Breaking Down the Barriers to Investing in Alternative Investments
March 10, 2022 | James Sprow | Blue Vault
A panel discussion was our keynote on March 9 at the Blue Vault Bowman Alts Week 2022, featuring, Diana Britton, Wealth Management, Brendan Cuddihy, CAIS, Justin Fay, BNY Mellon|Pershing, and Joe Raieta, Snowden Lane Partners.
Diana: A recent Preqin survey reported that assets in global alternatives are going to double by 2026, due in large part to private equity. Capital allocated to the alternative space is expected to grow by 70% over the next five years.
Why is more capital being allocated to alternatives now?
Brendan: The key personas of clients, advisers and asset managers have changed over the last decade. Clients are getting more access to information and are searching for solutions in a different way. Advisers are now understanding the benefits from a portfolio construction perspective. Asset managers see the value of having wealth management being inside as the shareholder base grows their volume, grows their capital allocations, grows their assets, so it’s a win-win-win from the manager perspective.
Justin: Environmental factors- We began working remotely, since that time Pershing was flooded with inquiries from our clients, in terms of reducing volatility, challenges that they are expecting with their portfolios. With the high returns in the market in 2021, we’ve not seen that for a long time. It brought a lot of interest.
Innovation- Technology making it easier for clients, as well as product innovations. More products targeting the mass affluent space.
Education-Overall awareness of the alternative investments. A valuable tool for investor diversification. Bringing awareness about the products out there.
Joe: More allocations due to portfolio construction; what alternatives can do with non-correlation and reliable income. The portfolio construction process has become, in some ways, more complex, but in some ways there is more transparency and there is a better understanding of what these products can do. The trade-off to liquidity is getting a product with income and low to non-correlation. There’s a risk/return profile that you’re not able to use by utilizing public markets.
What are some of the barriers to alternatives investments?
Brendan: On the adviser side it’s access, access to an offering that’s constantly refreshed and dynamic. It’s also about lower minimums. The adviser has to be comfortable for the adviser to feel confident speaking to the client about alternatives. CAIS IQ has about 25,000 advisers today learning about alternatives. Then there’s due diligence. We have an unconflicted independent due diligence partner in Mercer. Then it’s the transaction. How do I buy this thing? Historically it used to be mortgage documents, now there are electronic and integrated solutions that feel like buying stocks and bonds. Then there is monitoring. How does the adviser make sure that it is being reported on, not only on the stocks and bonds in the portfolio but also the alternatives.
Joe: The complexity and need for client education is paramount. If you’ve only used liquid securities before. There are different things that clients need to be educated on, and the adviser needs to be educated first. Manager selection is a challenge. How important it is to be in the top quartile for many of these different investment verticals. Reporting can be different from what a client is used to.
Justin: There have been solutions brought to market that sound great and look great. It’s just a question of translating that into how to apply this to a portfolio. Some managers do a great job of creating these solutions, but for what problem does the investor have for this opportunity set. Advisers get it, they’re smart, they say they understand the strategy, but “how do I apply it?”
The capital call process is onerous. We’re taking a look at it to streamline the process to minimize the steps.
How has Pershing helped advisers access alternatives?
Justin: All advisers have their own unique approach and vision. Pershing has invested in our alternatives investment platform. We’re making the investment process easier. We’re getting there and there’s more to come. We’ve gotten to a point now where we have an extensive list of over 4,000 investment options that we make available to our clients. We’re adding to it every week. We’re also speaking to the investment managers themselves. It’s those conversations with both sides that have helped us grow the platform. There’s new managers and products coming out every day.
Brendan: I think product innovation is the main event. Going back to 10 years ago, the managers were focused on the institutions because one large check is better.
Asset managers are building products and strategies that are tailored to wealth management that allows the adviser to sell a story, a process and a solution that can be a longer-term process. The adviser has to decide what to do with the distributions. They have to make another decision.
You’re starting to see product innovation in structure. We’re seeing interval funds becoming more prevalent and available. Registered products, and the value of having alternatives in these different types of wrappers help the end client in terms of liquidity, reporting perspective. We’re also seeing asset managers take their best ideas and ask how to make them more permanent.
To hear the full panel discussion, log into the Blue Vault Bowman Alts Week 2022 and the Wednesday, March 9 menu of presentations. There are still many sessions to come this week.
