More and more, individual investors navigating today’s complex financial landscape are turning to their financial advisors for fresh alternatives.
The pandemic re-set, changing investor attitudes, and the market’s volatility have all contributed to the transformation that’s taking place in the alternative investment space. Once the sacred domain of institutional clients, a growing legion of individual investors now want to explore how alternative investment classes can serve their own portfolios.
The result: a new era is unfolding across the worlds of alternative investing and wealth management, as more financial advisors seek to carve out novels, uncorrelated opportunities for their clientele and foster fresh partnerships with asset managers in the alts space.
Consider the following:
- In just 15 years, alts grew from 6% to 12% —or $ 13.4 trillion — of the global investable market in 2018, and they’re expected to make up to 24% of the global market by 2025, according to the Chartered Alternative Investment Analyst Association.
- Across the wealth management landscape, thousands of financial advisors have already invested over $ 12 billion in alternatives among a range of private equity, private credit, hedge funds and real estate asset classes. And advisors plan to boost their exposure in alternative assets to 11.8% in two years, up from their current allocation of 10.5%, according to Cerulli / Blue Vault Parnters.
And yet, this growth trend may be just getting started. We’re potentially only in the first inning. Perhaps we’re even in the dugout, still waiting to take the field. Looking ahead, the above data suggests that trillions of dollars will be reallocated from traditional assets (stocks, bonds, ETFs mutual funds) into alternatives:
Five Factors Fueling Alternative Investing’s Rise Across Wealth Management: A Survey
What could this mean for individual investors and their advisors? How can advisors and asset managers better align to seize the opportunities in alts, both securely and efficiently?
Last month, CAIS surveyed more than 300 advisors and other industry professionals attending the 2022 Morningstar Conference, gathering their insights on several topics relating to alternatives. Here’s what we learned — and what I think are five key factors that signal the growth of alternatives across wealth management.
- Changing investor attitudes and appetites – Market volatility. Inflation. Interest rate hikes. The growing lack of confidence surrounding public markets’ ability to offer strong returns. It has all contributed to one of the lowest annual performances of the 60/40 stock and bond portfolio in the last 20 years and triggered investor concerns around the traditional 60/40 portfolio strategy. More than a third of those we surveyed at the Morningstar Conference shared that a 60/40 portfolio is no longer effective for investing, while an additional 42% asserted that the 60/40 strategy is not as effective as it used to be. In this context, more advisors are exploring whether alternative investments can serve as both an effective option and an opportunity to enhance returns.
- Greater access for individual investors – Among the Morningstar Conference survey respondents who identified as financial advisors, 84% reported that they’re recommending alternatives allocation to clients who meet accredited investor requirements. It’s clear that continued efforts to democratize alternative investments — making them accessible to a broader swath of investors — should be key to this segment’s growth.
- Questions around what makes an accredited investor – The growing interest in alternatives among individual investors is coupled with industry-wide scrutiny around the definition of “accredited investor” —a long-standing threshold for alternative asset class access. In fact, 75% of respondents believe that the SEC’s definition of accredited investor needs to be updated. Among those respondents, 44% said that the definition is too strict, while 41% suggested that the income threshold for individuals should be lowered. Only 11.5% believe the definition is too lax. In the current market climate, investors who do not meet the threshold for alternatives access have fewer options to seek to diversify risk and supplement income.
- Increased availability of user-friendly tools and technology – More than 33% of our respondents reported that high levels of administration and paperwork — and concerns around due diligence and compliance processes — have historically made investing in alternative asset classes a challenge. The pandemic served as a catalyst for many in the wealth and asset management industries to embrace new technologies that could potentially solve for these pain points. Fintech platforms are aiming to bring efficiency to the fragmented community of independent wealth managers who might otherwise lack the infrastructure of wirehouses, as they seek new investment opportunities beyond stocks and bonds.
- Bespoke alt strategies and products – Research also shows that independent wealth managers are significantly under-allocated to alternatives when compared to wirehouses, narrowing the range of solutions they can offer to clients and reducing their competitiveness. Since alternatives have historically typically not been readily accessible to a broader swath of investors, there was not necessarily a need to offer specialized alt investments strategies and products tailored to individual investors. Now, as interest and access grow, there’s a rapidly expanding array of asset managers and platforms offering a strong product market fit for wealth management and alternative investments.
- Easy access to better education and deep dive data – Finally, as wealth managers and their clients become more interested in alts, knowledge might be an increasingly valuable form of currency to serve existing clients and attract new ones. Easy access to alternatives-focused education can be important in helping advisors and their clients tap into alternative investments. Advisors are indeed hungry for more knowledge — almost 70% of respondents at Morningstar cited “lack of education” as a current hurdle to investing in alternatives. While this knowledge gap is a hurdle, it is encouraged to see this community recognizing the urgent need to know more. We’re seeing more firms dedicate resources to educating their financial advisors on specialized products, including strategies, and the potential benefits associated with investing at-large. That’s very good news for everyone.
Greater Access, Better Education, New Opportunities
At a time of muted expectations for more traditional assets, alternative investments are already providing a potential opportunity for individual investors looking to hedge against increased volatility and generate strong returns. Looking ahead, providing advisors with the right mix of the resources, platforms, solutions, connectivity and education they needed could be key to meeting demand, delivering results, and unlocking the full potential of this dynamic asset class.
Advisors can potentially contribute to better outcomes for their clients when they’re more knowledgeable on the benefits of incorporating alternative investments into their portfolios. It all leads to greater fluency, elevated client conversations, increased loyalty, diversified investment capabilities and ultimately, the opportunity to offer clients something they’re expecting more than ever: fresh alternatives.
Matt Brown is the founder and CEO of CAIS