Written by: Emily Glassman | Ballast Rock Private Wealth
Once the sole purview of institutions, alternative investments have moved more into the mainstream of the wealth management industry, with a growing share of financial advisors offering products outside of stocks and bonds. But while adoption is becoming more widespread, advisors continue to register frustration with both the options and resources available to them.
Room for Improvement
According to an October 2022 survey from Broadridge Financial Solutions Inc., 67% of advisors report using alternatives, compared with 59% in the first quarter of 2022, and 52% of advisors also plan to increase their usage over the next two years. However, only 27% of financial advisors who use or plan to use alternatives are very satisfied with the private funds and alternative investment products and resources available through their firm, while 16% are dissatisfied overall.
Unlike equities and fixed income, which are transparent and widely accessible, advisors must access alternatives through either a fintech platform, custodian, or via personal relationships with fund managers. The added difficulties around procuring alternatives when combined with other perceived burdens—namely significant paperwork, due diligence requirements, higher fees and lack of liquidity—have caused high levels of dissatisfaction among advisors using alternatives.
But after a double-digit down year for both stocks and bonds, advisors know they need an alternative strategy. And while investing in alternatives is still more complex than traditional investments, the process is becoming simpler and more straightforward.
Weighing In-House vs. Partnerships
Advisors who are interested either in entering the space or increasing the types of alternative assets they offer should ask: Do I want to spend my time vetting potential managers and opportunities, or does it make more sense to partner with someone that has deep experience in this space?
Working with an outside firm with expertise in allocating to alternative investments can provide greater access to top managers and more diversified portfolios for clients. Too often, advisors settle for the latest opportunities available through the various fintech platforms. But do these opportunities offer the highest potential for return? Have the managers been adequately vetted? Are they best suited to meet the goals of your client? I have always believed that every client’s needs are different, and building an allocation to alternative investments that fits within each client’s portfolio must be customized to align with their goals.
Simplify & Diversify
Beyond providing greater access, an outside firm with significant experience in private equity and other alternatives can help educate advisors and take care of the back-end reporting that has long frustrated wealth managers. Difficulty reporting on alternative investments, particularly private market opportunities, has provided challenges for both clients and advisors who are looking for holistic reporting and comprehensive portfolio analysis. But new tools and technology partners make it easier to incorporate alternatives into the broader portfolio, which is good for all parties.
Ultimately, advisors must recognize that investing in an alternative asset is not the same as investing in the stock market. It is far more complex. But instead of steering their clients away from alternatives, which is becoming increasingly—and rightfully—impossible, wealth managers should consider partnering with a firm that is experienced in the space.
While advisors are increasingly adding to more mainstream private equity strategies, they have been slower to incorporate opportunities in areas such as private credit and secondaries. Advisors shouldn’t limit themselves only to private market investments, as the complete alternatives landscape is much broader. The non-traditional landscape offers a wealth of opportunities, and diversifying with the subset of alternatives is just as important as diversifying within a larger portfolio.
For advisors, integrating alternatives into their clients’ asset mix is no longer optional. The question becomes: Should advisors dedicate valuable resources to scouring and vetting opportunities, trying to educate themselves in a complex asset class, or would they be better partnering with a firm that has the expertise, relationships and tools to simplify the process?
An advisor is first and foremost a relationship manager, and any tool that provides expanded investment opportunities without taking away from a wealth manager’s ability to engage with clients and prospects is a win-win.
Emily Glassman is a senior advisor at Ballast Rock Private Wealth, which provides personalized private wealth management solutions, curated investment access and unique expertise in alternative investments.