For asset managers and financial advisors trying to bring alternative investment options to the retail channel, 2024 promises to be a year when the most viable players will set themselves apart in an increasingly crowded field.
There is widespread expectation that alternatives will play an increasingly important role in client portfolios over the next few years. But the investment products being adopted in the space are moving beyond interval funds and ETFs and may come with more complicated reporting and tax requirements. That means advisors will have to grapple with how to best introduce these more complex investment options to their clients and process the extra paperwork associated with them, leading to greater reliance on fintech platforms and more partnerships being formed between advisors and asset managers to streamline these processes.
“Those firms have such an incredible lead because of their brand and their credibility and their expertise that they tend to be the default group that advisors would look to for higher earning, more sophisticated alternatives,” said T. Neil Bathon, founder and managing partner with FUSE Research Network, which provides tactical decision support for investment management firms.
Bathon said the money and effort asset management firms have spent on educating financial advisors will pay off in 2024.
Advisors will likely increase their clients’ allocations to alternative investments to 10% or more of some client portfolios, according to Gurdeep Batra, the wealth & asset management consulting leader at Ernst & Young Americas Financial Services Organization.
Private credit products will continue to be of particular interest to advisors next year as they promise higher yields compared to traditional fixed-income investments and a way for advisors to further diversify client portfolios, said Jun Li, wealth and asset management co-leader with Ernst & Young Americas and an Ernst & Young LLP Financial Services Organization tax partner.
Surveys of financial advisors point to an increased appetite for private credit and infrastructure investments, agreed Daniil Shapiro, a director leading the alternative research efforts at Cerulli Associates, a Boston-based market research firm that focuses on global institutional and retail asset management. That comes at a time when “you are seeing more product availability within the category and even some new entrants bringing different types of strategies to market,” noted Rob Pettman, executive vice president of wealth management solutions with LPL Financial, an independent broker/dealer.
Research by FUSE found advisors currently have the highest alternative asset allocations in liquid alternative mutual funds, publicly-traded REITs and liquid alternative ETFs. However, over the next two years, alternative assets that might see the most growth also include private equity, cryptocurrency and digital assets, hedge funds and private debt.
Among RIAs, the alternative categories where the share of AUM is expected to grow the most include cryptocurrency, private equity, liquid alternative ETFs and private debt.
Handling the Workload
The challenge is that when it comes to some of the products in those categories, the reporting and tax requirements can be far more extensive than they are with an ETF, according to Li. They might involve a Private Placement Memorandum numbering hundreds of pages and K-1 forms that could run almost as long. The RIAs also have to explain to their clients in an easy-to-understand way what it is they are investing in, while the asset managers might be facing the issue of going from handling capital calls with several hundred institutional firms to potentially thousands of retail investors, Li said.
For advisors, that means more of them will seek to get certified “to prove to their firms that they understand alternatives well enough to be allowed to use them,” according to Bathon. In addition, expect to see more partnerships between asset managers and RIAs focused on streamlining the process of bringing alternative products to retail clients.
Advisors will need help as they grow their holdings in the alternative investment space and some of them will turn to firms like iCapital and CAIS to help them navigate the process, said Shapiro. “But it’s not just reporting,” he said. “There’s a tremendous education hurdle for advisors who are looking to do alternative investments. And they are relying on the asset managers to provide as much education as they can in order to explain those exposures to their own clients.”
At the same time, there might be a culling of the herd next year when it comes to the asset managers courting retail investors. In an increasingly crowded field, it might be tough for those without the brand appeal of the top few asset managers to break through and grow their share of the retail marketplace.
“Then the question for all the other firms is—should they be beefing up their distribution teams, should they be investing in hiring folks who are selling these types of exposures or does it end up being a misdirection because of how expensive it is?” according to Shapiro.
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