More and more individual investors, navigating today’s complex financial landscape, are turning to their financial advisors to explore new alternatives.
The reboot of the pandemic, changing investor attitudes and market volatility have all contributed to the transformation that is taking place in the alternative investment space. Once the sacred domain of institutional clients, a growing number of retail investors are now keen to explore how alternative asset classes can serve their own portfolios.
The result: A new era is unfolding in the world of alternative investing and wealth management as more financial advisors seek to create new, uncorrelated opportunities for their clients and forge new partnerships with alternative wealth managers.
Consider the following:
- In just 15 years, alts have grown from 6% to 12% — or $13.4 trillion — of the global investable market in 2018, and they’re projected to account for 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 invested more than $12 billion in alternative investments across a range of private equity, personal loan, hedge fund and real estate asset classes. And advisors plan to increase their exposure to alternative assets from their current allocation of 10.5% to 11.8% in two years, according to Cerulli/Blue Vault Partners.
And yet this growth trend may only be in its infancy. We may only be in the first inning. We may even be in the dugout, still waiting to take over the field. Looking ahead, the above data suggests that trillions of dollars will be shifted from traditional assets (stocks, bonds, ETFs) to alternatives:
Five Factors Fueling the Rise of Alternative Investments in Wealth Management: A Survey
What could this mean for individual investors and their advisers? How can advisors and asset managers coordinate better in order to use the opportunities of alts safely and efficiently?
Last month, CAIS surveyed more than 300 advisors and other industry professionals attending the 2022 Morningstar Conference, gathering their insights on various topics related to alternatives. Here’s what we learned — and what I think are five key factors signaling the growth of alternatives in wealth management.
- Changing investor attitudes and appetites – Market volatility. Inflation. rate hikes. The growing lack of confidence in the public markets’ ability to offer strong returns. All of this has contributed to one of the lowest annual performances for the 60/40 stock and bond portfolio in the past 20 years, and raised concerns among investors about the traditional 60/40 portfolio strategy. More than a third of the people we surveyed at the Morningstar conference shared that a 60/40 portfolio is no longer effective for investing, while another 42% claimed that the 60/40 strategy is no longer as is effective as before. In this context, more and more advisors are exploring whether alternative investments can be both an effective option and an opportunity to increase returns.
- Better access for private investors – Among Morningstar Conference survey respondents who identified themselves as financial advisors, 84% said they recommend an alternative allocation for clients who meet the requirements of accredited investors. It’s clear that continued efforts to democratize alternative investments – to make them more accessible to a broader investor base – should be key to the growth of this segment.
- Questions about what makes an accredited investor – Growing interest in alternatives by individual investors has coincided with an industry-wide scrutiny of the definition of “accredited investor” – a longstanding threshold for access to alternative asset classes. In fact, 75% of respondents believe the SEC’s definition of accredited investors needs to be updated. Of these respondents, 44% said the definition was too rigid, while 41% suggested that the income limit for individuals should be lowered. Only 11.5% think the definition is too lax. In the current market climate, investors who fail to reach the threshold to access alternatives have fewer opportunities to diversify risk and complement returns.
- Increased availability of user-friendly tools and technologies – More than 33% of our respondents indicated that high levels of administrative and paperwork – 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 wealth management industry to embrace new technologies that could potentially solve these vulnerabilities. Fintech platforms aim to make the fragmented community of independent wealth managers, who may otherwise lack the infrastructure of banking houses, more efficient as they seek new investment opportunities beyond stocks and bonds.
- Tailored alternative strategies and products – Research also shows that independent wealth managers are significantly under-invested in alternatives compared to wirehouses, limiting the range of solutions they can offer their clients and reducing their competitiveness. As alternatives have not typically been readily accessible to a broader mass of investors, there has not necessarily been a need to offer specialized alternative investment strategies and products tailored to individual investors. Now, as interest and access grows, there is a rapidly growing array of wealth managers and platforms offering a strong product market suited to wealth management and alternative investments.
- Easy access to better education and deep dive data – Finally, as wealth managers and their clients become increasingly interested in alts, knowledge could be an increasingly valuable form of currency to serve existing clients and attract new ones. Easy access to alternative education can be important in helping advisors and their clients explore alternative investments. Advisors are indeed hungry for more knowledge – nearly 70% of Morningstar respondents cited “lack of education” as a current barrier to investing in alternatives. While this knowledge gap is a hurdle, it is heartening to see that this community recognizes the urgent need to know more. We see more and more companies dedicating resources to educating their financial advisors about specialized products, specific strategies, and the potential benefits associated with alternative investing in general. This is very good news for everyone.
Better access, better education, new opportunities
At a time of muted expectations for more traditional investments, alternative investments already offer a potential opportunity for retail investors looking to hedge against heightened volatility and generate high returns. Looking ahead, providing advisors with the right mix of resources, platforms, solutions, connectivity and education could be key to meeting demand and delivering results. and Unlocking the full potential of this dynamic asset class.
Advisors may be able to contribute to better outcomes for their clients if they are better informed about the benefits of including alternative investments in their portfolios. All of this translates into greater fluency, improved client conversations, increased loyalty, diversified investment opportunities, and ultimately the ability to offer clients something they’ve come to expect more than ever: fresh alternatives.
Matt Brown is the founder and CEO of CAIS