and the recent market volatility have impacted those valuations, RIAs remain well positioned for sustainable growth, as long as they build out a long-term plan that keeps in mind the needs and interests of their evolving client base. Partnering with effective alts platforms can be mission critical in this regard.
Steven Brod is CEO & Chief Investment Officer of Crystal Capital Partners, a tech-enabled alternative investments platform for financial advisors.
