The financial advisory industry is on the cusp of a significant shift, driven in part by the use of alternatives. According to Cerulli Associates, registered investment advisors (RIAs) continue to be the leading intermediary channel targeted by alternative asset managers looking to market their products to retail investors. The increased use of alternatives derives from a range of factors, including the growing scale and sophistication of RIAs, increased access points to alternatives, and an overall fear of missing out on the returns alternative investors have enjoyed for many years. This growing demand is compounded by recent market volatility, when the strategic use of alternatives can be an option for investors seeking downside protection.
While some may view this focus on alternatives by RIAs as fleeting, these changes are more likely long-term. Increased access and subsequent demand for alternatives will have a material impact on the products and strategies RIAs will offer their clients in the future. This has the potential to transform the financial advisory industry, and re-shape it into something very different than what we have today. Forward-looking advisors and alternative asset managers will be paying close attention to this shift, lest they get left behind by their competition.
1. New Products Will Emerge
The products RIAs will offer their clients in the future will be noticeably different than what is available today. Blended products will emerge as the line between traditional and alternative assets blurs. A recent McKinsey study notes that the “integration of liquid, public markets alternatives with traditional asset classes is eroding the distinction between firms that offer traditional versus alternative strategies.” This in turn is “leading to the convergence of products.” As alternatives continue to become more mainstream, clients will demand access to strategies and products that can both meet specific investment outcomes and also perform across different market environments.
2. Technology Will Continue To Drive Increased Access To Alternatives
Technology has already played a crucial role in making alternatives more accessible to everyday investors, and this trend will only continue. People often talk about the democratization of investing, which alludes to the threat robo advisors may pose to financial advisor jobs. However, I would argue we are already seeing the makings of a less dystopian outlook. Technology platforms such as iCapital, CAIS and Hedgemark serve to connect high-net-worth clients with alternative asset managers without replacing financial advisors. These platforms are a bellwether for the types of services that will continue to emerge as RIAs increasingly seek out alternatives for their clients. Rather than fear technology, forward looking financial advisors will learn to embrace it, which will give them a significant competitive advantage in the coming years.
3. Education Will Become Essential As Advisors Sharpen Their Understanding Of Alternatives
As hedge funds, private equity and real estate all compete for capital under the “alternatives” umbrella, educating this new group of investors will be essential. According to some investment experts, “67 percent of advisors say lack of understanding is one of the main reasons they don’t invest more heavily in alternatives.” Understanding the strategies, risks and nuances associated with each alternative asset class, along with the types of investment vehicles available to RIAs, will only get more complex as demand for such assets continues to grow. While much of the headlines around hedge funds have been about mixed performance, the asset class’ main function—to provide downside protection, deliver uncorrelated returns, and generate alpha—are topics advisors should emphasize when communicating with their clients. Advisors that understand and allocate to the appropriate alternative products will have a unique value proposition as they deliver alpha while complementing their client’s long-only portfolio.
Moving Forward
This is an exciting time for the industry and an excellent opportunity for all the players involved. Looking ahead, we predict that alternatives and client needs will play a big part in the evolution of the financial advisory industry. The types of products advisors offer will converge, and that, in turn, will drive an interest in these products resulting in a need for increased education. Within that context, our unique role as Prime Broker with the backing of one of the largest custodian banks in the industry provides a unique vantage point to observe these fundamental changes and offer insights to clients on either side. Finally, technology will continue to shape both access to alternatives and the manner in which RIAs interact with their clients, further reinforcing the notion of democratizing investing.