I recently attended the Wealth Management Convergence 2024 conference. One thing really jumped out at me: how much the wealth management industry has embraced private market investments since the Global Financial Crisis. This trend started to gain momentum, especially at the big wire houses, over a decade ago, and now has become part of the conversation throughout the entire financial advisor community. Top tier private equity firms historically catered to institutional investors and the super wealthy, but, in many cases, have built out their capability to serve the broad private wealth channel. Many forward-thinking advisors seeking enhanced returns and diversification have led the charge to include private investments in their clients’ portfolios. Still, for many wealth advisors, the idea of adding alternatives can be overwhelming—there are many strategies, thousands of managers, the responsibility of due diligence, illiquidity and operational and tax processes that differ from public market investments. It’s unfamiliar terrain. Where to start? Here are five things every financial advisor should know about finding compelling opportunities across the alternative asset classes:
1. Not all alternatives are created equal. There is a dizzying array of alternative strategies. But a helpful way to think about them is that they all fall into the same categories that you would use when building a traditional 60/40 portfolio—growth, income and diversifiers.
Growth: Growth oriented strategies include venture capital, private equity, and real estate, which you would group alongside equities in a traditional portfolio.
Income: Others fall into an income bucket (more akin to bonds, treasuries, and high-yield debt), such as private credit, which is a fast-growing segment.
Diversifiers: There are also alternatives highly uncorrelated to the market, such as hedge fund strategies like global macro. These strategies often expand their market universe to include commodities and foreign currencies which can provide additional diversification.
Advisors can tailor their alternative strategy allocations to achieve the investment objectives they have developed for each client.
2. Alternatives are more accessible than ever. Once upon a time, only institutions such as pensions and endowments had full access to the top alternative strategies and managers. These investors had the networks to identify the right opportunities, conduct due diligence, meet the required investment minimums and have the resources to handle subscriptions, capital calls, tax reporting, etc. No more. Platforms like iCapital and CAIS were created to “democratize” access to alternative investing, providing research, due diligence, simplified online subscriptions and reporting, as well as streamlined back-office functions, making it easy for RIAs to invest and monitor.
3. The traditional 60/40 model is insufficient for meeting many investors’ goals and RIAs need other options. 2022 was a terrible year for 60/40 strategies, but there seem to be a lot of advisors who believe it was an aberration and gained confidence as 2023 rebounded. But on closer examination, that is just not the case. Since January of 2022, the S&P 500 has had 12 negative months and, in every one of these cases, global bonds have sold off as well. The protective quality of bonds during recent “flight to quality” periods has been non-existent. The income component is a nice addition to portfolios, but the non-correlation has disappeared. As a result, RIAs are searching for non-correlated strategies to provide protection during market dislocations and build more resilient portfolios.
4. Adding alternative allocations to your 60/40 portfolio can boost returns and lower risk. Expanding a 60/40 traditional portfolio to include alternatives can help advisors build long term, resilient portfolios for their clients. But do not just take my word for it. Historical analysis in a recent study by iCapital shows that a 20% allocation to alternative investments in a traditional 60% equity/40% bond portfolio would have lifted returns and lowered portfolio volatility in investor portfolios since the GFC.
5. As clients live longer, liquidity matters less. One of the other key takeaways from the conference: wealth managers now expect many younger clients to live to 100. This completely changes the math on retirement. RIAs need to be thinking much longer-term. If your clients are living longer, you do not need daily liquidity across your entire portfolio. So, the less liquid, traditional 10-year lockups of many private equity strategies, for example, are no longer an impediment. These types of investment opportunities can play a role in helping younger investors meet their retirement goals. There are lots of conversations happening on the regulatory front to create options to ease access to these kinds of investments, so watch this space.
As alternatives become more accessible and 60/40 strategies remain challenged, financial advisors will increasingly be called upon to provide their clients with new options across the spectrum of alternative strategies and asset classes. The good news is that implementing alternatives is easier than ever before and can help you deliver superior performance, risk mitigation and more resilient portfolios to your clients for the long term.
William Marr is senior managing director of the Wealth Management Group at Welton Investment Partners.