Advisors who are already seeing heightened demand for alternative investments can expect that demand to accelerate as the Securities and Exchange Commission modernizes the framework for product registration and investing.
The industry is also likely to see the world’s top securities cop lower the asset level required to invest in private and alternative investments, which will open up the world of alternatives to a much broader market of high net worth investors, Lawrence Calcano, CEO of iCapital, a booming $40 billion alternatives platform used by Fidelity and Morgan Stanley, told Financial Advisor magazine.
“Frankly, I can see the SEC changing the rules so that accredited investors ($1 million in assets or more) are allowed to invest in what qualified clients ($2.5 million in assets) are currently allowed to buy. There’s an opportunity to allow more high-worth investors to partake in the alternatives market, but they have to be educated,” Calcano said.
That goes double for advisors. As the SEC nears completion on its alternatives rule, a recent survey by iCapital found that nearly 20% of advisors have no alternatives experience, and about a quarter don’t use alts in client portfolios at all because they're difficult to explain.
“Like investors, no two advisors are alike. Some are extremely experienced with the asset class and due diligence and can help their clients thoughtfully understand alternatives. For those folks, the SEC rule will be purely positive, allowing them to offer these products more broadly in their client base and present a lot of opportunity,” Calcano said.
For advisors who are less experienced, these rule changes have to be accompanied by education, he said. “In our experience, most advisors we work with are very thoughtful and don’t want to present investment opportunities to clients until they completely understand and vet them,” he added.
While the SEC’s anticipated rule is probably a good thing all parties, “life is long and if this isn’t done in the context of greater education, than everyone is better off without these rules being changed because dealing with the aftermath won’t be worth it,” Calcano said.
Meanwhile, investor demand for alternatives is growing. “Investors today are quite interested in alternatives exposure. What that means is that advisors have to solve for many things at once—finding the best funds and completing due diligence to make sure they are best of breed, solving for operational management of those funds and in many cases obtain access to the funds—which in many cases require a minimum investment of $5 million, $10 million or even $20 million.
iCapital, which manages $40 billion across private equity-funds and other alternative assets generally reserved for institutions, has developed a winning strategy of pooling together resources from high net worth clients to purchase pieces of deals alongside institutional players.
But while many high net worth investors find private equity to be a desirable asset class, the unavoidable issue of illiquidity has forced their advisors to rule it out because of investors’ need for capital for things like new home down payments or emergencies.