Offering clients a well-rounded choice of private market investments can improve a financial advisor’s business, according to a whitepaper prepared by Cerulli and Invesco, an investment management firm based in Atlanta.
A mix of private market investment choices improves outcomes for the firm and its clients, according to the whitepaper, entitled, "Adapting to Growing Private Markets: A Playbook for Practice Success," which was released in conjunction with the Investments & Wealth Institute. The whitepaper was based on a survey of more than 200 financial advisors from RIAs, wirehouses, independent broker-dealers, and other sources.
An overwhelming majority (81%) of the survey participants agreed that offering private market investments set them apart from the competition. In addition, 67% said it attracted high-net-worth clients and 66% said it helped consolidate and retain assets under management.
“Equity and fixed-income market declines in 2022 spurred broad recognition among advisors of the need for greater diversification,” Cerulli said. “This, coupled with vast innovation in alternative product development, has coalesced into greater demand for private market exposure.”
“It’s clear that advisors understand the importance of private markets investments as both a defensive and offensive tool at a practice level because they can use the exposures to better define their value proposition and help clients meet their goals,” Daniil Shapiro, Cerulli director, said in a statement. “If advisors have a focus on wealthy clients, implementing alternatives may also prove to be a commonsense way for a practice to move upmarket toward a coveted wealthier client base.”
But there are roadblocks to advisors offering more private equity investments. Some advisors indicated the intent of their clients to increase private equity investments during the next two years, but on average advisors reported their clients had only 5% or less of their portfolios in alternative allocations, Cerulli said.
Advisors said the lack of liquidity (56%), the lack of client education (44%), and product complexity and problems conducting due diligence (39%) were the top challenges inhibiting greater adoption.
“Now more than ever, it is important for financial professionals to have access to robust educational tools and resources to help them grow and build their alternatives practices,” John McDonough, head of Americas distribution at Invesco, said in a statement. “Investor demand for private markets investments continues to grow, so financial professionals need to understand and clearly articulate the potential benefits of asset classes, structures, liquidity provisions, and individual products.”
Based on the survey results, Cerulli recommended “a multi-pronged educational effort that relies on communication and coordination across the distribution chain to address the challenges” of the asset class.
“Robust educational and consulting resources can help advisors best represent the value of incorporating private markets within their clients’ portfolios,” McDonough added.
Advisors who can offer clients private market investments will have an advantage in the future, Cerulli concluded.
“We believe the future is bright for practices that can curate a holistic educational experience while streamlining the operational challenges associated with due diligence,” Shapiro said.